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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
------------------------
FORM 10 -K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 26, 2000
Commission File Number: 000-23739
STEAKHOUSE PARTNERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3248672
(State of Incorporation) (I.R.S. Employer I.D. Number)
10200 Willow Creek Road, San Diego, California 92131
(Address of principal executive offices and Zip Code)
(858) 689-2333
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.
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: /X/ YES / / NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: /X/
Registrant's revenues for its most recent fiscal year (ended December 26, 2000):
$131,635,804.
Aggregate market value of voting stock held by non-affiliates: $5,093,720.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
3,386,522 common shares were outstanding as of December 26, 2000.
Documents Incorporated by Reference:
Part III -- Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.
The index to exhibits is located on page 20.
FORM 10-K
STEAKHOUSE PARTNERS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 26, 2000
TABLE OF CONTENTS
Item PAGE
PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 9
Item 3. Legal Proceedings................................. 10
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..................... 10
Item 6. Selected Financial Data........................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 12
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk..................................... 16
Item 8. Financial Statements and Supplementary Data....... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 17
PART III
Item 10. Directors, Executive Officers of the Registrant... 17
Item 11. Executive Compensation............................ 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 17
Item 13. Certain Relationships and Related Transactions.... 17
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 17
Signatures.................................................. 19
(i)
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
This Annual Report on Form 10-K and the documents incorporated herein by
reference 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. All statements other than statements of historical fact made in this
Annual Report on Form 10-K are forward looking. In particular, the statements
herein regarding industry prospects and future results of operations or
financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us"
and "our"), currently operates 65 full-service steakhouse restaurants located in
eleven states. The Company's restaurants specialize in complete steak and prime
rib meals, and also offer fresh fish and other lunch and dinner dishes. The
Company's average dinner check is approximately $23.00 (including alcoholic
beverages) and it currently serves over 6.8 million meals annually. The Company
operates principally under the brand names of Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers. Company 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.
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned 78 steakhouse restaurants
and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food distribution
company. Paragon and Pacific Basin are now wholly owned subsidiaries of the
Company.
OUR BUSINESS BACKGROUND
The steakhouse restaurant industry is expected to continue to expand
substantially over the next five years. We believe that this industry is highly
fragmented and presents an excellent opportunity for us to grow our business
nationwide by expanding Paragon's brand-name steakhouses through the
construction of new Hungry Hunter's, Hunter's Steakhouse, Mountain Jack's and
Carvers restaurants and the acquisition of other, large regional steakhouse
chains.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that
attract loyal clientele. By our use of the term destination restaurants, we mean
that we seek to establish our restaurants as the primary destination of our
clientele, rather than a destination or activity ancillary to another activity,
such as shopping or sight-seeing. All of our restaurants are full-service
steakhouses. Our restaurants feature only USDA Choice, midwestern corn-fed beef.
Unlike many of our competitors, we do not serve plastic-wrapped vacuum sealed
steaks but rather we hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is another "signature product" and is
the basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous
and full liquor and bar service is available. Alcoholic beverage service
accounts for approximately 19% of our net sales.
Most of our restaurants are open daily from 4:30 p.m. to 9:30 p.m. on
weekdays and from 4:00 p.m. to 10:00 p.m. on weekends. Some restaurants are open
for lunch beginning at 11:00 a.m. on weekdays; but most of these restaurants are
closed for lunch on weekends.
We currently operate in three distinctive steakhouse markets.
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HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 49 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is in
the under $25.00 per guest range. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and have the
"look and feel" of a special restaurant. For this reason, we have been able to
position our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's
steakhouses as a step-above the lower ticket Outback and Lone Star restaurant
chains.
Our menu also features fresh fish and chicken in addition to steaks. A
complete meal includes salad and a choice of side dishes including baked potato,
french fries and steamed vegetables. The menu also includes appetizers and
desserts.
Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's restaurants
are typically free-standing buildings with dinner seating capacities ranging
from 150 to 475 seats and an average seating capacity of approximately 220
seats. Unlike a typical Outback or Lone Star, our restaurants typically have one
or more banquet rooms to accommodate private parties and corporate events. The
bar in each restaurant is generally located adjacent to the dining room
primarily to accommodate customers waiting for dining tables and up to
approximately 30 additional diners at between six and nine tables.
We are currently developing the next generation of our classic steakhouse
concept under the names J. Dempsey's and H. Hunter Steakhouse. Each will
continue to be positioned as a step above the lower ticket Outback and Lone Star
Steakhouses.
CARVERS
We have 11 steakhouses operating in the upscale steakhouse dining segment
under the Carvers brand name with an average check per guest of slightly less
than $35.00. Carvers is a sophisticated, upper tier mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are higher than those of our other restaurants, but are
substantially lower than high-end steakhouses such as Morton's and Ruth's Chris.
Our Carvers restaurants are also typically housed in free-standing
buildings with dinner seating capacities ranging from 180 to 240 seats and an
average seating capacity of approximately 220 seats. The Carvers restaurants
also have one or more banquet rooms to accommodate private parties and corporate
events.
UNIQUE CONCEPTS
We have five unique formal restaurants housed in landmark buildings in
prime locations near or at tourist sites which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants is similar to Hungry Hunter's or Carvers and the average dinner
check per guest is between $25.00 and $35.00. These restaurants all have one or
more banquet rooms.
CORPORATE STRATEGY
We believe that a critical component to our success is to exceed the
expectations of each guest by providing a dining experience characterized by
high quality, personalized service and quality menu selections. We also believe
that ambiance, location and price-value relationship are keys to success in the
restaurant industry. We differentiate our restaurants by emphasizing the
following strategic elements:
* High-quality and attentive service.
* Consistent high-quality, fresh products achieved through careful
ingredient selection, generous food preparation and aging of steaks.
* Positioning in the mid-priced, full service steakhouse segment of the
restaurant industry.
* Strong emotional value through branding.
2
GROWTH STRATEGY
Our goal is to enhance our position as a leader in the steakhouse
restaurant industry by building through internal growth, licensing, and
acquisitions, a national network of steakhouse restaurants. Key components of
our strategy include the following:
* Leverage established brands. Paragon has been in the steakhouse business
since 1967 and we believe our Hungry Hunter's, Hunter's Steakhouse,
Mountain Jack's and Carvers brands are well established in the industry.
We plan to test the licensing of our brands with selected operators in
2001.
* Expand internal growth. We believe our management team has the ability to
recognize opportunities for further large steakhouse chain acquisitions
and the expertise to execute and improve on those acquisitions once they
are acquired. We believe our experienced management team can capitalize
on the fragmented nature of the successful steakhouse market.
* Operating efficiencies. We believe our integration strategy affords us
the ability to achieve operating efficiencies and cost savings through
volume discounts on purchases. Also, with our increasing size, we can
lower costs and better manage our expenses. We provide centralized
accounting functions and administrative functions to enhance our
efficiencies.
* Efficient penetration of new markets. We believe we avoid many of the
costs and risks associated with entering new geographic markets. We
consider the location of each restaurant to be critical to its long-term
success and management devotes significant effort to the investigation
and evaluation of potential sites. The site selection process focuses on
regional and trade area demographics, target population density,
household income and educational levels and traffic patterns, as well as
specific site characteristics such as visibility, accessibility, traffic
volume and the availability of adequate parking. We also review potential
competition and customer activity at other restaurants operating in the
area.
MARKETING
We rely principally on our commitment to customer service and excellent
price-value relationship to attract and retain customers. Accordingly, we focus
our resources on seeking to provide customers with high-quality and attentive
service, value and an exciting and vibrant atmosphere.
Our marketing efforts consist of local media advertising and couponing.
Local advertising and couponing consists of bulk mailers, free-standing
newspaper inserts and targeted direct mailers. We have also successfully offered
discounts to encourage more people to try our restaurants, as well as to
increase weekday customer counts.
