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 24, 2002
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: | | YES |X| NO
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not 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 24, 2002):
$97,102,252
Aggregate market value of voting stock held by non-affiliates: $3,357
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 30, 2003.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: | | YES |X| NO
Documents Incorporated by Reference:
The index to exhibits is located on page 27.
TABLE OF CONTENTS
Item
PAGE
PART I
Item 1. Business........................................................................1
Item 2. Properties.....................................................................12
Item 3. Legal Proceedings..............................................................13
Item 4. Submission of Matters to a Vote of Security Holders............................13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................................13
Item 6. Selected Financial Data........................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .....................................................16
Item 7a.Quantitative and Qualitative Disclosures about Market Risk ....................24
Item 7b.Critical Accounting Policies...................................................24
Item 8. Financial Statements and Supplementary Data....................................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................25
PART III
Item 10. Directors, Executive Officers of the Registrant ..............................26
Item 11. Executive Compensation........................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management ...............26
Item 13. Certain Relationships and Related Transactions ...............................26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..............27
Signatures ............................................................................30
Section 302 Certification .............................................................31
ITEM 1.
DESCRIPTION OF BUSINESS.
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.
BACKGROUND
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us" and
"our"), currently operates 50 full-service steakhouse restaurants located in
nine states. The Company's restaurants specialize in complete steak and prime
rib meals, and also offer fresh fish and other lunch and dinner dishes. The
Company's average dinner check is $24.74 (including alcoholic beverages) and it
currently serves over 4.3 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 after
it has completed the reorganization process described below under "Bankruptcy
Filing".
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned 78 steakhouse restaurants
and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food distribution
company. Paragon and Pacific Basin are now wholly owned subsidiaries of the
Company.
BANKRUPTCY FILING
On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon, a
wholly owned subsidiary of Steakhouse Partners, also filed for relief under
Chapter 11 of the Bankruptcy Code. The filing was made in connection with the
Company's inability to timely pay certain notes aggregating $1,734,285 (see
Notes 8 and 10 to the accompanying Consolidated Financial Statements). Pacific
Basin Foods, the other wholly owned subsidiary of Steakhouse Partners, on
October 11, 2002 ceased operations and filed under Chapter 7 of the United
States Bankruptcy Code. Steakhouse Partners and Paragon have and will continue
to manage their properties and operate their business as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code. By filing under Chapter 11, the
Company is seeking to retain core locations, eliminate non-competitive leases,
restructure its debt, and withdraw from under-performing markets.
1
On December 19, 2003 the U.S. Bankruptcy Court Central District of California -
Riverside Division confirmed and the Official Creditor's Committee approved the
Joint Plan of Reorganization. Under the terms of the Plan as of the effective
date (December 31, 2003) the Debtor-in-Possession financing as provided for by
Steakhouse Investors, LLC. will convert to 90% of the common stock and the
balance of the Common Stock will be given to the unsecured creditors as partial
payment of their claims. The unsecured creditors should also receive between
$0.50 and $0.70 on the dollar cash payment in the form of a three-year note
providing for periodic payments. All existing Common Stock, stock options,
warrants and preferred stock will be cancelled as of the effective date.
Also the approved plan provides for the payment term(s) for all classes of
creditors. I-Dine (Secured) has stipulated to a note payable over 4 years plus
interest. Critical Capital (Secured) has agreed to a 6- year note, the first
three payable monthly interest only the last three principal and interest.
Priority taxes per applicable statute will have a four-year note principal and
interest. The unsecured creditors were broken down into two classes. The first
class was those creditors that were scheduled at less than $4,000. This class
would be paid at $0.50 on the dollar within 30 days of the effective date. The
second class was those $4,000 and greater. They would receive a $1.0 million
down payment, within 30 days of the effective date and a note for $5.0 million
payable over three years (periodic payments) with no interest.
Finally, the plan provided for the Company to assume 25 profitable restaurants
as its core. For all the other units, either the Company's leasehold interest
was sold or the leases were rejected as of the effective date. Any claims
associated with the rejected leases were provided for in the joint plan of
reorganization.
In connection with the Company emerging from bankruptcy protection we
implemented fresh-start accounting under the provisions of SOP 90-7. Under SOP
90-7, the reorganization fair value of the Company was allocated to its assets
and liabilities, its accumulated deficit was eliminated, and its new equity was
issued according to the Plan of Reorganization as if it were a new reporting
entity.
In accordance with fresh-start accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11.
Such fair values represented the Company's estimates based on independent
appraisals and valuations. Immaterial differences between estimated pre-petition
liabilities assumed by the Reorganized Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Reorganized
Company, the Company developed a set of financial projections. Based on these
financial projections and with the assistance of a financial advisor, the
enterprise value was determined by the Company, using various valuation methods,
including (i) a comparison of the Company and its projected performance to the
market values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company, and (iii)
a calculation of the present value of the future cash flows under the
projections. The estimated enterprise value is highly dependent upon achieving
the future financial results set forth in the projections as well as the
realization of certain other assumptions, which are not guaranteed.
2
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was approximately $18,900,000 as of December 31, 2003.
The accompanying Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates the continuation of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. However, as a result of the bankruptcy filings, such realization of
certain of the Company's assets and liquidation of certain of the Company's
liabilities are subject to significant uncertainty. Furthermore, a plan of
reorganization could materially change the amounts and classifications reported
in the Consolidated Financial Statements, which do not give effect to any
adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization. See Note 2
to the Consolidated Financial Statements included in this report.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including claims of landlords
for lease payments and employee wages and benefits in the ordinary course of
business.
OUR BUSINESS BACKGROUND
The steakhouse restaurant industry is expected to continue to expand over the
next several years. We believe that this industry is highly fragmented and,
assuming a successful reorganization under Chapter 11 of the United States
Bankruptcy Code, presents an excellent opportunity for us to grow our business
by expanding one of Paragon's brand-name step-up steakhouses, Carvers.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that attract
loyal clientele. By our use of the term destination restaurants, we mean that we
seek to establish our restaurants as the primary destination of our clientele,
rather than a destination or activity ancillary to another activity, such as
shopping or sight seeing. Our restaurants are full-service steakhouses (with two
exceptions). We hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is our "signature product" and is the
basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous.
Prime Rib and Steaks account for approximately 65.0% of our food revenue. Full
liquor, wine and bar service are available. Alcoholic beverage sales account for
approximately 18.8% of our net sales.
Most of our restaurants are open daily from 4:30 p.m. to 9:30 p.m. on weekdays
and from 4:00 p.m. to 10:00 p.m. on weekends. Some restaurants are open for
lunch beginning at 11:00 a.m. on weekdays; most of these restaurants are closed
for lunch on weekends.
