Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen week period ended March 30, 2004
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
000-23739
(Commission file number)
STEAKHOUSE PARTNERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3248672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10200 Willow Creek Road, San Diego, CA 92131
(Address of principal executive offices)
(858) 689-2333
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / / No /X/
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of May 14, 2004: 4,500,000 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 for the
Successor Company as of March 30, 2004 and December
31, 2003 and for the Predecessor Company as of
December 30, 2003 ................................. 2-3
Condensed Consolidated Statements of Operations for
the Successor Company for the thirteen weeks ended
March 30, 2004 and the Predecessor Company as of
December 31, 2003 and the twelve weeks ended
March 18, 2003 .................................... 4
Condensed Consolidated Statements of Cash Flows for
the Successor Company for the thirteen weeks ended
March 30, 2004 and the Predecessor Company as of
December 31, 2003 and the twelve weeks ended
March 18, 2003 .................................... 5
Notes to Condensed Consolidated Financial
Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 22
Item 4. Controls and Procedures............................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 23
Item 2. Defaults Upon Senior Securities..................... 23
Item 3. Submission of Matters to a Vote of Security
Holders....................................... 23
Item 4. Other Information................................... 23
Item 5. Exhibits and Reports on Form 8-K.................... 23
SIGNATURES.................................................. 24
SECTION 302 CERTIFICATION................................... 25
1
EXPLANATORY STATEMENT
On February 15, 2002, Steakhouse Partners, Inc. (the "Company", "Steakhouse
Partners", or the "Company") and on February 19, 2002 Paragon Steakhouse
Restaurants, Inc., our wholly owned subsidiary, and its three subsidiaries
(collectively, "Paragon," and together with Steakhouse Partners, the "Debtors")
filed voluntary petitions for reorganization under Chapter 11 of the federal
bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in the United States
Bankruptcy Court for the Central District of California ("Bankruptcy Court").
The Amended Joint Plan of Reorganization (the "Plan") was confirmed on December
19, 2003, and became effective on December 31, 2003 (the "Effective Date"). On
October 11, 2002 Pacific Basin Foods, Inc. ("Pacific Basin Foods") the Company's
other wholly owned subsidary filed a petition under Chapter 7 of the Bankruptcy
Code in the Bankruptcy Court. In the condensed consolidated financial statements
provided herein, all results for periods prior to and including December 30,
2003 are referred to as those of the "Predecessor Company" and all results for
periods including and subsequent to December 31, 2003 are referred to as those
of the "Successor Company". Due to the effects of the "fresh start" accounting,
results for the Predecessor Company and the Successor Company are not comparable
(See Note 1, "Basis of Presentation Reorganization and Fresh Start Accounting,"
of the notes to condensed consolidated financial statements).
At this time, it is not possible to predict the effect of the Chapter 11
reorganization on our business. A more detailed description of the bankruptcy
filing and its effect on the Company is set forth in our Annual Report
on Form 10-K for the fiscal year ended December 30, 2003, filed with the
Securities Exchange Commission (the "SEC").
References in this report to the "Company", "Steakhouse Partners" and "we" or
similar or related terms refer to Steakhouse Partners, Inc. and its wholly owned
subsidiaries together, unless the context of such references requires otherwise.
1A
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 30, 2004
ASSETS
Successor Successor | Predecessor
Company Company | Company
March 30, December 31, | December 30,
2004 2003 | 2003
---- ---- | ----
(Unaudited) (Audited) | (Audited)
Assets |
Current assets: |
Cash and cash equivalents $ 6,788 $2,205,221 | $ 2,205,221
Accounts receivable, net of allowance for doubtful |
accounts of $133,234 197,870 67,909 | 67,909
Inventory, net of allowance for obsolete inventories |
of $45,805 982,498 1,298,203 | 1,298,203
Prepaid expenses and other current assets 714,021 497,416 | 497,416
---------- ---------- | ----------
Total current assets 1,901,177 4,068,749 | 4,068,749
|
Property, plant and equipment, net 11,824,264 12,582,374 | 13,110,554
Liquor Licenses 688,000 688,000 | -
Deposits and other assets 148,307 103,407 | 103,407
Cash - restricted under collateral agreements - - | 480,496
|
Goodwill 18,134,475 18,881,786 | -
|
---------- ---------- | ----------
Total Assets $ 32,696,243 $ 36,324,316 | $17,763,206
========== ========== | ==========
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Successor Successor Predecessor
Company Company Company
March 30, December 31, December 30,
2004 2003 2003
---- ---- -----
(Unaudited) (Audited) (Audited)
Liabilities and Stockholder's Deficit: |
Current liabilities: |
Current portion of long term debt $ 1,879,878 $ 2,058,222 | $ 5,137,118
Current portion of capital lease 221,408 258,918 | -
Accounts payable and other current |
liabilities 2,561,061 4,572,589 | 3,144,654
Accrued liabilities 3,894,641 4,779,828 | 6,693,183
Accrued payroll costs 1,642,652 1,473,853 | 1,473,853
----------- ----------- | -----------
Total current liabilities 10,199,640 13,143,410 | 16,448,808
|
Long-Term Debt 7,899,338 7,906,213 | 1,341,313
Long-Term capital leases 8,951,755 9,605,956 | -
Deferred rent 113,182 113,182 | -
Deferred tax liability - - | 119,411
----------- ----------- | -----------
Total liabilities not subject to compromise 27,163,915 30,768,761 | 17,909,532
----------- ----------- | -----------
Liabilities subject to compromise - - | 25,540,623
|
|
Stockholder's Equity (Deficit): |
Predecessor Company preferred stock |
$0.001 par value |
2,250,000 shares authorized |
0 shares issued and outstanding - - | -
|
Predecessor Company preferred stock |
Series B, Convertible $0.001 par value |
1,000,000 shares authorized |
1,000,000 shares issued and outstanding - - | 1,000
|
Predecessor Company preferred stock |
Series C, Convertible $0.001 par value |
1,750,000 shares authorized |
1,750,000 shares issued and outstanding - - | 1,750
|
Predecessor Company common stock |
$0.001 par value |
10,000,000 shares authorized |
3,386,522 shares issued and outstanding - - | 33,865
|
Successor Company preferred stock |
$0.001 par value |
5,000,000 shares authorized |
0 shares issued and outstanding - - | -
|
Successor Company common stock |
$0.001 par value |
15,000,000 shares authorized |
4,500,000 shares issued and outstanding 4,500 4,500 | -
Committed stock 555,555 555,555 | -
Predecessor Company treasury stock, 28,845 |
shares, at cost - - | (175,000)
|
Predecessor Company additional paid-in-capital - - | 12,100,750
Successor Company additional paid-in- |
capital 5,085,500 4,995,500 | -
Accumulated deficit, since January 1, 2004 (113,227) - | (37,649,314)
----------- ----------- | -----------
Total Stockholder's Equity (deficit) 5,532,328 5,555,555 | (25,686,949)
----------- ----------- | -----------
|
Total liabilities and stockholders' equity (deficit) $ 32,696,243 $ 36,324,316 | $ 17,763,206
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Successor
Company Predecessor Company
Thirteen Weeks Twelve Weeks
ended March 30, December 31, ended March 18,
2004 2003 2003
----------------------------------------------------
(Unaudited) (Audited) (Unaudited)
Core Restaurant Revenue, net 13,614,056 | - 19,881,265
Revenues earned on restaurants disposed, net 545,343 | - -
----------- | ----------- -------------
Total Revenues, net 14,159,399 | - 19,881,265
Restaurant Costs of Sales |
Food and beverage - core restaurants 4,712,783 | - 7,014,305
Food and beverage - disposed restaurants 260,197 | - -
Personnel costs - core restaurants 4,560,122 | - 6,979,157
Personnel costs - disposed restaurants 374,031 | - -
Direct operating costs - core restaurants 2,599,075 | - 4,597,317
Direct operating costs - disposed restaurants 182,780 | - -
Depreciation & amortization - core restaurants 315,501 | - 494,703
Depreciation & amortization - disposed restaurants 10,094 | - -
----------- | ----------- -------------
Total Costs of Sales 13,014,583 | - 19,085,482
Gross Profit 1,144,816 | - 795,783
|
General & Administrative 1,015,429 | - 1,439,167
----------- | ----------- -------------
Income (loss) before other income (expense) 129,387 | - (643,384)
Other Income/(Expense) |
Interest income 193 | - 107,610
Interest expense (311,523) | - (646,199)
Interest expense - disposed restaurants (9,312) | - -
Miscellaneous income 104,015 | - -
----------- | ----------- -------------
Total other income (expense) (216,627) | - (538,589)
