UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 7, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-23739
(Commission file number)
STEAKHOUSE PARTNERS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 94-3248672
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10200 WILLOW CREEK ROAD, SAN DIEGO, CA 92131
(Address of principal executive offices)
(858) 689-2333
(Issuer's telephone number)
GALVESTON'S STEAKHOUSE CORP.
151 EAST ALESSANDRO BLVD., RIVERSIDE, CA 92508
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of October 20, 1999 - 3,332,022 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 7, 1999 2-3
Condensed Consolidated Statements of Operations for the
twelve weeks ended September 7, 1999 and September 8, 1998 4
Condensed Consolidated Statements of Operations for the
thirty-six weeks ended September 7, 1999 and September 8, 1998 5
Condensed Consolidated Statements of Cash Flows for the
thirty-six weeks ended September 7, 1999 and September 8, 1998 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Part III. EXHIBITS
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 7, 1999
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,951,560
Accounts receivables, net 3,790,769
Inventories 5,095,564
Prepaid expenses and other current assets 4,144,860
-----------
Total current assets 14,982,753
Property and equipment, net 46,392,255
Intangible assets, net 451,928
Other 1,083,134
Note receivable 500,000
Cash - restricted under collateral agreements 1,591,785
-----------
Total assets $65,001,855
===========
2
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF SEPTEMBER 7, 1999
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $20,448,514
Current portion of capital lease obligations 648,891
Line of Credit 2,533,102
Accounts payable 8,752,499
Accrued liabilities 10,740,764
Accrued payroll costs 3,174,625
-----------
Total current liabilities 46,298,395
Long-term debt, net of current portion 6,166,405
Capital lease obligations, net of current portion 7,908,447
Deferred rent 2,983,817
-----------
Total liabilities 63,357,064
Commitments and contingencies
Stockholders' equity
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Preferred stock, Series C, Convertible, $0.001 par value
1,750,000 shares authorized
1,750,000 shares issued and outstanding 1,750
Common stock, $0.01 par value
10,000,000 shares authorized
3,332,022 shares issued and outstanding 33,320
Additional paid-in capital 11,285,061
Accumulated deficit (9,676,340)
-----------
Total stockholders' equity 1,644,791
-----------
Total liabilities and stockholders' equity $65,001,855
===========
See the accompanying notes
3
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED
SEPTEMBER 7, SEPTEMBER 8,
1999 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $37,457,661 $ 186,435
Cost of sales
Food and beverage 18,626,256 67,268
Payroll and payroll related costs 9,920,418 118,055
Direct operating costs 6,548,351 134,464
Depreciation and amortization 1,101,144 44,300
----------- -----------
Total cost of sales 36,196,169 364,087
Gross profit (loss) 1,261,492 (177,652)
General and administrative expenses 1,220,751 231,477
----------- -----------
Gain (Loss) before other income (expense) 40,741 (409,129)
Interest expense and financing costs, net 1,054,291 68,452
----------- -----------
Gain (Loss) before provision for income taxes (1,013,550) (477,581)
Provision for income taxes 41,215 -
----------- -----------
Net loss $(1,054,765) $ (477,581)
=========== ===========
Basic and diluted loss per share $ (0.33) $ (0.20)
=========== ===========
Weighted-average shares outstanding 3,186,775 2,416,325
=========== ===========
</TABLE>
See the accompanying notes
4
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
36 WEEKS 36 WEEKS
ENDED ENDED
SEPTEMBER 7, SEPTEMBER 8,
1999 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $115,700,080 $ 841,476
Cost of sales
Food and beverage 54,505,200 269,653
Payroll and payroll related costs 32,480,974 348,040
Direct operating costs 20,967,266 366,328
Depreciation and amortization 3,420,358 109,741
------------ -----------
Total cost of sales 111,373,798 1,093,762
Gross profit (loss) 4,326,282 (252,286)
General and administrative expenses 5,810,469 694,990
------------ -----------
Gain (Loss) before other income (expense) (1,484,187) (947,276)
Interest expense and financing costs, net 3,080,820 275,140
------------ -----------
Gain (Loss) before provision for income taxes (4,565,007) (1,222,416)
Provision for income taxes 129,086 -
------------ -----------
Net loss $ (4,694,093) $(1,222,416)
============ ===========
Basic and diluted loss per share $(1.71) $(0.59)
============ ===========
Weighted-average shares outstanding 2,748,673 2,072,305
============ ===========
</TABLE>
See the accompanying notes
5
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
36 WEEKS 36 WEEKS
ENDED ENDED
SEPTEMBER 7, SEPTEMBER 8,
1999 1998
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,694,093) $ (1,222,416)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization 3,420,358 109,741
Issuance of common stock in exchange for services