We currently operate in three distinctive steakhouse markets.
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HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 37 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is
approximately $23.00 per guest range. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and have the
"look and feel" of a classic special occasion restaurant. For this reason, we
have been able to position our Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's steakhouses as a step-above the lower ticket Outback and Lone Star
restaurant chains.
Our menu also features fresh fish, seafood, lamb and chicken in addition to
prime rib and steaks. A complete meal includes salad and a choice of side dishes
including choice of potato, and steamed vegetables. The menu also includes
appetizers and desserts. The Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's recently completed a menu revision designed to increase variety and
emotional value. The change included the addition of new appetizers, seafood,
specialty steaks, prime rib combinations and revisions to all plate
presentations.
Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's restaurants are
typically free-standing buildings with dinner seating capacities ranging from
150 to 220 seats and an average seating capacity of approximately 180 seats.
Unlike an Outback or Lone Star, our restaurants typically have one or more
banquet rooms to accommodate private parties and corporate events. The bar in
each restaurant is generally located adjacent to the dining room primarily to
accommodate customers waiting for dining tables and up to approximately 30
additional diners.
CARVERS
We have 8 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average dinner check per guest of slightly more
than $29.00. Carvers is a sophisticated, upper tier yet mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are slightly higher than those of our other restaurants,
but are substantially lower than high-end steakhouses such as Morton's and
Ruth's Chris.
Our Carvers restaurants are also typically housed in freestanding buildings with
dinner seating capacities ranging from 180 to 240 seats and an average seating
capacity of approximately 220 seats. The Carvers restaurants also have one or
more banquet rooms to accommodate private parties and corporate events. We are
currently developing the next generation lunch and dinner menus for Carvers.
UNIQUE CONCEPTS
We have 5 unique formal restaurants housed in landmark buildings in prime
locations near or at tourist sites, which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants are also unique for which the average dinner check per guest is
$26.80. These restaurants typically have one or more banquet rooms.
We will continue our efforts to differentiate our restaurants by emphasizing
personal and attentive service, consistent high-quality, fresh products and
position in the mid-priced, full service steakhouse segment of the restaurant
industry.
4
REORGANIZATION STRATEGY
Management plans to restructure the Company's debt through the Chapter 11
reorganization process, improve the Company's financial performance through
cost-reduction and restructuring of administrative overhead, and raise money
through equity or the selective sale of non-strategic restaurants. Our goal for
the future is to enhance our position in the steakhouse restaurant industry by
building through internal growth (Carvers) and through the acquisition of
steakhouse (step-up casual) restaurants. Key components of our strategy include
leveraging established brands, achieving operating efficiencies and cost savings
through volume discounts on purchases, and efficiently penetrating new markets.
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, diners club
participation and discount coupons. Local advertising and couponing consists of
bulk mailers, freestanding 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. We also evaluate
local image advertising opportunities and are utilizing spot radio strategies in
affordable markets.
To promote local community awareness, each restaurant manager is encouraged to
become a part of the local community. Many restaurants host meetings with
community leaders to solicit local input about the restaurants' potential
community participation.
Once we begin to grow, our plan for each new restaurant will be to 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 a
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.
5
We also utilize 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, one or two assistant managers and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 40 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 defines
operations and performance objectives for each restaurant and monitor
implementation. Senior management regularly visits various of our restaurants
and meets 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 strives to be responsive to the employees'
concerns.
PURCHASING
We purchase our food and beverage products from two UniPro Food Distributors;
Southwest Traders on the West Coast and Abbott Foods in the Mid-West. Food and
supplies are shipped directly to the restaurants, although invoices for
purchases are sent to the corporate support center for payment. Our emphasis on
high-quality food requires frequent deliveries of fresh food supplies.
PACIFIC BASIN FOODS
The Pacific Basin Foods subsidiary was a wholesale food distributor serving the
restaurant industry. Its principal clients were Paragon and several small
regional chains. In addition to the sale and distribution of food supplies to
restaurants, Pacific Basin Foods provided furniture, fixtures and equipment to
restaurants. As Paragon downsized and reduced the total number of restaurants
serviced by Pacific Basin Foods, the volume required to maintain its economic
feasibility also diminished. Therefore, on October 11, 2002 Pacific Basin Foods
ceased operations and filed under Chapter 7 with the United States Bankruptcy
Court for the Central District of California- Riverside Division.
6
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.
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 are 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 our
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.
7
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 review plans and specifications and make periodic inspections to ensure
continued compliance. 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 December 24, 2002, we employed approximately 2,637 individuals, of which 228
occupy executive, managerial or clerical positions, and 2,409 hold
non-managerial restaurant-related 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.
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 REORGANIZATION PLANS, OUR BUSINESS
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
On February 15, 2002 Steakhouse Partners, Inc and on February 19, 2002 its
wholly owned subsidiary Paragon Steakhouse Restaurants, Inc. filed for federal
reorganization protection under Chapter 11. On December 19, 2003 the U.S.
Bankruptcy Court confirmed and the Official Creditor's Committee approved the
Joint Plan of Reorganization. Under the terms of the Plan as of the effective
date (December 31, 2003) the Debtor-in-Possession financing as provided for by
Steakhouse Investors, Inc will convert to 90% of the common stock and the
balance of the Common Stock will be given to the unsecured creditors as partial
payment of their claims. The unsecured creditors will also receive between $0.50
and $0.70 on the dollar cash payment in the form of a three-year note providing
for periodic payments.
If we are not successful in selling certain units and cash flow from operations
is insufficient to satisfy the periodic payments required to our creditors,
deferred capital improvements and expansion, it will seriously effect our
ability to meet our plan objectives and we may be forced to liquidate the
Company.
8
IF WE ARE NOT SUCCESSFUL IN OUR EXPANSION PLANS, OUR BUSINESS OPERATIONS AND OUR
ABILITY TO CONTINUE AS A GOING CONCERN COULD BE MATERIALLY ADVERSELY AFFECTED.
Long term, we intend to expand our operations through the construction of new
restaurant properties and/or acquisition of existing properties. Our ability to
open additional restaurants will depend upon our ability to identify and acquire
available new construction sites or restaurant conversions at favorable prices.
We must also have sufficient available funds from operations or otherwise to
support this expansion.
If we cannot successfully construct new restaurant properties or convert
acquired restaurant properties to our established brands within projected
budgets or time periods, our business and our ability to continue as a going
concern will be adversely affected. Even with a successful reorganization and
sufficient funds, plans to expand the Company's business may fail due to
construction delays or cost overruns, which could be caused by numerous factors,
such as shortages of materials and skilled labor, labor disputes, weather
interference, environmental problems, and construction or zoning problems.