|
Loss before reorganization items, provision for |
income taxes, and discontinued operations (87,240) | - (1,181,973)
|
Reorganization items: |
Reorganization gain/(loss), net - | 6,645,343 -
Gain on rejection and sale of property, plant |
and equipment, net - | - 1,142,475
Professional fees - | - (109,080)
----------- | ----------- -------------
Total reorganization items - | 6,645,343 1,033,394
|
Loss before provision of income taxes and |
discontinued operations (87,240) | 6,645,343 (148,579)
Provision for income tax 25,987 | - 30,000
Income/(Loss) before discontinued operations (113,227) | 6,645,343 (178,579)
Income from discontinued operations, net of |
income taxes of $850 - | - 1,057,463
----------- | ----------- -------------
Net (Income)/Loss (113,227) | 6,645,343 878,884
=========== | =========== =============
|
----------- | ----------- -------------
Basic and diluted earnings (loss) per share
|
Earnings(Loss)from continuing operations $ (0.03) | $ 1.56 $ (0.05) |
=========== | =========== =============
Earnings(Loss)from discontinued operations - | - 0.31
=========== | =========== =============
Basic and diluted earning (loss) per share (0.03) | 1.96 0.26
=========== | =========== =============
Weighted average shares, basic and diluted 4,500,000 | 3,386,522 3,386,522
=========== | =========== =============
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor |
Company | Predecessor Company
Thirteen Weeks | Twelve Weeks
|
ended March 30, | December 31, ended March 18,
2004 | 2003 2003
------------------| -------------- -------------
(Unaudited) | (Unaudited) (Unaudited)
|
Net income (loss) from continuing operations $ (113,227) | $ 6,645,343 $(178,579)
Net income (loss) from discontinued operations - | 1,057,463
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operating activities |
Depreciation and amortization 320,000 | 510,235
Gain on disposal of rejected leases - | - (1,142,474)
Non Cash reorganization item - | (6,645,343) -
Net liabilities of discontinued operation forgiven in |
Chapter 7 liquidation - | - (1,057,463)
Decrease in operating assets 42,192 | 983,724
|
(Decrease) in liabilities subject to compromise - | (167,872)
(Decrease) in operating liabilities (2,624,637) | (2,368,750)
----------- | ---------- ------------
Net cash provided by (used in) continuing operating |
activities (2,375,722) | (2,363,713)
Net cash provided by (used in) discontinued operating |
activities - |
Cash flows from investing activities |
Proceeds from the sale of P.P. & E 615,956 | 1,233,524
Purchases of furniture & equipment (177,846) | (45,439)
----------- | ---------- ------------
Net cash provided by continuing investing activities 438,110 | 1,188,085
Cash flows from financing activities |
Principal payments on debt and capital leases (260,821) | (19,959)
----------- | ---------- ------------
Net cash used in continuing financing activities (260,821) | (19,959)
Net increase (decrease) in cash and cash equivalents (2,198,433) | (1,195,587)
Cash and cash equivalents, beginning of period 2,205,221 | 2,750,673
----------- | ---------- ------------
Cash and cash equivalents, end of period 6,788 | 1,555,086
----------- | ---------- ------------
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of the Company as of
March 30, 2004 and for the thirteen weeks ended March 30, 2004 and the twelve
weeks ended March 18, 2003 have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act of 1934, as
amended, and Article 10 of Regulation S-X under the Securities Act of 1934, as
amended. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations related to interim financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 30, 2004, and the results of its operations for the thirteen
week period ended March 30, 2004 and the twelve weeks ended March 18, 2003, and
its cash flows for the thirteen week period ended March 30, 2004 and the twelve
weeks ended March 18, 2003. The results for the thirteen-week period ended March
30, 2004 are not necessarily indicative of the expected results for the full
2004 fiscal year or any future period.
The Successor Company reports results quarterly, with four quarters having
thirteen weeks. The Predecessor Company reported three periods of twelve weeks
each and one period of sixteen weeks. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related footnotes included in the Company's Annual Report on Form 10-K for the
year ended December 30, 2003 filed with the SEC.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates embedded in the condensed consolidated financial
statements for the periods presented concern the fair values of goodwill and the
fixed assets and other intangible assets and the estimated useful lives of
intangible assets.
In February 2002, the Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On October 11, 2002,
Pacific Basin Foods filed a petition under Chapter 7 of the Bankruptcy Code in
the Bankruptcy Court. The Company's Plan was confirmed on December 19, 2003, and
became effective on the Effective Date. For financial reporting purposes, the
Company used an effective date of December 30, 2003. References in these
financial statements to "Predecessor Company" refer to the Company prior to and
including December 30, 2003. References to "Successor Company" refer to the
Company on and after December 31, 2003, after giving effect to the cancellation
of all outstanding securities of the Predecessor Company and the issuance of new
securities of the Successor Company in accordance with the Plan and
implementation of "fresh start" accounting. The events which occurred during
fiscal year 2003 relating to the Chapter 11 proceedings, the securities issued
in accordance with the Plan, and the "fresh start" accounting adjustments are
described in "Company Restructuring" and "Reorganization and Fresh Start
Adjustments" below.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the years ended December 31, 2003 (Successor
Company) and December 30, 2003 (Predecessor Company), the Company maintained a
current ratio (current assets to current liabilities) of 0.31-to-1 and
0.25-to-1, respectively. In addition, during the years ended December 31, 2003
(Successor Company) and December 30, 2003 (Predecessor Company,
Debtor-in-Possession), the Company had a working capital deficit of
approximately $9,000,000 and $12,400,000, respectively. If the Company is unable
to generate profits and unable to obtain financing for its working capital
requirements, it may have to curtail its business sharply or cease business
altogether.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
restructure its current financing, to obtain additional financing, and
ultimately to attain profitability. Management has evaluated its current
operations, and it has focused the Company's efforts and developed plans to
generate operating income to continue the Company's operations through the year
ending December 28, 2004.
6
Management's plans include the following:
1. Restructuring its long-term debt position.
2. Improving the Company's financial performance through local marketing sales
generation, cost-reduction and restructuring of administrative overhead.
3. Raising money through equity or third party financing.
BANKRUPTCY FILING
Company Restructuring
The Debtors filed for Chapter 11 reorganization under the Bankruptcy Code in
February 2002. From February 15, 2002 to December 30, 2003, the Debtors operated
their businesses as debtors-in-possession under Bankruptcy Court protection from
their creditors and claimants. Following approval by the creditors of the
Company entitled to vote on the Plan, on December 19, 2003, the Bankruptcy Court
entered an order confirming the Plan. As of the Effective Date, the Plan was
implemented and the reorganization of the Company was substantially completed.
Plan Investors
On August 13, 2003, the Company obtained and received Bankruptcy Court approval
for a $5,000,000 senior secured convertible debtor-in-possession financing
facility (the "DIP" Loan) from Steakhouse Investors, LLC ("Steakhouse
Investors") for payment of permitted pre-petition claims, working capital needs,
letter of credit and other general corporate purposes. The DIP Loan required
that the Company maintain certain financial covenants. In addition, pursuant to
the terms of the DIP Loan, the Company was required to accrue interest at a rate
of 6% per annum, which was capitalized on each payment date and added to the
outstanding principal until confirmation. Upon confirmation of the Plan, the
principal amount of DIP Loan was converted into 90% of the newly issued common
stock of the Company in exchange for a full and complete release of the
Company's obligations under the DIP Loan other than interest.
Confirmation of Plan of Reorganization
The Company commenced a balloting and solicitation process with respect to the
Plan, which concluded December 3, 2003.
On the Effective Date the Company emerged from reorganization proceedings under
Chapter 11 of the Bankruptcy Code pursuant to the terms of the Plan.
