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 30, 2003
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 30, 2003):
$77,757,815
Aggregate market value of voting stock held by non-affiliates: $0.00
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
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of Securities under a plan
confirmed by a court: |X| YES |_| NO
Documents Incorporated by Reference:
Part III -- Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.
The index to exhibits is located on page 39.
TABLE OF CONTENTS
Item
PAGE
PART I
Item 1. Business..........................................................................1
Item 2. Properties.......................................................................23
Item 3. Legal Proceedings................................................................25
Item 4. Submission of Matters to a Vote of Security Holders..............................25
PART II
Item 5. Market for the Registrant's Common Equity Related Stockholder....................25
Matters and Issuer Purchases of Securities
Item 6. Selected Financial Data..........................................................27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................................28
Item 7a. Quantitative and Qualitative Disclosures about Market Risk .....................35
Item 8. Financial Statements and Supplementary Data......................................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................................38
Item 9a.Controls and Procedures..........................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant .............................38
Item 11. Executive Compensation..........................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management .................38
Item 13. Certain Relationships and Related Transactions .................................38
Item 14. Principal Accounting Fees and Services .........................................38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................39
Signatures ..............................................................................42
Section 302 Certification ...............................................................45
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
On December 21, 1998, Steakhouse Partners, Inc. ("Steakhouse") consummated its
acquisition of Paragon Steakhouse Restaurants, Inc. and its subsidiaries
(together "Paragon", "PSR"), which then owned 78 steakhouse restaurants, and of
Pacific Basin Foods Inc., ("Pacific Basin"), a restaurant food distribution
company. Paragon is now a wholly owned subsidiary of Steakhouse (together
referred to as "Steakhouse Partners", the "Company", "we", "us" and "our").
As of March 30, 2004, the Company operates 25 full-service steakhouse
restaurants located in eight states. The Company's restaurants specialize in
complete steak and prime rib meals, and also offer fresh fish and other lunch
and dinner dishes. The Company's average dinner check is $27.40 (including
alcoholic beverages) and its 25 restaurants serve almost 3.0 million meals
annually. The Company operates principally under the brand names of Hungry
Hunter's, Hunter's Steakhouse, Mountain Jack's and Carvers. Company management
believes that its emphasis on quality service and its concentration on high
quality USDA graded steaks and prime ribs distinguishes its restaurants from
competitors, which differentiation presents an opportunity for significant
growth upon completion of the reorganization process described below under
"Proceedings Under the Bankruptcy Code".
PROCEEDINGS UNDER THE BANKRUPTCY CODE
Effective December 31, 2003, (the "Effective Date") the Company confirmed a Plan
of Reorganization, which allowed it to achieve the benefits that motivated the
filings described below. By way of background, on February 15, 2002, Steakhouse
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Central District of California (the "Bankruptcy Court"). On February 19,
2002, Paragon also filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court (together, the "Filing"). On October 11,
2002, Pacific Basin Foods, Inc., our wholly owned subsidiary, filed a petition
under Chapter 7 of the Bankruptcy Code in Bankruptcy Court.
The initial Filing was made in response to the maturing of certain notes
aggregating $1,734,285, which the Company was unable to pay. Throughout the
course of the Reorganization, the Company sought to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets.
1
During the Reorganization, the Company continued to manage its properties and
operated its businesses as "debtors-in-possession" ("DIP") under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.
As a consequence to the Filing, all pending litigation and claims against the
Company were stayed, and no party was permitted to take action to realize its
pre-petition claim, except pursuant to order of the Bankruptcy Code. While
enjoying the protection of this stay, the Company disposed of under performing
assets and sought third party participation in funding a plan. In July, 2003,
the Bankruptcy Court approved a DIP loan and the general terms pursuant to which
a plan of Reorganization would be approved, as more fully described below.
Generally, under the provisions of the Bankruptcy Code, holders of equity
interests may not participate under a plan of reorganization unless the claims
of creditors are satisfied in full under the plan or unless creditors accept a
reorganization plan that permits holders of equity interest to participate. The
approved plan provides for no distribution to equity holders, but rather
provides for distribution of equity upon confirmation to the plan funder and
creditors, as more fully described below.
Subsequent to the Filing, the Company commenced a balloting and solicitation
process with respect to the Plan of Reorganization, which concluded in December
2003. On December 19, 2003, the Company's Plan of Reorganization was confirmed
by the Bankruptcy Court. Upon the effective date of the Plan of Reorganization,
the entire balance of the DIP facility of $5,000,000, including accrued
interest, became due and payable to Steakhouse Investors, LLC or its assignees
("Steakhouse Investors"), and Steakhouse Investors received 90% of the new
common stock of the reorganized company in exchange for a full and complete
release of the Company's obligations under the DIP agreement other than
interest. The Plan of Reorganization provides that the outstanding preferred
stock, common stock, stock options, and warrants of the Company before
confirmation be canceled. In addition, all of the Company's pre-petition
liabilities have been completely restructured by the Plan of Reorganization,
whereby the Company will be obligated to pay the following claims according to
the Plan as follows:
1. Priority tax claim in the amount of approximately $1,921,000 will be paid
over a four-year period from the Effective Date, with interest payable at a
rate of 6% per annum.
2. Secured claims in the amount of approximately $2,151,000 will be paid as
follows: (a) $1,535,000 will be paid in full over a period of six years.
Interest only will be paid over the first three years, and the principal
will be paid over the remaining three years and (b) $616,000 will be deemed
paid upon the transfer of all of the assets and lease rights of one of the
Company's restaurants in Torrance, California. On December 31, 2003, the
Effective Date, the Company emerged from bankruptcy. All of the assets and
lease rights of the Torrance, CA restaurant were transferred in
satisfaction of such secured claim.