Our growth may also strain our management and other resources. To manage our
growth, we must:
o maintain a high level of quality and service at our existing and
future restaurants;
o enhance our operational, financial and management expertise; and
o 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 significant losses since
inception. We may never generate profits. We incurred a net loss of
approximately $6,582,559 for the fiscal year ended December 24, 2002, a net loss
of approximately $16,710,000 for the fiscal year ended December 25, 2001, 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 24, 2002 we had an accumulated deficit of
approximately $32.8 million.
In order to operate profitably, we must:
o further improve operating margins at our existing restaurants while
investing in the units' infrastructure;
o successfully drive top line sales at each of our units; and
o capitalize on the general and administrative cost savings implemented
during the last fiscal year.
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:
9
o National and local health and sanitation laws and regulations;
o National and local employment and safety laws and regulations; and
o 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 9 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:
o the quality and value of the food products offered;
o the quality of service;
o the price of the food products offered;
o the restaurant locations; and
o the ambiance of facilities.
10
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, as well as the costs of the reorganization process. Our
dependence on frequent deliveries of fresh food supplies means that shortages or
interruptions in supply could materially and adversely affect our operations. In
addition, unfavorable trends or developments concerning the following factors
could adversely affect our results:
o inflation, food, labor and employee benefit costs; and
o 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.
SHAREHOLDERS WILL NOT BE ABLE TO RESELL THEIR STOCK.
Generally, under the provisions of the Bankruptcy Code, holders of equity
interests may not participate under a plan of reorganization unless the claims
of creditors are satisfied in full under the plan or unless creditors accept a
reorganization plan that permits holders of equity interest to participate. The
Joint Plan of Reorganization confirmed by the United States Bankruptcy Court and
approved by the Official Creditors Committee does not provide for full payment
to the creditors nor does it provide for the participation of holders of equity.
As of the effective date (December 31, 2003) Steakhouse Investors, Inc.
debtor-in-possession financing will convert to 90% of the common stock and the
balance will go to the unsecured creditors. At this time the existing equity
interests in the reorganized debtor will be cancelled.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE
TERMS OR THE PLAN OF REORGANIZATION IS UNSUCCESSFUL, WE MAY HAVE TO CURTAIL OR
SUSPEND CERTAIN OR ALL OF OUR OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS 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 to
fund our deferred capital expense, we may have to curtail or suspend the
expansion of our operations and possibly terminate existing operations, which
could lead to overall lower revenues and adversely affect 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, which
could lead to the Company's inability to continue as a going concern.
11
ITEM 2. DESCRIPTION OF PROPERTY.
As of December 24, 2002, the Company leased all of its restaurant locations.
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 that require the Company to
pay the costs of insurance, taxes and maintenance. The Company intends to
continue to purchase restaurant locations where cost-effective. On July 19,
2000, the Company completed a sale and leaseback transaction with PS 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.
RESTAURANT LOCATIONS AS OF DECEMBER 24, 2002
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:
ARIZONA Oakland INDIANA NORTH CAROLINA
Phoenix Oceanside Indianapolis Raleigh
Tempe Pleasanton Lafayette
Yuma S. San Francisco
S. San Jose MICHIGAN OHIO
CALIFORNIA Sacramento Auburn Hills Sharonville
Bakersfield San Diego Clinton Township Independence
Concord Santa Rosa Grandville North Olmstead
Fairfield Temecula Kentwood
Fremont Thousand Oaks Lansing WISCONSIN
Lafayette Ventura Taylor Madison
Milpitas Troy
Modesto Portage
Traverse City
CARVERS LOCATIONS: Farmington Hills, Michigan UNIQUE FORMAL LOCATIONS:
Glendale, Arizona Beachwood, Ohio Folsom, California
Rancho Bernardo, California Centerville, Ohio Rancho Cordova, California
Roseville, California Sandy, Utah Riverside, California
Greenwood, Indiana South Bend, Indiana
Williamsburg, Virginia
The leases for the above locations have initial terms generally ranging from 10
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.
12
The Company's executive offices are located at 10200 Willow Creek Road, San
Diego, California 92131. The telephone number is (858) 689-2333. 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
During June 2002, Mr. Richard Lee, the Company's former Chief Executive Officer,
filed a claim with the Bankruptcy Court against the Company for approximately
$2,000,000, alleging, among other things, unpaid consulting fees and wrongful
termination. In 2003 the Company settled this claim for approximately $4,000
in a priority claim and $130,000 as an unsecured claim.
In the opinion of management, other than the bankruptcy filing described above,
there are no legal proceedings, which will have a material adverse effect on the
financial position or operating results of the Company. See Part I Item 1.
Description of Business--Bankruptcy Filing.
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 had been trading on the NASDAQ Small Cap Market
under the symbol "SIZL" from February 27, 1998, the date of the Company's
initial public offering to December 19, 2001 the day it was delisted. It is
currently traded over-the-counter on the Pink Sheets under the symbol
"SIZLQ.PK".
13
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:
Year ended December 31, 2000
HIGH LOW
First Quarter ................ $7.00 $4.50
Second Quarter................ 5.35 2.03
Third Quarter ................ 4.75 2.25
Fourth Quarter................ 7.22 2.75
Year ended December 31, 2001
HIGH LOW
First Quarter ................ $4.625 $2.375
Second Quarter................ 3.80 1.56
Third Quarter ................ 1.74 0.86
Fourth Quarter................ 0.99 0.28
Year ended December 31, 2002
HIGH LOW
First Quarter ................ $0.28 $0.01
Second Quarter................ 0.19 0.01
Third Quarter ................ 0.15 0.02
Fourth Quarter................ 0.10 0.00
HOLDERS
As of December 30, 2003 there were approximately 660 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 reorganization plan.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended December 24,
2002 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 24, 2002, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
14
INCOME STATEMENT DATA:....... 2002 2001 2000 1999 1998*
----------- ------------ ------------ ------------ -----------
Revenues..................... $97,102,252 $110,684,409 $123,618,199 $129,555,321 $ 6,519,421
----------- ------------ ------------ ------------ -----------
COST OF SALES
Food and beverage.......... 33,886,807 38,480,981 43,119,602 45,295,172 2,569,457
Payroll and payroll
related costs.......... 34,312,955 36,719,587 39,504,498 43,119,394 2,001,542
Direct operating costs .... 24,297,312 27,259,432 25,843,817 28,276,325 1,441,367
Reserve on impairment of
property, plant,
and equipment.......... -- 6,581,527 388,868 -- --
Depreciation and
amortization........... 2,785,465 3,452,109 3,703,346 4,045,155 148,156
----------- ------------ ------------ ------------ -----------
Total cost of sales...... 95,282,539 112,493,636 112,560,131 120,736,046 6,160,522
----------- ------------ ------------ ------------ -----------
GROSS PROFIT (LOSS).......... 1,819,713 (1,809,227) 11,058,068 8,819,275 358,899
COSTS AND EXPENSES
General and administrative
Expenses................... 5,104,117 8,514,500 7,561,262 8,033,124 2,219,992
Legal Settlement -- 800,000 -- -- --
Reserve for advances
to officers............ 277,016 616,584 -- -- --
=========== ============ ============ ============ ===========
INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSE) (3,561,420) (11,740,311) 3,496,806 786,151 (1,861,093)
OTHER INCOME (EXPENSE)
Gain on sale of property, -- -- 1,589,480 -- --
plant, and equipment ..