rendered 680,500 -
Issuance of common stock for additional
Financing cost on notes payable - 100,000
(Increase) decrease in operating assets 155,243 (446,535)
Increase (decrease) in operating liabilities (2,123,554) (360,716)
----------- ------------
Net cash provided by (used in) operating activities (2,561,546) (1,819,926)
Cash flows from investing activities
Purchases of furniture and equipment (715,774) (100,146)
Deposit on future acquisitions - (1,883,713)
Change in restricted cash (60,355)
Other (168,121) (10,431)
----------- ------------
Net cash used in investing activities (944,250) (1,994,290)
Cash flows from financing activities
Proceeds from issuance of notes payable 1,500,000 1,300,000
Debt offering costs (302,809) -
Net change in line of credit 886,732 -
Repayment of notes payable and capital leases (1,400,888) (1,069,758)
Proceeds from issuance of common stock 4,326,000 4,264,242
Equity offering costs (306,820) -
Other
----------- ------------
Net cash provided by financing activities 4,702,215 4,494,484
----------- ------------
Net increase in cash and cash equivalents 1,196,419 680,268
Cash and cash equivalents, beginning of period 755,141 64,726
----------- ------------
Cash and cash equivalents, end of period $ 1,951,560 $ 744,994
=========== ============
</TABLE>
6
See the accompanying notes
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The results of the thirty-six week period ended September
7, 1999 are not necessarily indicative of the results to be expected for the
full year ending December 28, 1999. The Company reports results quarterly with
the three quarters having 12 weeks and remaining quarter having 16 weeks. These
consolidated financial statements should be read in conjunction with the 1998
consolidated financial statements.
On December 21, 1998, the Company acquired Paragon Steakhouse Restaurants, Inc.
("Paragon"), which owned 78 steakhouses, of which five were closed, and Pacific
Basin Foods, Inc., a restaurant food distribution company. Prior to the
acquisition of Paragon, the Company owned and operated four restaurants. The
accompanying consolidated statement of operations for the thirty-six week period
ended September 7, 1999 reflects a twenty-fold increase in the number of
restaurants being operated by the Company, therefore, revenues, cost of sales
and operating expenses are substantially higher than the corresponding revenues,
cost of sales and operating expenses reported for the thirty-six week period
ended September 8, 1998.
NOTE 2 - LOSS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share amounts for all periods have
been restated to conform to SFAS No. 128 requirements.
7
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - STOCKHOLDERS' EQUITY
During the first quarter of 1999, the Company issued 181,000 shares of common
stock for consulting services and recognized consulting expense of $678,750. In
the second quarter, the Company issued 363,818 shares of common stock in two
private placement offerings that resulted in gross proceeds to the Company of
$2,001,000. In the third quarter, the Company issued 341,379 shares of its
common stock in two private placement offerings resulting in gross proceeds to
the Company of $2,325,000, and 1,750,000 shares of Series "C" preferred stock to
two of the Company's senior executive officers that was approved at the July 29,
1999 annual meeting of the stockholders.
NOTE 4 - NOTES PAYABLE
In March 1999, the Company executed a five-year promissory note for $1,500,000
with a finance company. The note bears interest at 12.5% and interest only is
payable in monthly payments of $15,625. At maturity, all unpaid principal and
interest are due and payable in full.
As a result of the purchase of Paragon the Company assumed a note payable
secured by certain restaurants owned by Paragon. The terms of the note payable
agreement include specific financial covenants, restrictions on obtaining other
financing, and limitations on payments to its parent. As of September 7, 1999,
the Company is not in compliance with certain financial ratio loan covenants and
therefore the entire loan balance is classified as current.
NOTE 5 - CONTINGENCIES
The Company is periodically a defendant in cases involving personal injury and
other matters that arise in the normal course of business. While any pending or
threatened litigation has an element of uncertainty, the Company believes that
the outcome of any pending lawsuits or claims, individually or combined, will
not materially affect the financial condition or results of operations.
On January 22, 1999, the Company entered into a settlement agreement that
required it to assign its leasehold interests in three restaurants. The Company
had previously established a reserve in anticipation of this settlement which
represented the value of leasehold improvements and other equipment at these
locations.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes and the
Company's Annual Report on Form 10-KSB for the year ended December 29, 1998. 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.
