UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 0-11331
PERFORMANCE INDUSTRIES, INC.
(Exact name of Registrant as Specified in its Charter)
OHIO 34-1334199
- ------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2701 E. CAMELBACK ROAD, SUITE 210
PHOENIX, ARIZONA 85016
(Address of principal executive offices and zip code)
(602) 912-0100
(Registrant's telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------- ---------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
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 pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.
The aggregate market value of Registrant's voting stock held by nonaffiliates as
of March 31, 1998 (based upon closing price) was $890,575.
At March 31, 1998, 2,481,264 shares of Registrant's Common Stock were
outstanding.
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PART I
ITEM 1. BUSINESS
--------
In 1997, the Company restructured its operations divesting itself of two
businesses, Factoring and Development. This will allow the company to
concentrate on its core business Restaurants. Management believes this will
enable analysts to better understand the Company which may result in greater
stock activity.
Performance Restaurants Group, Inc. (Restaurants)
Restaurants was formed in 1993 to acquire six operating restaurants in
California. Four of the restaurants operate under the trade name Bobby McGee's
and are full service restaurants/nightclubs. The fifth was converted to a sports
bar/nightclub concept operating under the trade name McGee's Grill. In 1995, a
sixth restaurant was acquired in Scottsdale, Arizona. It is a full service
restaurant and bar operating under the trade name Buster's Restaurant Bar &
Grill. In 1996, the Company acquired two Carlos Murphy's restaurants in San
Diego, California, with rights to open other Carlos Murphy's Restaurants in the
San Diego and Los Angeles Metropolitan areas and Maricopa County, Arizona. In
1998, the Company entered into an operating lease for the two Carlos Murphy's
restaurants with an unrelated third party. In 1996, the Company sold one of the
original Bobby McGee's locations.
The Bobby McGee's concept is a full service restaurant using costumed servers
and a lounge offering music and dancing at the same location. The restaurant
appeals to a wide range of diners as a special event restaurant. Diners come to
the restaurant to celebrate birthdays, anniversaries, graduations, and other
special occasions.
McGee's Grill was opened in 1994. It features pool tables and television screens
for the viewing of sports events and a limited menu for dinner and lunch in the
sports bar. The sports bar is combined with the more traditional nightclub
offered at other Bobby McGee's restaurants.
Buster's is a full service restaurant offering a variety of dishes including
seafood, steak and pasta dishes. Buster's is on the higher end of the casual
dining market.
Performance Funding Corp. (Funding)
The Company sold the Factoring business to a third party related through common
management in August 1997. The Company believes the sale to have been on terms
at least as favorable as it would have received in an arms length transaction.
The sale allowed the Company to make available cash for use in the expansion of
its restaurant division when needed.
Performance Development Corp. (Development)
Camelback Plaza Development, L.C.
- ---------------------------------
In December of 1997, the Company sold its interest in Camelback Plaza
Development, Inc. to Imprimis Partners II, the minority partner in the
Development. The Company received approximately $700,000 for its interest.
Ixtapa
- ------
The Company purchased land for development as a condominium complex. At the time
of purchase, the seller had committed to construction financing for the project.
As discussed further below, the Company has indefinitely delayed the project due
to the continuing financial situation in Mexico. Currently, the Company has the
property listed for sale with a broker.
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<PAGE>
A. Competition
The restaurant business is highly competitive. Restaurants competes in the
restaurant business with a number of chains and restaurants owned by
substantially larger companies with greater financial resources than
Restaurants. Restaurants competes on the basis of name recognition, concept of
restaurants, location, quality of product and other intangible elements.
Restaurants believes that the costume concept, along with the adjoining
nightclub, offers a unique experience for the consumer that has a broad appeal.
Restaurants further believes its present locations offer a competitive advantage
over other areas.
B. Trademarks and Patents
The Company's registered trademark for restaurants is an important factor in
marketing for this group due to the high degree of name recognition in its
geographical area and general market. The name Bobby McGee's is federally
trademarked.
C. Environmental Matters
An investigation of environmental matters related to facilities and property
owned and leased by the Company was performed to determine contingencies that
may have affected the Company's emergence from Chapter 11. Certain reports
received by the Company have identified areas of environmental contamination and
potential environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and governmental
agencies have been notified by the Company of the related possible liabilities.
In addition, the Company notified its insurance carriers of potential claims
under its general liability and property insurance coverage from prior years.
a) Reyes Avenue Compton, CA
--------------------------
This facility housed the manufacturing plant of the former Wheel business which
was sold in 1992.
In 1991, possible contamination at the site was discovered. The Richter Family
Trust, the owner of this facility, filed an action against the Company and
others in the U.S. District Court for the Central District of California and
served it on the Company in April 1995. The Company responded to the complaint
on its behalf and on behalf of Joe Hrudka as an officer of the Company. The
complaint seeks damages of an unspecified amount for environmental contamination
at the site under several theories. Currently, the action is stayed by
stipulation of the parties, so that further testing to determine the extent of
the contamination can be completed.
The Company tendered defense of the action to several insurance carriers under
policies in force for the periods when it owned and operated its wheel division
at the site. Two insurers have agreed to pay some legal costs of defending the
action under their policies, although they have reserved the right to ultimately
deny coverage.
b) Warehousing and Office Facility in Ohio
---------------------------------------
In 1990, potential contamination was discovered at this location. Environmental
studies performed to date have determined that the contamination is confined to
the site with no evidence of migration to groundwater or surrounding properties.
As part of the sale of the Performance Division to Echlin, Inc., the Company
entered into an indemnity agreement with a predecessor-in-interest at the site.
The predecessor-in-interest and the buyer of the Performance division have
agreed to pay for the remediation of the major known environmental contamination
at the site. However, the Company was required to guarantee the obligations of
the purchaser.
The Company had to agree to remove two above ground storage tanks, an
underground storage tank, and to submit a closure plan to the State for a drum
storage area. In March, 1995, the State of Ohio EPA accepted the company's
closure of the drum storage area as being in compliance with the previously
filed closure plan. This was the last requirement for the release of the escrow
funds held by Echlin, Inc., from
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the sale proceeds of the Brookpark Road facility. The Company had also completed
the removal of an underground storage tank at the Brookpark Road facility in
1994. With this closure, the Company believes it has no further expense for
environmental contamination related to the Brookpark Road facility.
ITEM 2. PROPERTIES
----------
As of December 31, 1997, the Company and its subsidiaries owned and leased a
total of approximately 104,402 square feet of restaurant, office, and other
space for its principal facilities. Management believes that the Company's and
its subsidiaries' facilities and equipment are modern and well maintained.
The locations and general description of the principal properties owned and
leased by the Company and its subsidiaries are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Approximate Area
Location Primary Functions in Square Feet Lease Expiration
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Phoenix, Office 2,115 7/31/2000
Arizona
- -------------------------------------------------------------------------------------------------
Scottsdale, Buster's Restaurant Bar & Grill 9,123 4/31/2000
Arizona
- -------------------------------------------------------------------------------------------------
Brea, Restaurant/Nightclub 11,000 6/30/2005
California
- -------------------------------------------------------------------------------------------------
Burbank, Restaurant/Nightclub 11,000 6/30/2010
California
- -------------------------------------------------------------------------------------------------
Burlingame, Restaurant/Nightclub 9,000 12/31/2006
California
- -------------------------------------------------------------------------------------------------
Citrus Heights, Restaurant/Nightclub 10,600 9/14/2005
California
- -------------------------------------------------------------------------------------------------
San Bernardino, Restaurant/Nightclub 10,500 11/13/2002
California
- -------------------------------------------------------------------------------------------------
Ixtapa Raw Land 8,748 sq. meters Owned
- -------------------------------------------------------------------------------------------------
Las Vegas, Restaurant/Nightclub 9,185 12/31/2005
Nevada (1)
- -------------------------------------------------------------------------------------------------
La Mesa, Restaurant/Nightclub 8,700 12/31/2005
California (1)
- -------------------------------------------------------------------------------------------------
La Jolla, Restaurant/Nightclub 9,000 1/15/2000
California (1)
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) These properties are currently subleased to unrelated third parties. The
Company is a guarantor of the leases.
ITEM 3. LEGAL PROCEEDINGS
-----------------
A. On January 6th, 1994, the Company filed an action in the Superior Court of
Arizona for the County of Maricopa to determine the fair cash value of its
shares held by shareholders who dissented from the sale of the Exhaust
business. The dissenting shareholders are as follows: Ecco Sales, Inc.,
Defined Benefit Plan and Mr. David E. Miller, its trustee; Murray & Murray
Co., L.P.A. Profit-Sharing Plan and Trust and Dennis E. Murray., its
trustee; and Murray and Murray Co., L.P.A. - Dennis Murray Voluntary
Account and Dennis E. Murray, Sr., its trustee; Monumental Life Insurance
Company, a Maryland Corporation; Ince & Co., a foreign Corporation; The
Travelers Corporation, a foreign corporation; The Travelers Insurance
Company, a Connecticut Corporation; Provident Mutual Life Insurance
Company, a foreign
4
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corporation; New England Mutual Life Insurance Company, a Massachusetts
Corporation; Angelo M. Alesci, an individual; William R. Bagger, an
individual:
All of the dissenting shareholders, except Ecco Sales and Murray & Murray,
LPA, agreed to accept and were paid $.75 per share, as the fair market
value, for their stock.