Interest income............ -- -- -- 22,069 68,495
Miscellaneous income....... 392,990 259,568 260,988 -- --
Interest and financing
costs ................. (2,327,903) (2,690,839) (3,524,994) (4,469,459) (844,961)
Forgiveness of
officer advances ...... -- -- (442,058) -- --
----------- ------------ ------------ ------------ -----------
Total other income
(expense) .............. (1,934,913) (2,431,271) (2,116,584) (4,447,390) (816,466)
----------- ------------ ------------ ------------ -----------
Income (loss) before
reorganization items,
provisions for income taxes,
and discontinued operations . (5,496,333) (14,171,582) 1,380,222 (3,661,239) (2,677,559)
----------- ------------ ------------ ------------ -----------
REORGANIZATION ITEMS
Gain on sale of property,
plant, and
equipment ............. 2,048,350 -- -- -- --
Professional Fees ......... (1,216,883) -- -- -- --
Idine settlement ......... (960,000) -- -- -- --
----------- ------------ ------------ ------------ -----------
Total reorganization items. (128,533) -- -- -- --
----------- ------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES AND
DISCONTINUED
OPERATIONS............... (5,624,866) (14,171,582) 1,380,222 (3,661,239) (2,677,559)
PROVISION FOR INCOME TAXES .. 129,758 148,341 53,419 4,816 6,044
----------- ------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE
DISCONTINUED
OPERATIONS............... (5,754,624) (14,319,923) 1,326,803 (3,666,055) (2,683,603)
DISCONTINUED OPERATIONS,
NET OF
INCOME TAXES OF
$850, $850 & $1,851...... (827,935) (2,396,821) (1,948,247) (228,984) (278,125)
----------- ------------ ------------ ------------ -----------
Net loss .................... $(6,582,559) $(16,716,744) $ (621,444) $ (3,895,039) $ (2,961,728)
=========== ============ ============ ============ ===========
EARNINGS (LOSS) PER SHARE
BASIC
Earnings (Loss) from
continuing operations ...... $ (1.70) $ (4.23) $ 0.39 $ (1.31) $ (0.80)
Loss from discontinued
operations ................. $ (0.24) $ (0.71) $ (0.58) $ (0.08) $ (0.46)
------- ------- ------- ------- -------
BASIC LOSS PER SHARE ........ $ (1.94) $ (4.94) $ (0.18) $ (1.39) $ (1.26)
DILUTED LOSS PER SHARE
Earnings (Loss) from
continuing operations....... $ (1.70) $ (4.23) $ 0.38 $ (1.31) $ (0.80)
Loss from discontinued
operations ................. $ (0.24) $ (0.71) $ (0.58) $ (0.08) $ (0.46)
------- ------- ------- ------- -------
DILUTED LOSS PER SHARE ...... $ (1.94) $ (4.94) $ (0.20) $ (1.39) $ (1.26)
SHARES USED TO CALCULATE
LOSS PER SHARE
Basic ....................... 3,386,522 3,386,522 3,369,022 2,802,186 2,350,578
Diluted ..................... 3,386,522 3,386,522 3,535,570 2,802,186 2,350,578
=========== ============ ============ ============ ===========
BALANCE SHEET DATE: 2002 2001 2000 1999 1998
----------- ------------ ------------ ------------ -----------
TOTAL ASSETS ................ $ 25,994,981 $ 31,000,321 $ 43,724,855 $ 57,243,510 $ 59,007,038
TOTAL DEBT,
EXCLUDING CAPITAL
LEASE OBLIGATIONS ....... $ 2,188,485 $ 5,760,306 $ 5,797,953 $ 26,115,608 $ 27,290,713
Stockholders' equity
(deficit) ............... $(20,895,668) $(14,373,109) $ 2,172,237 $ 2,501,346 $ 1,551,705
- --------------
*Steakhouse Partners, Inc. (aka Galveston Steakhouse Restaurants) acquired
Paragon Steakhouse Restaurants in December, 1998.
15
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, future results of operations,
financial position or reorganization plans 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 24, 2002 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
As of December 24, 2002 the Company operated 51 full-service steakhouse
restaurants located in nine states. The Company operates under the brand names
of Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's,
Mountain Jack's Steakhouse, Iguana Joe'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. On February 28, 2002 the Company
rejected nine (9) leases as part of the bankruptcy process and the
reorganization plan. As of December 2002, the Company had rejected or sold
sixteen (16) units. See notes 2 and 6 to the accompanying Consolidated Financial
Statements.
16
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. The Company plans to emerge from its
reorganization prior to focusing on any acquisitions.
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. The results of the Company
continued to improve until beginning second quarter 2001 when the economic
recession began to take affect on all of the units top line revenue. The decline
in revenue continued through the third period 2001 and was dramatically
accelerated with the events of September 11th.
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 California locations, which do not experience the same
seasonal changes in weather that occur at our Mid-west locations.
We had three (3) business units, which had separate management and reporting
infrastructures that offer different products and services. The business units
were 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
operated as Pacific Basin Foods, performed distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.
As Paragon downsized and reduced the total number of restaurants serviced by
Pacific Basin Foods, the volume required to maintain its economically feasible
also diminished. Therefore, on October 11, 2002 Pacific Basin Foods ceased
operations and filed under Chapter 7 with the United States Bankruptcy Court in
Riverside, California.