The Company currently operates 73 full-service steakhouse restaurants located in
11 states. The Company operates under the brand names of Carvers, Hungry Hunter
Steakhouse, Hunter Steakhouse, Mountain Jack's, Mountain Jack's Steakhouse,
Texas Loosey's and Galveston's.
On December 21, 1998, the Company acquired Paragon Steakhouse Restaurants, Inc.
("Paragon"), which owned 78 steakhouses, of which five were closed, and Pacific
Basin Foods, Inc., a restaurant food distribution company. Prior to the
acquisition of Paragon, the Company owned and operated four restaurants.
The Company believes that its restaurants are well positioned in a high-quality,
moderately priced segment of the restaurant industry. With the acquisition of
Paragon's Carvers restaurants, the Company has entered the upscale Steakhouse
market specializing in complete steak, chop, prime rib and seafood meals. The
Company plans to expand the number of restaurants it owns either by building new
restaurants, converting existing restaurants acquired from others or acquiring
other steakhouse chains. The Company believes that the location of each
restaurant is critical to its long-term success.
Since acquiring Paragon in December 1998, the Company has focused on reducing
the general and administrative expenses. Prior to the acquisition, the general
and administrative expenses related to the restaurants operated by Paragon was
approximately $9 million annually. During the first fiscal quarter of 1999, the
Company identified areas in which the general and administrative expenses could
be reduced. During the second fiscal quarter of 1999, the Company began making
the necessary changes to reduce the general and administrative expenses. To
date, the Company has reduced general and administrative expenses by
approximately $4.6 million on an annualized basis. The reduction in the general
and administrative expenses in the financial statements began to be realized in
the third fiscal quarter of 1999. General and administrative expenses were
approximately $878,000 less in the third fiscal quarter of 1999 compared to the
second fiscal quarter of 1999. Many of the reductions that involved the
termination of employees were offset by severance and vacation pay. The Company
expects to report a significant reduction in general and administrative expenses
in the fourth fiscal quarter of 1999.
9
<PAGE>
RESULTS OF OPERATIONS
The following discussion of the results of operations include the operations of
the restaurants purchased from Paragon and those previously owned by the
Company. With a twenty-fold increase in the number of restaurants being operated
by the Company, revenues, cost of sales and operating expenses have increased
substantially.
Twelve Weeks Ended September 7, 1999 and September 8, 1998
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED PERCENTAGE OF REVENUE
SEPTEMBER 7, SEPTEMBER 8, --------------------------
1999 1998 1999 1998
---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $37,457,661 $ 186,435 100.0% 100.0%
---------------- --------------- ------------ ------------
Food and beverage 18,626,256 67,268 49.7% 36.1%
Payroll and payroll related costs 9,920,418 118,055 26.5% 63.3%
Direct operating costs 6,548,351 134,464 17.5% 72.1%
Depreciation and amortization 1,101,144 44,300 2.9% 23.8%
---------------- --------------- ------------ ------------
Gross profit (loss) 1,261,492 (177,652) 3.4% (95.3%)
General and administrative 1,220,751 231,477 3.3% 124.2%
---------------- --------------- ------------ ------------
Income (Loss) before other income 40,741 (409,129) 0.1% (219.4%)
(expense)
Interest expense and financing costs, net 1,054,291 68,452 (2.8%) 36.7%
---------------- --------------- ------------ ------------
Loss before provision for income taxes (1,013,550) (477,581) (2.7%) (256.2%)
Provision for income taxes 41,215 - 0.1% -
================ =============== ============ ============
Net loss (1,054,765) $(477,581) (2.8%) (256.2%)
================ =============== ============ ============
</TABLE>
Revenues for the twelve week period ended September 7, 1999 increased
$37,271,226 or 19,992% from $186,435 for the twelve week period ended September
8, 1998 to $37,457,661 for the same period in 1999. The increase is almost
entirely attributable to the acquisition of Paragon. Revenue from the Company's
original restaurants was $591,796 for the twelve-week period ended September 7,
1999. Gross revenue for the restaurants purchased in the Paragon acquisition
increased by 0.25% for the twelve week period ended September 7, 1999 compared
to the gross revenue for comparable restaurants for the same twelve week period
in 1998.