3. Unsecured claims estimated to be between $8,700,000 to $12,700,000 will be
paid as follows: (a) general unsecured claims in the amount of $8,000,000
to $12,000,000 are expected to receive recovery of 50% to 70% of their
allowed claims. We have paid creditors $1,000,000 in January 2004, and will
make payments under a $5,030,000 note payable, which will be paid in the
amount of $500,000 on each April, August, and December of each year for the
next three years. The note is non-interest-bearing and the last payment is
due on or before December 2006. In addition, the general unsecured
creditors will receive their pro rata share of 500,000 shares of common
stock, representing 10% of the new common stock of the Company and (b)
convenience claims in the amount of approximately $700,000 were paid an
estimated recovery of 50%. Each allowed claim was paid in January, 2004.
2
Finally, the Plan of Reorganization 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.
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. As a
result of the Filing, realization of certain of the Company' assets and
liquidation of certain of the Company' liabilities are subject to significant
uncertainty. Furthermore, the plan of reorganization materially changed the
amounts and classifications reported in the December 30, 2003 consolidated
financial statements, which did not give effect to any adjustments to the
carrying value or classification of assets or liabilities that were necessary as
a consequence of a 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.
3
OUR BUSINESS BACKGROUND
The steakhouse industry is expected to continue to expand over the next several
years. We believe that this industry is highly fragmented and, we believe we may
have the opportunity to grow our business by expanding one of Paragon's
brand-name step-up steakhouses, Carvers.
Our overall steakhouse operations have historically experienced seasonal
fluctuations, with the fourth quarter and first quarter of each year being our
strongest quarters, reflecting both the Christmas season and the colder weather
at our Mid-west operations, and the third quarter being the slowest, as people
tend to eat less steak in restaurants in the summer months. This seasonality,
however, is less pronounced at our California locations, which do not experience
the same seasonal changes in weather that occur at our Mid-west locations.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that attract
loyal clientele. By the term "destination restaurants", we mean that our
restaurants are situated as the primary destination of our clientele, rather
than a destination or activity ancillary to another activity, such as shopping
or sight seeing. With one exception, our restaurants are full-service
steakhouses. 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
eighteen 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 11:30 a.m. on weekdays; most of these restaurants are closed
for lunch on weekends.
We currently operate in three distinctive steakhouse markets:
HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 18 steakhouses operating under our core brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's, for which the average dinner check is
approximately $24.64 per guest. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and 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 core menu also features fresh fish, seafood, pasta and chicken in addition
to prime rib and steaks. A complete meal includes salad and a choice of two side
dishes including soup, choice of potato, and steamed vegetables. The menu also
includes appetizers and desserts. The restaurant menus have recently been
revised and expanded to respond to changing guest palates and diets, and 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.
4
CARVERS
We have 4 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average dinner check per guest of slightly more
than $36.00. 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 (OTHER) CONCEPTS
We have 3 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. Two have menus
similar to the core menus, with additional feature items unique to their
communities and environment. The third, the Williamsburg Whaling Company,
features fresh seafood richly available in its colonial Williamsburg local.
Overall, the menus at these restaurants are different than the steakhouses and
enjoy an average dinner guest check of approximately $32.35. These restaurants
typically have one or more banquet rooms.
We will continue our efforts to differentiate our restaurants by emphasizing
personal and attentive service, consistent high-quality, fresh products and
position in the mid-priced, full service steakhouse segment of the restaurant
industry.
REORGANIZATION STRATEGY
Among others, the benefits of the reorganization have included the restructuring
of the Company debt, the improved Company's financial performance through
cost-reduction and restructuring of administrative overhead, and the ability to
raise money the selective sale of non-strategic restaurants and the commitment
of plan funding. Our goal for the future is to enhance our position in the
steakhouse restaurant industry by building through internal growth (Carvers) and
through the potential acquisition of steakhouse (step-up casual) restaurants. No
acquisitions are currently pending and there can be no assurance such
acquisitions will be made. Key components of this 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.
5
Our marketing efforts consist of local media advertising, diners club
participation and limited 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. Restaurant leadership teams also coordinate birthday
and anniversary programs, hotel relationships, catering outreach, and other
community-targeted guest relations programs.
Should we expand, our plan for each new restaurant would 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.
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. However, because of the age, reliability and serviceability
issues of our existing POS system, the Company will begin upgrading this
critical feature starting in 2004. The software and hardware vendors have been
selected, lab equipment has been ordered with testing and training following
shortly. Once everything has been proven and tested, the Company anticipates it
will take approximately eighteen months to convert all the units.
6
The management team for a typical steakhouse restaurant generally consists of
one general manager, one or two leaders 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 five to seven 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 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 Van Eerden 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 subsidiary was a wholesale food distributor serving
the restaurant industry. Its principal clients were Paragon and several small
regional chains. 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.
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.
7
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 employment and
wage laws governing such matters as working conditions, overtime and tip credits
and other employee matters. Significant numbers of our food service and
preparation personnel are paid at rates related to the federal minimum wage.
Government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.
The development and construction of additional restaurants will be subject to
compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on us or our restaurants to date.
The Federal Americans With Disabilities Act (the "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. We seek to
cause that our restaurants will be in full compliance with the ADA, 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 30, 2003, we employed approximately 1,663 individuals, of which 160
occupy executive, managerial or clerical positions, and 1503 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.
8
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 our Joint Plan of Reorganization. Under the terms of
the Plan of Reorganization, 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 are expected to receive between $0.50 and $0.70 for each
dollar of allowable claim in the form of cash and a three-year note providing
for periodic payments.
If cash flow from operations is insufficient to satisfy the periodic payments
required to our creditors, deferred capital improvements and expansion, and we
are unable to raise additional funds it will seriously effect our ability to
meet our plan objectives, and we may be forced to liquidate the Company.
9
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 $4,851,281 for the fiscal year ended December 30, 2003; 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
and a net loss of approximately $3.9 million for the fiscal year ended December
26, 1999. As of December 30, 2003, we had an accumulated deficit of
approximately $37.7 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 including:
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 effected.
ADVERSE ECONOMIC CONDITIONS IN A LIMITED NUMBER OF STATES COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS.
Our restaurants are located in 8 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.
