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 JUNE 15, 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)
(619) 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 August 6, 1999 - 3,314,522 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 June 15, 1999 2-3
Condensed Consolidated Statements of Operations for
the twelve weeks ended June 15, 1999 and June 16, 1998 4
Condensed Consolidated Statements of Operations for
the twenty-four weeks ended June 15, 1999 and June 16, 1998 5
Condensed Consolidated Statements of Cash Flows for
the twenty-four weeks ended June 15, 1999 and June 16, 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 JUNE 15, 1999
(unaudited)
<TABLE>
<CAPTION>
ASSETS
Current assets
<S> <C>
Cash and cash equivalents $2,569,091
Accounts receivables, net 3,113,745
Inventories 5,270,448
Prepaid expenses and other current assets 3,611,099
------------------
Total current assets 14,564,383
Property and equipment, net 47,165,937
Intangible assets, net 460,752
Other 1,234,524
Note receivable 500,000
Cash - restricted under collateral agreements 1,585,358
------------------
Total assets $65,510,954
==================
</TABLE>
2
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF JUNE 15, 1999
(unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
<S> <C>
Current portion of long-term debt $20,765,972
Current portion of capital lease obligations 885,885
Line of Credit 2,155,953
Accounts payable 9,451,660
Accrued liabilities 10,932,534
Accrued payroll costs 3,606,818
------------------
Total current liabilities 47,798,822
Long-term debt, net of current portion 6,166,405
Capital lease obligations, net of current portion 7,954,142
Deferred rent 3,164,528
------------------
Total liabilities 65,083,897
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
Common stock, $0.01 par value
10,000,000 shares authorized
2,973,143 shares issued and outstanding 29,731
Additional paid-in capital 9,017,901
Accumulated deficit (8,621,575)
------------------
Total stockholders' equity 427,057
------------------
Total liabilities and stockholders' equity $65,510,954
==================
</TABLE>
See the accompanying notes
3
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED
JUNE 15, JUNE 16,
1999 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $37,866,137 $ 268,780
Cost of sales
Food and beverage 17,623,603 89,292
Payroll and payroll related costs 10,894,094 101,924
Direct operating costs 6,935,258 106,401
Depreciation and amortization 1,137,361 32,721
------------------ ------------------
Total cost of sales 36,590,316 330,338
Gross profit (loss) 1,275,821 (61,558)
General and administrative expenses 2,097,057 354,912
------------------ ------------------
Loss before other income (expense) (821,236) (416,470)
Interest expense and financing costs, net 1,175,932 102,524
------------------ ------------------
Loss before provision for income taxes (1,997,168) (518,994)
Provision for income taxes 46,155 -
------------------ ------------------
Net loss $(2,043,323) $(518,994)
================== ==================
Basic and diluted loss per share $ (0.78) $ (0.22)
================== ==================
Weighted-average shares outstanding 2,617,992 2,373,125
================== ==================
</TABLE>
See the accompanying notes
4
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JUNE 15, JUNE 16,
1999 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 78,242,419 $ 655,041
Cost of sales
Food and beverage 35,878,944 202,385
Payroll and payroll related costs 22,560,556 229,985
Direct operating costs 14,418,915 231,864
Depreciation and amortization 2,319,214 65,441
------------------ ------------------
Total cost of sales 75,177,629 729,675
Gross profit (loss) 3,064,790 (74,634)
General and administrative expenses 4,589,718 463,513
------------------ ------------------
Loss before other income (expense) (1,524,928) (538,147)
Interest expense and financing costs, net 2,026,529 206,688
------------------ ------------------
Loss before provision for income taxes (3,551,457) (744,835)
Provision for income taxes 87,871 -
------------------ ------------------
Net loss $ (3,639,328) $(744,835)
================== ==================
Basic and diluted loss per share $ (1.44) $ (0.39)
================== ==================
Weighted-average shares outstanding 2,529,623 1,885,994
================== ==================
</TABLE>
See the accompanying notes
5
<PAGE>
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JUNE 15, JUNE 16,
1999 1998
--------------------- ---------------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net loss $(3,639,328) $ (744,835)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 2,319,214 65,441