To promote local community awareness, each restaurant manager is encouraged
to become part of the local community. Many restaurants host meetings with
community leaders to solicit local input about the restaurants' potential
community participation.
For each new restaurant, we conduct a pre-opening awareness program
beginning approximately two to three weeks prior to, and ending four to six
weeks after, the opening of a restaurant. A given program typically would
include special promotions, site signs, sponsorship of a fund-raising event for
a local charity to establish ties to local community leaders and increase
awareness of the new restaurant, and pre-opening trial operations, to which the
family and friends of new employees would be invited.
RESTAURANT OPERATIONS AND MANAGEMENT
We maintain quality and consistency in our restaurants through the careful
hiring, training and supervision of personnel and the establishment of standards
relating to food and beverage preparation, maintenance of facilities and conduct
of personnel. To achieve our service goals, each service employee completes an
extensive training program, which teaches employees to provide the level of
quality service that encourages guests to return and request the same server on
subsequent visits.
We maintain financial and accounting controls for each of our restaurants
through the use of centralized accounting and management information systems.
All levels of our management participate in the ongoing process of strategic and
financial planning and our systems are continuously refined to allow management
to compare actual results with budgets and projections.
3
We also utilize modern management information systems to allow timely
information analysis and response. Our computerized point-of-sale (POS) data
management system and related telecommunication equipment permits daily polling
of restaurant operations and rapid collection of sales data and cash management
information. Transaction level data is electronically transferred from each
restaurant location via POS systems on a daily basis. By consolidating
individual restaurant's sales, purchasing, payroll, operating expenses, guest
related statistics and other data, we can regularly monitor restaurant
operations. Management uses real-time information and control systems to reduce
labor costs, to maintain constant surveillance of inventory usage and to analyze
various aspects of restaurant operations including ideal food costs, sales mix,
labor minutes per meal, promotional programs, restaurant costs and general
marketing data.
The management team for a typical steakhouse restaurant generally consists
of one general manager, two assistant managers and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 50 to 70 hourly
employees, many of whom work part-time. Typically, each general manager reports
directly to a District Leader, who each supervise eight to 12 restaurants, and
who, in turn, reports to our vice president of operations. Restaurant managers
complete an extensive training program during which they are instructed in areas
including food quality and preparation, customer satisfaction, alcoholic
beverage service, governmental regulations compliance, liquor liability
management and employee relations. Restaurant managers are also provided with an
operations manual relating to food and beverage preparation, all areas of
restaurant management and compliance with governmental regulations. Working in
concert with the individual restaurant managers, our senior management define
operations and performance objectives for each restaurant and monitor
implementation. Senior management regularly visit various of our restaurants and
meet with the respective management teams to ensure compliance with our
strategies and standards of quality in all respects of restaurant operations and
personnel development.
Each of our new restaurant employees participates in a training program
during which the employee works under the close supervision of a restaurant
manager, or an experienced key employee. Management continuously solicits
employee feedback concerning restaurant operations and strive to be responsive
to the employees' concerns.
PURCHASING
We purchase a major portion of our food and beverage products from our
wholly owned subsidiary, Pacific Basin Foods, at below market rates. Food and
supplies are shipped directly to the restaurants, although invoices for
purchases are sent to us for payment. Our emphasis on high-quality food requires
frequent deliveries of fresh food supplies.
PACIFIC BASIN FOODS
Our Pacific Basin Foods subsidiary is a wholesale food distributor serving
the restaurant industry. Its principal clients are Paragon and several small
regional chains. Pacific Basin Foods has warehouses located in Rantoule,
Illinois and in San Diego, California, from which it services its customers. In
addition to the sale and distribution of food supplies to restaurants, Pacific
Basin Foods provides furniture, fixtures and equipment to restaurants.
COMPETITION
Competition in the restaurant industry is increasingly intense. We compete
with other mid-priced, full service restaurants, which are not necessarily
steakhouse restaurants, primarily on the basis of quality of food and service,
ambiance, location and price-value relationship. We also compete with a number
of other steakhouse restaurants within our markets, including both locally owned
restaurants and regional or national chains. We believe that the quality of our
service, our well-regarded brands, attractive price-value relationship and
quality of food will enable us to differentiate ourselves from our competitors.
We also compete with other restaurants and retail establishments for sites. Many
of our competitors are well-established in the mid-priced dining segment and
certain competitors have substantially greater financial, marketing and other
resources than us. We believe that our ability to compete effectively will
continue to depend upon our ability to offer high-quality, mid-priced food in a
full service, distinctive dining environment.
4
GOVERNMENT REGULATION
Our restaurants are subject to numerous federal, state and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant
currently has appropriate licenses from regulatory authorities allowing it to
sell liquor, beer and wine, and each restaurant has food service licenses from
local health authorities. We are required to renew these licenses annually. In
addition, these licenses may be suspended or revoked at any time for cause,
including violation by us or our employees of any law or regulation pertaining
to alcoholic beverage control, such as those regulating the minimum age of
patrons or employees, advertising, wholesale purchasing and inventory control.
Our failure to obtain or retain liquor or food service licenses would likely
have a material adverse effect on our operations. In order to reduce this risk,
each of our restaurants is expected to be operated in accordance with
standardized procedures designed to assure compliance with all applicable codes
and regulations. Difficulties in obtaining or failures to obtain the required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area. In certain states, there is a set number of alcoholic
beverage licenses available, but there is an active market through which new
licenses can be obtained at the then-applicable market price. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect our ability to obtain such a license elsewhere.
We are subject in certain states to "dram-shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of its
comprehensive general liability insurance.
Our restaurant operations are also subject to federal and state minimum
wage laws governing such matters as working conditions, overtime and tip credits
and other employee matters. Significant numbers of our food service and
preparation personnel are paid at rates related to the federal minimum wage.
Government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on us or our restaurants to date.
The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. We intend to ensure
that our restaurants will be in full compliance with the Disabilities Act, and
we intend to review plans and specifications and make periodic inspections to
ensure continued compliance. Our current restaurants are designed to be
accessible to the disabled. We believe that we are in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. We do not anticipate that such compliance will require us to
expend substantial funds.
EMPLOYEES
At March 20, 2001, we employed 3,399 individuals, of which 291 occupy
executive or managerial positions, approximately 3,100 hold non-managerial
restaurant-related positions and the balance occupy clerical and office
positions. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be good and have not
experienced any interruption of operations due to labor disputes.
5
RESTAURANT LOCATIONS AS OF MARCH 20, 2001
The following table sets forth the location of our existing Hungry
Hunter's, Hunter's Steakhouse, Mountain Jack's, Carvers restaurants and our
unique formal restaurants:
HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE, AND MOUNTAIN JACK'S LOCATIONS:
ARIZONA Oakland INDIANA NEVADA
Phoenix (2) Oceanside Indianapolis Las Vegas
Tempe Pleasanton Lafayette
Yuma S. San Francisco NORTH CAROLINA
S. San Jose MICHIGAN Raleigh
CALIFORNIA Sacramento Auburn Hills Traverse City
Anaheim San Diego Clinton Township
Bakersfield Santa Rosa Dearborn Heights OHIO
Concord Temecula Grandville Canton
Fairfield Thousand Oaks Kentwood Elyria
Fremont Ventura Lansing Independence
Lake Forest Taylor Middleburg Heights
Milpitas ILLINOIS Troy North Olmstead
Modesto Springfield Portage Toledo
WISCONSIN
Madison (2)
CARVERS LOCATIONS: Farmington Hills, Michigan UNIQUE FORMAL LOCATIONS:
Glendale, Arizona Henderson, Nevada Folson, California
Scottsdale, Arizona Beachwood, Ohio Rancho Cordova,
Rancho Bernardo, California Centerville, Ohio Riverside, California
Roseville, California Orem, Utah South Bend, Indiana
Greenwood, Indiana Sandy, Utah Williamsburg, Virginia
The leases for the above locations have initial terms generally ranging
from 20 to 35 years and, in certain instances, provide for renewal options
ranging from five to 25 years. Certain of these leases require additional
contingent rental payments by us if sales volumes at the related restaurants
exceed specified levels. Most of these lease agreements require payments of
taxes, insurance and maintenance costs by us.