10
IF WERE ARE UNABLE TO RESPOND TO THE RECENT OR ANY FUTURE MAD COW SCARE AND
ASSURE OUR CUSTOMERS THAT OUR RESTAURANTS AND BEEF ARE SAFE IT MAY NEGATIVELY
AFFECT OUR BUSINESS.
Our ability to be pro active and provide factual information to our customers
will be critical to maintaining our business. In the most recent outbreak of mad
cow disease, the affected animal was a Holstein cow from Washington State.
Typically Mad Cow has only been detected in animals five years and older. Our
customers must believe that all our meat is non-Holstein and comes from the
Midwest. We only use whole muscle beef that come from cattle that are 24-28
months old. Our approved vendors have controls in place to prevent cross
contamination (muscle meats versus brain, spinal cord and spleen material) of
these organs with any other cut of beef. Nevertheless, we cannot assure you that
every ounce of beef used at our Restaurants is safe.
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.
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.
11
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.
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.
OUR PRIOR BANKRUPTCY COULD HINDER OUR ABILITY TO NEGOTIATE EFFECTIVELY WITH
THIRD PARTIES AND COULD ADVERSELY AFFECT OUR OPERATIONS GOING FORWARD.
In February 2002 we, along with our wholly-owned subsidiary Paragon filed for
voluntary reorganization under Chapter 11 of the Bankruptcy Code. We officially
emerged from bankruptcy on December 31, 2003. However, our Chapter 11
reorganization and financial condition and performance could adversely affect
our operations going forward. Our bankruptcy filing had an adverse affect on our
credit standing with our lenders, certain suppliers and other trade creditors.
This can increase our costs of doing business and can hinder our negotiating
power with our lenders, certain suppliers and other trade creditors. The
failure to negotiate favorable terms could adversely affect our financial
performance. Though we have emerged from Chapter 11, the distribution of shares
to the general unsecured creditors is not complete as we continue to reconcile
the claims made by these creditors. Until this process is complete, we will
continue to incur expenses with respect to the reorganization process.
BECAUSE WE HAVE EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM,
IT MAY BE DIFFICULT FOR INVESTORS TO EVALUATE OUR PROSPECTS FOR IMPROVED
PERFORMANCE.
There have been a number of changes in our senior management team since our
emergence from bankruptcy. Our chief executive officer was appointed by the
Bankruptcy Court in July 2003. If our management team is unable to develop
successful business strategies, achieve our business objectives or maintain
effective relationships with employees, suppliers, creditors and customers, our
ability to grow our business and successfully meet operation and challenges
could be impaired.
12
IF WE LOSE OR ARE UNABLE TO OBTAIN KEY PERSONNEL, OUR ABILITY TO EFFECTIVELY
OPERATE OUR BUSINESS COULD BE HINDERED.
Our ability to maintain or enhance our competitive position will depend to a
significant extent on the efforts and ability of our executive and senior
management, particularly our chief executive officer. Our future success and our
ability to manage future growth will depend in large part upon the efforts of
our management team and on our ability to attract and retain other highly
qualified personnel. Competition for personnel is intense, and we may not be
successful in attracting and retaining our personnel. Our inability to retain
our current management team and attract and retain other highly qualified
personnel could adversely affect our results of operations and hinder our
ability to effectively manage our business.
WE FACE RISKS ASSOCIATED WITH CHANGES IN GENERAL ECONOMIC AND POLITICAL
CONDITIONS THAT EFFECT CONSUMER SPENDING.
We believe that the weak general economic conditions in effect in the United
States will continue through 2004. As the economy struggles, we are concerned
that our customers may become more apprehensive about the economy and reduce
their level of discretionary spending. We believe that a decrease in
discretionary spending could impact the frequency with which our customers
choose to dine out or the amount they spend on meals while dining out, thereby
decreasing our revenues. Additionally, the continued military responses to
terrorist attacks and our military operations abroad may exacerbate current
economic conditions and lead to further weakening in the economy. Adverse
economic conditions and any related decrease in discretionary spending by our
customers could have an adverse effect on our revenues and operating results.
OUR PROFITABILITY IS DEPENDENT IN LARGE MEASURE ON FOOD AND SUPPLY COSTS WHICH
ARE NOT WITHIN OUR CONTROL.
Our profitability is dependent in large measure on our ability to anticipate and
react to changes in food and supply costs. Various factors beyond our control,
including climatic changes and government regulations, may affect food costs.
Specifically, our dependence on frequent, timely deliveries of fresh beef,
poultry, seafood and produce subjects us to the risks of possible shortages or
interruptions in supply caused by adverse weather or other conditions, which
could adversely affect the availability and cost of any such items. We cannot
assure you that we will be able to anticipate or react to increasing food and
supply costs in the future. The failure to react to these increases could
materially and adversely affect our business and result of operations.
13
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.
Our strategy for expansion of our operations includes the construction of new
restaurant properties and/or acquisition of existing properties. Our ability to
open additional restaurants will depend upon our ability to identify and acquire
available new construction sites or restaurant conversions at favorable prices.
We must also have sufficient available funds from operations or otherwise to
support this expansion.
If we cannot successfully construct new restaurant properties or convert
acquired restaurant properties to our established brands within projected
budgets or time periods, our business and our ability to continue as a going
concern will be adversely affected. Even with a successful reorganization and
sufficient funds, plans to expand our business may fail due to construction
delays or cost overruns, which could be caused by numerous factors, such as
shortages of materials and skilled labor, labor disputes, weather interference,
environmental problems and construction Of zoning problems.
WE FACE RISKS ASSOCIATED WITH THE EXPANSION OF OUR OPERATIONS.
The success of our business depends on our ability to expand the number of our
restaurants, either by developing or acquiring additional restaurants. Our
success also depends on our ability to operate and manage successfully our
growing operations. Our ability to expand successfully will depend upon a number
of factors, including the following:
-- the availability and cost of suitable restaurant locations for
development;
-- the availability of restaurant acquisition opportunities;
-- the hiring, training, and retention of additional management and
restaurant personnel;
-- the availability of adequate financing;
-- the continued development and implementation of management information
systems;
-- competitive factors; and
-- general economic and business conditions.