Issuance of common stock in exchange for services
rendered 678,750 -
Issuance of common stock for additional
Financing cost on notes payable - 100,000
(Increase) decrease in operating assets 1,191,144 (142,512)
Increase (decrease) in operating liabilities (707,218) (72,956)
--------------------- ---------------------
Net cash provided by (used in) operating activities (157,438) (794,862)
Cash flows from investing activities
Purchases of furniture and equipment (397,136) (2,325)
Deposit on future acquisitions - (1,388,550)
Change in restricted cash (53,929)
Other (319,511) (10,431)
--------------------- ---------------------
Net cash used in investing activities (770,576) (1,401,306)
Cash flows from financing activities
Proceeds from issuance of notes payable 1,500,000 -
Debt offering costs (302,809) -
Net change in line of credit 509,584 -
Repayment of notes payable and capital leases (800,741) (639,500)
Proceeds from issuance of common stock 2,001,000 4,264,242
Equity offering costs (165,070) -
Other
--------------------- ---------------------
Net cash provided by financing activities 2,741,964 3,624,742
--------------------- ---------------------
Net increase in cash and cash equivalents 1,813,950 1,428,574
Cash and cash equivalents, beginning of period 755,141 64,726
--------------------- ---------------------
Cash and cash equivalents, end of period $ 2,569,091 $ 1,493,300
===================== =====================
</TABLE>
See the accompanying notes
6
<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 twenty-four week period ended June 15,
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 twenty-four week
period ended June 15, 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 twenty-four week period
ended June 16, 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
addition, in June 1999, 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. Subsequent to the end of the second quarter reporting period, the
Company issued 341,379 shares of its common stock in two private placement
offerings in July, 1999 resulting in gross proceeds to the Company of
$2,325,000.
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 is payable in
monthly principal and interest 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 June 15, 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 restaurant
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 $4.9 million on an annualized basis. The reduction in the general
and administrative expenses in the financial statements is not expected until
the third fiscal quarter of 1999 as many of the reductions involved the
termination of employees who received severance and vacation pay during the
second fiscal quarter of 1999. The Company expects to report a significant
reduction in general and administrative expenses in the third and fourth fiscal
quarters 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 June 15, 1999 and June 16, 1998
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED
JUNE 15, JUNE 16, PERCENTAGE OF REVENUE
---------------- --------------- --------------------------
1999 1998 1999 1998
---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $37,866,137 $268,780 100.0% 100.0%
---------------- --------------- ------------ ------------
Food and beverage 17,623,603 89,292 46.5% 33.2%
Payroll and payroll related costs 10,894,094 101,924 28.8% 37.9%
Direct operating costs 6,935,258 106,401 18.3% 39.6%
Depreciation and amortization 1,137,361 32,721 3.0% 12.2%
---------------- --------------- ------------ ------------
Gross profit (loss) 1,275,821 (61,558) 3.4% (22.9%)
General and administrative 2,097,057 354,912 5.5% 132.0%
---------------- --------------- ------------ ------------
Loss before other income (expense) (821,236) (416,470) (2.2%) (154.9%)
Interest expense and financing costs,
net 1,175,932 102,524 3.1% 38.1%
---------------- --------------- ------------ ------------
Loss before provision for income taxes (1,997,168) (518,994) (5.3%) (193.1%)
Provision for income taxes 46,155 - 0.1% -
================ =============== ============ ============
Net loss $(2,043,323) $(518,994) (5.4%) (193.1%)
================ =============== ============ ============
</TABLE>
Revenues for the twelve week period ended June 15, 1999 increased $37,597,357 or
13,988% from $268,780 for the twelve week period ended June 16, 1998 to
$37,866,137 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 $635,280 for the twelve-week period ended June 15, 1999. Gross
revenue for the restaurants purchased in the Paragon acquisition increased by
3.6% for the twelve week period ended June 15, 1999 compared to the gross
revenue for comparable restaurants for the same twelve week period ended June
16, 1998.