Upon confirmation of the Plan on the Effective Date, the entire balance of the
DIP Loan, including accrued interest, became due and payable to Steakhouse
Investors. Accordingly, Steakhouse Investors received, 4.5 million shares or 90%
of the Company's newly issued common stock in exchange for a full and complete
release of the Company's obligations under the DIP Loan other than interest. The
preferred stock, common stock, stock options, and warrants of the Company
outstanding before confirmation of the Plan were all canceled on the Effective
Date.
Discharge of Liabilities
On the Effective Date, all then-outstanding equity securities of the Company, as
well as a substantial amount of its pre-petition liabilities, were cancelled.
The newly authorized securities of the Company on the Effective Date pursuant to
the Plan, consisted of 15,000,000 shares of common stock and 5,000,000 shares of
new preferred stock. Of the shares of common stock authorized on the Effective
Date, 0.5 million will be distributed pursuant to the Plan in satisfaction of
pre-petition claims, and 4.5 million shares were issued to Steakhouse Investors
in exchange for $5,000,000 DIP Loan.
All shares issued Steakhouse Investors were issued without registration under
the Securities Act of 1933 in reliance on the provision of Section 1145 of the
Bankruptcy Code and Section 4(2) of the Securities Act of 1933. In addition, as
part of the Plan an independent creditor litigation trust ("Creditor Trust") was
established for the benefit of the Company's pre-petition creditors.
7
In accordance with the Plan, on the Effective Date Steakhouse Investors
converted its $5,000,000 DIP Loan for 90% (4.5 million shares) of the Company's
newly issued common stock. As of the Effective Date, the Company is obligated to
pay certain pre-petition liabilities as follows:
1. Priority tax claim in the amount of approximately $1,921,004
will paid over a four-year period from the Effective Date with
interest payable at 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. On the
Effective Date, all of the assets and lease rights of the
Torrance, California restaurant were transferred in
satisfaction of such secured claim.
3. Unsecured claims in the amount of approximately $8,700,000 to
$12,700,000 will be paid as follows: (a) general unsecured
claims in the amount of $8,000,000 to $12,000,000 will be paid
an estimated recovery of 50% to 70%. Each allowed claim will
receive its pro rata share of $1,000,000 within 30 days of the
Effective Date and payments under a $5,030,000 note payable,
which will be paid in the amount of $500,000 on each April,
August, and December of each year for the next three years. In
addition, on December 31, 2006, the remaining unpaid balance
of $530,000 becomes due. The note is non-interest-bearing and
due on or before December 2006. In addition, the general,
unsecured creditors will receive their pro rata share of
500,000 shares of common stock, representing 10% of the newly
issued common stock of the Company and (b) convenience claims
in the amount of approximately $700,000 will be paid an
estimated recovery of 50%. As of the date hereof, each allowed
claim has received its payment.
Accounting Impact
According to Statement of Position ("SOP") 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," the financial statements
of an entity in a Chapter 11 reorganization proceeding should distinguish
transactions and events that are directly associated with the reorganization
from those operations of the ongoing business as it evolves. Accordingly, SOP
90-7 requires the following financial reporting and accounting treatment:
o Balance Sheet - The balance sheet separately classifies
liabilities subject to compromise from liabilities not subject to
compromise.
o Statement of Operations - Pursuant to SOP 90-7, revenues and
expenses, realized gains and losses, and provisions for losses
resulting from the reorganization and restructuring of the
business are reported in the statement of operations separately.
Professional fees are expensed as incurred.
o Statement of Cash Flows - Reorganization items are reported
separately within the operating, investing, and financing
categories of the statement of cash flows with respect to the
financial statements, or details of operating cash receipts and
payments resulting from the reorganization are disclosed in a
supplementary schedule.
Upon emergence from bankruptcy, the Company implemented fresh-start accounting
under the provisions of SOP 90-7. Under SOP 90-7, the reorganization fair value
of the Company was allocated to its assets and liabilities, its accumulated
deficit was eliminated, and its new equity was issued according to the Plan as
if it were a new reporting entity.
Fresh-Start Accounting
The Company adopted the provisions of fresh-start accounting as of December 31,
2003. In accordance with fresh-start accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11
Reorganization. Such fair values represented the Company's estimates based on
independent appraisals and valuations. Immaterial differences between estimated
pre-petition liabilities assumed by the Successor Company and the final
settlement amounts are recognized as they occur.
To facilitate the calculation of the enterprise value of the Company after the
Effective Date, the Company developed a set of financial projections. Based on
these financial projections and with the assistance of a financial advisor, the
enterprise value was determined by the Company, using various valuation methods,
including (i) a comparison of the Company and its projected performance to the
market values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company, and (iii)
a calculation of the present value of the future cash flows under the
projections. The estimated enterprise value is highly dependent upon achieving
the future financial results set forth in the projections as well as the
realization of certain other assumptions, which are not guaranteed.
8
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was $18,881,786 as of December 31, 2003.
A black line has been drawn in the accompanying condensed consolidated balance
sheet between December 30, 2003 and March 30, 2004 to distinguish between the
Predecessor Company and the Successor Company. The results of the interim
periods shown are for the Predecessor Company and are not considered as being
indicative of the results of operations that are expected for the full year.
These results will not be comparable to those of the Successor Company.
The adjustments for "fresh start" accounting were based upon the work of outside
appraisers, as well as internal valuation estimates using discounted cash flow
analyses, to determine the relative fair values of the Company's assets and
liabilities and are not expected to differ materially.
Earnings Per Share
Due to the Company's emergence from bankruptcy and the implementation of "fresh
start" reporting, the presentation of earnings per share is not meaningful for
the periods presented in the accompanying condensed consolidated financial
statements.
NOTE 2 -- EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings (loss)
per share is computed by dividing income (loss) available to common stockholders
by the weighted-average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive. The
Company's common share equivalents consist of warrants.
NOTE 3 -- 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.
As a consequence of the bankruptcy filing of the Debtors and Pacific Basin
Foods, all pending litigation and claims against the Company were stayed. All
such claims were treated per the Plan.
NOTE 4 DISCONTINUED OPERATIONS
On October 11, 2002, Pacific Basin Foods, filed for protection under Chapter 7
of the Bankruptcy Code. Pacific Basin Foods ceased operations effective as of
the filing date. The Company's financial statements have been retroactively
adjusted to reflect the impact of the discontinuation of Pacific Basin Foods.
The results of operations of Pacific Basin Foods have been classified as
discontinued operations in the accompanying consolidated statements of
operations for the period ended March 18, 2003.
During February 2003, the Predecessor Company finalized the liquidation of
Pacific Basin Foods. In connection with final liquidation the Company recorded a
gain in the amount of $1,057,463 during the year ended December 30, 2003, as the
liabilities exceeded the assets.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
During the three months ended March 30, 2004, the Company negotiated the sale of
four restaurant leases and related property, plant and equipment for gross
proceeds of $615,956. The sale of these restaurants was conducted through the
Company's bankruptcy proceeding and was not finalized until February 2004. As a
result of the Company's adoption of "fresh start" accounting as of December 31,
2003, the gain realized by the Company in connection with this transaction has
been recorded as a reduction of goodwill.
9
NOTE 6 - EQUITY TRANSACTION
During the three months ended March 30, 2004, the Company granted warrants to
purchase 150,000 shares of common stock to their secured claim note holder. The
warrants were granted in consideration of the Company's secured claim note
holder extending the payment terms of their secured claim in the amount of
$1,535,000. The warrants have an exercise price of $1.11 per share and expire
six years from the date of issuance. The Company has valued the warrants at
$90,000, which represent the fair market value of consideration received. The
value of the warrants has been recorded as a deferred financing cost which will
be amortized over six years, the extended payment terms of the note.