Increased construction costs and delays resulting from governmental regulatory
approvals, strikes, or work stoppages, adverse weather conditions, and various
acts of God may also affect the opening of new restaurants. Newly opened
restaurants may operate at a loss for a period following their initial opening.
The length of this period will depend upon a number of factors, including the
time of the year the restaurant is opened, the sales volume, and our ability to
control costs.
14
We may not successfully achieve our expansion goals. Additional restaurants that
we develop or acquire may not be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing
customers from and reducing the sales volume of our existing restaurants in
those markets.
WE WILL NEED ADDITIONAL CAPITAL FOR EXPANSION.
The development of new restaurants requires funds for construction, tenant
improvements, furniture fixtures equipment training of employee permits, initial
franchise fees and other expenditures. We will require funds to develop
additional restaurants and to pursue any additional restaurant development or
restaurant acquisition opportunities that may develop.
In the future, we may seek additional equity or debt financing to provide funds
so that we can develop or acquire additional restaurants. Such financing may not
be available or may not be available on satisfactory terms. If financing is not
available on satisfactory terms we may be unable to expand our restaurant
operations. While debt financing will enable us to add more restaurants than we
otherwise would be able to add, debt financing increases expenses and is limited
as to availability due to our financial results and bankruptcy history, and we
must repay the debt regardless of our operating results. Future equity
fll1ancings could result in dilution to our stockholders.
WE DEPEND ON KEY FOOD PRODUCT DISTRIBUTORS.
We currently rely on two food product distributors Southwest Traders and Van
Earden. If either Southwest Traders or Van Earden is unable to continue
providing us with a high level of quality and dependability in the receipt of
our supplies, at the cost advantages resulting from our volume purchases, this
could have a material impact on our business.
We believe that all essential products are available from other national
suppliers as well as from local suppliers in the cities in which our restaurants
are located in the event we must purchase our products from other suppliers;
however, there can be no assurance that we will be able to match quality, price
or dependability of supply.
WE FACE COMMODITY PRICE AND AVAILABILITY RISKS.
We purchase energy and agricultural products that are subject to price
volatility caused by weather, market conditions and other factors that are not
predictable or within our control. Increases in commodity prices could result
in lower restaurant level operating margins for our restaurant concepts.
Occasionally, the availability of commodities can be limited due to
circumstances beyond our control. If we are unable to obtain such commodities,
we may be unable to offer related products, which would have a negative impact
on our profitability.
15
THE RESTAURANT INDUSTRY IS AFFECTED BY CHANGES IN CONSUMER PREFERENCES AND
DISCRETIONARY SPENDING PATTERNS THAT COULD FORCE US TO MODIFY OUR MENUS AND
CONCEPTS AND COULD RESULT IN A REDUCTION IN OUR REVENUES.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our Hungry Hunter's, Hunter's Steakhouse, Mountain
Jack's, Carvers restaurants' menus, or by specific events such as the outbreak
or scare caused by "mad cow disease". If we were to have to modify the emphasis
on beef in our restaurants' menus we may lose customers who would be less
satisfied with a modified menu, and we may not be able to attract a new customer
base to generate the necessary revenues to maintain our income from restaurant
operations. A change in our menus may also result in us having different
competitors. We may not be able to successfully compete against established
competitors in the general restaurant market. Our success also depends on
various factors affecting discretionary consumer spending, including economic
conditions, disposable consumer income, consumer confidence and the United
States participation in military activities. Adverse changes in these factors
could reduce our customer base and spending patterns, either of which could
reduce our revenues and results of operations.
WE DEPEND UPON OUR SENIOR MANAGEMENT.
Our success depends, in large part, upon the services of our senior management.
The loss of the services of any members of our senior management team could have
a material adverse effect on our business.
INCREASE IN THE MINIMUM WAGE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND FINANCIAL RESULTS.
A number of our employees are subject to various minimum wage requirements. The
federal minimum wage has remained at $5.15 per hour since September 1, 1997. Any
minimum wage increase may have a material adverse effect on our business,
financial condition, results of operations or cash flows.
THE FAILURE TO ENFORCE AND MAINTAIN OUR TRADEMARKS AND TRADE NAMES COULD
ADVERSELY AFFECT OUR ABILITY TO ESTABLISH AND MAINTAIN BRAND AWARENESS.
Our current operations and marketing strategy depend significantly on the
strength of trademarks and service marks. Our wholly owned subsidiary, Paragon
of Michigan, Inc. has registered, among others, the names Hungry Hunter's,
Mountain Jack's and Carvers. The success of our growth strategy depends on our
continued ability to use our existing trademarks and service marks in order to
increase brand awareness and further develop our branded products. Although we
are not aware of any infringing uses of any of the trademarks or service marks
that we believe could materially affect us; we cannot assure you that we will be
free from such infringements in the future.
The names "Hungry Hunter's", "Mountain Jack's" and "Carvers" represents our core
concept. The termination of our right to use this name or our failure to
maintain any of our other existing trademarks could materially and adversely
affect our growth and marketing strategies.
16
BECAUSE WE MAINTAIN A SMALL NUMBER OF RESTAURANTS, THE NEGATIVE PERFORMANCE
OF A SINGLE RESTAURANT COULD HAVE A SUBSTANTIAL IMPACT ON OUR OPERATING
RESULTS.
We currently own and operate 25 restaurants. Due to this relatively small number
of restaurants, poor financial performance at any owned restaurant could have a
significant negative impact on our profitability as a whole. The results
achieved to date by our relatively small restaurant base may not be indicative
of the results of a larger number of restaurants in a more geographically
dispersed area with varied demographic characteristics. We cannot assure you
that we will be able to operate our existing restaurants at higher sales levels
that generate equal or higher operating profits or increase the number or our
restaurants sufficiently to offset the impact of poor performance at any one
restaurant.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER
FACTORS BEYOND OUR CONTROL.