Food and beverage costs for the twelve week period ended June 15, 1999 increased
$17,534,311 or 19,637% from $89,292 for the twelve week period ended June 16,
1998 to $17,623,603 for the same period in 1999. Food and beverage costs for the
restaurants only as a percentage of restaurant revenues was 33.2% for the twelve
week period ended June 16, 1998 compared to 35.9% for the same period in 1999.
The food and beverage costs of Paragon's food distribution subsidiary, Pacific
Basin Foods, Inc., were 90.2% of the food distribution revenue for the
twelve-week period ended June 15, 1999. The total food and beverage cost as a
percentage of total revenue was 46.5% , which includes the restaurants and the
food distribution subsidiary. The increase in the food and beverage costs at the
restaurant level was principally a result of higher meat costs for the
twelve-week period in 1999.
10
<PAGE>
Payroll and payroll related costs for the twelve week period ended June 15, 1999
increased $10,792,170 or 10,588% from $101,924 for the twelve week period ended
June 16, 1998 to $10,894,094 for the same period in 1999. Payroll and payroll
related costs as a percentage of revenues were 37.9% for the twelve week period
ended June 16, 1998 compared to 28.8% for the same period in 1999. Payroll and
payroll related costs for the restaurants only were 34.8% 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 June 15, 1999 increased $6,828,857 or 6,418% from $106,401 for
the twelve week period ended June 16, 1998 to $6,935,258 for the same period in
1999. These costs as a percentage of restaurant revenues were 39.6% for the
twelve week period ended June 16, 1998 compared to 18.3% 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 June 15, 1999
increased $1,104,640 or 3,376% from $32,721 for the twelve week period ended
June 16, 1998 to $1,137,361 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 June 15,
1999 increased $1,742,145 or 491% from $354,912 for the twelve week period ended
June 16, 1998 to $2,097,057 for the same period in 1999. General and
administrative expenses as a percentage of restaurant revenues was 132.0% for
the twelve week period ended June 16, 1998 compared to 5.5% 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 is in the process of significantly reducing its
general and administrative expenses. Of the $2,097,057 of general and
administrative expense incurred during the twelve-week period ended June 15,
1999, $1,375,800 represents amounts incurred that have subsequently been
eliminated and will not be recurring expenses of the Company. A majority of this
amount represents salaries and benefits of employees who were terminated during
the twelve-week period ended June 15, 1999. The Company expects to see a
significant reduction in general and administrative expenses in the third and
fourth quarters of 1999.
11
<PAGE>
Interest expense and financing costs, net for the twelve week period ended June
15, 1999 increased $1,073,408 or 1,047% from $102,524 for the twelve week period
ended June 16, 1998 to $1,175,932 for the same period in 1998. 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.
Twenty-four Weeks Ended June 15, 1999 and June 16, 1998
<TABLE>
<CAPTION>
24 WEEKS 24 WEEKS
ENDED ENDED
JUNE 15, JUNE 16, PERCENTAGE OF REVENUE
---------------- --------------- --------------------------
1999 1998 1999 1998
---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $78,242,419 $655,041 100.0% 100.0%
---------------- --------------- ------------ ------------
Food and beverage 35,878,944 202,385 45.9% 30.9%
Payroll and payroll related costs 22,560,556 229,985 28.8% 35.1%
Direct operating costs 14,418,915 231,864 18.4% 35.4%
Depreciation and amortization 2,319,214 65,441 3.0% 10.0%
---------------- --------------- ------------ ------------
Gross profit (loss) 3,064,790 (74,634) 3.9% (11.4%)
General and administrative 4,589,718 463,513 5.9% 70.8%
---------------- --------------- ------------ ------------
Loss before other income (expense) (1,524,928) (538,147) (1.9%) (82.2%)
Interest expense and financing costs,
net 2,026,529 206,688 2.6% 31.6%
---------------- --------------- ------------ ------------
Loss before provision for income taxes (3,551,457) (744,835) (4.5%) (113.7%)
Provision for income taxes 87,871 - 0.1% -
================ =============== ============ ============
Net loss $(3,639,328) $(744,835) (4.7%) (113.7%)
================ =============== ============ ============
</TABLE>
Revenues for the twenty-four week period ended June 15, 1999 increased
$77,587,378 or 11,845% from $655,041 for the twenty-four week period ended June
16, 1998 to $78,242,419 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 $655,041 for the twenty-four week period ended June 15,
1999. Gross revenue for the restaurants purchased in the Paragon acquisition
increased by 0.6% for the twenty-four week period ended June 15, 1999 compared
to the gross revenue for comparable restaurants for the same twenty-four week
period ended June 16, 1998.