NOTE 7 INCOME TAXES
Significant components of the provision for taxes based on income for the
quarter ended March 30, 2004 were as follows:
Current
Federal -
State $ 25,987
------------
25,987
------------
Deferred
Federal -
State 0
------------
0
------------
PROVISION FOR
INCOME TAXES $ 25,987
============
A reconciliation of the provision for income tax expense with the expected
income tax computed by applying the federal statutory income tax rate to income
before provision for income taxes for the quarter ended March 30, 2004 is as
follows:
Income tax provision
computed at federal
statutory tax rate 34.0%
State taxes, net of
federal benefit (19.61)
Purchase Adjustment - Goodwill (31.55)
Increase in valuation
reserve and
other (12.54)
------------
TOTAL (29.70)%
============
Significant components of the Company's deferred tax assets and liabilities
for federal income taxes consisted of the following at the quarter ended
March 30, 2004:
Deferred tax assets
Net operating losses $ 1,436,113
Deferred Revenue 1,455,301
Asset valuation reserves
Property, plant, and equipment 2,893,300
Other 1,916,854
------------
Total deferred tax assets 7,701,568
------------
Deferred tax liabilities
State Tax Deferred (473,753)
------------
Total deferred tax liabilities (473,753)
7,227,815
Valuation allowance (7,227,815)
------------
NET DEFERRED TAX LIABILITY $ 0
============
10
The December 30, 2003, income tax disclosures have not been included, as the
amounts are not considered to be comparative as a result of change in ownership
of the Company and the Company's adoption of fresh start accounting. The
estimates used to calculate the tax provision are based on not necessarily
indicative of the expected results for the full 2004 fiscal year or any future
period.
As a result of the reorganization certain of the deferred tax assets,
liabilities, and valuation will be adjusted. All amounts will be fully reserved
for.
The Company has remaining net operating loss carry-forwards, after
carry-backs, of approximately $3,949,995 for federal and $1,053,332 for state,
which will begin expiring in 2017.
The reorganization of the Company on the Effective Date constituted an ownership
change under Section 382 of the Internal Revenue Code. An ownership change
generally occurs if certain persons or groups increase their aggregate ownership
percentage in a corporation's stock by more than 50 percentage points in the
shorter of any three-year period or the period beginning the day after the day
of the last ownership change. Section 382 may apply to limit the Successor
Company's future ability to any remaining NOL's and tax credits generated before
the ownership change and certain subsequently recognized "built-in" losses and
deductions, if any, existing as of the date of the ownership change.
NOTE 8 -- SUBSEQUENT EVENTS
In a meeting on April 16, 2004, the Company's Board of Directors confirmed the
appointments of Messrs. Edler and Lindner as members of the Compensation and
Audit Committees, and adopted the Company Code of Ethics. The Board of Directors
also ratified the decisions of the Compensation Committee to enter into
employment agreements with three executives for three-year terms and adopted the
2004 Stock Option Incentive Plan, subject to shareholder approval.
The employment agreements require annual gross salary payments of $200,000,
$156,000 and $150,000 respectively, for the three executives and may be
terminated without cause. However, in the event the agreement is terminated
without cause, the Company is obligated to pay twelve months salary to the
executives. The employment agreements also provide a set number of stock options
subject to shareholder approval of an employee Stock Incentive Plan and an
annual bonus for specific performance criteria, subject to the approval of the
Compensation Committee of the Board of Directors.
The 2004 Stock Option Incentive Plan is intended to provide incentive to key
employees, officers, and directors of the Company who provide significant
services to the Company. Subject to shareholder approval there will be 1.3
million options available for grant under the Stock Option Incentive Plan.
Options will vest over a three-year period and the Board of Directors will fix
the exercise price of the options granted.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q may contain forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. In February 2002, the Debtors filed voluntary petitions for
bankruptcy under Chapter 11 of the Bankruptcy Code. On the Effective Date, the
Debtors emerged from bankruptcy protection pursuant to the Bankruptcy Court's
confirmation of the Debtors' Plan. The operation of the Company following
emergence from Bankruptcy Court protection involves risks and uncertainties,
including uncertainties associated with the ability of the Company to
successfully emerge from bankruptcy and disruptions to the Company's business
relationships during the restructuring process. Other risks and uncertainties
include the strength of the recovery of the U.S. economy, trends affecting the
Company's financial condition or results of operations, the Company's operating
strategy and growth strategy, potential acquisitions or joint ventures by the
Company, litigation affecting the Company, the timely development and market
acceptance of new products, the ability to provide adequate incentives to retain
and attract key employees, the impact of competitive products and pricing, and
other risks which are detailed in the herein under the heading "Risk Factors."
For this purpose, any statement contained herein that is not a statement of
historical fact may be deemed to be a forward-looking statement. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
and similar expressions are intended to identify forward-looking statements. The
Company's actual results may differ materially from those indicated by such
forward-looking statements based on the factors outlined above.
11
The following is management's discussion and analysis of certain significant
factors, which have affected the results of operations and should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and notes thereto.
OVERVIEW
BACKGROUND
The Company, currently operates 25 full-service steakhouse restaurants located
in eight states. The Company's restaurants specialize in complete steak and
prime rib meals, and also offer fresh fish and other lunch and dinner dishes.
The Company's average dinner check is $24.74 (including alcoholic beverages) and
it currently serves approximately 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 its emergence from the reorganization process described
below under "Bankruptcy Filing".
BANKRUPTCY FILING
In February 2002, the Debtors filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. On October 11, 2002, Pacific
Basin Foods filed a petition under Chapter 7 of the Bankruptcy Code in
Bankruptcy Court.
The bankruptcy filings were made in response to the maturing of certain notes
aggregating $1,734,285, which the Company was unable to pay. Throughout the
course of the reorganization, the Company sought to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets.
During the reorganization, the Company continued to manage its properties and
operated its businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code.
As a consequence to the filing, all pending litigation and claims against the
Company were stayed, and no party was permitted to take action to realize its
pre-petition claim, except pursuant to order of the Bankruptcy Code. While
enjoying the protection of this stay, the Company disposed of under performing
assets and sought third party participation in funding a plan. In July, 2003,
the Bankruptcy Court approved a DIP Loan and the general terms pursuant to which
a Plan would be approved, as more fully described below. Generally, under the
provisions of the Bankruptcy Code, holders of equity interests may not
participate under a plan of reorganization unless the claims of creditors are
satisfied in full under the plan or unless creditors accept a reorganization
plan that permits holders of equity interest to participate. The Plan provides
for no distribution to equity holders, but rather provides for distribution of
equity upon confirmation to Steakhouse Investors, LLC ("Steakhouse Investors")
and creditors, as more fully described below.
In the Fall of 2003, the Company commenced a balloting and solicitation process
with respect to the Plan, which concluded in December 2003. On December 19,
2003, the Plan was confirmed by the Bankruptcy Court. Upon the Effective Date,
the entire balance of the DIP Loan of $5,000,000, including accrued interest,
became due and payable to Steakhouse Investors. Steakhouse Investors converted
the principal amount of the DIP Loan into 90% (4.5 million shares) of the newly
issued common stock of the Company in exchange for a full and complete release
of the Company's obligations under the DIP Loan. The Plan provided that the
preferred stock, common stock, stock options, and warrants of the Company
outstanding prior to the Effective Date be canceled. In addition, all of the
Company's pre-petition liabilities have been completely restructured by the
Plan, whereby the Company is obligated to pay the following claims according to
the Plan as set forth below:
1. Priority tax claim in the amount of approximately $1,921,000 will be
paid over a four-year period from the Effective Date, with interest
payable at a rate of 6% per annum.
2. Secured claims in the amount of approximately $2,151,000 will be paid
as follows: (a) $1,535,000 will be paid in full over a period of six
years. Interest only will be paid over the first three years, and the
principal will be paid over the remaining three years and (b) $616,000
will be deemed paid upon the transfer of all of the assets and lease
rights of one of the Company's restaurants in Torrance, California.
Upon the Effective Date all of the assets and lease rights of the
Torrance, California restaurant were transferred in satisfaction of
such secured claim.