17
RESULTS OF OPERATIONS
52 Weeks Ended December 24, 2002 Compared to the 52 Weeks Ended December 25,
2001
Revenues for the year 52 weeks ended December 24, 2002 decreased $13,582,157 or
12.3% from $110,684,409 for the year ended December 25, 2001 to $97,102,252 for
the same period in 2002. Net revenue for Paragon Steakhouse Restaurants
decreased $13,509,978 or 12.3% from $109,731,118 for the fifty-two week period
ended December 25, 2001 to $96,221,140 for the same period in 2002. The decrease
is substantially attributable to the decrease in total operating units. Between
the filing date of bankruptcy and the end of 2002, sixteen (16) operating units
were closed and/or sold. The same store sales for those units that were still
open at the end of the year reflected a decline of 3.2% for the 52 weeks ended
December 24, 2002 versus the same period in 2001. Revenue from the Company's
only remaining original restaurant (Iguana Joe's) decreased $72,179 or 7.6% from
$953,291 for the fifty-two week period ended December 25, 2001 to $881,112 for
the same period in 2002. The decrease is the result of this unit being shut down
for approximately six weeks for remodeling and opening as a new concept Iguana
Joe's.
Food and beverage costs for the fifty-two week period ended December 24, 2002
decreased $4,594,174 or 11.9% from $38,480,981 for the fifty-two week period
ended December 25, 2001 to $33,886,807 for the same period in 2002. Food and
beverage costs as a percentage of restaurant revenues was 34.9% for the
fifty-two week period ended December 24, 2002 compared to 34.8% for the same
period in 2001. Even with the reduced volume at the unit level, the Company was
able to hold food costs consistent with the previous year without sacrificing
quality or quantity. This includes the cost of the transition from the Company
owned food distributor (Pacific Basin Foods) to two outside UniPro Distributors
(one in the West and one in the Mid-west) in October of 2002.
Payroll and payroll related costs for the fifty-two week period ended December
24, 2002 decreased $2,406,632 or 6.6% from $36,719,587 for the fifty-two week
period ended December 25, 2001 to $34,312,955 for the same period in 2002. The
total payroll and payroll related costs as a percentage of revenues were 35.3%
for the fifty-two week period ended December 24, 2002 compared to 33.2% for the
same period in 2001. The chief reason for this increase as a percentage
relationship to revenue is that the decrease in the restaurants net revenue was
slightly greater than the minimum staffing that is required per unit to maintain
guest services and a positive dining experience. Also contributing to the
increase is as a result of the bankruptcy, workman's compensation state run
insurance rates are approximately 50.0% higher than the normal premiums charged
by insurance agencies.
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, insurance 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 24, 2002 decreased $2,962,120
or 10.9% from $27,259,432 for the fifty-two week period ended December 25, 2001
to $24,297,312 for the same period in 2002. However, these costs as a percentage
of restaurant revenues were 25.0% for the fifty-two week period ended December
24, 2002 compared to 24.6% for the same period in 2001. The chief reason for
this increase as a percentage relationship to revenue is that the fixed or
indirectly variable nature of Direct operating costs does not allow for a
proportionate decrease in expenses versus revenue. Also contributing to the
increase is as a result of the bankruptcy general liability insurance rates are
almost 30.0% higher than the normal premiums.
18
Depreciation and amortization for the fifty-two week period ended December 24,
2002 decreased $666,644 or 19.3% from $3,452,109 for the fifty-two week period
ended December 25, 2001 to $2,785,465 for the same period in 2002. The main
reason for this decrease is the sale and/or rejection of sixteen (16) operating
units during the course of 2002.
General and administrative expenses for the fifty-two week period ended December
24, 2002 decreased $3,410,383 or 40.1% from $8,514,500 for the fifty-two week
period ended December 25, 2001 to $5,104,117 for the same period in 2002.
General and Administrative expenses as a percentage of restaurant revenues was
5.3% for the fifty-two week period ended December 24, 2002 compared to 7.7% for
the same period in 2001. The principal reasons for this decrease in expense are;
in 2001 a reserve for expenses associated with a consulting agreement
($539,409); adjusted officer compensation ($156,813); a reserve for consulting
fees for sale-leaseback ($175,000); a reserve for estimated payroll tax
liability relating to Richard M. Lee ($331,895); a reserve for sublease rent
(bad debt) for a unit rejected February 2002 ($93,357) versus 2002 when no
additional reserves or write-offs were required. In addition, 2002 was further
reduced by the reduction in work force implemented in conjunction with the
reorganization.
Total other income and interest expense, net for the fifty-two week period ended
December 24, 2002 decreased $496,358 or 20.4% from $2,431,271 for the fifty-two
week period ended December 25, 2001 to $1,934,913 for the same period in 2002.
The decrease is principally due to the reduction in interest expense chiefly the
result of filing for bankruptcy and the stay of certain interest expense.
Total reorganization items, net for the fifty-two week period ended December 24,
2002 was a loss of $128,533. The loss was chiefly the result of Legal and
Professional fees specifically associated with the bankruptcy ($1,216,883) and a
stipulated compromise with a secured creditor ($960,000). This was almost
totally offset from gains associated with the rejection of 15 leases and the
sale of the leasehold interest in 3 other units that totaled $2,048,350.
On October 11, 2002 Pacific Basin Foods ceased operations and filed for Chapter
7 with the United States Bankruptcy Court in Riverside, California. The
financial results have been adjusted to reflect the impact of the
discontinuation of Pacific Basin Foods. The total loss from the discontinued
operations was $827,935.
Net loss for the fifty-two week period ended December 24, 2002 decreased
$10,134,185 from $16,716,744 for the fifty-two week ended December 25, 2001 to
$6,582,559 for the same period in 2002. The decrease is principally due to in
2001 there were non-recurring expenses such as: asset impairment reserves
($6,581,000) for certain under performing assets and significantly higher
general and administrative expenses ($4,114,255) as a result of reserves for
loans; fees; insurance; taxes bad debt; as well as, a larger work force.
52 Weeks Ended December 25, 2001 Compared to the 52 Weeks Ended December 26,
2000
19
Revenues for the year 52 weeks ended December 25, 2001 decreased $12,933,790 or
10.5% from $123,618,199 for the year ended December 26, 2000 to $110,684,409 for
the same period in 2001. Net revenue for Paragon Steakhouse Restaurants
decreased $12,979,327 or 10.6% from $122,710,445 for the fifty-two week period
ended December 26, 2000 to $109,731,118 for the same period in 2001. The
decrease is substantially attributable to the economic recession compounded by
the events of September 11th. Revenue from the Company's only remaining original
restaurant (Galveston) increased $45,537 or 5.0% from $907,754 for the fifty-two
week period ended December 26, 2000 to $953,291 for the same period in 2001.