Food and beverage costs for the twenty-four week period ended June 15, 1999
increased $35,676,559 or 17,628% from $202,385 for the twenty-four week period
ended June 16, 1998 to $35,878,944 for the same period in 1999. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 30.9% for the twenty-four week period ended June 16, 1998 compared to 35.8%
for the same period in 1999. The food and beverage costs of Paragon's food
distribution subsidiary, Pacific Basin Foods, Inc., were 89.9% of the food
distribution revenue for the twenty-four week period ended June 15, 1999. The
total food and beverage cost as a percentage of total revenue was 45.9% , 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 35.8% is not unusual for the steakhouse industry.
12
<PAGE>
Payroll and payroll related costs for the twenty-four week period ended June 15,
1999 increased $22,330,571 or 9,710% from $229,985 for the twenty-four week
period ended June 16, 1998 to $22,560,556 for the same period in 1999. Payroll
and payroll related costs as a percentage of revenues were 35.1% for the
twenty-four week period ended June 16, 1998 compared to 28.8% for the same
period in 1999. Payroll and payroll related costs for the restaurants only were
34.6% 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
twenty-four week period ended June 15, 1999 increased $14,187,051 or 6,119% from
$231,864 for the twenty-four week period ended June 16, 1998 to $14,418,915 for
the same period in 1999. These costs as a percentage of restaurant revenues were
35.4% for the twenty-four week period ended June 16, 1998 compared to 18.4% for
the same period in 1999. Direct operating costs for the restaurants only were
21.9% of restaurant revenue for the twenty-four week period ended June 15, 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 twenty-four week period ended June 15,
1999 increased $2,253,773 or 3,444% from $65,441 for the twenty-four week period
ended June 16, 1998 to $2,319,214 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 twenty-four week period ended June
15, 1999 increased $4,126,205 or 890% from $463,513 for the twenty-four week
period ended June 16, 1998 to $4,589,718 for the same period in 1999. General
and administrative expenses as a percentage of restaurant revenues was 70.8% for
the twenty-four week period ended June 16, 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 is in the process of significantly reducing
its general and administrative expenses. Of the $4,126,205 of general and
administrative expense incurred during the twenty-four period ended June 15,
1999, $2,944,755 represents amounts incurred that have subsequently been
eliminated and will not be recurring expenses of the Company. A majority of this
amount represents salaries and benefits of employees who were terminated during
the twenty-four week period ended June 15, 1999. The Company expects to see a
significant reduction in general and administrative expenses in the third and
fourth fiscal quarters of 1999.
Interest expense and financing costs, net for the twenty-four week period ended
June 15, 1999 increased $1,819,841 or 880% from $206,688 for the twenty-four
week period ended June 16, 1998 to $2,026,529 for the same period in 1998. 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 $2,569,091 at June 15,
1999. Management of the Company believes that such cash and cash equivalents
plus the cash generated from two private placement equity offerings subsequent
to June 15, 1999 together with anticipated cash 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.
On a proforma basis the Company's tangible net assets as of June 15, 1999 were
$2,383,689. The proforma adjustment takes into account the net proceeds received
from two private placement offerings in July 1999 of $2,183,250.
The Company is currently in the process of obtaining additional financing to
repay an approximate $20 million loan that is collateralized by 19 restaurants
owned by the Company. The Company is currently in default with respect to
certain loan covenants associated with this loan. The Company is negotiating a
sale-leaseback transaction that will provide the Company enough money to repay
the existing debt on the 19 restaurants and provide favorable lease rates for a
substantial period of time. The Company is also attempting to obtain a waiver
of the debt covenants violations 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
has just begun to roll out the new accounting software and point of sale
terminals in each restaurant and 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 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 June 1999, 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 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.
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 June 15, 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
None
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: August 6, 1999
17
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