Steakhouse Partners' executive offices are located at 10200 Willow Creek
Road, San Diego California 92131. The telephone number is (858) 689-2333.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
IF WE ARE NOT SUCCESSFUL IN OUR EXPANSION PLANS, OUR BUSINESS OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED.
We intend to expand our operations through the construction of new
restaurant properties and conversion of acquired restaurant properties to our
restaurant brand names. We also intend to expand through the targeted
acquisition of one or more large restaurant chains. 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.
6
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 will be adversely affected. Construction
delays or cost overruns 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.
Also, if we are not successful in identifying suitable restaurant targets,
measuring the fair value of the restaurant targets, or operating the acquired
restaurants, our business will be adversely affected.
Our growth strategy may also strain our management and other resources. To
manage our growth, we must:
* maintain a high level of quality and service at our existing and future
restaurants;
* enhance our operational, financial and management expertise; and
* hire and train experienced and dedicated operating personnel.
WE HAVE INCURRED LOSSES FROM INCEPTION AND MAY NEVER GENERATE SUBSTANTIAL
PROFITS.
We were organized in May 1996 and have incurred losses from inception. We
may never generate profits. We incurred a net loss of approximately $621,000 for
the fiscal year ended December 26, 2000, a net loss of approximately $3.9
million for the fiscal year ended December 26, 1999 and a net loss of
approximately $3.0 million for the fiscal year ended December 29, 1998. As of
December 26, 2000 we had an accumulated deficit of approximately $9.5 million.
In order to operate profitably, we must:
* further improve operating margins at our existing restaurants;
* successfully expand our operations in a cost effective manner; and
* capitalize on the general and administrative cost savings implemented
during the last fiscal year.
THE COMPANY RECEIVED A NOTICE FROM THE NASDAQ SMALLCAP MARKET STATING THAT IT
MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
In November 2000, we received a notice from The Nasdaq SmallCap Market
indicating that we failed to meet Nasdaq's $2 million in net tangible assets
standard for continued listing on The Nasdaq Small Cap Market. A hearing has
been scheduled with Nasdaq to review that determination. At the hearing we plan
to present, among other things, this Annual Report on Form 10-K, which reflects
net tangible assets of approximately $2.2 million.
Delisting of Steakhouse Partner, Inc.'s common stock from The Nasdaq
SmallCap Market would cause the price of the common stock to drop and impair the
ability of holders to sell their shares. In addition, in order to be relisted on
Nasdaq if our stock is delisted, we would have to comply with the initial
listing requirements, which are substantially more onerous than the maintenance
standards. In the event our securities are delisted from Nasdaq, such delisting
would also adversely affect our ability to raise financing.
IF HOOF-AND-MOUTH DISEASE SPREADS TO THE UNITED STATES IT COULD HAVE A NEGATIVE
EFFECT ON OUR FINANCIAL RESULTS.
There has been a recent outbreak of hoof-and-mouth disease (also known as
foot-and-mouth disease) in Great Britain and France. If the disease spreads to
animals in the United States, it could have a negative effect on our financial
results by reducing the amount of beef consumption in the United States and/or
making meat more expensive at the market. Although hoof-and-mouth disease has
not occurred in the United States since 1929, there can be no assurance that
this most recent outbreak won't spread to the United States.
Hoof-and-mouth disease is a highly communicable virus that affects mainly
cows and pigs. An animal with hoof-and-mouth disease will develop a fever and
blisterlike lesions on its tongue, lips and between its hooves. Even if an
animal recovers, the disease will dramatically reduce the animal's ability to
produce milk and cause the animal to grow more slowly, thus making meat more
expensive at the market.
7
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.
Our restaurant operations are subject to certain federal and state laws and
government regulations:
* National and local health and sanitation laws and regulations;
* National and local employment and safety laws and regulations; and
* Local zoning, building code and land-use regulations.
We cannot assure you that we will be able to fully comply with all such
laws and regulations. Failure to comply with any of these laws or regulations,
or the loss of our liquor licenses, would have a material adverse effect on our
business. In addition, each of our restaurants must obtain licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and each
restaurant must obtain a food service license from local health authorities.
Each restaurant's liquor license must be renewed annually and may be revoked at
any time for cause. Liquor accounts for a large percentage of our sales and the
loss of this traffic would materially adversely impact our revenues.
We may be subject to "dram-shop" liability, which generally provides a
person injured by an intoxicated person with the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.
ADVERSE ECONOMIC CONDITIONS IN A LIMITED NUMBER OF STATES COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS.
Our restaurants are located in 11 states, predominantly on the West Coast
and in the Great Lakes region. Adverse economic conditions in these regions
could have an adverse effect on our financial results. Each of our restaurants
represents a significant investment and long-term commitment which limits our
ability to respond quickly or effectively to changes in local competitive
conditions or other changes that could affect our operations.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS WE WILL NOT BE ABLE
TO INCREASE REVENUES OR GENERATE PROFITS.
Our ability to increase revenues and operate profitably is directly related
to our ability to compete effectively with our competitors. Many of our
competitors have been in existence longer than us, have a more established
market presence and have substantially greater financial, marketing and other
resources than us.
Key competitive factors include:
* the quality and value of the food products offered;
* the quality of service;
* the price of the food products offered;
* the restaurant locations; and
* the ambiance of facilities.
We compete with other steakhouse restaurants specifically and with all
other restaurants in general. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry. As our competitors expand operations,
competition from steakhouse restaurants with concepts similar to ours can be
expected to intensify. We cannot assure you that third parties will not be able
to successfully imitate and implement our concepts. Such increased competition
could adversely affect our revenues.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR POTENTIAL PROFITABILITY.
Our potential profitability is highly sensitive to increases in food, labor
and other operating costs. Our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in
8
supply could materially and adversely affect our operations. In addition,
unfavorable trends or developments concerning the following factors could
adversely affect our results:
* inflation, food, labor and employee benefit costs; and
* rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we cannot
modify our purchase practices or quickly or readily pass on increased costs to
customers, our business could be materially affected.
BECAUSE IT MAY BE DIFFICULT TO EFFECT A CHANGE IN CONTROL WITHOUT CURRENT
MANAGEMENT'S CONSENT, A POTENTIAL SUITOR WHO OTHERWISE MIGHT BE WILLING TO PAY A
PREMIUM FOR ACQUIRING US MAY DECIDE NOT TO ATTEMPT AN ACQUISITION OF STEAKHOUSE
PARTNERS.
Our executive officers, directors, and their affiliates beneficially own
1,579,462 shares of our common stock. This represents approximately 35.1% of the
common stock issued and outstanding. Our executive officers also collectively
own 1,000,000 shares of Series B Preferred Stock and 1,750,000 shares of Series
C Preferred Stock, each of which carries voting rights with our common stock on
a one vote per share basis. Such concentration of ownership and voting power may
have the effect of delaying, deferring or preventing a change in control of
Steakhouse Partners.
In addition, the board of directors has the authority to issue up to
2,250,000 additional shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
such stock without further shareholder approval. The rights of the holders of
common stock will be subjected to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Issuance
of additional shares of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Steakhouse Partners.
SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT PRICES
SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as the price that holders may achieve for their shares upon any
future sale.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE
TERMS, WE MAY HAVE TO CURTAIL OR SUSPEND THE EXPANSION OF OUR OPERATIONS, WHICH
COULD LEAD TO OVERALL LOWER REVENUES AND ADVERSELY EFFECT OUR FINANCIAL RESULTS
AND PROSPECTS.