Our business is subject to seasonal fluctuations, which may vary greatly
depending upon the region of the United States in which a particular restaurant
is located. In addition to seasonality, our quarterly and annual operating
results and comparable unit sales may fluctuate significantly as a result of a
variety of factors, including:
-- the amount of sales contributed by new and existing restaurants;
-- the timing of new openings;
-- increases in the cost of key food or beverage products;
-- labor costs for our personnel;
-- our ability to achieve and sustain profitability on a quarterly or
annual basis;
-- consumer confidence and changes in consumer preferences;
-- health concerns, including adverse publicity concerning food-related
illness;
-- the level of competition from existing or new competitors in the our
segment of the restaurant industry; and
-- economic conditions generally and in each of the market in which we are
located.
These fluctuations make it difficult for us to predict and address in a timely
manner factors that may have a negative impact on our results of operations.
17
WE COULD FACE LABOR SHORTAGES, INCREASED LABOR COSTS AND OTHER ADVERSE EFFECTS
OF VARYING LABOR CONDITIONS.
The development and success of our restaurants depend, in large part, on the
efforts, abilities, experience and reputations of the general managers and chefs
at such restaurants. In addition, our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified employees,
including restaurant managers, kitchen staff and wait staff. Qualified
individuals needed to fill these positions are in short supply and the inability
to recruit and retain such individuals may delay the planned openings of new
restaurants or result in high employee turnover in existing restaurants. A
significant delay in finding qualified employees or high turnover of existing
employees could materially and adversely affect our results of operations or
business. Also, competition for qualified employees could require us to pay
higher wages to attract sufficient qualified employees, which could result in
higher, labor costs. In addition, increases in the minimum hourly wage,
employment tax rates and levies, related benefits costs including health
insurance, and similar matters over which we have no control may increase our
operating costs.
THE RESTAURANT INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING FOOD
QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE GUESTS TO AVOID OUR
RESTAURANTS AND RESULT IN LIABILITIES.
Health concerns, including adverse publicity concerning food-related illness,
although not specifically related to our restaurants, could cause guests to
avoid our restaurants, which would have a negative impact on our sales. We may
also be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. A lawsuit or claim could result in all adverse
decision against us that could have a material adverse effect on our business
and results of operations. We may also be subject to litigation which,
regardless of the outcome, could result in adverse publicity. Adverse publicity
resulting from such allegations may materially adversely affect us and our
restaurants, regardless of whether such allegations are true or whether we are
ultimately held liable. Such litigation, adverse publicity or damages could have
a material adverse effect on our business, competitive position and results of
operations.
18
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY AFFECT OUR FINANCIAL CONDITION.
We are subject to various, federal, state and local environmental laws. These
laws govern discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. These laws may also impose liability
for damages from and the costs of cleaning up sites of spills, disposals or
other releases of hazardous materials. We may be responsible for environmental
conditions or contamination relating to our restaurants and the land on which
our restaurants are located, regardless of whether we lease or own the
restaurant or land in question and regardless of whether such environmental
conditions were created by US or by a prior owner or tenant. The costs of any
cleanup could be significant and have a material adverse effect on our financial
position and results of operations.
WE FACE INCREASED EXPENDITURES OF TIME AND MONEY ASSOCIATED WITH COMPLIANCE WITH
CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE.
Keeping abreast of, and in compliance with, changing laws, regulations, and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq National Market
rules, has required an increased amount of management attention and external
resources. We remain committed to maintaining high standards of corporate
governance and public disclosure. As a result, we intend to invest all
reasonably necessary resources to comply with evolving standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue generating activities to
compliance activities.
RISKS RELATED TO OUR COMMON STOCK
SINCE OUR SHARES ARE THINLY TRADED AND TRADING ON THE PINK SHEETS MAY BE
SPORADIC BECAUSE IT IS NOT AN EXCHANGE, STOCKHOLDERS MAY HAVE DIFFICULTY
RESELLING THEIR SHARES.
Ours common stock is currently quoted on the Pink Sheets. The fact that our
common stock is not listed is likely to make trading its shares more difficult
for broker-dealers, shareholders and investors, potentially leading to further
declines in share price. An investor may find it more difficult to sell our
common stock or to obtain accurate quotations of the share price of its common
stock.
19
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock could fluctuate substantially due to a
variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies, trading volume
in our common stock, dilution systemic to financing operations, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. Such
litigation, if initiated, could result in substantial costs, a material adverse
effect, and a diversion of management's attention and resources.
FAILURE OF OUR COMMON STOCK TO APPRECIATE IN VALUE COULD AFFECT OUR ABILITY TO
RAISE WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL
OPERATIONS.
A prolonged period in which our common stock trades at current levels could
result in our inability to raise capital and may force us to reallocate funds
from other planned uses, which would have a significant negative effect on our
business plans and operations. If our stock price does not recover from its
current levels, there can be no assurance that we can raise additional capital
or generate funds from operations sufficient to meet our obligations. If we are
unable to raise sufficient capital in the future, we may not be able to have the
resources to continue our normal operations.
THE LARGE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AND THE
FACT THAT A RELATIVELY SMALL NUMBER OF INVESTORS HOLD OUR PUBLICLY TRADED COMMON
STOCK COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
The market price of our common stock could fluctuate as a result of sales by our
existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. A large number of shares
of our unregistered stock is eligible for public sale and our registered common
stock is concentrated in the hands of a small number of investors and is thinly
traded. An attempt to sell by a large holder could adversely affect the price of
our stock. These sales or the perception that these sales might occur could also
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.
20
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SECURITIES AND EXCHANGE
COMMISSION'S PENNY STOCK REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO
BUY AND SELL 0UR STOCK.
The Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
21
NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR STOCK.
In addition to the "penny stock" roles described above, the National Association
of Securities Dealers (NASD) has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules the NASD believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
WE DO NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS.