12
3. Unsecured claims estimated to be between $8,700,000 to $12,700,000 will
be paid as follows: (a) general unsecured claims in the amount of
$8,000,000 to $12,000,000 are expected to receive recovery of 50% to
70% of their allowed claims. The Company has paid creditors $1,000,000
in January 2004, and will make payments under a $5,030,000 note
payable, which will be paid in the amount of $500,000 on each April,
August, and December of each year for the next three years. The note is
non-interest-bearing and the last payment is due on or before December
2006. In addition, the general unsecured creditors will receive their
pro rata share of 500,000 shares of common stock, representing 10% of
the newly issued common stock of the Company and (b) convenience claims
in the amount of approximately $700,000 were paid an estimated recovery
of 50%. As of the date hereof, each allowed claim has received its
payment.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SELECTED ITEMS AS A PERCENTAGE OF NET SALES
The following table sets forth, as a percentage of net sales for core
restaurants only, certain items in the Company's condensed consolidated
statements of operations for the indicated periods:
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------- -------------------
THIRTEEN WEEKS ENDED TWELVE WEEKS ENDED
---------------------
MARCH 30, MARCH 18,
2004 2003
-------------- ---------- --------
Revenue 100.0% 100.0%
Discounts 4.7% 4.9%
Net Revenues 95.3% 95.1%
Cost of Sales
Food & Liquor costs 34.6% 35.3%
Personnel Costs 33.5% 33.5%
Direct Operating Cost 19.1% 20.5%
Depreciation 2.3% 2.4%
Gross Margin 10.5% 8.2%
General & Administrative 7.4% 8.8%
Interest Expense 2.3% 2.8%
Net Income (Loss) 1.3% (3.0%)
Factors that have affected the results of operations for the first quarter and
first thirteen weeks of fiscal 2004 for the Company as compared to the first
period and first twelve weeks of fiscal 2003 for the Company are discussed
below.
THIRTEEN WEEKS ENDED MARCH 30, 2004 COMPARED TO TWELVE WEEKS ENDED MARCH 18,
2003
Revenues for the thirteen-week period ended March 30, 2004 decreased $5,721,866
or 28.8% from $19,881,265 for the twelve-week period ended March 18, 2003 to
$14,159,399 for the thirteen-week period in 2004. The chief reason for this
decline is Paragon sold or closed twenty units from the end of the first quarter
of 2003 to the end of the first quarter of 2004. Paragon same-store sales
increased 4.7% for the 25 comparable core units in 2004 versus the same
thirteen-week period in 2003.
Food and beverage costs for the thirteen-week period ended March 30, 2004
decreased $2,041,325 or 29.1% from $7,014,305 for the twelve-week period ended
March 18, 2003 to $4,972,980 for the thirteen-week period in 2004. The chief
reason for this decline is Paragon sold or closed twenty units from the end of
the first quarter of 2003 to the end of the first quarter of 2004.Food and
beverage costs as a percentage of restaurant revenues for the core restaurants
was 35.3% for the twelve-week period ended March 18, 2003 compared to 34.6% for
the thirteen-week period in 2004. The chief reason for this improvement is the
Company has reengineered its menu to provide increase perceived guest value
while reducing overall cost and contracting for its prime rib at lower than
market rates.
13
Payroll and payroll related costs for the thirteen-week period ended March 30,
2004 decreased $2,045,004 or 29.3% from $6,979,157 for the twelve-week period
ended March 18, 2003 to $4,934,153 for the thirteen-week period in 2004. The
chief reason for this decline is Paragon sold or closed twenty units from the
end of the first quarter of 2003 to the end of the first quarter of 2004.
Restaurant payroll and payroll related costs as a percentage of revenue for the
core restaurants was 33.5% for the twelve-week period ended March 18, 2003
compared to 33.5% for the thirteen-week period in 2004. Although for the core
restaurants there was no change in the percentage relationship to sales from
year to year, the Company is actively reviewing fundamentals to reducing payroll
and payroll related costs over time without affecting the dining experience.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expense, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating cost for the
thirteen-week period ended March 30, 2004 decreased $1,815,462 or 39.5% from
$4,597,317 for the twelve-week period ended March 18, 2003 to $2,781,855 for the
thirteen-week period in 2004. The chief reason for this decline is Paragon sold
or closed twenty units from the end of the first quarter of 2003 to the end of
the first quarter of 2004. These costs as a percentage of core restaurant
revenues were 20.5% for the twelve-week period ended March 18, 2003 compared to
19.1% for the thirteen-week period in 2004. In absolute dollars the direct
operating costs for core restaurants remained relatively constant, however the
chief reason for the improvement in the percentage relations was the significant
increase in revenue between the quarter just ended March 30, 2004 and same
period 2003.
Depreciation and amortization for the thirteen-week period ended March 30, 2004
decreased $169,108 or 34.2% from $494,703 for the twelve-week period ended March
18, 2003 to $325,595 for the same period in 2004. The decrease is principally
due to the sale or rejection of 20 restaurants. Depreciation for the core
restaurants remained relatively constant between the quarter just ended March
30, 2004 and same period 2003.
General and administrative expenses for the thirteen-week period ended March 30,
2004 decreased $423,738 or 29.4% from $1,439,167 for the twelve-week period
ended March 18, 2003 to $1,015,429 for the thirteen-week period in 2004. These
costs as a percentage of core restaurants revenues were 8.8% for the twelve-week
period ended March 18, 2003 compared to 7.4% for the same period in 2004. The
chief reason for the reduction in general and administrative expense is staffing
reductions (i.e., district leader in the Midwest, director at corporate,
purchasing manager, etc.) partially offset by a general managers meeting in San
Diego, California for the Company.
Other income (expenses) for the thirteen-week period ended March 30, 2004
decreased $321,962 or 59.8% from $538,589 for the twelve-week period ended March
18, 2003 to $216,627 for the same period in 2004. The chief reason for this
decrease was the restructuring of all the debt (except capital lease interest)
by the Company in accordance with the terms set forth in the Plan.
As reorganization items for the thirteen-week period ended March 30, 2004 were
included in "fresh start" accounting as an offset to Goodwill, there was no
effect on current period numbers. For the twelve-week period ended March 18,
2003 the reorganization items was a gain of $1,033,394.
There was no gain from discontinued operations for the thirteen-week period
ended March 30, 2004. Gain from discontinued operations for the twelve-week
period ended March 18, 2003 was $1,057,463. On October 11, 2002 when Pacific
Basin Foods ceased operations and filed for Chapter 7 with the Bankruptcy Court.
The Company had a net liability of $1,057,463 as of December 24, 2002. As
Pacific Basin Foods has legally and practically ceased operations the net
liability was recognized as one time income of discontinued operations, net of
taxes.
Net loss for the thirteen-week period ended March 30, 2004 increased $992,111
from a net gain of $878,884 for the twelve-week period ended March 18, 2003 to a
net loss of $113,227 for the thirteen-week period in 2004. The loss for the
thirteen-week period ended March 30, 2004 was chiefly the result of operating
and then disposing (timing issues as part of the Plan) of under performing
restaurants in the first quarter of 2004. The restaurants contributed a combined
loss of $291,071 to the net income line. If all the units could have been
disposed of as per the plan prior to year-end December 30, 2003, the
Company would have reported income of $177,844. The income for the twelve-week
period ended March 18, 2003 is entirely due to recognizing the net liability of
Pacific Basin Foods that remained on the Company's books as of December 24, 2002
as a one-time income of discontinued operations.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company had a cash and cash equivalents balance of $6,788 at March 30, 2004.
Our operating activities for the thirteen weeks ended March 30, 2004 used almost
$2.4 million. Most of the cash was used to pay certain pre-petition liabilities
in accordance with the Plan. Without these extraordinary payments, the company
believes that the cash flow from operations should be more than sufficient to
fund its operations at current levels and fund its repayment obligations
pursuant to the Plan during the remainder of fiscal 2004. The Company's highest
cash generation quarters from operations are the second and fourth quarters.
However, to the extent the Company's estimates and assumptions are inaccurate
the Company may not have sufficient cash reserves to maintain its operations and
fund its obligations. In such event, the Company may need to seek additional
financing. Any required additional financing may not be available on terms
favorable to us, or at all. If adequate funds are not available on acceptable
terms, we may be unable to fund our reorganization plan and may be required to
sell core assets or dissolve the business. If we raise additional funds by
issuing equity securities, shareholders may experience dilution of their
ownership interest and the newly issued securities may have a rights superior to
those of the common stock. If we issue or incur debt to raise funds, we may be
subject to limitations on our operations.
The Company had a cash and cash equivalents balance of $2,205,221 at December
30, 2003. During the year ended December 30, 2003, the Company maintained a
current ratio (current assets to current liabilities) of 0.25 to 1, which arose
from a working capital deficit of $7,380,059 after adjusting for the debtor-
in-possession note that converted to equity upon plan confirmation.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include food
and labor costs. The Company's restaurant personnel are paid at the federal and
state established minimum wage levels and accordingly, changes in such wage
level affect the Company' s labor costs. As costs of food and labor have
increased, the Company will be seeking to offset those increases through
economies of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue. To date inflation has not had a
material impact on loss from operations.