We currently do not have any firm commitments for additional financing. We
cannot be certain that additional financing will be available when and to the
extent required or that, if available, it will be on acceptable terms. If we are
unable to obtain additional funds in a timely manner or on acceptable terms, we
may have to curtail or suspend the expansion of our operations, which could lead
to overall lower revenues and adversely effect our financial results and
prospects. If adequate funds are not available on acceptable terms, we may not
be able to fund our expansion or respond to competitive pressures.
ITEM 2. DESCRIPTION OF PROPERTY.
As of March 24, 2001, the Company leased all of its restaurant locations
and five of the Company's restaurants were closed for renovation. Lease terms
are generally 10 to 35 years, with renewal options. All of the Company's leases
provide for a minimum annual rent and some leases provide for additional rent
based on sales volume at the particular location over specified minimum levels.
Generally, the leases are net leases which require the Company to pay the costs
of insurance, taxes and maintenance. The Company intends to continue to purchase
restaurant locations where cost-effective.
9
On July 19, 2000, the Company completed a sale and leaseback transaction
with RS Realty Partners, LP with respect to 19 of its properties, yielding net
proceeds of approximately $22 million. The Company utilized a majority of these
net proceeds to pay down a $20 million mortgage debt.
The Company's executive offices are located at 10200 Willow Creek Road, San
Diego, California 92131. The Company believes that there is sufficient office
space available at favorable leasing terms in the San Diego, California
metropolitan area to satisfy the additional needs of the Company that may result
from future expansion.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there are no legal proceedings which will
have a material adverse effect on the financial position or operating results of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this Report.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Common Stock of the Company has been trading on the NASDAQ SmallCap
Market under the symbol "SIZL" since February 27, 1998, the date of the
Company's initial public offering.
The following table sets forth the range of high and low closing prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
HIGH LOW
---- ---
Year ended December 31, 1999
First Quarter.............................. $ 8.63 $ 4.13
Second Quarter............................. 7.31 4.00
Third Quarter.............................. 9.25 6.07
Fourth Quarter............................. 7.375 4.875
HIGH LOW
---- ---
Year ended December 31, 2000
First Quarter.............................. $ 7.00 $ 4.50
Second Quarter............................. 5.35 2.03
Third Quarter.............................. 4.75 2.25
Fourth Quarter............................. 7.22 2.75
HOLDERS
As of March 25, 2001, there were approximately 470 record holders of the
Company's Common Stock.
DIVIDENDS
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not issue within the period covered by this Report any
securities which were not registered pursuant to the Securities Act of 1933, as
amended.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the three years ended December
31, 2000 has been derived from the Company's Consolidated Financial Statements.
This data should be read in conjunction with Consolidated Financial Statements
and related Notes for the year ended December 31, 2000, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
INCOME STATEMENT DATA: 2000 1999 1998
---------------------- ------------ ------------ -----------
REVENUES............................................ $131,635,804 $167,800,573 $ 6,519,421
------------ ------------ -----------
COST OF SALES
Food and beverage................................. 50,030,402 79,928,345 2,569,457
Payroll and payroll related costs................. 41,253,070 46,093,086 2,001,542
Direct operating costs............................ 26,074,710 28,513,663 1,441,367
Depreciation and amortization..................... 3,927,687 4,213,750 148,156
------------ ------------ -----------
Total cost of sales............................ 121,285,869 158,748,844 6,160,522
------------ ------------ -----------
GROSS PROFIT........................................ 10,349,935 9,051,729 358,899
COSTS AND EXPENSES
General and administrative expenses............... 8,257,405 8,365,542 2,219,992
------------ ------------ -----------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)......... 2,092,530 686,187 (1,861,093)
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, and equipment.... 1,589,480 -- --
Interest income................................... -- 36,942 68,495
Miscellaneous income.............................. 271,821 -- --
Interest and financing costs...................... (3,524,994) (4,607,781) (884,961)
Impairment of property, plant, and equipment...... (388,868) -- --
Impairment of goodwill............................ (194,514) -- --
Forgiveness of officer advances................... (442,058) -- --
------------ ------------ -----------
Total other income (expense)................... (2,689,133) (4,570,839) (816,466)
------------ ------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT......... (596,603) (3,884,652) (2,677,559)
PROVISION FOR INCOME TAXES.......................... 24,841 10,387 6,044
------------ ------------ -----------
LOSS BEFORE EXTRAORDINARY LOSS ON DEBT
EXTINGUISHMENT.................................... (621,444) (3,895,039) (2,683,603)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT........... -- -- (278,125)
------------ ------------ -----------
NET LOSS............................. $ (621,444) $ (3,895,039) $(2,961,728)
------------ ------------ -----------
------------ ------------ -----------
BASIC AND DILUTED LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM................................ $ (0.18) $ (1.39) $ (1.26)
------------ ------------ -----------
------------ ------------ -----------
EXTRAORDINARY LOSS PER SHARE........................ $ -- $ -- $ (0.13)
------------ ------------ -----------
------------ ------------ -----------
BASIC AND DILUTED LOSS PER SHARE AFTER EXTRAORDINARY
ITEM.............................................. $ (0.18) $ (1.39) $ (1.39)
------------ ------------ -----------
------------ ------------ -----------
BALANCE SHEET DATA: 2000 1999 1998
------------------- ------------ ------------ -----------
Current assets. $ 8,917,182 $ 11,701,064 $12,219,301
TOTAL ASSETS........................................ $ 45,387,251 $ 63,080,613 $67,446,977
TOTAL DEBT, EXCLUDING CAPITAL LEASE OBLIGATIONS..... $ 5,797,953 $ 26,115,608 $27,290,713
Stockholders' equity.............................. $ 2,172,237 $ 2,501,346 $ 1,551,705
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
company's actual results may differ significantly from management's
expectations. The following discussion and the section entitled "Business --
Additional Factors That May Affect Future Results" describes some, but not all,
of the factors that could cause these differences.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and related footnotes for the
year ended December 26, 2000 included in this Annual Report. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
OVERVIEW
The Company currently operates 65 full-service steakhouse restaurants
located in 11 states. The Company operates under the brand names of Carvers,
Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's, Mountain Jack's
Steakhouse, Red Oak, Texas Loosey's and Galveston's. On December 21, 1998, the
Company acquired Paragon Steakhouse Restaurants, Inc. ("Paragon"), which owned
78 steakhouses, of which five were closed, and Pacific Basin Foods, Inc., a
restaurant food distribution company. Prior to the acquisition of Paragon, the
Company owned and operated four restaurants.
The Company believes that its restaurants are well positioned in a high
quality, moderately priced segment of the restaurant industry. With the
acquisition of Paragon's Carvers restaurants, the Company has entered the
upscale restaurant market specializing in complete steak, chop, prime rib and
seafood meals. Our growth strategy is based on internal growth and growth
through acquisition. Internal growth focuses on improvement in same store sales
and construction of new restaurant properties. Acquisition growth focuses on
conversion of acquired restaurant properties to our steakhouse brand names and
the targeted acquisition of one or more large steakhouse chains.
To the extent we build steakhouses in new locations there is likely to be a
time lag between when the expenses of the startup are incurred and when the
newly constructed steakhouses are opened and begin to generate revenues, which
time lag could affect quarter-to-quarter comparisons and results.
Since acquiring Paragon in December 1998, one of the areas the Company has
focused on is reducing the operational, general and administrative expenses.