Two of the dissenting shareholders made a special appearance by Motion to
Dismiss for lack of personal jurisdiction, Murray & Murray Co., L.P.A.
Profit Sharing Plan, and Murray & Murray Co., L.P.A. After the remand from
the Arizona Court of Appeals, the Maricopa County Superior Court held it
had jurisdiction over the defendants in February, 1995. The defendants
appealed the trial court decision to the Arizona Court of Appeals. The
court again upheld the trial court decision. The defendants then appealed
to the Arizona Supreme Court, which upheld the Court of Appeals' decision.
The defendants sought review by the U.S. Supreme Court under a Writ of
Certiorari. The was denied in February 1996.
The matter will now proceed to establish the fair market value of the
defendants' shares as of the date of their dissent. The matter was
remanded to the Superior Court County of Maricopa, State of Arizona for
further proceedings in the Fall, 1996. The Company requested a hearing
pursuant to statute to determine if the shareholders are entitled to
receive the fair cash value of their shares and to appoint an appraiser(s)
to determine the fair cash value.
The Court held a status conference with all parties in January, 1997. The
Court requested that each side submit the lists of appraisers from whom
the Court could appoint two appraisers. All other matters before the Court
were taken under advisement.
In the Second Quarter 1997, the court appointed two appraisers to
determine the fair market value of the stock. One appraisal has not been
completed to the date of this report.
B. On January 26, 1994, an action filed by Murray & Murray in the Court of
Common Pleas, County of Cuyahoga, State of Ohio, was served on the Company
and three former or present officers and/or directors of the Company; Joe
Hrudka, Tom Hrudka and Howard B. Gardner. The action against the Company
seeks declaratory judgment holding that the fair cash value determination
be heard in the State of Ohio. The action against the directors and
officers alleges a breach of fiduciary duty involving the negotiation of
consulting and non-competition agreements in connection with the Company's
sale of its former businesses. The Company has filed a motion to dismiss
the action which motion has not yet been decided.
In March, 1998 the Court of Common Pleas issued an order dismissing the
action as to all counts. The Plaintiffs have appealed the Court's
decision.
C. In April 1995, the Company was served with an action filed by the Richter
Family Trust in the U.S. District Court for the Central District of
California against the Company and others for unspecified damages for the
remediation of the site of the Company's former wheel manufacturing plant.
The Company responded to the suit on its own behalf and on behalf of Joe
Hrudka, an officer and director of the Company, who was sued personally.
Currently, the case has been stayed by stipulation of the parties, so that
further testing can be conducted on site to determine the extent of the
contamination.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business, including product liability claims. In
the opinions of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
5
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
----------------------------------------------------------------------
MATTERS
- -------
The following table sets forth the range of high and low closing bid prices for
the Company's common stock as reported by the NASDAQ National Market System for
the past two calendar years: (1)
- -----------------------------------------------------------------------------
BID ASK
1997
Quarter ended March 31, 1997 5/8 1 3/8
Quarter ended June 30, 1997 5/8 1 3/8
Quarter ended September 30, 1997 3/4 1 5/8
Quarter ended December 31, 1997 3/4 1 5/8
1996 (2)
Quarter ended March 31, 1996 5/8 1 3/8
Quarter ended June 30, 1996 5/8 1 3/8
Quarter ended September 30, 1996 5/8 1 3/8
Quarter ended December 31, 1996 3/4 1 3/8
- -----------------------------------------------------------------------------
(1) All quotations represent inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual trades.
(2) Restated to reflect 4 for 1 reverse stock split effective June, 1996.
As of March 26, 1998, there were 774 holders of record of the Company's common
stock. No dividends have been declared since December 1984, nor does the Company
anticipate that any dividends will be declared in the foreseeable future.
The Company's shares are traded over the counter.
During 1996, the Company effected a 4 for 1 reverse stock split and an odd lot
tender offer. Approximately 8200 shares were tendered to the Company.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data).
-----------------------
The Company's selected consolidated financial data has been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which principles, except as otherwise disclosed, assume that assets
will be realized and liabilities will be discharged in the normal course of
business.
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1993 through 1997. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere herein. The selected
consolidated financial data for the years ended December 31, 1993 through 1997
are derived from the audited financial statements of the Company.
6
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<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------
OPERATING RESULTS: 1993 1994 1995 1996 1997
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 360 $19,004 $21,598 $22,407 $22,029
Net income (loss) $27,623 $ 435 $ 294 $(3,723) $(1,606)
Net income (loss) per common share $ 9.36 $ .17 $ .12 $ (1.50) $ (.64)
Weighted average number of common
stock outstanding 2,947 2,458 2,489 2,486 2,472
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------------------------------
FINANCIAL POSITION: 1993 1994 1995 1996 1997
------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital
(deficiency) $ 2,636 $ 574 $ 2,424 $ 1,118 $ 1,206
Total assets $23,126 $24,108 $24,878 $21,971 $10,405
Long term debt, excluding $ 515 $ 5,962 $ 7,345 $ 8,950 $ 255
current installments and
amount subject to compromise
Shareholders' equity $12,824 $11,494 $13,061 $ 8,530 $ 6,212
(deficiency)
- --------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATION
The Company has sold two of its divisions in 1997. Most of the Management's
discussion and analysis will concern the remaining operational division,
Restaurants.
Consolidated
The Company had a loss of $1,606,000 for the period ending December 31, 1997 as
compared to a loss of $3,723,000 for the same period in 1996. Selling General
and Administrative expenses have been reduced to $2,131,000 for the year ending
December 31, 1997 or by 28% from $2,995,000 for the same period last year.
Management believes further savings are possible but will not be as significant
as in prior years.
There were several extraordinary losses recorded by the Company this year. The
Company had invested in a low fare airline and its subsidiary in 1995. Both
filed for protection under the U.S. Bankruptcy laws in 1997 and the value of the
stock was written down to nothing this year. The Company had previously recorded
a gain on sale of a portion of the securities in 1995.
Also, the Company loss $916,000 on the sale of its interest in the Real Estate
development subsidiary. Management felt that the prospects of selling the
Development for a profit both on a long term and short term basis were small. By
selling to its minority investors in the project, the Company was able to stop
the operational losses it had suffered in the Development.
7
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Cash flow from operating activities improved from the year earlier period. But
for the one time charges set forth above, the Company would have had a positive
cash flow from operations. Cash flow for investing activities was also positive.
However, a majority of this cash flow was provided by sale of the two
subsidiaries and payments on the sale of the Mexican subsidiary in a prior year.
The Company does not expect a significant contribution from investing activities
in the future as it has returned to a core business.
Performance Restaurants Group, Inc.
Restaurants Gross Revenue rose $1,686,000 or 8% in 1997 as compared to 1996.
This increase is attributed to the addition of units in 1997. Sales at stores
open at least one year were approximately the same for both years.
Restaurant earnings, which are not adjusted to include corporate overhead, were
$907,000 for the year ending December 31, 1997 as compared to a loss of
$2,774,497 for restaurants for the year ending December 31, 1996. There was a
one time charge of $1,795,054 in 1996 for the closure of the Las Vegas
restaurant. Without the charge, Restaurants would have had a loss of $979,443
for the year ending December 31, 1996. The cost cutting measures undertaken in
1996 have helped the Restaurant division become a profitable operation for the
Company.
In January, 1998, the Company signed an operational lease for the two Carlos
Murphy's Restaurants in San Diego with an unrelated Third Party. Under the terms
of the lease the company will receive $345,000 as rental in 1998 and $360,000 in
1999. The lessee will pay all operational expense for those restaurants.
Management believes that the operating lease will provide greater cash flow
through rental income than anticipated earnings for the upcoming year for these
restaurants.
The Company expects restaurant earnings to remain strong throughout 1998 as it
continues to monitor cost at the restaurant level. The Company has reduced its
costs at the corporate level throughout the past two years. Further, cost
cutting may be possible but will not offer as great a potential for savings as
in years past.
Cash Flow for Restaurants was sufficient over the past year to meet the
operating needs of the restaurant. Any expansion will call for additional funds.
The Company would use its cash reserves, leases of furniture, fixtures and
equipment, owner funded improvements to real property and bank financing, if
available, for any expansion.
Performance Funding Corp.
The Company operated its Funding subsidiary through its sale in August 1997.
Funding's earnings were down as a result of the loss of its marketing person in
the spring of 1997. The Company was unable to find a suitable replacement.
Revenues for the partial year 1997 were approximately $400,000 as compared to
$623,000 for the full year in 1996. The 1997 revenues include approximately
$200,000 received in payment for an account reserved for as bad debt. The
decrease was attributable to the loss of clients during the year.