Food and beverage costs for the fifty-two week period ended December 25, 2001
decreased $4,638,621 or 10.8% from $43,119,602 for the fifty-two week period
ended December 26, 2000 to $38,480,981 for the same period in 2001. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 34.8% for the fifty-two week period ended December 25, 2001 compared to
34.9% for the same period in 2000. Even with the reduced volume at the unit
level the Company was able to hold food costs consistent with the previous year
without sacrificing quality or quantity.
Payroll and payroll related costs for the fifty-two week period ended December
25, 2001 decreased $2,784,911 or 7.0% from $39,504,498 for the fifty-two week
period ended December 26, 2000 to $36,719,587 for the same period in 2001.
Payroll and payroll related costs were 33.2% of restaurant revenues for the
fifty-two week period ended December 25, 2001 compared to 32.0% for the
fifty-two week period ended December 26, 2000. The major reason for this
increase as a percentage relationship to revenue is the decrease in the
restaurants net revenue was slightly greater than the minimum staffing that is
required per unit to maintain guest services and a positive dining experience.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, rent, insurance 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 25, 2001 increased $1,415,615
or 5.8% from $25,843,817 for the fifty-two week period ended December 26, 2000
to $27,259,432 for the same period in 2001. Direct operating costs for the
restaurants were 24.6% of restaurant revenue for the fifty-two week period ended
December 25, 2001 compared to 20.9% for the fifty-two week period ended December
26, 2000. The difference is primarily due to an increase in insurance reserves
required for current and estimated future liabilities ($464,107), versus a
self-insurance reserve reduction ($1,034,135) in 2000.
Reserve for impairment of property, plant, and equipment: During the year ended
December 31, 2001 events and circumstances in connection with continuing
operating losses of certain under-performing restaurants indicated that an
estimated $6,581,527 of property, plant and equipment of the Company were
impaired. The estimate of undiscounted cash flows indicates that such carrying
amounts are not expected to be recovered. We have recorded the current year's
impairment loss as a reserve as the amount reflects and estimated impairment
loss. We intend to finalize the actual impairment loss during the next fiscal
year as most (if not all) of these properties have/will be addressed in the
bankruptcy process.
20
Depreciation and amortization for the fifty-two week period ended December 25,
2001 decreased $251,237 or 6.8% from $3,703,346 for the fifty-two week period
ended December 26, 2000 to $3,452,109 for the same period in 2001.
General and administrative expenses for the fifty-two week period ended December
25, 2001 increased $953,238 or 12.6% from $7,561,262 for the fifty-two week
period ended December 26, 2000 to $8,514,500 for the same period in 2001.
General and Administrative expenses as a percentage of restaurant revenues was
7.7% for the fifty-two week period ended December 25, 2001 compared to 6.1% for
the same period in 2000. The principal reasons for this increase in expense are;
a reserve for expenses associated with a consulting agreement ($539,409);
adjusted officer compensation ($156,813); a reserve for consulting fees for
sale-leaseback ($175,000); a reserve for estimated payroll tax liability
relating to Richard M. Lee ($331,895); a reserve for sublease rent (bad debt)
for a unit rejected February 2002 ($93,357). The adjusted General and
administrative expense without these reserves and write-offs is $7,218,026 or
6.5% of restaurant revenues. This number was further reduced by the reduction in
work force implemented in conjunction with the reorganization.
Total other income and interest expense, net for the fifty-two week period ended
December 25, 2001 increased $314,687 or 14.9% from $2,116,584 for the fifty-two
week period ended December 26, 2000 to $2,431,271 for the same period in 2001.
The increase is principally due to in 2001 the Company's Paragon Subsidiary sold
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 in 2001 by the
forgiveness of $442,058 of advances to two officers.
Net loss for the fifty-two week period ended December 25, 2001 increased
$16,095,300 from $621,444 for the fifty-two week ended December 26, 2000 to
$16,716,744 for the same period in 2001. The increase is principally due to the
impact on operations from the economic recession and the September 11th tragedy
that significantly decreased revenues at the restaurants and the distributing
company. Also contributing to the increase were non-recurring expenses such as:
asset impairment reserves ($6,972,000) for certain under performing assets and
reserves for loans; fees; insurance; taxes and bad debt ($2,769,157).
Year Ended December 26, 2000 Compared to the Year Ended December 28, 1999
Revenues for the year ended December 26, 2000 decreased $5,937,122 or 4.6% from
$129,555,321 for the year ended December 28, 1999 to $123,618,199 for the same
period in 2000. The decrease is substantially attributable to the sale or
closure of 8 under performing Paragon and Galveston restaurants. This was
partially offset by a 4.1% increase in Paragon's same store sales from the
comparable fifty-two week period in 1999. 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 restaurant, subleasing another
and closing down a third pending its sale.
Food and beverage costs for the fifty-two week period ended December 26, 2000
decreased $2,175,570 or 4.8% from $45,295,172 for the fifty-two week period
ended December 28, 1999 to $43,119,602 for the same period in 2000. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 34.9% for the fifty-two week period ended December 26, 2000 compared to
35.0% 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.
21
Payroll and payroll related costs for the fifty-two week period ended December
26, 2000 decreased $3,614,896 or 8.4% from $43,119,394 for the fifty-two week
period ended December 28, 1999 to $39,504,498 for the same period in 2000.
Payroll and payroll related costs 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 major reason for this
decrease is the reduction in force expense and its proportionate effect on these
numbers.
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 $2,432,508 or 8.6% from
$28,276,325 for the fifty-two week period ended December 28, 1999 to $25,843,817
for the same period in 2000. These costs as a percentage of restaurant revenues
were 20.9% for the fifty-two week period ended December 26, 2000 compared to
21.8% for the same period in 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 $341,809 or 8.4% from $4,045,155 for the fifty-two week period
ended December 28, 1999 to $3,703,346 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), 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 $471,862 or 5.9% from $8,033,124 for the fifty-two week
period ended December 28, 1999 to $7,561,262 for the same period in 2000.
General and administrative expenses as a percentage of restaurant revenues was
6.1% for the fifty-two week period ended December 26, 2000 compared to 6.2% 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.
Total other income and interest expense, net for the fifty-two week period ended
December 26, 2000 decreased $2,330,806 or 52.4% from $4,447,390 for the
fifty-two week period ended December 28, 1999 to $2,116,584 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
forgiveness of $442,058 of advances to two officers.
22
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 (2) 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 additional training and recruitment for Paragon
Steakhouse.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering was commenced on February 27, 1998. In addition to
the approximately $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 operating loss.