We have not declared or paid
any dividends on our common stock since our inception, and we do not anticipate
paying any such dividends for the foreseeable future.
ANTI-TAKEOVER PROVISIONS.
We do not currently have a shareholder rights plan
or any anti-takeover provisions in our By-laws. Without any anti-takeover
provisions, there is no deterrent for a take-over of our company, which may
result in a change in our management and directors.
OWNERSHIP OF APPROXIMATELY 47% OF OUR OUTSTANDING COMMON STOCK BY 5 STOCKHOLDERS
WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS.
A substantial majority of our capital stock is held by a limited number of
stockholders. 5 stockholders, including our officers and directors and parties
affiliated with or related to such persons or to us, own approximately 47% of
the shares of common stock outstanding. Accordingly, such stockholders will
likely have a strong influence on major decisions of corporate policy, and the
outcome of any major transaction or other matters submitted to our stockholders
or board of directors, including potential mergers or acquisitions, and
amendments to our Amended and Restated Certificate of Incorporation.
Stockholders other than these principal stockholders are therefore likely to
have little influence on decisions regarding such matters.
22
BECAUSE FRESH START REPORTING WILL MAKE FUTURE FINANCIAL STATEMENTS DIFFICULT TO
COMPARE WITH OUR HISTORICAL FINANCIAL STATEMENTS, IT MAY BE DIFFICULT FOR
INVESTORS TO MEASURE OUR FINANCIAL PERFORMANCE OR ASSESS OUR PROSPECTS FOR
GROWTH.
In accordance with the requirements of SOP 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, we adopted fresh start reporting
effective December 31, 2004. Because SOP 90-7 required us to reset our assets
and liabilities to current fair value, our financial position, results of
operations and cash flows for periods ending after December 31, 2004 will not
be comparable to the financial position, results of operations and cash flows
reflected in our historical financial statements for periods ending on or prior
to December 31, 2004 included elsewhere in this prospectus. The use of fresh
start reporting will make it difficult to assess our future prospects based on
historical performance.
ITEM 2. PROPERTIES.
As of December 30, 2003, 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 if cash flow
permits. 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.
23
RESTAURANT LOCATIONS AS OF MARCH 30, 2004
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. All of our restaurants are located in space leased by us as set
forth below:
Year of
Approx- Expira-
imate tion of If All
Square Initial Options
Restaurant Name Location Footage Term Exercised
- --------------------------------------------------------------------------------
Carvers 8172 W. Bell Road, 8,500 2015 2025
Glendale, AZ
Mountain Jack's 1451 Opdyke Road 7,785 2020 2030
Aubur Hills, MI
Hungry Hunter 3580 Rosedale Highway 7,785 2020 2030
Bakersfield, CA
Carvers 1535 Miamisburg-Centerville 9,054 2016 2026
Centerville, OH
Cliffhouse of Folsom 9900 Greenback Lane 10,000 2014 2019
Folsom, CA
Hungry Hunter 2470 Martin Road 9,200 2011 2031
Fairfield, CA
Hungry Hunter 3201 Mt. Diablo Boulevard 6,700 2020 2030
Lafayette, CA
Mountain Jack's 4211 State Route 26E 8,122 2005 2020
Lafayette, IN
Hunter Steakhouse 2445 Hotel Circle 5,000 2031 2031
San Diego, CA
Hungry Hunter 3037 Sisk Road 6,747 2012 2022
Modesto, CA
Hunter Steakhouse 1221 Vista Way 5,500 2020 2030
Oceanside, CA
Carvers Creek 2711 Capital 9,578 2020 2030
Raleigh, NC
Carvers 1400 Eureka Road 8,008 2016 2026
Roseville, CA
Hungry Hunter 180 S. Airport Boulevard 5,820 2023 2043
South San Francisco, CA
Hungry Hunter 450 Bercut Drive 8,600 2020 2030
Sacramento, CA
Carvers 10720 S. Holiday Park Drive 8,006 2015 2025
Sandy, UT
Hungry Hunter 3785 Cleveland Avenue 8,800 2010 2020
Santa Rosa, CA
Mountain Jack's 22020 W. Eureka Road 6,700 2008 2013
Taylor, MI
Hungry Hunter 27600 Jefferson Avenue 7,737 2022 2032
Temecula, CA
Hungry Hunter 487 Moorpark Road 5,010 2008 2013
Thousand Oaks, CA
Tippecanoe Place 620 W. Washington 23,744 2020 2030
South Bend, IN
Mountain Jack's 5555 US 31 NOrth 17,000 2009 2019
Williamsburg, MI
Mountain Jack's 2360 Rochester Court 8,865 2020 2030
Troy, MI
Hungry Hunter 2046 E. Harbor Boulevard 4,290 2020 2030
Ventura, CA
Whaling Company 494 McLaws Circle 9,579 2020 2030
Williamsburg, VA
24
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.
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
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-- Proceedings Under the Bankruptcy Code.
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 Annual 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 quoted on the Pink Sheets under the symbol "SIZLQ.PK".
25
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
Year ended December 31, 2003 No Activity
SHAREHOLDERS
As of December 30, 2003 there were approximately 660 record holders of the
Company's Common Stock. Upon confirmation of the Joint Plan of Reorganization,
effective December 31, 2003, the entire balance of the DIP loan (described
above), including accrued interest, became due and payable to Steakhouse
Investors, LLC ("Steakhouse Investors"), and Steakhouse Investors received 90%
of the new common stock of the reorganized company in exchange for a full and
complete release of the Company's obligations under the DIP loan agreement other
than interest. The outstanding preferred stock, common stock, stock options, and
warrants of the Company before confirmation was canceled.
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.