Performance Camelback Development Inc.
The Company sold its interest in December 1997 to the other members of the
Limited Liability Company. Prior to the sale the Development had been nearly
covering all of its operating cost. The Company did advance monies on two
occasions but was repaid any sums advanced in the year. The Company had hoped to
sell the Development to recoup its investment but no bona fide buyer was
located.
LIQUIDITY AND CAPITAL RESOURCES
The Company has sufficient Cash flow to meet its current operating needs. The
slowest period for Restaurants is the late spring and summer when sales are
seasonally slow. During this period, the Company will use some of its cash
reserve for operations. Over the past several years, tighter costs control has
lessened the Company's reliance on cash reserves during this period. During
1997, the
8
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Company has reviewed several proposals for new locations or restaurants for
purchase. After review, none of the proposed locations met the Company's
criteria for expansion. The Company is still seeking new locations for
expansion.
In addition, the Company is contemplating changes at some of its underperforming
units. Recently, the Company signed operating leases for its two Carlos Murphy's
Restaurants in Southern California. Under the lease, the Lessee pays a rental of
$360,000 per year for the two locations and pays all operating expenses. The
result is positive cash flow in excess of projected profits from these stores
for the two years of the lease.
In addition, the Company is reviewing several new concepts for two of the Bobby
McGee's in California where sales have been trailing the other units. No
decision has been made on the type of concept, although management has decided
to make a change from its current operations. Several format changes are being
reviewed including a steakhouse, an american grill concept and a seafood
restaurant. A decision should be made in the second quarter and the conversion
completed by September, 1998.
Management believes that most of the capital costs for expansion could be met
through financing by way of loans, seller carry backs and leases for furniture,
fixtures and equipment. If new restaurants are opened, the Company will use less
of its cash reserves to open the new restaurant and more financing where
available.
The Company sold its interest in Camelback Plaza Development in late 1997. As a
result, the Company suffered a loss on the sale. The Company had hoped to sell
this investment upon completion of construction. However, no sale was ever
completed. The short term prospect of selling the development for a profit was
reduced when two tenants vacated the premises. While one of the spaces has been
leased again, it requires a significant cash outlay for tenant improvements
prior to rental income being realized. Further, while the negative cash flow of
the project had been significantly reduced, there was a possibility of further
investment of capital until new tenants were in place and paying rent.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The independent auditors' report on the Consolidated Financial Statements and
Schedules listed in the accompanying index are filed as part of this report. See
Index to Audited Consolidated Financial Statements and Schedules on page 16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
----------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
- ------------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Directors and Executive Officers of the Company as of December 31, 1997 were
as follows:
- --------------------------------------------------------------------------------
NAME AGE POSITION
- --------------------------------------------------------------------------------
JOE HRUDKA 59 PRESIDENT
EDMUND L. FOCHTMAN, JR. (1) 60 VICE PRESIDENT/CFO
ALLEN L. HAIRE (1) 55 DIRECTOR
JONATHAN TRATT (1) 39 DIRECTOR
ROBERT A. CASSALIA 45 SECRETARY
- --------------------------------------------------------------------------------
9
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All Directors are elected annually by the Company's shareholders and hold office
until their successors are duly elected and qualified.
(1) Member of the Audit Committee
Joe Hrudka is the founder and principal shareholder of the Company. Since 1981
he has served as the Chairman of the Board and a Director. Mr. Hrudka has served
as Chief Executive Officer of the Company since November 1993. In 1997, he
assumed the additional position of President. In 1964, Mr. Hrudka founded the
original Mr. Gasket Company and served as Chairman of the Board and President
until the Company was purchased by W.R. Grace in 1971. He was then employed as a
Vice President of the Automotive Division of W.R. Grace from 1972 to 1974 and as
a consultant to W.R. Grace during 1975 and 1976. From 1977 until the formation
of the Company in 1981, Mr. Hrudka was a private investor. Mr. Hrudka had served
as a director of Action Products, Inc., from 1987, and served as Secretary of
Action Products, Inc., from October 1990 to May 1992. In November 1991, a
receiver was appointed by the Maricopa County Superior Court, State of Arizona,
to manage the assets of Action Products, Inc., at the request of a secured
party. Action's assets were sold in May 1992 by the receiver. Mr. Hrudka has
served as a Director of each of the subsidiaries since they have been formed.
Edmund L. Fochtman, Jr., has been a Vice President of the Company from June,
1997. Prior to this, he was President of the Company from May, 1993. He was an
executive Vice President of the Company since January, 1992. He was Chairman of
the Board of Directors and Chief Executive Officer of Action Products, Inc., a
company engaged in manufacture and sale of fiberglass bodied mini-cars and sales
of other promotional products from October 1986 until January 1992. From 1984 to
1986, Mr. Fochtman was a private investor. From 1976 to 1984, he served as Vice
President of F.W. & Associates, Inc. In November 1991, a receiver was appointed
by the Maricopa County Superior Court, State of Arizona, to manage the assets of
Action Products, Inc., at the request of a secured party. Action's assets were
sold in May 1992 by the receiver. Mr. Fochtman was elected a Director of the
Company in June 1988 and as a director of each of the subsidiaries since 1993.
Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical
Products, a manufacturer of gas-fired infra-red heating equipment, since July
1984. He was a manufacturer's representative from 1977 to 1984. Mr. Haire was
elected a Director in June 1988.
Jonathan Tratt has been President and Director of Industrial Brokerage, Inc., an
investment and commercial real estate brokerage company since 1992. Prior to
1992, Jonathan Tratt was a general investor and real estate agent in Phoenix,
Arizona. Mr. Tratt was elected a director of the Company in May, 1993.
Robert A. Cassalia was hired by the Company as Assistant Secretary, in January
of 1991. On May 4, 1993, he was elected Secretary. Before joining the Company
Mr. Cassalia was General Counsel of Action Products, Inc., a manufacturer of
fiberglass bodied mini-cars. Since October, 1986, he was in private practice in
Phoenix, Arizona and Syracuse, New York.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated herein from the Company's
proxy statement to be filed pursuant to Regulation 14(a) under the Securities
Exchange Act of 1934, within 120 days from December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Principal shareholders
The following tables sets forth the number and percentage of the outstanding
shares of common stock beneficially owned as of March 29, 1997, by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.
10
<PAGE>
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned of Class
- ------------------- ------------------ --------
Joe Hrudka
2701 E. Camelback Rd., Suite 210 1,689,241 69%
Phoenix, AZ 85016
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Howard Gardner Consultants received $30,000 in 1996 from the Company for
consulting services on financial and general business matters. Howard B. Gardner
is a former officer and director of the Company. The fees are included in
selling, general and administrative expenses in the statement of operations.
A Director of the Company earned a 3% commission of $90,000 from the sale of the
Company's stock in its Mexican subsidiary during 1996. The commission is
included in selling, general and administrative expenses in the accompanying
statement of operations. Of the commission earned, $45,000 was paid during 1996.
During 1997, the Company received a discount of $4,500 on the commission. The
remaining balance of $37,500 was paid during 1997.
In August 1997, the Company sold its Factoring division to a new company
including two present directors and officers of the Company, Joe Hrudka and Ed
Fochtman, Jr. The sale was on terms at least as favorable as would have been
realized in a sale to unrelated third parties.
In December of 1997, the Company sold its interest in the Camelback Plaza
Development, L.C., to the other members of the limited liability company. The
Company had tried to sell the development for over a year and was unsuccessful
in finding a bona fide purchaser for the entire project. Management believes the
sale to be on terms at least of favorable as would have been realized in a sale
to unrelated third parties.
In 1997, the Company made two short term loans totaling $55,000 to Joe Hrudka.
Mr. Hrudka has repaid the loans.
In December, 1997, the Company purchased shares of stock in the Company from
Jonathan Tratt, a director, for $126,425.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
----------------------------------------------------------------
(1) Index to Consolidated Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements - Years ended December 31, 1997,
1996 and 1995
11
<PAGE>
(2) Index to Consolidated Financial Statement Schedules:
All schedules have been omitted because the material is not applicable or
is not required as permitted by the rules and regulations of the
Commission, or the required information is included in Notes to the
Consolidated Financial Statements.
(3) Exhibits:
Exhibit No.
2.1 Disclosure Statement and Plan of Reorganization filed on July 21, 1992
by the Official Creditors' Committee. Incorporated by reference to the
Company's Report on Form 10-Q filed on August 12, 1992.
2.2 Amended Plan of Reorganization filed by the Company on August 3, 1992.
Incorporated by reference to the Company's Report on Form 10-Q filed
on august 12, 1992.
2.3 Amended Disclosure Statement including a Joint Plan of Reorganization
approved by the Court to be distributed to interested parties on
October 27, 1992. Incorporated by reference to the Company's Report on
Form 10-Q filed on November 10, 1992.