The Company had a cash and cash equivalents balance of $2,750,673 at December
24, 2002. During the year the Company maintained a current ratio of 0.49-to-1,
which arose from a working capital deficit of $5,405,111. In addition, as
described above, the Company is in default with secured financing as of December
31, 2001, and on February 15, 2002, the Company filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. In addition to the
sale of selected assets in the reorganization process under Chapter 11, the
Company may need additional sources of financing during the next 12 months to
fund our reorganization plan. Any required additional financing may not be
available on terms favorable to us, or at all. If adequate funds are not
available on acceptable terms, we may be unable to fund our reorganization plan
and may be required to sell core assets or dissolve the business. If we raise
additional funds by issuing equity securities, shareholders may experience
dilution of their ownership interest and the newly issued securities may have
rights superior to those of the common stock. If we issue or incur debt to raise
funds, we may be subject to limitations on our operations.
On August 13, 2003 the United States Bankruptcy Court in Riverside, California
entered the order approving the Debtor-in Possession financing of $5.0 million
available immediately. Per the terms of the financing agreement approved by the
court upon the effective date of the Company's Plan of Reorganization the loan
will convert to 90% of the Common Stock and the existing common stock of the
debtor will be canceled.
The Company has a cash and cash equivalents balance of $2,205,221 at December
30, 2003. During the year ended December 30, 2003, the Company maintained a
current ratio of 0.36 to 1, which arose from a working capital deficit of
$7,380,059 after adjusting for the Debtor in Possession note that converted to
equity upon plan confirmation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
23
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 24, 2002, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of these assets.
Foreign Currency Exchange Risk. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.
ITEM 7B. CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 5 to our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results, and that require significant judgment.
SELF-INSURANCE
In the past the Company was self-insured for certain losses related to general
liability and workers' compensation. The Company maintained stop loss coverage
with third party insurers to limit its total exposure. The self-insurance
liability represents and estimate of the ultimate cost of old claims incurred as
of the balance sheet date. The estimated liability is based upon analysis of
historical data and actuarial estimates, and is reviewed by the Company on a
quarterly basis to ensure that the liability is appropriate. If for any reason
in the final settlement of these old claims the results differ from our
estimates, our financial results could be impacted.
UNEARNED REVENUE
The Company sells gift certificates and recognizes a liability, which is
included in unearned revenue, for gift certificates outstanding until the gift
certificate is redeemed or considered to be unredeemable. There gift
certificates do not carry an expiration date so if all outstanding gift
certificates are redeemed at once, our financial results (cash) would be
impacted.
PROPERTY, FIXTURES AND EQUIPMENT
Property, fixtures and equipment are recorded at cost. We expense repair and
maintenance costs incurred to maintain the appearance and functionality of the
restaurant that do not extend the useful life of any restaurant asset or are
less than $1,000. Depreciation is computed on the straight-line basis over the
following estimated useful lives:
Buildings and building improvements 20 years
Furniture and fixtures and equipment 5 years
24
Our accounting policies regarding property, fixtures and equipment include
certain management judgments and projections regarding the estimated useful
lives of these assets and what constitutes increasing the value and useful life
of existing assets. These estimates, judgments and projections may produce
materially different amounts of depreciation expense than would be reported if
different assumptions were used.
IMPAIRMENT OF LONG LIVED ASSETS
We assess the potential impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Recoverability of assets is measured
by comparing the carrying value of the asset to the future cash flows expected
to be generated by the asset. In evaluating long-lived restaurant assets for
impairment, we consider a number of factors such as:
a) Restaurant sales trends;
b) Local competition;
c) Changing demographic profiles;
d) Local economic conditions;
e) New laws and government regulations that adversely affect sales and
profits; and
f) The ability to recruit and train skilled restaurant employees.
If the aforementioned factors indicate that we should review the carrying value
of the restaurant's long-lived assets, we perform an impairment analysis.
Identifiable cash flows that are largely independent of other assets and
liabilities typically exist for land and buildings, and for combined fixtures,
equipment and improvements for each restaurant. If the total future cash flows
are less than the carrying amount of the asset, the carrying amount is written
down to the estimated fair value, and a loss resulting from value impairment is
recognized by a charge to earnings.
Judgments and estimates made by us related to the expected useful lives of
long-lived assets are affected by factors such as changes in economic conditions
and changes in operating performance. As we assess the ongoing expected cash
flows and carrying amounts of our long-lived assets, these factors could cause
us to realize a material impairment charge.
ITEM 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.
25
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.
PART IV.
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.
26
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.
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.
27
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.
2. 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
28
REPORTS ON FORM 8-K
1. Form 8-K dated February 21, 2002 reporting that Steakhouse Partners, Inc and
its wholly owned subsidiary, Paragon Steakhouse Restaurants, filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy court for the Central District of California. The 8-K
also reported that the Company's Board of Directors eliminated the Chief
Executive Officer position, which had been held by Mr. Richard M. Lee. Mr. Hiram
J. Woo continued as President of the Company and is responsible for the
day-to-day operations. Finally, it was reported that for personal reasons Mr.
Mark K. Goudge resigned as a member of the Company's Board of Directors.
2. Form 8-K dated July 28, 2003 reporting that the United States Bankruptcy
Court in Riverside, California authorized Steakhouse Partners, Inc and its
wholly owned subsidiary, Paragon Steakhouse Restaurants, to obtain post petition
debtor-in-possession financing in the sum of $5.0 million. Upon Confirmation,
the financing will convert into 90% of the common stock of the reorganized
debtor and the remaining 10% to be issued to certain creditors. Under the
forthcoming plan, existing equity interests in the debtor would be canceled upon
confirmation.
3. Form 8-K dated August 19, 2003 reporting that the order of the United States
Bankruptcy Court in Riverside, California authorized Steakhouse Partners, Inc
and its wholly owned subsidiary; Paragon Steakhouse Restaurants to obtain post
petition debtor-in-possession financing was entered on August 13, 2003. Per that
order and the bylaws of the debtor, effective July 30, 2003, A. Stone Douglass
was appointed and will perform the duties of chief executive officer and
president of the debtor.
4. Form 8-K dated December 31, 2003 reporting that the Order was entered by the
United States Bankruptcy Court for the Central District of California -
Riverside Division confirming Steakhouse Partners, Inc and its wholly owned
subsidiary; Paragon Steakhouse Restaurants their Joint Plan of Reorganization.
Under the terms of the Order the Plan will become effective December 31, 2003,
and the debtor-in-possession financing, that was approved by the Court on August
13, 2003 will convert to 90% of the Common Stock. The balance of the Common
Stock will be distributed to the Unsecured Creditors as partial payment in
accordance with the Plan. Also, all existing Common Stock, Stock Options,
Preferred Stock and Warrants will be cancelled at that time.