Prior to the acquisition, the general and administrative (including divisional)
expenses related to the restaurants operated by Paragon were approximately $9
million annually. During the first fiscal quarter of 1999, the Company
identified areas in which general and administrative expenses could be reduced
and the Company began immediately making the necessary changes to reduce these
expenses. During the second fiscal quarter of 1999, the Company began making the
necessary operational changes to improve quality, customer satisfaction and
reduce cost. The Company realized the full effect of the operational
improvements in the fourth fiscal quarter of 1999.
Our overall steakhouse operations tend to experience seasonal fluctuations,
with the fourth quarter and first quarter of each year being our strongest
quarters, reflecting both the Christmas season and the colder weather at our
Mid-west operations, and the third quarter being the weakest, as people tend to
eat less steak in restaurants in the summer months. This seasonality, however,
is less pronounced at our
12
California locations, which do not experience the same seasonal changes in
weather that occur at our Mid-west locations.
We have three business units, which have separate management and reporting
infrastructures that offer different products and services. The business units
have been aggregated into two reportable segments, restaurant services and food
service distribution, since the long-term financial performance of these
reportable segments is affected by similar economic conditions. The restaurant
services segment consists of two business units -- Paragon Steakhouse
Restaurants, Inc. and Steakhouse Partners, Inc. -- that operate specialty
restaurants around the country. Our food service distribution segment, which
operates as Pacific Basin Foods, performs distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.
Since our Pacific Basin Foods subsidiary is in the wholesale business of
providing food supplies to restaurants, its profit margin on sale of food
products to restaurants is significantly less than the margin that can be
obtained through restaurant sales. In addition, since Pacific Basin Foods
maintains a large inventory of food supplies to service its wholesale customers,
its business is more susceptible to the risk of inventory obsolescence than our
other business operations.
RESULTS OF OPERATIONS
Year Ended December 26, 2000 Compared to the Year Ended December 28, 1999
Revenues for the year ended December 26, 2000 decreased $36,164,769 or
21.6% from $167,800,573 for the year ended December 28, 1999 to $131,635,804 for
the same period in 2000. The decrease is entirely attributable to the sale or
closure of 8 under performing Paragon and Galveston restaurants and the loss of
Pacific Basin Foods' 2 largest external customers. This was partially offset by
a 4.1% increase in Paragon's same store sales from the comparable fifty-two week
period in 1999. Pacific Basin Foods revenues for the fifty-two week period ended
December 26, 2000 decreased $30,227,647 or 79.0% from $38,245,252 for the
fifty-two week period ended December 28, 1999 to $8,017,605 for the same period
in 2000. Revenue from the Company's original restaurants (Galveston) decreased
$1,585,713 or 63.6% from $2,493,467 for the fifty-two week period ended December
28, 1999 to $907,754 for the same period in 2000. The decrease was the result of
selling one, subleasing another and closing down a third pending its sale. Net
revenue for Paragon Steakhouse Restaurants increased 4.1% for the fifty-two week
period ended December 26, 2000 compared to the net revenue for comparable (64)
restaurants for the same fifty-two week period ended December 28, 1999.
Food and beverage costs for the fifty-two week period ended December 26,
2000 decreased $29,897,943 or 37.4% from $79,928,345 for the fifty-two week
period ended December 28, 1999 to $50,030,402 for the same period in 2000. Food
and beverage costs for the restaurants only as a percentage of restaurant
revenues was 38.0% for the fifty-two week period ended December 26, 2000
compared to 47.6% for the same period in 1999. The factors for this improvement
were operating efficiencies, menu simplification and a small price increase
partially offset by higher beef costs. The food and beverage costs of Paragon's
food distribution subsidiary, Pacific Basin Foods, Inc., were 86.2% of the food
distribution revenue for the fifty-two week period ended December 26, 2000
compared to 90.6% for the same period in 1999. The main reason for this
improvement was the replacement of larger less profitable external customers
with smaller more profitable ones. The total food and beverage cost which
includes the restaurants and the food distribution subsidiaries as a percentage
of total revenue was 38.0% for the fifty-two week period ended December 26, 2000
compared to 47.6% for the same period in 1999. The major reason for this
reduction is the decrease in the food distribution subsidiary's business and its
proportionate effect on these numbers.
Payroll and payroll related costs for the fifty-two week period ended
December 26, 2000 decreased $4,840,016 or 10.5% from $46,093,086 for the
fifty-two week period ended December 28, 1999 to $41,253,070 for the same period
in 2000. The total payroll and payroll related costs which includes the
restaurants and the food distribution subsidiaries as a percentage of revenues
were 31.3% for the fifty-two week period ended December 26, 2000 compared to
27.5% for the same period in 1999. The major reason for this increase is the
decrease in the food distribution subsidiary's business coupled with the
reduction in force expense and its proportionate effect on these numbers. The
food distribution subsidiary's payroll and payroll related costs typically ran
about 5.4% for the same period in 1999.
13
Payroll and payroll related costs for the restaurants only were 32.0% of
restaurant revenues for the fifty-two week period ended December 26, 2000
compared to 33.3% for the fifty-two week period ended December 28, 1999. The
decrease is principally due to the operational efficiencies and improvements
that management introduced in the second quarter of 1999 partially offset by an
increase in the minimum wage and higher non-recurring training expenses in 2000.
Direct operating costs include all other unit-level operating costs, the
major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, rent and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Direct operating
costs for the fifty-two week period ended December 26, 2000 decreased $2,438,953
or 8.6% from $28,513,663 for the fifty-two week period ended December 28, 1999
to $26,074,710 for the same period in 2000. These costs as a percentage of
restaurant revenues were 21.0% for the fifty-two week period ended December 26,
2000 compared to 22.0% for the same period in 1999. Direct operating costs for
the restaurants only were 19.4% of restaurant revenue for the fifty-two week
period ended December 26, 2000 compared to 20.4% for the fifty-two week period
ended December 28, 1999. The decrease is primarily due to the cost reduction
program and elimination of excessive coupon usage implemented during the first
half of 1999. This was partially offset by higher utility costs especially in
the California units, the operating lease portion of the sale leaseback and
investing more dollars in the Company's guest relations program in the second
half of the period.
Depreciation and amortization for the fifty-two week period ended December
26, 2000 decreased $286,063 or 6.8% from $4,213,750 for the fifty-two week
period ended December 28, 1999 to $3,927,687 for the same period in 2000. The
decrease is principally due to the sale of one non-performing Texas Loosey's
restaurant, five non-performing Paragon steakhouse restaurants (of which one was
already closed) this was partially off set by adjusting Paragon's asset base to
reflect the purchase price paid by Steakhouse Partners and new asset life.
General and administrative expenses for the fifty-two week period ended
December 26, 2000 decreased $108,137 or 1.3% from $8,365,542 for the fifty-two
week period ended December 28, 1999 to $8,257,405 for the same period in 2000.
General and administrative expenses as a percentage of restaurant revenues was
6.7% for the fifty-two week period ended December 26, 2000 compared to 6.5% for
the same period in 1999. The same percentage relationship to revenues is
principally due to non-recurring expenses associated with the acquisition of
Paragon not being incurred for the same period in 2000, as well as, the
reduction in force and other cost savings measures implemented by management in
the first half of 1999. These savings are partially offset by planned
investments in additional training programs and recruitment to develop and
improve the Company's District Leaders and General Managers, as well as,
additional consulting and management fees incurred for the reorganization of
Pacific Basin Foods and analysis of potential acquisition targets.
Total other income and interest expense, net for the fifty-two week period
ended December 26, 2000 decreased $1,881,706 or 41.2% from $4,570,839 for the
fifty-two week period ended December 28, 1999 to $2,689,133 for the same period
in 2000. The decrease is principally due to the Company's Paragon Subsidiary
selling two previously closed (prior to December, 1998) Mountain Jack's
Steakhouse in Warren and Harper Woods, MI for a gain of $1,274,702 plus the net
gain of selling three other locations. This was partially offset by the $583,382
write down of leasehold improvements and goodwill of Galveston's' Fullerton
location for asset impairment (subleased for final four years remaining on
original lease) and the forgiveness of $442,058 of advances to two officers.