2.4 The Confirmed Joint Plan of Reorganization, approved by the United
States Bankruptcy Court, Central District of California on April 21,
1993, as filed with the Company's report on Form 10-Q for the period
ended March 31, 1993.
2.5 Notice of satisfaction to all conditions precedent to implementation
of Option "A" of the Joint Plan of Reorganization dated September 30,
1992, as filed with the Company's report on Form 10-Q for the period
ended March 31, 1993.
3.3 Amended and Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3.3 of the Company's Annual
Report on Form 10-K, dated March 29, 1988.
3.4 Revised Code of Regulations, as amended, of the Company. Incorporated
by reference to Exhibit 3.4 of the Company's Annual Report on Form
10-K, dated March 29, 1988.
10.45 Asset purchase agreements relating to the sale of the Wheel and Tire
business dated December 31, 1992 by and between Cragar Industries,
Inc., and the Company. Incorporated by reference to the Company's
report on Form 8-K filed on January 12, 1993.
10.46 The following exhibits relate to the sale of the Performance business
on May 4, 1993 as filed with the Company's report on Form 10-Q for the
period ended March 31, 1995 and incorporated herein by reference:
10.47 The following documents related to the sale of the Company's Exhaust
Division to Walker Manufacturing Company as filed with Notice of
Annual Meeting of shareholders dated November 8, 1994 and incorporated
herein by reference.
10.48 1993 Stock Option Plan of Performance Industries, Inc. filed with the
Company's Notice of Annual Meeting of shareholders dated November 8,
1993 and incorporated herein by reference.
12
<PAGE>
10.49 Documents relating to its purchase of operating assets from Bobby
McGee's USA, Inc., effective December 20, 1993, which were filed with
the Company's report on Form 10-K for the period ended December 31,
1993, and are incorporated herein by reference.
10.50 The following documents relating to the purchase of the ground lease
for 2671 E. Camelback Road, Phoenix, Arizona, effective December 30,
1993, as filed with the Company's report on Form 10-K for the year
ended December 31, 1993, and are incorporated herein by reference:
10.51 Lease dated May 9, 1994, by and between Just for Feet, Inc. (Lessee)
and Camelback Development L.C. (Lessor) dated May 9, 1994. As filed
with the Company's report on Form 10-K for the year ended December 31,
1994, and are incorporated herein by reference.
10.52 Lease dated June 30, 1994, by and between Blockbuster Music Retail,
Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor). As filed
with the Company's report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10.53 Lease dated January 17, 1995 by and between Restaurants of America,
Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor). As filed
with the Company's report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10.54 Design Build Lease Agreement dated December 18, 1992, by and between
Hard Rock Cafe Investors, Ltd., XIV (Lessee) and Imprimis Partners II
(Lessor) and amendment thereto dated September 26, 1994. As filed with
the Company's report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10.55 Offer to purchase Buster's Restaurant, Bar and Grill dated February
25, 1995, including a first assignment and Assumption of Lease and
landlord's consent dated March 15, 1995, by and between Mercado Del
Lago, L.L.C., Buster's & Company, Inc. and Performance Restaurants
Group, Inc., and lease dated the 20th of November 1989 by and between
Mercado Project Group, Inc., and lease dated the 20th of November 1989
by and between Mercado Project Limited (Lessor) and Buster's &
Company, Inc. (Lessee), and Bill of Sales dated March 15, 1995. As
filed with the Company's report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference.
10.56 Documents from the Caliber Bank loan dated June 24, 1994, as amended
September 21, 1994.
- Restaurant Phase Construction Agreement,
dated June 24, 1994.
- Restaurant Phase Promissory Note.
- Irrevocable Letter of Credit - $1,900,000.
- Environmental Indemnification Agreement.
- Amendment to Restaurant Phase Construction
Loan Agreement, Restaurant Phase Promissory
Note, and Restaurant Phase Deed of Trust,
dated September 21, 1994.
- Restaurant Phase Leasehold Construction Deed
of Trust and Security Agreement with
Assignment of Rents and Fixtures Filing.
- Assignment of Hard Rock Cafe Lease.
- Retail Phase Construction Loan Agreement,
dated June 24, 1994.
- Retail Phase Promissory Note.
- Amendment to Retail Phase Construction Loan
Agreement, Retail Phase Promissory note, and
Retail Phase Deed of Trust, dated September
21, 1994.
13
<PAGE>
- Retail Phase Leasehold Construction Deed of
Trust and Security Agreement with Assignment
of Rents and Fixtures Filing.
- Assignment of Retail Leases.
As filed with the Company's report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference.
10.57 Line of Credit Agreement dated July 19, 1995, by and between
Performance Funding Corp. and Capital Factors, Inc., and Guarantee of
Performance Industries, Inc. As filed with the Company's report on
Form 10-K for the year ended December 31, 1995, and incorporated
herein by reference.
10.58 Lease dated September 1, 1995, between Performance Restaurants of
Nevada, Inc. and 1030 East Flamingo, L.L.C. As filed with the
Company's report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference.
10.59 Second Amendment to Retail Phase Construction Loan Agreement dated
October 31, 1995 by and between Camelback Plaza Development, L.C. and
Norwest Bank. As filed with the Company's report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
10.60 Tenth Amendment to Restaurant Phase Construction Loan Agreement dated
October 31, 1995, by and between Camelback Plaza Development, L.C. and
Norwest Bank. As filed with the Company's report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
10.61 Cash Collateral Agreement by and between Performance Industries,
Inc., and Norwest Bank dated October 31, 1995. As filed with the
Company's report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference.
10.62 Promissory Note, Deed of Trusts, Assignment of Lease and Rents by and
between the Camelback Plaza Development L.C. and Boston Capital
Mortgage dated as of November 1, 1996 for the sum of $7,250,000 on the
property of the subsidiary at 2621 E. Camelback Rd., Phoenix, AZ. As
filed with the Company's report on Form 10-K for the year ended
December 31, 1996, and are incorporated herein by reference.
10.63 Stock Purchase Agreement, dated February 28, 1996, Letter Amendment
there to dated March 20, 1996, Letter Amendment there to dated July
15, 1996, and Deposit Escrow Agreement between Markwood L.L.C. as
Buyer and the Company as seller of stock in its wholly owned
subsidiary Fabricaciones Metalicas Mexicanas - S.A. As filed with the
Company's report on Form 10-K for the year ended December 31, 1996,
and by reference incorporated herein.
22. Subsidiaries of the Registrant.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 7, 1998 Performance Industries, Inc.
By: /s/ Joe Hrudka
------------------------------
Joe Hrudka
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 7th day of April, 1998, by the following persons on
behalf of the Registrant in the capacities indicated:
By: /s/ Joe Hrudka Chairman of the Board, President and
----------------------------- Director
Joe Hrudka
By: /s/ Edmund L. Fochtman, Jr. Vice President, CFO and Director
-----------------------------
Edmund L. Fochtman, Jr.
By: /s/ Allen L. Haire Director
-----------------------------
Allen L. Haire
By: /s/ Jonathan Tratt Director
-----------------------------
Jonathan Tratt
15
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT 17
CONSOLIDATED FINANCIAL STATEMENTS:
----------------------------------
BALANCE SHEETS 18
STATEMENTS OF OPERATIONS 19
STATEMENTS OF SHAREHOLDERS' EQUITY 20
STATEMENTS OF CASH FLOW 21
NOTES TO FINANCIAL STATEMENTS 23
16
<PAGE>
Board of Directors and Shareholders
Performance Industries, Inc.
Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of
Performance Industries, Inc. and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, shareholders' equity and
cash flows for the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Performance Industries, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
TOBACK CPAs, P.C.