CRITICAL ACCOUNTING POLICIES
The following discussion addresses our most critical accounting policies, which
are those that are most important to the portrayal of our financial condition
and results, and that require significant judgment.
NEW REPORTING ENTITY AND ADOPTION OF FRESH START ACCOUNTING
The Company's emergence from Chapter 11 bankruptcy proceedings resulted in a new
reporting entity and adoption of fresh start reporting in accordance with
Statement of Position ("SOP") No. 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code . The condensed consolidated financial
statements as of and for the quarter ended March 30, 2004 reflect reorganization
adjustments for the discharge of debt and adoption of fresh start reporting.
In accordance with "fresh-start" accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11.
Such fair values represented the Company's estimates based on independent
appraisals and valuations. Immaterial differences between estimated pre-petition
liabilities assumed by the Successor Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Successor Company,
the Company developed a set of financial projections. Based on these financial
projections and with the assistance of a financial advisor, the enterprise value
was determined by the Company, using various valuation methods, including (i) a
comparison of the Company and its projected performance to the market values of
comparable companies, (ii) a review and analysis of several recent transactions
of companies in similar industries to the Company, and (iii) a calculation of
the present value of the future cash flows under the projections. The estimated
enterprise value is highly dependent upon achieving the future financial results
set forth in the projections as well as the realization of certain other
assumptions, which are not guaranteed.
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was approximately $18,900,000 as of December 31, 2003.
A black line has been drawn in the accompanying condensed consolidated balance
sheet between December 30, 2003 and March 30, 2004 to distinguish between the
Successor Company and the Predecessor Company. The results of the interim
periods shown are for the Predecessor Company and are not considered as being
indicative of the results of operations that are expected for the full year.
These results will not be comparable to those of the Successor Company.
These adjustments for "fresh start" accounting were based upon the work of
outside appraisers, as well as internal valuation estimates using discounted
cash flow analyses, to determine the relative fair values of the Company's
assets and liabilities and are not expected to differ materially.
15
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. The gift certificates
do not carry an expiration date so if all outstanding gift certificates are
redeemed at once, our financial results (cash) would be impacted.
PROPERTY, FIXTURES AND EQUIPMENT
Property, fixtures and equipment are recorded at cost. We expense repair and
maintenance costs incurred to maintain the appearance and functionality of the
restaurant that do not extend the useful life of any restaurant asset or are
less than $1,000. Depreciation is computed on the straight-line basis over the
following estimated useful lives:
Buildings and building improvements 20 years
Furniture and fixtures and equipment 5 years
Our accounting policies regarding property, fixtures and equipment include
certain management judgments and projections regarding the estimated useful
lives of these assets and what constitutes increasing the value and useful life
of existing assets. These estimates, judgments and projections may produce
materially different amounts of depreciation expense than would be reported if
different assumptions were used.
IMPAIRMENT OF LONG LIVED ASSETS
We assess the potential impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Recoverability of assets is measured
by comparing the carrying value of the asset to the future cash flows expected
to be generated by the asset. In evaluating long-lived restaurant assets for
impairment, we consider a number of factors such as:
a) Restaurant sales trends;
b) Local competition;
c) Changing demographic profiles;
d) Local economic conditions;
e) New laws and government regulations that adversely affect
sales and profits; and
f) The ability to recruit and train skilled restaurant employees.
If the aforementioned factors indicate that we should review the carrying value
of a restaurant's long-lived assets, we perform an impairment analysis.
Identifiable cash flows that are largely independent of other assets and
liabilities typically exist for land and buildings, and for combined fixtures,
equipment and improvements for each restaurant. If the total future cash flows
are less than the carrying amount of the asset, the carrying amount is written
down to the estimated fair value, and a loss resulting from value impairment is
recognized by a charge to earnings.
Judgments and estimates made by us related to the expected useful lives of
long-lived assets are affected by factors such as changes in economic conditions
and changes in operating performance. As we assess the ongoing expected cash
flows and carrying amounts of our long-lived assets, these factors could cause
us to realize a material impairment charge.
16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
OUR PRIOR BANKRUPTCY COULD HINDER OUR ABILITY TO NEGOTIATE EFFECTIVELY WITH
THIRD PARTIES AND COULD ADVERSELY AFFECT OUR OPERATIONS GOING FORWARD.
In February 2002 we, along with our wholly owned subsidiary Paragon and its
subsidiaries filed for voluntary reorganization under Chapter 11 of the
Bankruptcy Code. We officially emerged from bankruptcy on December 31, 2003.
However, our Chapter 11 reorganization and financial condition and performance
could adversely affect our operations going forward. Our bankruptcy filings had
an adverse affect on our credit standing with our lenders, certain suppliers and
other trade creditors. This can increase our costs of doing business and can
hinder our negotiating power with our lenders, certain suppliers and other trade
creditors. The failure to negotiate favorable terms could adversely affect our
financial performance. Though we have emerged from Chapter 11, the distribution
of shares to the general unsecured creditors is not complete as we continue to
reconcile the claims made by these creditors. Until this process is complete, we
will continue to incur expenses with respect to the reorganization process.
BECAUSE WE HAVE EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM,
IT MAY BE DIFFICULT FOR INVESTORS TO EVALUATE OUR PROSPECTS FOR IMPROVED
PERFORMANCE.
Our chief executive officer was hired in July 2003. If our new management team
is unable to develop successful business strategies, achieve our business
objectives or maintain effective relationships with employees, suppliers,
creditors and customers, our ability to grow our business and successfully meet
operational challenges could be impaired.
IF WE LOSE OR ARE UNABLE TO OBTAIN KEY PERSONNEL, OUR ABILITY TO EFFECTIVELY
OPERATE OUR BUSINESS COULD BE HINDERED.
Our ability to maintain or enhance our competitive position will depend to a
significant extent on the efforts and ability of our executive officers,
particularly our chief executive officer. Our future success and our ability to
manage future growth will depend in large part upon the efforts of our
management team and on our ability to attract and retain other highly qualified
personnel. Competition for personnel is intense, and we may not be successful in
attracting and retaining our personnel. Our inability to retain our current
management team and attract and retain other highly qualified personnel could
adversely affect our results of operations and hinder our ability to effectively
manage our business
WE FACE RISKS ASSOCIATED WITH CHANGES IN GENERAL ECONOMIC AND POLITICAL
CONDITIONS THAT EFFECT CONSUMER SPENDING.
We believe that the weak general economic conditions in effect in the United
States will continue through 2004. As the economy struggles, we are concerned
that our customers may become more apprehensive about the economy and reduce
their level of discretionary spending. We believe that a decrease in
discretionary spending could impact the frequency with which our customers
choose to dine out or the amount they spend on meals while dining out, thereby
decreasing our revenues. Additionally, the continued military responses to
terrorist attacks and our military operations abroad may exacerbate current
economic conditions and lead to further weakening in the economy. Adverse
economic conditions and any related decrease in discretionary spending by our
customers could have an adverse effect on our revenues and operating results.
OUR PROFITABILITY IS DEPENDENT IN LARGE MEASURE ON FOOD AND SUPPLY COSTS WHICH
ARE NOT WITHIN OUR CONTROL.
Our profitability is dependent in large measure on our ability to anticipate and
react to changes in food and supply costs. Various factors beyond our control,
including climatic changes and government regulations, may affect food costs.
Specifically, our dependence on frequent, timely deliveries of fresh beef,
poultry, seafood and produce subjects us to the risks of possible shortages or
interruptions in supply caused by adverse weather or other conditions, which
could adversely affect the availability and cost of any such items. We cannot
assure you that we will be able to anticipate or react to increasing food and
supply costs in the future. The failure to react to these increases could
materially and adversely affect our business and result of operations.
OUR ABILITY TO EXECUTE OUR EXPANSION PLANS DEPENDS ON SECURING SUITABLE
LOCATIONS AT FAVORABLE PRICES.