Food and beverage costs for the twelve week period ended September 7, 1999
increased $18,558,988 or 27,590% from $67,268 for the twelve week period ended
September 8, 1998 to $18,626,256 for the same period in 1999. Food and beverage
costs for the restaurants only as a percentage of restaurant revenues was 36.1%
for the twelve week period ended September 8, 1998 compared to 34.7% for the
same period in 1999. The food and beverage costs of Paragon's food distribution
subsidiary, Pacific Basin Foods, Inc., were 90.1% of the food distribution
revenue for the twelve-week period ended September 7, 1999. The total food and
beverage cost as a percentage of total revenue was 49.7% , which includes the
restaurants and the food distribution subsidiary. The decrease in the food and
beverage costs at the restaurant level was principally a result of better cost
controls.
10
<PAGE>
Payroll and payroll related costs for the twelve week period ended September 7,
1999 increased $9,802,363 or 8,303% from $118,055 for the twelve week period
ended September 8, 1998 to $9,920,418 for the same period in 1999. Payroll and
payroll related costs as a percentage of revenues were 63.3% for the twelve week
period ended September 8, 1998 compared to 26.5% for the same period in 1999.
Payroll and payroll related costs for the restaurants only were 34.5% of
restaurant revenues. The decrease is principally due to the acquisition of
Paragon whose payroll costs as a percentage of revenue are less than those
previously experienced by the Company due to the economies of scales of
operating more restaurants.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the twelve
week period ended September 7, 1999 increased $6,413,887 or 4,770% from $134,464
for the twelve week period ended September 8, 1998 to $6,548,351 for the same
period in 1999. These costs as a percentage of restaurant revenues were 72.1%
for the twelve week period ended September 8, 1998 compared to 17.5% for the
same period in 1999. The decrease is principally due to the acquisition of
Paragon whose direct operating costs as a percentage of revenue are less than
those previously experienced by the Company due to the economies of scales of
operating more restaurants.
Depreciation and amortization for the twelve week period ended September 7, 1999
increased $1,056,844 or 2,386% from $44,300 for the twelve week period ended
September 8, 1998 to $1,101,144 for the same period in 1999. The increase is
principally due to the acquisition of Paragon, which significantly increased the
depreciable assets owned by the Company.
General and administrative expenses for the twelve week period ended September
7, 1999 increased $989,274 or 427% from $231,477 for the twelve week period
ended September 8, 1998 to $1,220,751 for the same period in 1999. General and
administrative expenses as a percentage of restaurant revenues was 124.2% for
the twelve week period ended September 8, 1998 compared to 3.8% for the same
period in 1999. This increase in the dollar amount of general and administrative
expenses is principally due to the acquisition of Paragon and higher
professional fees. The Company has significantly reduced its general and
administrative expenses. The Company began to realize a reduction of general and
administration expenses in the third quarter and expects to see a significant
reduction in the fourth quarter of 1999.
11
<PAGE>
Interest expense and financing costs, net for the twelve week period ended
September 7, 1999 increased $985,839 or 1,440% from $68,452 for the twelve week
period ended September 8, 1998 to $1,054,291 for the same period in 1999. The
increase is principally due to an increase in outstanding indebtedness, which
was assumed in connection with the acquisition of Paragon and additional
borrowings by the Company in the fall of 1998 and spring of 1999.
Thirty-six Weeks Ended September 7, 1999 and September 8, 1998
<TABLE>
<CAPTION>
36 WEEKS 36 WEEKS
ENDED ENDED PERCENTAGE OF REVENUE
SEPTEMBER 7, SEPTEMBER 8, --------------------------
1999 1998 1999 1998
---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $115,700,080 $ 841,476 100.0% 100.0%
---------------- --------------- ------------ ------------
Food and beverage 54,505,200 269,653 47.1% 32.0%
Payroll and payroll related costs 32,480,974 348,040 28.1% 41.4%
Direct operating costs 20,967,266 366,328 18.1% 43.5%
Depreciation and amortization 3,420,358 109,741 3.0% 13.0%
---------------- --------------- ------------ ------------
Gross profit (loss) 4,326,282 (252,286) 3.7% (30.0%)
General and administrative 5,810,469 694,990 5.0% 82.6%
---------------- --------------- ------------ ------------
Loss before other income (expense) (1,484,187) (947,276) (1.3%) (112.6%)
Interest expense and financing costs, net 3,080,820 275,140 2.7% 32.7%
---------------- --------------- ------------ ------------
Loss before provision for income taxes (4,565,007) (1,222,416) (3.9%) (145.3%)
Provision for income taxes 129,086 - (0.2%) -
================ =============== ============ ============
Net loss $ (4,694,093) $(1,222,416) (4.1%) (145.3%)
================ =============== ============ ============
</TABLE>
Revenues for the thirty-six week period ended September 7, 1999 increased
$114,858,604 or 13,650% from $841,476 for the thirty-six weeks ended September
8, 1998 to $115,700,080 for the same period in 1999. The increase is almost
entirely attributable to the acquisition of Paragon. Revenue from the Company's
original four restaurants for the thirty-six week period ended September 7, 1999
was $1,976,905. Gross revenue for the restaurants purchased in the Paragon
acquisition increased by 0.8% for the thirty-six week period ended September 7,
1999 compared to the gross revenue for comparable restaurants for the same
period in1998.