Phoenix, Arizona
March 20, 1998
17
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------- --------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,815 $ 1,136
Restricted cash (Note 2) -- 409
Securities available for sale (Note 3) -- 722
Accounts and other receivables, less allowance for
doubtful accounts of $14 and $36, respectively (Note 5) 410 503
Current portion of receivables from sale of businesses,
net of allowance (Notes 4 and 5) 269 1,356
Factored accounts receivable, net of allowance for
doubtful accounts of $283 and $417, respectively (Notes 5 and 14) 261 1,139
Inventories 313 328
Prepaid expenses and other current assets 227 192
Deferred income taxes (Note 13) 64 --
Real estate held for sale (Notes 6 and 9) 785 --
-------- --------
Total current assets 5,144 5,785
Receivables from sale of businesses, less current portion,
net of allowance (Notes 4 and 5) -- 119
Investment in real estate (Notes 6, 9, and 14) -- 9,481
Deferred income taxes (Note 13) 1,227 1,460
Property and equipment (Notes 7 and 9) 2,757 3,084
Other assets (Note 8) 1,277 2,042
-------- --------
Total assets $ 10,405 $ 21,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations (Note 9) $ 1,051 $ 547
Accounts payable 637 1,000
Accrued employment costs 476 491
Accrued expenses and other current liabilities (Note 10) 666 1,339
Factored receivables reserve 61 286
Liabilities subject to compromise (Notes 11 and 19) 797 754
Foreign tax liability 250 250
-------- --------
Total current liabilities 3,938 4,667
Long-term debt and capital lease obligations, less current portion (Note 9) 255 8,403
Commitments and contingencies (Notes 12, 18, 19 and 21)
Minority interest (Notes 6 and 14) -- 371
Shareholders' equity:
Preferred stock, par value $1.00 per share; authorized
100,000 shares; none issued -- --
Common stock, no par value; authorized 5,000,000
shares; issued 3,157,332 shares; outstanding 2,377,889
and 2,481,264, respectively (Notes 15 and 16) 31,202 31,202
Accumulated deficit (21,745) (20,139)
Unrealized holding gains on securities available for sale,
net of income taxes (Note 3) -- 443
-------- --------
9,457 11,506
Treasury stock at cost (Note 16) (3,245) (2,976)
-------- --------
Total shareholders' equity 6,212 8,530
-------- --------
Total liabilities and shareholders' equity $ 10,405 $ 21,971
======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
18
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 22,029 $ 20,344 $ 19,357
Cost of revenues (20,753) (19,949) (18,668)
Selling, general and administrative expenses (Note 20) (2,131) (2,995) (2,672)
Interest expense (134) (156) (93)
Other income (expenses), net 231 132 1,012
Loss on closure of restaurants (Note 17) -- (1,795) --
----------- ----------- -----------
Loss from continuing operations
before income taxes (758) (4,419) (1,064)
Income tax (expense) benefit (Note 13) (318) (591) 148
----------- ----------- -----------
Loss from continuing operations (1,076) (5,010) (916)
Income (loss) from discontinued operations (Note 14) (530) 1,287 1,210
----------- ----------- -----------
Net (loss) income $ (1,606) $ (3,723) $ 294
=========== =========== ===========
Income (loss) per common share:
Continuing operations $ (.44) $ (2.02) $ (.36)
Discontinued operations (.21) .52 .48
----------- ----------- -----------
Net income (loss) per common share $ (.65) $ (1.50) $ .12
=========== =========== ===========
Average number of shares outstanding 2,472,649 2,486,086 2,489,530
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
19
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Treasury Unrealized
Stock Stock holding gains on
--------------------- ---------------------- securities
Number Number Accumulated available for
Amount of shares Amount of shares Deficit sale
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 31,202 3,157,332 $ (2,998) 699,052 $ (16,710) $ --
Net income -- -- -- -- 294 --
Adjustment to treasury stock purchased
-- -- 47 (31,250) -- --
Holding gain on securities available
for sale, net of income taxes
-- -- -- -- -- 1,226
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 31,202 3,157,332 (2,951) 667,802 (16,416) 1,226
Net loss -- -- -- -- (3,723) --
Treasury stock purchased (Note 16) -- -- (25) 8,266 -- --
Holding loss on securities
available for sale, net of -- -- -- -- -- (783)
--------- --------- --------- --------- --------- ---------
income taxes
Balance, December 31, 1996 31,202 3,157,332 (2,976) 676,068 (20,139) 443
Net loss -- -- -- -- (1,606) --
Treasury stock purchased (Note 20) -- -- (269) 103,375 -- --
Holding loss on securities
available for sale, net of -- -- -- -- -- (443)
--------- --------- --------- --------- --------- ---------
income taxes (Note 3)
Balance, December 31, 1997 $ 31,202 3,157,332 $ (3,245) 779,443 $ (21,745) $ --
========= ========= ========= ========= ========= =========
</TABLE>
See Note 16 regarding a one-for-four reverse stock split which occurred in 1996.
The accompanying notes are an integral
part of these consolidated financial statements.
20
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,606) $(3,723) $ 294
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 699 1,020 788
Gain on sale of securities available for sale -- -- (343)
Loss on settlement of receivables from sale of
business 88 99 --
Impairment loss on real estate held for sale 375 -- --
Loss on disposal of restaurants -- 1,795 --
Gain on sale of Mexican subsidiary -- (1,219) --
Loss on sale of real estate subsidiary 916 -- --
Gain on sale of factoring subsidiary (3) -- --
Loss on investment in preferred stock 120 -- --
Loss on securities available for sale 207 -- --
Minority interest in loss from subsidiary (82) (43) (2)
Adjustments and changes in estimates for
receivables related to previously
discontinued businesses -- -- (480)
Loss on sale of property and equipment 92 70 --
Provision for allowance for doubtful accounts 88 416 133
Changes in assets and liabilities (net of changes
related to discontinued operations):
Accounts receivable (152) (94) (62)
Factored accounts receivable, net of reserve (7) 276 1,836
Inventories 15 (6) (17)
Prepaid expenses and other current assets (405) (305) (121)
Other assets 477 (321) (75)
Accounts payable (359) (260) (214)
Accrued employment costs (15) -- --
Foreign tax liability -- 250 --
Other current liabilities, net (673) 205 (1,450)
Liabilities subject to compromise 43 -- --
Deferred income taxes 231 548 3
------- ------- -------
Net cash (used in)
provided by operating activities 49 (1,292) 290
------- ------- -------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
21
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from investing activities:
Changes in restricted cash $ 409 $ 1,358 $ 1,633
Payments received on receivables from sale
of businesses 1,118 1,305 709
Proceeds from sale of securities available for sale -- -- 387
Investment in real estate -- (283) (3,250)
Purchase of property and equipment (466) (1,486) (960)
Net proceeds from sale of:
Mexican subsidiary -- 837 --
Real estate operations 560 -- --
Factoring operations 513 -- --
Property and equipment -- 147 --
Other assets held for sale -- 6 --
Payment for purchase of restaurant assets -- (240) (450)
Investment in preferred stock -- (120) --
Loan to officer (55) (150) --
Repayment of officer loan 55 150 --
Other, net 166 (192) (5)
------- ------- -------
Net cash provided by (used in)
investing activities 2,300 1,332 (1,936)
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings -- 2,659 1,115
Repayments of borrowings (401) (1,949) (247)
Changes in treasury stock (269) (25) 47
------- ------- -------
Net cash (used in) provided by
financing activities (670) 685 915
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,679 725 (731)
Cash and cash equivalents, beginning of year 1,136 411 1,142
------- ------- -------
Cash and cash equivalents, end of year $ 2,815 $ 1,136 $ 411
======= ======= =======
</TABLE>
Supplemental Disclosure of Noncash Investing and Financing Activities
See notes to financial statements for noncash investing and financing
activities.
The accompanying notes are an integral
part of these consolidated financial statements.
22
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies:
Business:
Performance Industries, Inc. (the Company) is the parent company of its
wholly-owned subsidiaries Performance Restaurant Group, Inc.
(restaurant company), Performance Funding Corp. (factoring company),
Performance Camelback Development Corp. (real estate company).
Performance Camelback Development had a 72% ownership interest in
Camelback Plaza Development Corp., L..L.C., an Arizona Limited
Liability Company during 1996 and 1995.
During 1997, Performance Funding Corp., (a factoring company) discontinued
its operations. The Company sold the majority of its factored
receivables to a related corporation (see Note 20). The Company has
accounted for the disposition of these assets as discontinued
operations (see Note 14).
Also during November 1997, Performance Camelback Development Corp. sold
its 72% interest in Camelback Plaza Development Corp., L.L.C. Camelback
Plaza Development Corp., L.L.C. owns and operates a retail and
restaurant property in Phoenix, AZ. The Company has accounted for this
disposition as discontinued operations (see Note 14).
At December 31, 1997, the Company is primarily a restaurant company with
restaurant locations in Arizona and California.
Principles of consolidation:
The consolidated financial statements include the accounts of Performance
Industries, Inc. and its wholly-owned subsidiaries and its majority
owned real estate limited liability company. All significant
intercompany balances and transactions are eliminated in consolidation.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
Fair value of financial instruments:
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
The carrying amount of other financial instruments including accounts
receivable, receivables from sale of business, factored receivables and
current liabilities approximate the fair value of these instruments
because of the short-term nature of the instruments.
23
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
The carrying amount of long-term debt approximates fair value because the
interest rates on debt are comparable to current market rates on debt
with similar terms.
Advertising:
Advertising costs are charged to operations as incurred. The Company
incurred advertising expense of approximately $334,000, $408,000 and
$425,000 during 1997, 1996 and 1995, respectively.
Accounting estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
The Company's significant estimates relate to the realizability of certain
receivables, valuation of net deferred tax assets, estimates of
liabilities subject to compromise, and certain litigation
contingencies.
Inventory:
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory consists of food
and beverages at restaurant locations.
Property and equipment:
Property and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives;
buildings, 35 years; machinery and equipment, furniture and fixtures
and vehicles, 5 to 10 years; land improvements, 10 years. Leasehold
improvements are depreciated over the term of the related lease.
Restaurant equipment available for sale:
Restaurant equipment available for sale represents assets removed from
closed restaurants and is reported at the lower of carrying amount or
fair value less costs of disposal.