Our strategy for expansion of our operations includes the construction of new
restaurant properties and/or acquisition of existing properties. Our ability to
open additional restaurants will depend upon our ability to identify and acquire
available new construction sites or restaurant conversions at favorable prices.
We must also have sufficient available funds from operations or otherwise to
support this expansion.
17
If we cannot successfully construct new restaurant properties or convert
acquired restaurant properties to our established brands within projected
budgets or time periods, our business and our ability to continue as a going
concern will be adversely affected. Even with a successful reorganization and
sufficient funds, plans to expand our business may fail due to construction
delays or cost overruns, which could be caused by numerous factors, such as
shortages of materials and skilled labor, labor disputes, weather interference,
environmental problems and construction or zoning problems.
WE FACE RISKS ASSOCIATED WITH THE EXPANSION OF OUR OPERATIONS.
The success of our business depends on our ability to expand the number of our
restaurants, either by developing or acquiring additional restaurants. Our
success also depends on our ability to operate and manage successfully our
growing operations. Our ability to expand successfully will depend upon a number
of factors, including the following:
-- the availability and cost of suitable restaurant locations for
development;
-- the availability of restaurant acquisition opportunities;
-- the hiring, training, and retention of additional management and
restaurant personnel;
-- the availability of adequate financing;
-- the continued development and implementation of management
information systems;
-- competitive factors; and
-- general economic and business conditions.
Increased construction costs and delays resulting from governmental regulatory
approvals, strikes, or work stoppages, adverse weather conditions, and various
acts of God may also affect the opening of new restaurants. Newly opened
restaurants may operate at a loss for a period following their initial opening.
The length of this period will depend upon a number of factors, including the
time of the year the restaurant is opened, the sales volume, and our ability to
control costs.
We may not successfully achieve our expansion goals. Additional restaurants that
we develop or acquire may not be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing
customers from and reducing the sales volume of our existing restaurants in
those markets.
WE WILL NEED ADDITIONAL CAPITAL FOR EXPANSION.
The development of new restaurants requires funds for construction, tenant
improvements, furniture, fixtures, equipment, training of employees, permits,
initial franchise fees, and other expenditures. We will require funds to develop
additional restaurants and to pursue any additional restaurant development or
restaurant acquisition opportunities that may develop.
In the future, we may seek additional equity or debt financing to provide funds
so that we can develop or acquire additional restaurants. Such financing may not
be available or may not be available on satisfactory terms. If financing is not
available on satisfactory terms, we may be unable to expand our restaurant
operations. While debt financing will enable us to add more restaurants than we
otherwise would be able to add, debt financing increases expenses and is limited
as to availability due to our financial results and bankruptcy history, and we
must repay the debt regardless of our operating results. Future equity
financings could result in dilution to our stockholders.
WE DEPEND ON KEY FOOD PRODUCT DISTRIBUTORS.
We currently rely on chiefly two food product distributors Southwest Traders and
VanEerden. If either Southwest Traders or VanEerden is unable to continue
providing us with a high level of quality and dependability in the receipt of
our supplies, at the cost advantages resulting from our volume purchases, this
could have a material impact on our business.
We believe that all essential products are available from other national
suppliers as well as from local suppliers in the cities in which our restaurants
are located in the event we must purchase our products from other suppliers;
however, there can be no assurance that we will be able to match quality, price
or dependability of supply.
WE FACE COMMODITY PRICE AND AVAILABILITY RISK.
We purchase energy and agricultural products that are subject to price
volatility caused by weather, market conditions and other factors that are not
predictable or within our control. Increases in commodity prices could result in
lower restaurant-level operating margins for our restaurant concepts.
Occasionally, the availability of commodities can be limited due to
circumstances beyond our control. If we are unable to obtain such commodities,
we may be unable to offer related products, which would have a negative impact
on our profitability.
18
THE RESTAURANT INDUSTRY IS AFFECTED BY CHANGES IN CONSUMER PREFERENCES AND
DISCRETIONARY SPENDING PATTERNS THAT COULD FORCE US TO MODIFY OUR MENUS AND
CONCEPTS AND COULD RESULT IN A REDUCTION IN OUR REVENUES.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our Hungry Hunter's, Hunter's Steakhouse, Mountain
Jack's, Carvers restaurants' menus, or by specific events such as the outbreak
or scare caused by "mad cow disease". If we were to have to modify the emphasis
on beef in our restaurants' menus, we may lose customers who would be less
satisfied with a modified menu, and we may not be able to attract a new customer
base to generate the necessary revenues to maintain our income from restaurant
operations. A change in our menus may also result in us having different
competitors. We may not be able to successfully compete against established
competitors in the general restaurant market. Our success also depends on
various factors affecting discretionary consumer spending, including economic
conditions, disposable consumer income, consumer confidence and the United
States participation in military activities. Adverse changes in these factors
could reduce our customer base and spending patterns, either of which could
reduce our revenues and results of operations.
INCREASE IN THE MINIMUM WAGE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND FINANCIAL RESULTS.
A number of our employees are subject to various minimum wage requirements. The
federal minimum wage has remained at $5.15 per hour since September 1, 1997. Any
minimum wage increase may have a material adverse effect on our business and
results of operations.
THE FAILURE TO ENFORCE AND MAINTAIN OUR TRADEMARKS AND TRADE NAMES COULD
ADVERSELY AFFECT OUR ABILITY TO ESTABLISH AND MAINTAIN BRAND AWARENESS.
Our current operations and marketing strategy depend significantly on the
strength of trademarks and service marks. Our wholly owned subsidiary, Paragon
of Michigan, Inc. has registered, among others, the names Hungry Hunter's,
Mountain Jack's and Carvers. The success of our growth strategy depends on our
continued ability to use our existing trademarks and service marks in order to
increase brand awareness and further develop our branded products. Although we
are not aware of any infringing uses of any of the trademarks or service marks
that we believe could materially affect us; we cannot assure you that we will be
free from such infringements in the future.
The names "Hungry Hunter's", "Mountain Jack's" and "Carvers" represent our core
concept. The termination of our right to use this name or our failure to
maintain any of our other existing trademarks could materially and adversely
affect our growth and marketing strategies.
BECAUSE WE MAINTAIN A SMALL NUMBER OF RESTAURANTS, THE NEGATIVE PERFORMANCE OF A
SINGLE RESTAURANT COULD HAVE A SUBSTANTIAL IMPACT ON OUR OPERATING RESULTS.
We currently own and operate 25 restaurants. Due to this relatively small number
of restaurants, poor financial performance at any owned restaurant could have a
significant negative impact on our profitability as a whole. The results
achieved to date by our relatively small restaurant base may not be indicative
of the results of a larger number of restaurants in a more geographically
dispersed area with varied demographic characteristics. We cannot assure you
that we will be able to operate our existing restaurants at higher sales levels
that generate equal or higher operating profits or increase the number of our
restaurants sufficiently to offset the impact of poor performance at any one
restaurant.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER
FACTORS BEYOND OUR CONTROL.
Our business is subject to seasonal fluctuations,
which may vary greatly depending upon the region of the United States in which a
particular restaurant is located. In addition to seasonality, our quarterly and
annual operating results and comparable unit sales may fluctuate significantly
as a result of a variety of factors, including:
-- the amount of sales contributed by new and existing restaurants;
-- the timing of new openings;
-- increases in the cost of key food or beverage products;
-- labor costs for our personnel;
-- our ability to achieve and sustain profitability on a quarterly
or annual basis;
-- consumer confidence and changes in consumer preferences;
-- health concerns, including adverse publicity concerning
food-related illness;
-- the level of competition from existing or new competitors in the
our segment of the restaurant industry; and
-- economic conditions generally and in each of the market in which
we are located.
19
These fluctuations make it difficult for us to predict and address in a timely
manner factors that may have a negative impact on our results of operations.
WE COULD FACE LABOR SHORTAGES, INCREASED LABOR COSTS AND OTHER ADVERSE EFFECTS
OF VARYING LABOR CONDITIONS.