26
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not issue within the period covered by this Annual 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 30,
2003 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 30, 2003, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
INCOME STATEMENT DATA:..... 2003 2002 2001 2000 1999
----------- ----------- ------------ ------------ -----------
Revenues................... $77,757,815 $97,102,252 $110,684,409 $123,618,199 $ 129,555,321
----------- ----------- ------------ ------------ -----------
COST OF SALES
Food and beverage........ 28,395,681 33,886,807 38,480,981 43,119,602 45,295,172
Payroll and payroll related costs 27,703,764 34,312,955 36,719,587 39,504,498 43,119,394
Direct operating costs .. 20,008,320 24,297,312 27,259,432 25,843,817 28,276,325
Reserve on impairment of
property, plant, and equipment -- -- 6,581,527 388,868 --
Depreciation and amortization 1,876,778 2,785,465 3,452,109 3,703,346 4,045,155
----------- ----------- ------------ ------------ -----------
Total cost of sales.... 77,984,543 95,282,539 112,493,636 112,560,131 120,736,046
----------- ----------- ------------ ------------ -----------
GROSS PROFIT (LOSS)........ (226,728) 1,819,713 (1,809,227) 11,058,068 8,819,275
COSTS AND EXPENSES
General and administrative
Expenses................. 4,711,199 5,104,117 8,514,500 7,561,262 8,033,124
Legal Settlement -- -- 800,000 -- --
Reserve for advances to officers -- 277,016 616,584 -- --
=========== =========== ============ ============ ===========
INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSE) (4,937,927) (3,561,420) (11,740,311) 3,496,806 786,151
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, -- -- -- 1,589,480 --
and equipment .........
Interest income.......... 8,830 -- -- -- 22,069
Miscellaneous income.... 179,143 392,990 259,568 260,988 --
Interest and financing costs (2,567,705) (2,327,903) (2,690,839) (3,524,994) (4,469,459)
Forgiveness of officer advances -- -- -- (442,058) --
----------- ----------- ------------ ------------ -----------
Total other (expense) (2,388,562) (1,934,913) (2,431,271) (2,116,584) (4,447,390)
----------- ----------- ------------ ------------ -----------
Income (loss) before reorganization
items, provisions for income taxes,
and discontinued operations (7,326,489) (5,496,333) (14,171,582) 1,380,222 (3,661,239)
----------- ----------- ------------ ------------ -----------
REORGANIZATION ITEMS
Gain on sale of property, plant,
and equipment ........... 3,515,564 2,048,350 -- -- --
Professional Fees (1,967,819) (1,216,883) -- -- --
Idine settlement -- ( 960,000) -- -- --
----------- ----------- ------------ ------------ -----------
Total reorganization items 1,547,745 (128,533) -- -- --
----------- ----------- ------------ ------------ -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND DISCONTINUED
OPERATIONS............ (5,778,744) (5,624,866) (14,171,582) 1,380,222 (3,661,239)
PROVISION FOR INCOME TAXES 130,000 129,758 148,341 53,419 4,816
----------- ----------- ------------ ------------ -----------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS............ (5,908,744) (5,754,624) (14,319,923) 1,326,803 (3,666,055)
INCOME (LOSS) BEFORE DISCONTINUED,
OPERATIONS NET OF
INCOME TAXES OF $850, $850 & $1,851 1,057,463 (827,935) (2,396,821) (1,948,247) (228,984)
----------- ----------- ------------ ------------ -----------
Net loss .................. $(4,851,281) $(6,582,559) $(16,716,744) $ (621,444) $ (3,895,039)
=========== =========== ============ ============ ===========
EARNINGS (LOSS) PER SHARE
BASIC
Earnings (Loss) from continuing operations $ (1.74) $ (1.70) $ (4.23) $ 0.39 $(1.31)
Earnings (Loss) from discontinued operations $0.31 $(0.24) $(0.71) $(0.58) $(0.08)
------- ------- ------- ------ -------
BASIC LOSS PER SHARE $(1.43) $(1.94) $(4.94) $(0.18) $(1.39)
DILUTED LOSS PER SHARE
Earnings (Loss) from continuing operations $ (1.74) $ (1.70) $ (4.23) $0.38 $ (1.31)
Earnings (Loss) from discontinued operations $0.31 $(0.24) $(0.71) $(0.58) $(0.08)
------- ------- ------- ------ -------
BASIC LOSS PER SHARE $(1.43) $(1.94) $(4.94) $(0.20) $(1.39)
SHARES USED TO CALCULATE LOSS PER SHARE
Basic 3,386,522 3,386,522 3,386,522 3,369,022 2,802,186
Diluted 3,386,522 3,386,522 3,386,522 3,535,570 2,802,186
=========== =========== ============ ============ ===========
BALANCE SHEET DATE: 2003 2002 2001 2000 1999
----------- ----------- ------------ ------------ -----------
TOTAL ASSETS .............. $ 17,763,206 $ 25,994,981 $ 31,000,321 $ 45,724,855 $ 57,243,510
TOTAL DEBT, EXCLUDING CAPITAL
LEASE OBLIGATIONS $ 6,478,431 $ 2,188,485 $ 5,760,306 $ 5,797,953 $ 26,115,608
Stockholders' equity (deficit) $(25,686,949) $(20,895,668) $(14,373,109) $ 2,172,237 $ 2,501,346
27
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 30, 2003 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 30, 2003 the Company operated 28 full-service steakhouse
restaurants located in eight states. The Company operates under the brand names
of Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's, and
Mountain Jack's Steakhouse. 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 first-day process and the reorganization plan. As of
December 2003, the Company had rejected or sold thirty-seven (37) units.
28
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
delay between when the expenses of the startup are incurred and when the newly
constructed steakhouses are opened and begin to generate revenues, which time
delay could affect quarter-to-quarter comparisons and results.
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 Midwest
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 Midwest 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 consisted 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.
29
As Paragon downsized and reduced the total number of restaurants serviced by
Pacific Basin Foods, the volume required to maintain its economical feasibility
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.