24
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Securities available for sale:
Securities available for sale are reported at fair value. Unrealized
holding gains, net of income tax, on securities available for sale are
reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Fair values for securities available for sale are determined using quoted
market prices.
Income taxes:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax benefit (expense) is the tax
receivable (payable) for the period and the change during the period in
deferred tax assets and liabilities excluding the tax effect on
unrealized holding gains on securities available for sale.
Investment in real estate:
Investment in real estate and real estate held for sale represents the
cost of certain real estate held for future development or sale.
Income (loss) per common share:
Income (loss) per common share is based upon the weighted average number
of shares outstanding. The assumed exercise of employee stock options
does not result in material dilution.
Reclassifications:
Certain reclassifications have been made to the financial statements for
1996 and 1995 to conform to the financial statement classifications for
1997.
25
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Restricted cash:
In November 1996, the Company entered into an agreement with the minority
shareholders in the Camelback Plaza Development, L.L.C. for the rights
to purchase the Company's interest in the L.L.C. The agreement
contained a provision that restricted the use of a portion of the
proceeds from the refinancing of the real estate project. The cash was
used to fund operating expenses of the project. The restrictions were
entirely released on April 1, 1997.
3. Securities available for sale:
During 1993, the Company invested $250,000 in the common stock of a
start-up airline company.
In 1995, a portion of the stock became marketable as a result of a public
stock offering by the airline. The common stock that was marketable was
sold for a gain of approximately $343,000 in 1995. The remaining
securities became available for sale in May 1997 subject to certain SEC
limitations.
During 1997, the airline filed petitions for relief under Chapter 11 of
the Federal bankruptcy laws. Subsequent to this filing, the airline
converted the filing to a Chapter 7 liquidation. As a result, the
Company realized a loss on the original investment in the common stock
of approximately $207,000 during 1997, which is included in other
income (expense) in the accompanying consolidated statements of
operations. Also, as a result of this liquidation, unrealized holding
gains associated with the airline stock of $515,000 were eliminated in
1997.
4. Receivables from sale of businesses:
Receivables from sale of businesses consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note receivable, corporation, interest at 10%,
principal and interest payments due in monthly
installments of approximately $120,000 through
January 1998, secured by stock of former Mexican
subsidiary. The corporation has currently suspended
payments on the note until clarification of a
certain lease agreement related to real estate the
corporation acquired in the sale is resolved.
Management believes that the note will be paid in
full in 1998. (See Note 6)
$ 269 $1,475
</TABLE>
26
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Receivables from sale of businesses, continued:
1997 1996
------- -------
Notes settled during 1997 -- 123
------- -------
269 1,598
Less allowance for doubtful accounts -- (123)
------- -------
269 1,475
Less current portion (269) (1,356)
------- -------
$ -- $ 119
======= =======
5. Allowances for doubtful accounts:
The changes in allowances for doubtful accounts are as follows (in
thousands):
1997 1996 1995
------- ------- -------
Balance at beginning of year $ 576 $ 514 $ 1,016
Additions charged to cost and expenses 88 416 133
Reduction of estimated allowances from
discontinued operations -- -- (480)
Accounts written off (163) (354) (163)
Reduction of allowance credited to costs
and expenses (204) -- --
------- ------- -------
Balance at end of year $ 297 $ 576 $ 506
======= ======= =======
The allowances for doubtful accounts include allowances for accounts and
other receivables, receivables from sale of businesses, and factored
accounts receivable.
27
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate:
Investment in real estate included in the 1997 and 1996 consolidated
balance sheets is as follows:
1997 1996
------- -------
Rental real estate $ -- $ 8,751
Less accumulated depreciation -- (430)
------- -------
-- 8,321
Real estate held for sale 785 1,160
------- -------
$ 785 $ 9,481
======= =======
Summaries of real estate transactions and related accumulated
depreciation are as follows (in thousands):
Real estate: 1997 1996
-------- --------
Balance at beginning of year $ 9,911 $ 12,149
-------- --------
Additions during the year:
Ground lease fees -- 99
Tenant improvements -- 291
-------- --------
Total additions -- 390
-------- --------
9,911 12,539
Reductions during the year:
Cost of real estate sold (8,735) (2,619)
Impairment loss (375) --
Other (16) (9)
-------- --------
Total reductions (9,126) (2,628)
-------- --------
Balance at end of year $ 785 $ 9,911
======== ========
Accumulated depreciation: 1997 1996 1995
-------- -------- --------
Balance at beginning of year $ 430 $ 1,076 $ 862
Additions during the year:
Depreciation 244 320 214
Reductions during the year:
Disposals (674) (966) --
-------- -------- --------
Balance at end of year $ -- $ 430 $ 1,076
======== ======== ========
28
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate, continued:
Real estate held for sale as of December 31, 1997 represents land in
Ixtapa, Mexico. The Company plans to sell the land and has discontinued
making payments on a note payable secured by the land (see Note 9).
Because the Company is in default on the note, the carrying cost of the
land has been reduced to the balance of the note plus accrued interest.
The impairment loss included in other income (expense) in the
accompanying December 31, 1997 consolidated statement of operations is
approximately $375,000.
The Company's real estate subsidiary previously owned a 72% interest in a
retail and restaurant project in Phoenix, Arizona. The subsidiary
completed the project in 1995 and sold its interest in the project
during 1997.
During 1996, the Company sold its stock in its Mexican subsidiary. The
subsidiary held an ownership interest in rental real estate in Mexico.
The operating income and losses and the gains and losses from the sale of
its real estate operations are included in discontinued operations in
the accompanying consolidated statements of operations (see Note 14).
7. Property and equipment:
The components of property and equipment consist of the following (in
thousands):
1997 1996
------- -------
Restaurant equipment $ 1,445 $ 1,315
Furniture and fixtures 692 678
Transportation equipment 438 400
Leasehold improvements 1,875 1,783
Equipment held under capital leases 219 219
------- -------
4,669 4,395
Less accumulated depreciation (1,912) (1,311)
------- -------
$ 2,757 $ 3,084
======= =======
29
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Other assets:
Other assets consist of the following (in thousands):
1997 1996
------ ------
Classic automobiles $ 206 $ 206
Deposits and other 136 314
Investment in preferred stock -- 120
Lease incentives, net of accumulated
amortization of $9 for 1996 (Note 14) -- 117
Liquor licenses 191 191
Loan acquisition costs, net of accumulated
amortization of $87 for 1996 (Note 14) -- 360
Restaurant small wares 404 404
Restaurant equipment available for sale 340 330
------ ------
$1,277 $2,042
====== ======
During 1996, the Company invested $120,000 in the preferred stock of a
closely held regional airline. The investment was written off during
1997 as the airline ceased operations and filed petitions for relief
under Chapter 11 of the Federal bankruptcy laws. The loss is included in
other income (expenses) on the accompanying consolidated statements of
operations.
9. Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Notepayable, Mexican corporation, with interest at prime plus 3-7/8%,
with monthly principal payments of $6,000 plus interest through
December 2006, secured by real estate (see Note 6). The company has
discontinued making the required payments on this note. As a result,
the entire note balance has been classified as current
$ 708 $ 720
Unsecured note payable, State of California, with interest at 6%, with
monthly principal payments of $25,000 plus interest through June
1999
450 750
Capital lease obligations (Note 12) 148 187
Notes settled during 1997 (Note 14) -- 7,293
------- -------
1,306 8,950
Less current portion (1,051) (547)
------- -------
$ 255 $ 8,403
======= =======
</TABLE>
30
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-term debt and capital lease obligations, continued:
Cash paid for interest was approximately $102,000, $818,000, and $700,000
during 1997, 1996 and 1995, respectively.
Approximate future maturities of long-term debt, excluding capital lease
obligations, for the next five years as of December 31, 1997 are as
follows (in thousands):
1998 $ 1,008
1999 150
10. Accrued expenses and other current liabilities:
At December 31, 1997 and 1996, the components of accrued expenses and
other current liabilities consist of the following (in thousands):
1997 1996
------ ------
Gift certificates and advance
customer deposits $ 106 $ 86
Litigation settlements and estimated claims (Note 18) 117 619
Product liability costs 66 85
Sales taxes payable 145 133
Other accruals 232 416
------ ------
$ 666 $1,339
====== ======
11. Liabilities subject to compromise:
From April 21, 1991 through May 4, 1993, Performance Industries, Inc.
(formerly Mr. Gasket Company) operated as debtor-in-possession under
the supervision of the Bankruptcy Court. In Chapter 11, the
shareholders' interests and substantially all liabilities as of the
filing date were subject to compromise.
Additions or deletions to the claims (liabilities subject to compromise)
may arise from the determination by the Bankruptcy Court or agreement
by parties in interest of allowed claims for contingencies and disputed
collateral and amounts. The Company is in the process of negotiating
settlements of the final claims outstanding. Liabilities subject to
compromise at December 31, 1997 consist primarily of environmental
remediation and tax liabilities.