Food and beverage costs for the thirty-six week period ended September 7, 1999
increased $54,235,547 or 20,113% from $269,653 for the thirty-six week period
ended September 8, 1998 to $54,505,200 for the same period in 1999. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 32.0% for the thirty-six week period ended September 8, 1998 compared to
35.4% for the same period in 1999. The food and beverage costs of Paragon's food
distribution subsidiary, Pacific Basin Foods, Inc., were 90.6% of the food
distribution revenue for the thirty-six week period ended September 7, 1999. The
total food and beverage cost as a percentage of total revenue was 47.1% , which
includes the restaurants and the food distribution subsidiary. The increase in
the food and beverage costs at the restaurant level is directly related to the
acquisition of Paragon which carries traditional steakhouse food and beverage
costs. The increase from 32.0% to 35.4% is primarily the higher cost of meat
prices in the steakhouse restaurants.
12
<PAGE>
Payroll and payroll related costs for the thirty-six week period ended September
7, 1999 increased $32,132,934 or 9,233% from $348,040 for the thirty-six week
period ended September 8, 1998 to $32,480,974 for the same period in 1999.
Payroll and payroll related costs as a percentage of revenues were 41.4% for the
thirty-six week period ended September 8, 1998 compared to 28.1% for the same
period in 1999. Payroll and payroll related costs for the restaurants only were
34.5% of restaurant revenues.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the
thirty-six week period ended September 7, 1999 increased $20,600,938 or 5,624%
from $366,328 for the thirty-six week period ended September 8, 1998 to
$20,967,266 for the same period in 1999. These costs as a percentage of
restaurant revenues were 43.5% for the thirty-six week period ended September 8,
1998 compared to 18.1% for the same period in 1999. Direct operating costs for
the restaurants only were 22.0% of restaurant revenue for the thirty-six week
period ended September 7, 1999. The decrease is principally due to the
acquisition of Paragon whose direct operating costs as a percentage of revenue
are less than those previously experienced by the Company due to the economies
of scales of operating more restaurants.
Depreciation and amortization for the thirty-six week period ended September 7,
1999 increased $3,310,617 or 3,017% from $109,741 for the thirty-six period
ended September 8, 1998 to $3,420,358 for the same period in 1999. The increase
is principally due to the acquisition of Paragon, which significantly increased
the depreciable assets owned by the Company.
General and administrative expenses for the thirty-six week period ended
September 7, 1999 increased $5,115,479 or 736% from $694,990 for the thirty-six
week period ended September 8, 1998 to $5,810,469 for the same period in 1999.
General and administrative expenses as a percentage of restaurant revenues was
82.6% for the thirty-six week period ended September 8, 1998 compared to 5.9%
for the same period in 1999. This increase in the dollar amount of general and
administrative expenses is principally due to the acquisition of Paragon, the
issuance of 181,000 shares of common stock to consultants valued at $678,750 and
an increase in professional fees. The Company has significantly reduced its
general and administrative expenses. The Company began to realized a reduction
in general and administrative expenses in the third quarter and expects to see a
significant reduction in the fourth quarter of 1999.
Interest expense and financing costs, net for the thirty-six week period ended
September 7, 1999 increased $2,805,680 or 1,020% from $275,140 for the
thirty-six week period ended September 8, 1998 to $3,080,820 for the same period
in 1999. The increase is principally due to an increase in outstanding
indebtedness, which was assumed in connection with the acquisition of Paragon
and additional borrowings by the Company in the fall of 1998 and spring of 1999.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In addition to the approximately $9 million raised by the Company in 1998 in
equity and debt financing, the Company raised $1.5 million by issuing a
promissory note in March 1999 and approximately $4 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 Company's operating loss.