Net loss for the fifty-two week period ended December 26, 2000 decreased
$3,273,595 or 84.0% from $3,895,039 for the fifty-two week ended December 28,
1999 to $621,444 for the same period in 2000. The decrease is principally due to
the operational improvements and labor efficiencies that management introduced
in the fifty-two week period ended December 28, 1999. Also contributing to the
decrease was non-recurring expenses associated with the acquisition of Paragon
not being incurred for the same period in 2000, as well as, the gain from
selling two previously closed Mountain Jack's Steakhouse in Warren and Harper
Woods, MI. This was partially offset by an executive bonus accrual, the major
restructuring and non-recurring charges of $684,112 at Pacific Basin Foods
(warehouse consolidation and the reduction of 47% of its workforce) and
additional training and recruitment for Paragon Steakhouse.
14
Year Ended December 28, 1999 Compared to the Year Ended December 29, 1998
Revenues for the year ended December 28, 1999 increased $161,281,152 or
2,474% from $6,519,421 for the year ended December 29, 1998 to $167,800,573 for
the same period in 1999. The increase is almost entirely attributable to the
acquisition of Paragon. Gross revenue for the restaurants purchased in the
Paragon acquisition increased by 3.3% for the year ended December 28, 1999
compared to the gross revenue for comparable restaurants for the same period in
1998.
Food and beverage costs for the year ended December 28, 1999 increased
$77,358,888 or 3,011% from $2,569,457 for the year ended December 29, 1998 to
$79,928,345 for the same period in 1999. Food and beverage costs for the
restaurants only as a percentage of restaurant revenues was 45.9% for the year
ended December 29, 1998 compared to 34.9% for the same period in 1999. The food
and beverage costs of Paragon's food distribution subsidiary, Pacific Basin
Foods, Inc., were 90.5% of the food distribution revenue for the year ended
December 28, 1999. The total food and beverage cost as a percentage of total
revenue was 47.6%, which includes the restaurants and the food distribution
subsidiary. The increase in the food and beverage costs at the restaurant level
is directly related to the acquisition of Paragon that carries traditional
steakhouse food and beverage costs, and higher meat prices experienced by the
restaurant industry in 1999.
Payroll and payroll related costs for the year ended December 28, 1999
increased $44,091,544 or 2,203% from $2,001,542 for the year ended December 29,
1998 to $46,093,086 for the same period in 1999. Payroll and payroll related
costs as a percentage of revenues were 30.7% for the year ended December 29,
1998 compared to 27.5% for the same period in 1999. The decrease in payroll
costs as a percentage of revenue is attributed to the cost cutting program
implemented by the Company in 1999. The Company believes that its labor cost is
in line with industry averages.
Direct operating costs include all other unit-level operating costs, the
major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Direct operating
costs for the year ended December 28, 1999 increased $27,072,296 or 1,878% from
$1,441,367 for the year ended December 29, 1998 to $28,513,663 for the same
period in 1999. These costs as a percentage of restaurant revenues were 22.11%
for the year ended December 29, 1998 compared to 17.0% for the same period in
1999. The decrease is principally due to the acquisition of Paragon whose direct
operating costs as a percentage of revenue are less than those previously
experienced by the Company due to the economies of scales of operating more
restaurants.
Depreciation and amortization for the year ended December 28, 1999
increased $4,065,594 or 2,744% from $148,156 for the year ended December 29,
1998 to $4,213,750 for the same period in 1999. The increase is principally due
to the acquisition of Paragon, which significantly increased the depreciable
assets owned by the Company.
General and administrative expenses for the year ended December 28, 1999
increased $6,145,550 or 277% from $2,219,992 for the year ended December 29,
1998 to $8,365,542 for the same period in 1999. General and administrative
expenses as a percentage of revenues was 34.1% for the year ended December 29,
1998 compared to 5.0% for the same period in 1999. This increase in the dollar
amount of general and administrative expenses is principally due to the
acquisition of Paragon. The Company has significantly reduced its general and
administrative expenses throughout 1999. A majority of the reduction represents
salaries and benefits of employees who were terminated throughout the year, with
a significant reduction in the second fiscal quarter. The Company began to
realize a reduction in general and administrative expenses in the third and
fourth quarters.
Interest income, expense and financing costs, net, for the year ended
December 28, 1999 increased $3,754,373 or 460% from $816,466 for the year ended
December 29, 1998 to $4,570,839 for the same period in 1999. The increase is
principally due to an increase in outstanding indebtedness, which was assumed in
connection with the acquisition of Paragon and additional borrowings by the
Company in the fall of 1998 and spring of 1999.
Net loss net for the fifty-two week period ended December 28, 1999
increased $933,311 or 31.5% from $2,961,728 for the fifty-two week ended
December 29, 1998 to $3,895,039 for the same period in 1999. The increase is
principally due to the acquisition of Paragon and Pacific Basin Foods and the
15
increase in indebtedness partially offset by the operational improvements and
headcount reductions realized in the second half of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering commenced on February 27, 1998. In addition to
the approximate $9.3 million raised by us in 1998 in equity and debt financing,
we raised $1.5 million under a promissory note in March 1999 and $4.0 million in
private placement equity offerings in June and July 1999. A significant portion
of the equity and debt financing raised in 1998 was used to pay the purchase
price and related transaction costs associated with the acquisition of Paragon
and to a lesser degree to fund the our operating loss.
The Company has a cash and cash equivalents balance of $3,359,150 at
December 26, 2000. Management of the Company believes that such cash and cash
equivalents together with anticipated cash from operations is sufficient to
cover the cost of operations for at least the next twelve months. In order for
the Company to expand its operations through the purchase or construction of new
restaurants, the Company may have to sell additional equity or debt securities
or obtain credit facilities.
Our operating activities for the year ended December 26, 2000 provided $3.4
million of cash. This was chiefly the result of the improvements in operations
and working capital for the year. In addition, the use of cash of approximately
$1.1 million for investing activities relates primarily to the capital purchase
of furniture and equipment for the steakhouses. This was more than offset by the
$2.0 million in net proceeds from the sale of several restaurants.
The major source of cash used in financing activities for the year ended
December 26, 2000 was for the repayment in total of a line of credit and debt of
$25.4 million. This was partially offset by the $22.0 million in proceeds for a
sale-leaseback of 19 company fee owned properties.
The cost of opening each new restaurant ranges from $1,200,000 to
$1,650,000 for the build-out of a brand-new facility and from $500,000 to
$750,000 for the conversion of an existing restaurant, which includes leasehold
improvements, furniture, fixtures, equipment, food and beverage inventory and
other start-up expenses. We lease restaurant and transportation equipment under
operating and capital leases. These leases have initial terms generally ranging
from five to seven years and require a fixed monthly payment, or in the case of
transportation equipment, additional payments on a per mile basis.
We may need additional sources of financing during the next 12 months. 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 growth strategy, including any potential additional
acquisitions, which could lower our revenues and increase the net loss, if we
achieve profitability in the future. If we raise additional funds by issuing
equity securities, shareholders may experience dilution of their ownership
interest and the newly issued securities may have 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.
We intend to continue our aggressive acquisition program with a combination
of cash, common stock and some debt used to finance the primary portion of
consideration. We expect the cash needed for these acquisitions to come from
additional financing facilities and potential debt or equity offerings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 26, 2000, 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 value of these assets.
Foreign Currency Exchange Risk. The Company does not have any foreign
currency exposure because it currently does not transact business in foreign
currencies.
16
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of Steakhouse Partners, Inc. and its
subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed as part of this Report:
3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Correction to Restated Certificate of
Incorporation of the Company.
3.3* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.4* By-Laws of the Company.