The development and success of our restaurants depend, in large part, on the
efforts, abilities, experience and reputations of the general managers and chefs
at such restaurants. In addition, our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified employees,
including restaurant managers, kitchen staff and wait staff. Qualified
individuals needed to fill these positions are in short supply and the inability
to recruit and retain such individuals may delay the planned openings of new
restaurants or result in high employee turnover in existing restaurants. A
significant delay in finding qualified employees or high turnover of existing
employees could materially and adversely affect our results of operations or
business. Also, competition for qualified employees could require us to pay
higher wages to attract sufficient qualified employees, which could result in
higher, labor costs. In addition, increases in the minimum hourly wage,
employment tax rates and levies, related benefits costs, including health
insurance, and similar matters over which we have no control may increase our
operating costs.
THE RESTAURANT INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING FOOD
QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE GUESTS TO AVOID OUR
RESTAURANTS AND RESULT IN LIABILITIES.
Health concerns, including adverse publicity concerning food-related illness,
although not specifically related to our restaurants, could cause guests to
avoid our restaurants, which would have a negative impact on our sales. We may
also be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. A lawsuit or claim could result in an adverse
decision against us that could have a material adverse effect on our business
and results of operations. We may also be subject to litigation, which,
regardless of the outcome, could result in adverse publicity. Adverse publicity
resulting from such allegations may materially adversely affect us and our
restaurants, regardless of whether such allegations are true or whether we are
ultimately held liable. Such litigation, adverse publicity or damages could have
a material adverse effect on our business, competitive position and results of
operations.
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY AFFECT OUR FINANCIAL CONDITION.
We are subject to various federal, state and local environmental laws. These
laws govern discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. These laws may also impose liability
for damages from and the costs of cleaning up sites of spills, disposals or
other releases of hazardous materials. We may be responsible for environmental
conditions or contamination relating to our restaurants and the land on which
our restaurants are located, regardless of whether we lease or own the
restaurant or land in question and regardless of whether such environmental
conditions were created by us or by a prior owner or tenant. The costs of any
cleanup could be significant and have a material adverse effect on our financial
position and results of operations.
WE FACE INCREASED EXPENDITURES OF TIME AND MONEY ASSOCIATED WITH COMPLIANCE WITH
CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE.
Keeping abreast of, and in compliance with, changing laws, regulations, and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq National Market
rules, has required an increased amount of management attention and external
resources. We remain committed to maintaining high standards of corporate
governance and public disclosure. As a result, we intend to invest all
reasonably necessary resources to comply with evolving standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue generating activities to
compliance activities.
20
RISKS RELATED TO OUR COMMON STOCK
SINCE OUR SHARES ARE THINLY TRADED, AND TRADING ON THE PINK SHEETS MAY BE
SPORADIC BECAUSE IT IS NOT AN EXCHANGE, STOCKHOLDERS MAY HAVE DIFFICULTY
RESELLING THEIR SHARES.
Our common stock is currently quoted on the Pink Sheets. The fact that our
common stock is not listed is likely to make trading more difficult for
broker-dealers, shareholders and investors, potentially leading to further
declines in share price. An investor may find it more difficult to sell our
common stock or to obtain accurate quotations of the share price of its common
stock.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock could fluctuate substantially due to a
variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies, trading volume
in our common stock, dilution systemic to financing operations, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. Such
litigation, if initiated, could result in substantial costs, a material adverse
effect, and a diversion of management's attention and resources.
FAILURE OF OUR COMMON STOCK TO APPRECIATE IN VALUE COULD AFFECT OUR ABILITY TO
RAISE WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL
OPERATIONS.
A prolonged period in which our common stock trades at current
levels could result in our inability to raise capital and may force us to
reallocate funds from other planned uses, which would have a significant
negative effect on our business plans and operations. If our stock price does
not recover from its current levels, there can be no assurance that we can raise
additional capital or generate funds from operations sufficient to meet our
obligations. If we are unable to raise sufficient capital in the future, we may
not be able to have the resources to continue our normal operations.
THE LARGE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AND THE
FACT THAT A RELATIVELY SMALL NUMBER OF INVESTORS HOLD OUR PUBLICLY TRADED COMMON
STOCK COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
The market price of our common stock could fluctuate as a result of sales by our
existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. A large number of shares
of our stock is eligible for public sale and our common stock is concentrated in
the hands of a small number of investors and is thinly traded. An attempt to
sell by a large holder could adversely affect the price of our common stock.
These sales or the perception that these sales might occur could also make it
more difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S PENNY STOCK REGULATIONS,
WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.
The SEC has adopted regulations which generally define "penny stock" to be any
equity security that has a market price (as defined) less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to certain
exceptions. Our securities are covered by the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell to persons
other than established customers and "accredited investors". The term
"accredited investor" refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC, which provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit the
marketability of our common stock.
21
NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR STOCK.
In addition to the "penny stock" rules described above, the National Association
of Securities Dealers (NASD) has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the NASD believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
We do not expect to declare or pay any dividends. We have not declared or paid
any dividends on our common stock since our inception, and we do not anticipate
paying any such dividends for the foreseeable future.
ANTI-TAKEOVER PROVISIONS.
We do not currently have a shareholder rights plan or any anti-takeover
provisions in our by-laws. Without any anti-takeover provisions, there is no
deterrent for a take-over of our company, which may result in a change in our
management and directors.
OWNERSHIP OF APPROXIMATELY 47% OF OUR OUTSTANDING COMMON STOCK BY 5 STOCKHOLDERS
WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS.
A substantial majority of our capital stock is held by a limited number of
stockholders. Five stockholders, including our officers and directors and
parties affiliated with or related to such persons or to us, own approximately
47% of the shares of common stock outstanding. Accordingly, such stockholders
will likely have a strong influence on major decisions of corporate policy, and
the outcome of any major transaction or other matters submitted to our
stockholders or board of directors, including potential mergers or acquisitions,
and amendments to our Amended and Restated Certificate of Incorporation.
Stockholders other than these principal stockholders are therefore likely to
have little influence on decisions regarding such matters.
BECAUSE "FRESH START" REPORTING WILL MAKE FUTURE FINANCIAL STATEMENTS DIFFICULT
TO COMPARE WITH OUR HISTORICAL FINANCIAL STATEMENTS, IT MAY BE DIFFICULT FOR
INVESTORS TO MEASURE OUR FINANCIAL PERFORMANCE OR ASSESS OUR PROSPECTS FOR
GROWTH.
In accordance with the requirements of SOP 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, we adopted fresh start reporting
effective December 31, 2003. Because SOP 90-7 required us to reset our assets
and liabilities to current fair value, our financial position, results of
operations and cash flows for periods ending after December 31, 2003 will not be
comparable to the financial position, results of operations and cash flows
reflected in our historical financial statements for periods ending on or prior
to December 31, 2003 included elsewhere in this prospectus. The use of fresh
start reporting will make it difficult to assess our future prospects based on
historical performance.
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 March 30, 2004, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair market value of these assets.
FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
required to be filed under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's reports required to be filed under the
Securities Exchange Act of 1934, as amended is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
22
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's President, who serves as the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its subsidiaries to disclose material information
otherwise required to be set forth in the Company's periodic reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence to the bankruptcy filings, all pending litigation and claims
against the Company through December 30, 2003 were stayed, and no party could
take action to realize its pre-petition claims, except pursuant to order of the
Bankruptcy Court. All pre-petition claims have been treated within the Plan.
The Company is periodically a defendant in cases involving personal injury
and other matters that arise in the normal course of business. While any pending
or threatened litigation has an element of uncertainty, the Company believes
that the outcome of any pending lawsuits or claims, individually or combined,
will not materially affect the financial condition or results of operation.
ITEM 2. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4. OTHER INFORMATION
Effective as of April 29, 2004 the new trading symbol for the Company's common
stock is "STPK.PK"
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.21. A. Stone Douglass Employment Agreement
10.22. Susan Schulze-Claasen Employment Agreement
10.23. Joseph L. Wulkowicz Employment Agreement
31.1 Certification of Principal Executive Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
31.2 Certification of Financial Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.2 Certification of Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEAKHOUSE PARTNERS INC.
BY: /S/ A Stone Douglass BY: /S/ Joseph L Wulkowicz
.................................. .....................................
A Stone Douglass Joseph L Wulkowicz
President, Secretary and Director Vice President and Chief Financial Officer
(Serving as principal executive (Serving as principal financial and
officer) (accounting officer)
24