The Company has a cash and cash equivalents balance of $1,951,560 at September
7, 1999. Management of the Company believes that such cash and cash equivalents
plus the cash generated from operations is sufficient to cover the cost of
operations for at least the next twelve months. If existing cash and cash
equivalents and anticipated cash from operations is insufficient to satisfy the
Company's working capital and capital expenditures requirements, the Company may
have to sell additional equity or debt securities or obtain credit facilities.
The Company is currently in default with respect to certain loan covenants
associated with a $20 million loan that is collateralized by 19 restaurants
owned by the Company. The Company is attempting to obtain a waiver from the
current lender.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include food
and labor costs. The Company's restaurant personnel are paid at the federal and
state established minimum wage levels and accordingly, changes in such wage
level affect the Company' s labor costs. As costs of food and labor have
increased, the Company will be seeking to offset those increases through
economics of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue. To date inflation has not had a
material impact on loss from operations.
YEAR 2000
The Company has made a formal assessment of Year 2000 issues. Generally, "Year
2000 issues" refers to problems that may arise due to the inability of some
computer software to distinguish between the early part of the present century
and the early part of the next because the software only uses two digits to
identify the year. Thus, 2001 would be indistinguishable from 1901. The Company
believes that there are three possible ways that it could be impacted by this
problem.
14
<PAGE>
First, the Company's current accounting and restaurant management systems,
principally those acquired with the acquisition of Paragon have been determined
not to be Year 2000 compliant. The Company has met with various software vendors
and has selected a new accounting and restaurant management system that will be
Year 2000 compliant. With the change in accounting software, the Company has
decided also to upgrade its point of sale system in each restaurant. The Company
expects to have the project completed by November 1999. The cost of a new
accounting and restaurant management system is expected to be $1.4 million. If
the Company is unable to convert to the new software in a timely manner, the
impact could be material and adverse to the Company's financial position and
results of operations.
The second concern posed by Year 2000 issues is the impact that such software
failure would have on the Company's suppliers. The Company has contacted
critical suppliers of products and services to determine the extent to which the
Company may be vulnerable to such parties' failure to resolve their own Year
2000 issues. All the Company's major suppliers have indicated that they are Year
2000 compliant or have plans to be Year 2000 compliant before the end of 1999.
Where practicable, the Company will assess and attempt to mitigate its risks
with respect to the failure of these entities to be Year 2000 compliant. The
effect, if any, on the Company's results of operations from the failure of such
parties to be Year 2000 compliant is not reasonably estimable.
The third possible threat posed to the Company by Year 2000 issues is one of a
general downturn in the economy due to software failures. The Company believes
that this is a remote possibility.
Although the Company believes that it will not suffer any material adverse
effects as a result of Year 2000 issues, it cannot be certain its judgment
regarding Year 2000 is correct. In the event that the Company or its suppliers
experience a Year 2000 software failure such a failure could have a material
adverse impact on the Company's business, financial condition and results of
operations. Similarly, if the economy as a whole should be adversely impacted by
Year 2000 problems, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to open new restaurants, general market
conditions, competition and pricing. Although the Company believes the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.
15
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
In July 1999, the Company issued 341,379 shares of common stock in a private
placement offering that resulted in gross proceeds to the Company of $2,325,000.
In connection with the issuance of these shares the Company paid a placement fee
of $141,750. Also in July 1999, the Company issued 1,750,000 shares of Series
"C" preferred stock to two of the Company's senior executive officers that was
approved at the July 29, 1999 annual meeting of the stockholders. In August
1999, the Company issued 17,500 shares of common stock to a consultant.
Item 3. Defaults Upon Senior Securities
As a result of the purchase of Paragon the Company assumed a note payable
secured by certain restaurants owned by Paragon. The terms of the note payable
agreement include specific financial covenants, restrictions on obtaining other
financing, and limitations on payments to its parent. As of September 7, 1999,
the Company is not in compliance with certain financial ratio loan covenants and
therefore the entire loan balance is classified as current.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
On August 3, 1999, the Company filed a Report on Form 8-K announcing that the
Company had changed its name to Steakhouse Partners, Inc. This action was
approved at the annual Shareholders meeting held on July 29, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEAKHOUSE PARTNERS, INC.
By: /s/ Hiram J. Woo
Hiram J. Woo
Chief Financial and Principal
Accounting Officer, President,
and Director
Date: October 20, 1999
17
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