31
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases:
As lessee:
---------
The Company's restaurant subsidiary leases ten restaurant locations under
operating leases including one restaurant location which closed during
1996. These leases expire at various dates through 2010 and require
aggregate annual payments of approximately $1,400,000. The leases also
contain provisions for contingent rental payments ranging from 3% to 9%
of sales. During 1997 and 1996, the restaurants incurred contingent
rentals of approximately $331,000 and $358,000, respectively.
The Company's restaurant subsidiary also leases certain equipment under
capital leases. The leases require aggregate monthly payments of
approximately $4,600 through May 2001.
The Company and its subsidiaries also lease their office space and two
warehouse facilities under operating leases. These leases require
aggregate monthly payments of approximately $9,000 and expire at
various dates through 2000.
Future minimum lease payments for capital leases and noncancelable
operating leases as of December 31, 1997 are as follows (in thousands):
Capital Operating
leases leases
------ ------
1998 $ 56 $ 1,489
1999 56 1,329
2000 47 1,183
2001 9 1,134
2002 - 1,123
Thereafter - 3,713
------- -------
168 $ 9,971
=======
Less amount representing interest (20)
---
Present value of future minimum lease
payments on capital leases $ 148
=======
Rent expense for operating leases was approximately $1,862,000, $1,818,000
and $1,723,000 for 1997, 1996 and 1995, respectively.
32
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases, continued:
Subsequent to December 31, 1997, the Company has subleased three of its
restaurant locations to unrelated restaurant companies in California
and Nevada (see Note 21). The subleases provide for monthly payments of
approximately $45,000 beginning in February and April 1998 and expire
from January 2000 through December 2005. Approximate minimum future
rentals to be received on noncancelable subleases for each of the next
five years are as follows:
1998 $ 442,000
1999 540,000
2000 210,000
2001 180,000
2002 180,000
Thereafter 525,000
----------
Total minimum future rentals $2,077,000
==========
13. Income taxes:
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes as of January 1, 1995. There was no
cumulative effect on prior years from the change in accounting for
income taxes.
The provision for income tax expense consists of the following (in
thousands):
1997 1996 1995
----- ----- -----
Federal:
Current $-- $-- $--
Deferred (231) (548) (3)
Foreign -- (250) (16)
State and local -- (2) (2)
----- ----- -----
Total income tax expense $(231) $(800) $ (21)
===== ===== =====
Allocated to:
Continuing operations $(318) $(591) $ 148
Discontinued operations 87 (209) (169)
----- ----- -----
$(231) $(800) $ (21)
===== ===== =====
Foreign income taxes represent an estimate of the Mexican income tax on
the sale of the Company's Mexican subsidiary in 1996.
33
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
Thefollowing is a reconciliation between the income tax (expense) benefit
from continuing operations and income taxes calculated at the statutory
federal income tax rate of 34% for continuing operations (in
thousands):
1997 1996 1995
----- ------- -----
Income tax benefit at statutory rate $ 247 $ 1,502 $ 362
Foreign and state income taxes -- (252) (18)
Tax effect of valuation allowance
on deferred tax assets (212) (1,841) (202)
Reduction of net operating loss and tax
credit carryforwards net of valuation
allowance (353) -- --
Other -- -- 6
----- ------- -----
Income tax (expense) benefit from
continuing operations $(318) $ (591) $ 148
===== ======= =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carry forwards. Significant components of
the Company's net deferred tax assets consist of the following (in
thousands):
1997 1996
-------- --------
Current deferred tax assets (liabilities):
Reserves not currently deductible $ 373 $ 332
Unrealized holding losses (gains) on investment 82 (72)
-------- --------
455 260
Valuation allowance (391) (260)
-------- --------
Net current deferred tax asset $ 64 $ --
======== ========
Non-current deferred tax assets (liabilities):
Difference between book and tax bases of assets $ 703 $ 255
Contribution carryforwards 27 24
Net operating loss carryforwards 7,971 9,477
General business credit carryforwards 66 414
-------- --------
8,767 10,170
Valuation allowance (7,540) (8,710)
-------- --------
Net non-current deferred tax asset $ 1,227 $ 1,460
======== ========
34
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
The deferred income tax liability related to unrealized holding gains on
securities available for sale decreased by $72,000 during 1997 and a
deferred tax asset was recognized as a result of the loss recognized on
the Company's investment in securities available for sale.
The Company has recorded a net deferred tax asset as of December 31, 1997
of $1,291,000 primarily reflecting the benefits of net operating loss
carryforwards. Realization is dependent upon generating sufficient
taxable income prior to the expiration of the carryforwards. Although
realization is not assured, management believes it is more likely than
not that all of the net deferred tax asset will be realized. The amount
of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. During 1997, the Company lost the
benefit of a portion of its net operating loss carryforwards and
general business credits due to reaching the expiration date of the
carryforwards.
The Company has available at December 31, 1997, federal net operating loss
carryforwards and unused general business credits, which may provide
future tax benefits as follows (in thousands):
Unused Unused federal
federal net general
Year of operating loss business
expiration carryforwards credits
---------- ------------- -------
2003 $ -- $ 37
2005 2,585 --
2006 3,866 --
2007 7,015 --
2008 2,967 --
2009 3,917 29
2010 1,231 30
2011 489 --
2012 986
------- -----
$23,056 $ 96
======= =====
The Company has net operating carryforwards for state income tax purposes
of approximately $4,000,000 which expire through 2002.
35
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Discontinued operations:
Discontinued operations:
During 1997, the Company sold its real estate operations and its factoring
business. As a result, net sales, costs of sales, income and expenses
related to those segments have been recorded as discontinued operations
in the accompanying consolidated statements of operations. The sales of
the businesses are described below.
Real estate operations:
In November 1997, the Company sold its 72% interest in Camelback Plaza
Development Corp., L.L.C., to the minority shareholders. The net cash
sales price for its 72% interest was $709,000. The significant assets
disposed of by the Company for which the subsidiary held an ownership
interest included rental estate with a carrying value of approximately
$8,000,000. Along with the real estate acquired, the associated note
payable of approximately $7,200,000 was assumed by the buyer.
Camelback Plaza Development had gross rental revenue of approximately
$1,142,000 and $801,000 for the years ending December 31, 1996 and
1995, respectively. For the eleven months prior to the sale in 1997,
Camelback Plaza Development had gross rental revenues of $934,000.
Percentage rental income earned was approximately $84,000, $173,000 and
$80,000 for 1997, 1996 and 1995, respectively. Any income or loss from
operations is included in income (loss) from discontinued operations.
During 1996, the Company sold its stock in its Mexican subsidiary,
Fabricaciones Metalicas Mexicanas, S. A. (FMMSA). The total sales price
for the shares was $3,000,000, including $1,000,000 in cash and a note
receivable of $2,000,000 (See Note 4). The significant assets disposed
of by the Company for which the subsidiary held an ownership interest
included rental real estate with a carrying value of approximately
$1,500,000. The gain on the sale, net of selling costs, was
approximately $1,200,000 for 1996 and is included in income (loss) from
discontinued operations.
FMMSA had gross rental revenues of approximately $524,000 and net income
of approximately $195,000 for the year ending December 31, 1995. For
the seven months prior to the sale in 1996, FMMSA had gross rental
revenue of approximately $384,000 and income from operations before
income taxes of approximately $219,000. The income from operations is
included in income (loss) from discontinued operations.
36
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Discontinued operations, continued:
Factoring:
In August 1997, the Company discontinued operating its factoring
subsidiary and sold substantially all of the net assets of its
factoring business, including factored accounts receivable, equipment
and intangible assets, to a related company, Performance Funding,
L.L.C. (see Note 20). The buyer also assumed the obligations of the
factoring business upon sale. The net selling price was approximately
$513,000 in the form of cash. At December 31, 1997, factored accounts
receivables remaining were approximately $260,000, net of an allowance
for doubtful accounts of approximately $345,000. The buyer has agreed
to collect the remaining receivables for a 5% collection fee based on
payments collected.
Revenues of the factoring operation were approximately $508,000 and
$1,024,000 for 1996 and 1995, respectively. Revenues for the eight
months prior to the sale in 1997 were approximately $400,000. The
income (loss) from the operation of the factoring business is included
in income (loss) from discontinued operations.
The caption "Income (loss) from discontinued operations" in the
accompanying consolidated statements of operations for the years ended
December 31, consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
(Loss) income from operations of real estate
subsidiaries, net of income tax $ (118,000) $ 360,000 $ 191,000
(Loss) gain on sales of real estate subsidiaries,
net of income tax (670,000) 1,053,000 --
Income (loss) from operations of
factoring subsidiaries, net of income tax 255,000 (126,000) 581,000
Gain on the sale of factoring operations 3,000 -- --
Adjustments to reserves from previously
discontinued automotive operations net
of income tax -- -- 438,000
----------- ----------- ----------
$ (530,000) $ 1,287,000 $1,210,000
=========== =========== ==========
</TABLE>
37
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Stock option plans:
The Company has a stock option plan which provides for a maximum of
500,000 shares of common stock that may be issued to employees,
directors, or consultants of the Company and its subsidiaries.