3.5* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.6* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
10.1* Galveston Steakhouse Corp. Omnibus Stock Plan.
10.2* Richard M. Lee Stock Option Agreement.
10.3* Hiram J. Woo Stock Option Agreement.
10.4** Merger Agreement dated August 31, 1998 by and among the
Company, Tri-Core Steakhouse, Inc., Paragon Steakhouse
Restaurants, Inc. and Kyotaru Co. Ltd.
10.5*** First Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
17
10.6*** Second Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri- Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.7*** Third Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.8**** Form of Securities Purchase Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.9**** Form of Registration Rights Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.10**** Form of Debenture issued to JMG Capital Partners, L.P.,
Triton Capital Investments Ltd and Barry Lebin.
10.11**** Form of Note Purchase Agreement by and between the Company
and Talisman Capital Opportunity Fund Ltd.
10.12**** Form of Secured Exchangeable Note issued to Talisman Capital
Opportunity Fund Ltd.
10.13**** Form of Warrant issued to Talisman Capital Opportunity Fund
Ltd.
10.14**** Form of Collateral, Pledge and Security Agreement by and
between the Company and Talisman Capital Opportunity Fund
Ltd.
10.15**** Loan and Security Agreement dated December 21, 1998 by and
between Pacific Basin Foods, Inc. and The CIT Group/Credit
Finance, Inc.
10.16**** Security Agreement dated December 21, 1998 by and between
the Company and The CIT Group/Credit Finance, Inc.
10.17**** Secured Continuing Guaranty dated December 21, 1998 executed
by the Company.
10.18**** Security Agreement (Intellectual Property) dated December
21, 1998 by and between the Company and The CIT Group/Credit
Finance, Inc.
10.19**** Grant of Security Interest (Trademarks) dated December 21,
1998 executed by the Company.
10.20***** Purchase and Sale Agreement between Paragon Steakhouse
Restaurants, Inc. and HS Realty Partners, LP
21.1****** List of Subsidiaries of Steakhouse Partners, Inc.
23.1****** Consent of Singer Lewak Greenbaum & Goldstein LLP.
- - ------------------
* Incorporated by reference from Registration Statement on
Form SB-2 (File #333-29093).
** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on September 14, 1998.
*** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on January 4, 1999.
**** Incorporated by reference from Registration Statement on
Form SB-2 (File #333-69137)
***** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on August 3, 2000.
****** Filed herewith
REPORTS ON FORM 8-K
1. Form 8-K dated July 19, 2000 reporting the sale-leaseback by Paragon
Steakhouse Restaurants, Inc., a wholly owned subsidiary of Steakhouse Partners,
Inc., of 19 of its restaurants.
18
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
STEAKHOUSE PARTNERS, INC.
/s/ RICHARD M. LEE
......................................
Richard M. Lee
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report is
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
NAME AND CAPACITY DATE
----------------- ----
/s/ RICHARD M. LEE March 28, 2001
.......................................................
Name: Richard M. Lee
Title: Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ HIRAM J. WOO March 28, 2001
.......................................................
Name: Hiram J. Woo
Title: President, Secretary, Director
/s/ JOSEPH L. WULKOWICZ March 28, 2001
.......................................................
Name: Joseph L. Wulkowicz
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ TOM EDLER March 28, 2001
.......................................................
Name: Tom Edler
Title: Director
/s/ MARK W. GOUDGE March 28, 2001
.......................................................
Name: Mark W. Goudge
Title: Director
/s/ TOD LINDNER March 28, 2001
.......................................................
Name: Tod Lindner
Title: Director
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
21.1 List of Subsidiaries of Steakhouse Partners, Inc.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP
20
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999, AND 1998
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 2000
- - -------------------------------------------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 4
Consolidated Statements of Operations 5 - 6
Consolidated Statements of Stockholders' Equity 7 - 8
Consolidated Statements of Cash Flows 9 - 12
Notes to Consolidated Financial Statements 13 - 45
SUPPLEMENTAL INFORMATION
Report Of Independent Certified Public Accountants
On Financial Statement Schedules 46
Valuation and Qualifying Accounts - Schedule II 47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Steakhouse
Partners, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Steakhouse Partners,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 8, 2001
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
ASSETS
2000 1999
--------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 3,359,150 $ 1,590,467
Accounts receivables, net of allowance for doubtful accounts
of $116,851 and $61,264 722,766 3,498,401
Inventories 3,344,087 5,173,175
Prepaid expenses and other current assets 1,491,179 1,439,021
--------------- ----------------
Total current assets 8,917,182 11,701,064
PROPERTY, PLANT, AND EQUIPMENT, net 33,274,038 47,608,117
OTHER ASSETS
Advances to officers 893,600 150,000
Intangible assets, net 190,574 443,722
Deposits and other assets 946,111 1,568,207
Cash - restricted under collateral agreements 1,165,746 1,609,503
--------------- ----------------
TOTAL ASSETS $ 45,387,251 $ 63,080,613
=============== ================
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
--------------- ----------------
CURRENT LIABILITIES
Current portion of convertible debt $ 1,100,000 $ -
Current portion of long-term debt 2,697,953 22,434,042
Current portion of capital lease obligations 361,831 542,569
Line of credit - 2,775,435
Accounts payable 4,903,246 4,925,479
Accrued expenses 2,238,103 2,522,281
Unearned revenue 5,388,491 6,567,589
Reserve for self insurance claims 836,718 2,499,339
Sales and property taxes payable 1,256,197 1,261,181
Accrued payroll costs 2,486,597 3,089,052
--------------- ----------------
Total current liabilities 21,269,136 46,616,967
CONVERTIBLE DEBT, net of current portion - 1,100,000
SECURED EXCHANGEABLE NOTES 2,000,000 2,000,000
LONG-TERM DEBT, net of current portion - 581,566
CAPITAL LEASE OBLIGATIONS, net of current portion 17,468,625 7,909,068
DEFERRED TAXES 119,411 162,970
DEFERRED RENT 2,357,842 2,208,696
--------------- ----------------
Total liabilities 43,215,014 60,579,267
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of these financial statements.
3
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (CONTINUED)
2000 1999
--------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
2,250,000 shares authorized
0 and 0 shares issued and outstanding $ - $ -
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 and 1,000,000 shares issued and outstanding 1,000 1,000
Preferred stock, Series C, Convertible, $0.001 par value
1,750,000 shares authorized
1,750,000 and 1,750,000 shares issued and outstanding 1,750 1,750
Common stock, $0.01 par value
10,000,000 shares authorized
3,386,522 and 3,369,022 shares issued and outstanding 33,865 33,690
Subscription receivable - (10,000)
Treasury stock, 28,845 shares, at cost (175,000) (175,000)
Additional paid-in capital 11,809,352 11,527,192
Accumulated deficit (9,498,730) (8,877,286)
--------------- ----------------
Total stockholders' equity 2,172,237 2,501,346
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,387,251 $ 63,080,613
=============== ================
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
REVENUES $ 131,635,804 $ 167,800,573 $ 6,519,421
---------------- --------------- ----------------
COST OF SALES
Food and beverage 50,030,402 79,928,345 2,569,457
Payroll and payroll related costs 41,253,070 46,093,086 2,001,542
Direct operating costs 26,074,710 28,513,663 1,441,367
Depreciation and amortization 3,927,687 4,213,750 148,156
---------------- --------------- ----------------
Total cost of sales 121,285,869 158,748,844 6,160,522
---------------- --------------- ----------------
GROSS PROFIT 10,349,935 9,051,729 358,899
COSTS AND EXPENSES
General and administrative expenses 8,257,405 8,365,542 2,219,992
---------------- --------------- ----------------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) 2,092,530 686,187 (1,861,093)
---------------- --------------- ----------------
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, and equipment 1,589,480 - -
Interest income - 36,942 68,495
Miscellaneous income 271,821 - -
Interest and financing costs (3,524,994) (4,607,781) (884,961)
Impairment of property, plant, and equipment (388,868) - -
Impairment of goodwill (194,514) - -
Forgiveness of officer advances (442,058) - -
---------------- --------------- ----------------
Total other income (expense) (2,689,133) (4,570,839) (816,466)
---------------- --------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT (596,603) (3,884,652) (2,677,559)
PROVISION FOR INCOME TAXES 24,841 10,387 6,044
---------------- --------------- ----------------
LOSS BEFORE EXTRAORDINARY LOSS ON DEBT
EXTINGUISHMENT (621,444) (3,895,039) (2,683,603)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT - - (278,125)
---------------- --------------- ----------------
NET LOSS $ (621,444) $ (3,895,039) $ (2,961,728)
================ =============== ================
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
BASIC AND DILUTED LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM $ (0.18) $ (1.39) $ (1.26)
================ =============== ================
EXTRAORDINARY LOSS PER SHARE $ - $ - $ (0.13)
================ ================ ================
BASIC AND DILUTED LOSS PER SHARE AFTER
EXTRAORDINARY ITEM $ (0.18) $ (1.39) $ (1.39)
================ =============== ================
WEIGHTED-AVERAGE SHARES OUTSTANDING 3,369,022 2,800,805 2,135,241
================ =============== ================
The accompanying notes are an integral part of these financial statements.