29
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.
Dated: April 15, 2004 STEAKHOUSE PARTNERS, INC.
/s/
....................................
A. STONE DOUGLASS
President, Secretary, Director
(Principal executive officer and
principal financial and accounting
officer)
STEAKHOUSE PARTNERS, INC.
/s/
....................................
Joseph L. Wulkowicz
Chief Financial Officer, Assistant
Secretary (Principal financial
and accounting 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/ April 15, 2004
......................................................
Name A. STONE DOUGLASS
Title: President, Secretary and Director
/s/ TOM EDLER April 15, 2004
......................................................
Name: Tom Edler
Title: Co-Chairman of the Board of Directors
/s/ TOD LINDNER April 15, 2004
......................................................
Name: Tod Lindner
Title: Co-Chairman of the Board of Directors
............................................
30
CERTIFICATION*
I, ____________, certify that:
1. I have reviewed this annual report Form 10-K of Steakhouse Partners, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Dated: April 15, 2004 /s/
Name: A. STONE DOUGLASS
Title: President, Secretary and Director
(Serving as principal executive officer)
CERTIFICATION*
I, ____________, certify that:
1. I have reviewed this annual report Form 10-K of Steakhouse Partners, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Dated: April 15, 2004 /s/
Name: Joseph L. Wulkowicz
Title: Chief Financial Officer and
Assistant Secretary (Serving as principal
financial and accounting officer)
31
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001, AND 2000
F-1
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONTENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT 1 - 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 3 - 5
Consolidated Statements of Operations 6 - 7
Consolidated Statements of Stockholders' Equity (Deficit) 8 - 9
Consolidated Statements of Cash Flows 10 - 13
Notes to Consolidated Financial Statements 14 - 55
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule 56
Valuation and Qualifying Accounts - Schedule II 57
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
(Debtor-In-Possession)
We have audited the accompanying consolidated balance sheets of Steakhouse
Partners, Inc. (a Delaware corporation) and subsidiaries (Debtor-In-Possession)
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2002. These consolidated 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 auditing standards generally accepted
in the United States of America. 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 (Debtor-In-Possession) as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 31, 2002, the Company maintained a current ratio of 0.54-to-1, which
arose from a working capital deficit of $5,405,111. In addition, the Company is
currently in default of certain debt as the Company did not make payments when
the notes came due. Furthermore, the Company failed to meet certain financial
covenants requirement by its lenders. The total amount of debt that is currently
in default is $3,625,870. In addition, during February 2002, the Company filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the Company's
transition, ultimately, to the attainment of profitable operations is dependent
upon obtaining adequate financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost structure.
These factors, among others, as discussed in Note 4 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 4. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
F-3
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
(Debtor-In-Possession)
Page 2
As discussed in Note 2, on December 31, 2003, the Company's Plan of
Reorganization was confirmed by the United States Bankruptcy Court.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 17, 2003, except for
Notes 2, 14, 18, and 22, as
to which the date is
December 31, 2003
F-4
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
2002 2001
------------ ------------
Current assets
Cash and cash equivalents $ 2,750,673 $ 1,107,889
Accounts receivable, net of allowance for doubtful
accounts of $133,234 and $154,621 829,909 875,412
Inventories, net of allowance for obsolete inventories
of $45,805 and $45,805 1,931,383 2,268,421
Current portion of advances to officers, net of allowance
for doubtful accounts of $277,016 and $616,584 - 277,016
Prepaid expenses and other current assets 847,727 1,240,528
------------ ------------
Total current assets 6,359,692 5,769,266
Property, plant, and equipment, net 18,313,773 23,365,134
Deposits and other assets 199,441 377,732
Cash - restricted under collateral agreements 1,122,075 1,488,189
------------ ------------
Total assets $25,994,981 $31,000,321
============ ============
The accompanying notes are an integral part of these financial statements.
F-5
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
2002 2001
------------ ------------
Liabilities not subject to compromise
Current liabilities
Convertible debt $ - $ 1,100,000
Current portion of notes payable 72,842 2,660,306
Current portion of capital lease obligations - 302,467
Accounts payable 2,654,497 5,421,436
Accrued expenses 746,075 2,777,327
Unearned revenue 4,385,940 5,734,551
Reserve for self insurance claims 403,780 719,724
Sales and property taxes payable 979,817 841,017
Accrued payroll costs 2,521,852 3,063,360
------------ ------------
Total current liabilities 11,764,803 22,620,188
Secured exchangeable notes - 2,000,000
Notes payable, net of current portion 2,115,643 -
Capital lease obligation, net of current portion - 17,032,636
Deferred tax liability 119,411 119,411
Deferred gain on sale-leaseback - 903,172
Net liabilities of Pacific Basin Foods, Inc. in liquidation 1,057,463 315,400
Deferred rent - 2,382,623
------------ ------------
Total liabilities not subject to compromise 15,057,320 45,373,430
------------ ------------
Liabilities subject to compromise 31,833,329 -
------------ ------------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements.
F-6
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (Continued)
2002 2001
------------ ------------
Stockholders' deficit
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 3,386,522 shares issued
and outstanding 33,865 33,865
Treasury stock, 28,845 and 28,845 shares, at cost (175,000) (175,000)
Additional paid-in capital 12,040,750 11,980,750
Accumulated deficit (32,798,033) (26,215,474)
------------ ------------
Total stockholders' deficit (20,895,668) (14,373,109)
------------ ------------
Total liabilities and stockholders' deficit $25,994,981 $31,000,321
============ ============
The accompanying notes are an integral part of these financial statements.
F-7
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------- --------------
Revenues $97,102,252 $110,684,409 $ 123,618,199
------------ ------------- --------------
Cost of sales
Food and beverage 33,886,807 38,480,981 43,119,602
Payroll and payroll related costs 34,312,955 36,719,587 39,504,498
Direct operating costs 24,297,312 27,259,432 25,843,817
Impairment of property, plant, and
equipment - 6,581,527 388,868
Depreciation and amortization 2,785,465 3,452,109 3,703,346
------------ ------------- --------------
Total cost of sales 95,282,539 112,493,636 112,560,131
Gross profit (loss) 1,819,713 (1,809,227) 11,058,068
General and administrative expenses 5,104,117 8,514,500 7,561,262
Legal settlement - 800,000 -
Reserve for advances to officers 277,016 616,584 -
------------ ------------- --------------
Income (loss) before other income
(expense) (3,561,420) (11,740,311) 3,496,806
------------ ------------- --------------
Other income (expense)
Gain on sale of property, plant, and
equip