The option price for options granted to eligible employees must be at
least 100% of the fair market value of the stock at the time the
options are granted. The option price for options granted to
non-employees is determined by the Board of Directors. Options granted
to employees are not exercisable after ten years. Restrictions on the
time to exercise options given to non-employees are set forth in the
options agreements.
At December 31, 1997, all outstanding options were exercisable and 62,500
shares were available for future grant. The weighted average remaining
contractual life of the outstanding options is approximately nine
years.
A summary of transactions with respect to the stock option plan follows:
Number Range of Weighted average
of shares exercise prices exercise price
-------- --------------- --------------
Balance at January 1, 1997 307,500 $.88 to $.96 $ .90
Issued 167,500 $.88 to $.96 $ .89
Exercised --
Cancelled (37,500) $.88 $ .88
--------
Balance at December 31, 1997 437,500 $.88 to $.96 $ .90
========
16. Reverse stock split:
During 1996, the Company approved a one-for-four reverse stock split of
its issued and outstanding common stock. In conjunction with the
reverse stock split, the Company also approved an offer to purchase
shares of the Company's stock held by shareholders with holdings of
less than 100 shares. The Company purchased 8,266 treasury shares in
1996 as a result of the offer.
38
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Restaurant closures:
During 1996, the Company opened a new restaurant in Las Vegas, Nevada. The
Company incurred total costs of approximately $1,500,000 related to the
restaurant, including leasehold improvements, restaurant equipment and
pre-opening costs. The Company also has a lease obligation for the
restaurant building which requires annual payments totalling
approximately $180,000 per year through December 2005. Operations of
the restaurant included sales of approximately $809,000 and losses of
approximately $360,000 during 1996. In October 1996, management
determined that the location could not generate sufficient revenue to
become a profitable operation and closed the restaurant. Accordingly,
the Company recorded a loss resulting from the closure of the
restaurant of approximately $1,255,000 in 1996. At December 31, 1996,
management estimated future costs of the disposal for additional rental
liabilities to be $80,000. These costs are included in the recorded
loss on closure of restaurants and in accrued expenses and other
current liabilities on the accompanying consolidated balance sheet for
1996. Additional costs incurred during 1997 were approximately $100,000
related to the Las Vegas restaurant and are included in selling,
general and administrative expenses in the accompanying consolidated
statement of operations. Management does not anticipate significant
costs of disposal at December 31, 1997 (see Note 21).
During 1996, the Company also closed a restaurant in San Ramon, California
due to the inability of the restaurant operation to generate positive
cash flow. Operations of the restaurant included sales of approximately
$925,000 and losses of approximately $144,000 during 1996. The Company
recorded a loss related to the closure of the restaurant of
approximately $540,000 in 1996. Sales from the San Ramon restaurant
were approximately $2,116,000 during 1995. Losses from operations of
the restaurant were approximately $9,000 during 1995. During 1997, the
Company sold its interest in the restaurant property for $50,000 and
the buyer assumed the lease commitment related to the property.
18. Litigation:
In November 1993, certain shareholders dissented from the sale of one of
the Company's automotive products business. As a result, the company
filed an action to obtain a determination of the "fair cash value" of
shares held by those shareholders as of November 28, 1993, as if the
sale had not occurred. The Company settled with the majority of the
dissenting shareholders during 1995 for $.75 a share. The remaining
dissenting shareholders, who hold 461,500 shares, are entitled to
payment of "fair cash value" of the shares within 30 days of the
determination of the value by the court.
During 1993, two of the remaining dissenting shareholders filed an action
against the Company and certain current and former directors, alleging
that certain actions taken by the Company and management have lowered
the value of the Company's stock. Management is aggressively defending
this action and does not currently expect to incur any material
liability at its conclusion.
39
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Litigation, continued:
In another matter, an insurance carrier has filed an action against the
Company alleging that Company representatives failed to notify the
insurance carrier of a product liability claim in a timely manner. The
accident occurred in 1990 and the carrier voluntarily paid out
approximately $1,700,000 in benefits to settle the claim in January
1996. Management believes the action to be without merit and intends to
vigorously defend the suit.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business, including product liability claims
and employment disputes.
Accrued liabilities at December 31, 1997, include approximately $100,000
for potential litigation settlements on various claims (see Note 10).
In the opinion of management, any additional liabilities related to
legal actions will not have a material adverse effect on the Company's
consolidated financial condition.
19. Commitments and contingencies:
An investigation of environmental matters related to facilities and
property previously owned and leased by the Company was performed
during 1992 to determine contingencies that would affect the Company's
emergence from Chapter 11. Certain reports received by the Company
identified areas of environmental contamination and potential
environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and
governmental agencies were notified by the Company of the related
possible liabilities. In addition, the Company notified its insurance
carriers of potential claims under its general liability and property
insurance coverage from prior years.
Locations reviewed for potential environmental liability included the
following:
Manufacturing facility in California:
This facility housed the manufacturing plant of a wheel business formerly
owned by the Company. All assets at this facility were sold and the
buyer vacated the premises in a prior year.
An environmental survey was conducted in the fall of 1991. Two areas for
further investigation were identified. Further investigation in the
spring of 1992 disclosed ground contamination and possible seepage into
groundwater. Management believed the contamination to have existed
prior to its purchase of the business in 1982 and has notified its
predecessor-in-interest. The Company has accrued the estimated minimum
remediation costs of approximately $500,000. These costs are included
in liabilities subject to compromise in the accompanying consolidated
balance sheets.
40
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. Commitments and contingencies, continued:
All appropriate county, state and federal agencies were notified regarding
contamination at this site. To management's knowledge, no response was
made by any notified governmental agency nor was the facility inspected
by any such agency. However, the Company may, at a later date, be
ordered to undertake further testing and/or remediation at the
location.
Warehousing and office facility in Ohio:
In 1990, potential contamination was discovered at this location.
Consultants were retained to perform testing and investigation of the
site to determine the extent of the contamination. In compliance with
bankruptcy statutes, rules and regulations regarding the
dischargeability of claims, in January 1993, the Company notified the
Ohio Environmental Protection Agency (EPA) of contamination at the
site. Environmental studies performed determined that the contamination
is confined to the site with no evidence of migration to groundwater or
surrounding properties. Management estimated the costs of remediation
to be as much as $5,600,000. The Company believed that a former
owner/operator of the site, which is a Fortune 500 company, caused the
contamination. The Company negotiated an agreement with the former
owner/operator regarding indemnification for the costs of remediation.
The agreement required that remediation costs be shared by the Company,
the Fortune 500 company and the successor to the Company as owner of
the property. The Company's responsibility with respect to the
agreement was to pay remediation costs and to guarantee payment of
costs by the successor related to certain clean-up areas. The Company's
continuing obligation is the guarantee of the payment by the current
owners of the final clean-up costs.
20. Related party transactions:
Howard Gardner Consultants received $30,000 in 1996 from the Company for
consulting services on financial and general business matters. Howard
B. Gardner is a former officer and director of the Company. The fees
are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations.
A Director of the Company earned a 3% commission of $90,000 from the sale
of the Company's stock in its Mexican subsidiary during 1996. The
commission is included in selling, general and administrative expenses
in the accompanying consolidated statement of operations. Of the
commission earned, $45,000 was paid during 1996. During 1997, the
Company received a discount of $4,500 on the commission. The remaining
balance of $37,500 was paid during 1997.
41
<PAGE>
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Related party transactions, continued:
During 1997, the Company approved a short term loan of $55,000 to the
principle shareholder. The loan was repaid to the Company prior to
December 31, 1997. During 1996, the Company approved a short term loan
of $150,000 to the principle shareholder, which was repaid to the
Company during 1996.
As discussed in Note 14 the Company sold the majority of its assets of
Performance Funding Corp to Performance Funding, L.L.C., for a gain of
approximately $3,000. Members of Performance Funding L.L.C. include the
Chairman and President of the Company, and the Vice President of
Operations and CFO. Additionally, Performance Funding, L.L.C. is
subleasing an office from the Company on a month-to-month basis for
$180 a month.
During 1997, the Company purchased approximately 49,000 shares of the
Company's stock from a Director of the Company for $2.60 per share.
21. Subsequent events:
In January 1998, the Company entered into a lease agreement with an
individual to sublease two of the Company's restaurants in California
for $30,000 per month through January 2000. At the end of the sublease
term, the lessee has the option to purchase the assets of each
restaurant for $250,000 per restaurant. The sublease includes all of
the operating assets of the restaurants, as well as the restaurant
name. The lessee is responsible for all operating expenses, including
the base and percentage rent of the original lease. The Company would
remain liable upon default by the lessee.
In January, 1998, the Company entered into an agreement to assign the
lease of its former Las Vegas restaurant location to a restaurant
company in Nevada, effective April 1, 1998. The Company remains a
guarantor of the lease.
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