6
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PREFERRED STOCK PREFERRED STOCK
SERIES B, SERIES C,
CONVERTIBLE CONVERTIBLE COMMON STOCK
-------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- ---------- ---------- --------
Balance, December 31, 1997........... 1,000,000 $1,000 -- $ -- 825,000 $ 8,250
Issuance of common stock in
connection with initial
public offering.................... 1,250,000 12,500
Issuance costs.......................
Conversion of promissory notes....... 333,325 3,333
Issuance of common stock in lieu of
interest........................... 20,000 200
Interest from fixed conversion
features...........................
Extraordinary loss on debt
extinguishment.....................
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 1998........... 1,000,000 1,000 -- -- 2,428,325 24,283
Issuance of common stock for services
rendered........................... 146,000 1,460
Issuance of common stock in lieu of
interest........................... 52,500 525
Issuance of common stock for cash in
connection with
private placements................. 705,197 7,052
Issuance costs.......................
Issuance of warrants in lieu of
interest...........................
Issuance of Series C convertible
preferred stock.................... 1,750,000 1,750
Purchase of stock options............
Exercise of stock options............ 35,000 350
Purchase of treasury stock...........
Issuance of common stock for
subscriptions receivable........... 2,000 20
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 1999........... 1,000,000 $1,000 1,750,000 $ 1,750 $3,369,022 $ 33,690
Issuance of common stock in lieu of
interest........................... 17,5000 175
Issuance of warrants in lieu of
interest...........................
Issuance of warrants for services
rendered...........................
Issuance of stock options for
services rendered..................
Purchase of stock options............
Cash payment on subscriptions
receivable.........................
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 2000........... 1,000,000 $1,000 1,750,000 $ 1,750 3,386,522 $ 33,865
========= ====== ========= ========== ========== ========
The accompanying notes are an integral part of these financial statements.
7
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ADDITIONAL
SUBSCRIPTIONS TREASURY PAID-IN ACCUMULATED
RECEIVABLE STOCK CAPITAL DEFICIT TOTAL
------------- --------- ----------- ----------- -----------
Balance, December 31, 1997........... $ -- $ -- $ 596,563 $(2,020,519) $(1,414,706)
Issuance of common stock in
connection with initial
public offering.................... 6,487,500 6,500,000
Issuance costs....................... (2,532,603) (2,532,603)
Conversion of promissory notes....... 1,201,167 1,204,500
Issuance of common stock in lieu
of interest........................ 99,800 100,000
Interest from fixed conversion
features........................... 378,117 378,117
Extraordinary loss on debt
extinguishment..................... 278,125 278,125
Net loss............................. (2,961,728) (2,961,728)
---------- --------- ----------- ----------- -----------
Balance, December 31, 1998........... -- -- 6,508,669 (4,982,247) 1,551,705
Issuance of common stock for
services rendered.................. 546,040 547,500
Issuance of common stock in lieu
of interest........................ 205,725 206,250
Issuance of common stock for
cash in connection with
private placements................. 4,318,948 4,326,000
Issuance costs....................... (306,820) (306,820)
Issuance of warrants in lieu of
interest........................... 60,000 60,000
Issuance of Series C convertible
preferred stock.................... 1,750
Purchase of stock options............ 10,000 10,000
Exercise of stock options............ 174,650 175,000
Purchase of treasury stock........... (175,000) (175,000)
Issuance of common stock for
subscriptions receivable........... (10,000) 9,980 --
Net loss............................. (3,895,039) (3,895,039)
---------- --------- ----------- ----------- -----------
Balance, December 31, 1999........... $ (10,000) $(175,000) $11,527,192 $(8,877,286) $ 2,501,346
Issuance of common stock in lieu of
interest........................... 90,200 90,375
Issuance of warrants in lieu of
interest........................... 60,000 60,000
Issuance of warrants for services
rendered........................... 38,960 38,960
Issuance of stock options for
services rendered.................. 73,000 73,000
Purchase of stock options............ 20,000 20,000
Cash payment on subscriptions
receivable......................... 10,000 10,000
Net loss............................. (621,444) (621,444)
---------- --------- ----------- ----------- -----------
Balance, December 31, 2000........... $ -- $(175,000) $11,809,352 $(9,498,730) $ 2,172,237
========== ========= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
8
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (621,444) $ (3,895,039) $ (2,961,728)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 3,927,687 4,213,750 148,156
Gain on sale of property, plant, and equipment (1,589,480) - -
Reduction of self insurance reserve (1,210,713) - -
Impairment of property, plant, and equipment 388,868 - -
Impairment of goodwill 194,514 - -
Issuance of warrants for services rendered 38,960 - -
Issuance of warrants for interest 60,000 - -
Issuance of stock options for services
rendered 73,000 - -
Forgiveness of officer advances 442,058 - -
Interest paid with common stock 90,375 266,250 100,000
Interest charges on convertible debt - - 378,117
Non-cash bonuses paid to officers - - 406,256
Loss on debt extinguishment - - 278,125
Deferred taxes (43,559) (44,613) -
Issuance of common stock in exchange for
services rendered - 547,500 -
Adjustment to purchase price of Paragon
Steakhouse Restaurants, Inc. - 435,830 -
(Increase) decrease in
Accounts receivable 2,775,460 1,399,414 (1,126,342)
Advances to officers (1,185,658) (150,000) (226,517)
Inventories 1,829,088 382,114 235,998
Prepaid expenses and other current assets 211,383 (667,548) (8,864)
Intangible assets, net 58,634 - 183,438
Deposits and other assets 334,943 (300,135) (904,904)
Cash - restricted under collateral agreements - (78,074) -
Increase (decrease) in
Accounts payable (22,233) (3,942,613) (1,985,311)
Accrued expenses (284,178) (284,767) 269,740
Unearned revenue (1,179,098) 527,605 476,165
Reserve for self insurance claims (451,908) (8,652) 21,273
Sales and property taxes payable (4,984) (296,385) 134,659
Accrued payroll costs (602,455) (738,722) (492,168)
Deferred rent 149,146 161,976 (923)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities 3,378,406 (2,472,109) (5,074,830)
---------------- --------------- ----------------
The accompanying notes are an integral part of these financial statements.
9
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment $ (1,057,148) $ (1,346,661) $ (355,846)
Proceeds from the sale of property, plant, and
equipment 1,981,963 - -
Change in restricted cash 443,757 - -
Acquisition of Paragon Steakhouse Restaurants,