RESULTS OF OPERATIONS
53 Weeks Ended December 30, 2003 Compared to the 52 Weeks Ended December 24,
2002
Revenues for the fifty-three week period ended December 30, 2003 decreased
$19,344,437 or 19.9% from $97,102,252 for the year ended December 24, 2002 to
$77,757,815 for the same period in 2003. The decrease is substantially
attributable to the decrease in total operating units. Between the filing date
of bankruptcy (February, 2002) and the end of 2003, thirty-seven (37) operating
units were rejected, closed and/or sold. Partially offsetting the decrease in
revenue was the same store sales for those core units that were open at the end
of the year reflected an increase of 1.5% for the 53 weeks ended December 30,
2003 versus the same period in 2002.
Food and beverage costs for the fifty-three week period ended December 30, 2003
decreased $5,491,126 or 16.2% from $33,886,807 for the fifty-two week period
ended December 24, 2002 to $27,395,681 for the same period in 2003. Food and
beverage costs as a percentage of restaurant revenues were 36.5% for the
fifty-three week period ended December 30, 2003 compared to 34.9% for the same
period in 2002. The major reason for this increase was the record high beef
prices that affected the Company throughout the year but had its biggest impact
in the fourth quarter. The extremely high beef prices cost the Company over $1.2
million in 2003 versus the same period in 2002.
Payroll and payroll related costs for the fifty-three week period ended December
30, 2003 decreased $6,609,191 or 19.3% from $34,312,955 for the fifty-two week
period ended December 24, 2002 to $27,703,764 for the same period in 2003. The
total payroll and payroll related costs as a percentage of revenues were 35.6%
for the fifty-three week period ended December 30, 2003 compared to 35.3% for
the same period in 2002. The chief reason for this increase as a percentage
relationship to revenue 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 private insurance companies.
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-three week period ended December 30, 2003 decreased
$4,288,992 or 17.6% from $24,297,312 for the fifty-two week period ended
December 24, 2002 to $20,008,320 for the same period in 2003. However, these
costs as a percentage of restaurant revenues were 25.7% for the fifty-three week
period ended December 30, 2003 compared to 25.0% for the same period in 2002.
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 were almost 30.0% higher than the normal premiums.
Depreciation and amortization for the fifty-three week period ended December 30,
2003 decreased $908,687 or 32.6% from $2,785,465 for the fifty-two week period
ended December 24, 2002 to $1,876,778 for the same period in 2003. The main
reason for this decrease is between the filing date of bankruptcy and the end of
2003, thirty-seven (37) operating units were rejected, closed and/or sold.
30
General and administrative expenses for the fifty-three week period ended
December 30, 2003 decreased $392,918 or 4.7% from $5,104,117 for the fifty-two
week period ended December 24, 2002 to $4,711,199 for the same period in 2003.
General and Administrative expenses as a percentage of restaurant revenues was
6.1% for the fifty-three week period ended December 30, 2002 compared to 5.3%
for the same period in 2002. Even though in absolute dollars the Company
continues to reduce its administrative expenses, the chief reason for the
increase as a percentage relationship to revenue is that the fixed or indirectly
variable nature of general and administrative costs does not allow for a
proportionate decrease in expenses versus revenue. Further reviews of these
expense categories have begun as the Company has emerged from bankruptcy.
However with on going resolutions of bankruptcy related issues, a certain
additional level of administration is required for the near term.
Total other income and interest expense, net for the fifty-three week period
ended December 30, 2003 increased $453,649 or 23.4% from $1,934,913 for the
fifty-two week period ended December 24, 2002 to $2,388,562 for the same period
in 2003. The increase is principally due to the full year of interest charges
associated with the I-Dine Settlement, which was signed in July, 2002 and other
related bankruptcy activity.
Total reorganization items, net for the fifty-three week period ended December
30, 2003 was a gain of $1,547,745. This improvement was the result from gains
associated with the rejection and or sale of 22 units that totaled $3,515,564.
The gain was partially offset by the continued high Legal and Professional fees
specifically associated with the bankruptcy ($1,967,819).
Gain from discontinued operations for the fifty-three week period ended December
30, 2003 was $1,057,463. On October 11, 2002 Pacific Basin Foods ceased
operations and filed for Chapter 7 with the United States Bankruptcy Court in
Riverside, California. The Company had a net liability of $1,057,463 as of
December 24, 2002. As Pacific Basin Foods has legally and practically ceased
operations the net liability was recognized as one time income of discontinued
operations, net of taxes.
Net loss for the fifty-three week period ended December 30, 2003 decreased
$1,731,278 from $6,582,559 for the fifty-two week ended December 24, 2002 to
$4,851,281 for the same period in 2003. The decrease is principally due to the
net liability of Pacific Basin Foods being recognized as one time income of
discontinued operations, net of taxes ($1,057,463), as well as the net gain in
total reorganization items of $1,547,745.
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.
31
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.
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.
32
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
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 for the restaurants only 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.
33
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.
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).
34
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 $2,205,221 at December
30, 2003. During the year 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. In
addition, as described above, the Company was in default with secured financings
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. The
reorganization plan was contingent on the sale of selected assets and the
Company may need additional sources of financing. Any required additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
reorganization plan and may be required to sell core assets or dissolve the
business. If we raise additional funds by issuing equity securities,
shareholders may experience dilution of their ownership interest and the newly
issued securities may have 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 and on December
19, 2003, the Company's Plan of Reorganization was confirmed by the Court. Upon
confirmation of the Plan, effective December 31, 2003, the entire balance of the
DIP facility, including accrued interest, became due and payable to Steakhouse
Investors, LLC ("Steakhouse Investors"), and Steakhouse Investors received 90%
of the new common stock of the reorganized company in exchange for a full and
complete release of the Company's obligations under the DIP agreement other than
interest. The outstanding preferred stock, common stock, stock options, and
warrants of the Company in existence before the effective date were canceled.
The Company's financial affairs were completely restructured under circumstances
whereby Steakhouse Investors exchanged its $5,000,000 super-priority
administrative claim for 90% of the newly issued common stock in the reorganized
company. In addition, all of the Company's pre-petition liabilities were
completely restructured in accordance with the Plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.
Interest Rate Sensitivity. As of December 30, 2003, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair 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.
35
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 5 to our consolidated
financial statements. The following discussion address