<PAGE>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission file number: 0-16808
SIXX HOLDINGS, INCORPORATED
(Name of small business issuer in its charter)
DELAWARE 75-2222883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 CRESCENT COURT, SUITE 1630
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (214) 855-8800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $.01 par value per share
Check 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 past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best or registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Revenues for the year ended December 31, 1995 were $5,796,000.
As of March 1, 1996, the registrant had issued and outstanding 10,881,356
shares of the Company's common stock, $.01 par value.
The aggregate market value of the approximately 18% of the voting stock
held by non-affiliates of the registrant, based on the closing price of such
stock on March 1, 1996, was approximately $551,308. For purposes of this
computation, all executive officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
an admission that such executive officers, directors and 10% beneficial owners
are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be furnished to
shareholders in connection with the Annual Meeting of Stockholders to be held
May 14, 1996, are incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format Yes [ ] No [X]
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Sixx Holdings, Incorporated (formerly "Yates Unit, Inc."), a Delaware
corporation ("Sixx" or the "Company"), was organized in January 1988 to hold the
interests of Caspen Oil, Inc. (formerly Summit Energy, Inc.) ("Caspen") in the
Yates Field Unit. The assets and operations were transferred to Sixx on March
3, 1988, and, after settlement of certain litigation in August 1989, consisted
primarily of cash and cash equivalents.
On April 25, 1994, Patrizio Restaurant, Inc., a Texas corporation
("Patrizio I") and Patrizio North, Inc., a Texas corporation ("Patrizio II"),
were merged (the "Merger") with and into Patrizio Acquisition, Inc., a Texas
corporation and wholly owned subsidiary of Sixx Holdings, Incorporated, a
Delaware corporation (the "Company"). At the effective time of the Merger, the
name of Patrizio Acquisition, Inc. was changed to Patrizio Restaurant, Inc.
Prior to the Merger, Jack D. Knox, the President, Chief Executive Officer
and a Director of the Company, owned 100% of the outstanding capital stock of
Patrizio I and Patrizio II. Pursuant to the terms of the Agreement and Plan of
Merger (the "Merger Agreement"), Mr. Knox exchanged the outstanding shares of
capital stock of Patrizio I and Patrizio II for, in the aggregate, approximately
$3.0 million in cash and 6,163,934 shares of the Company's common stock, par
value $.01 per share (the "Common Stock"). Of the $3.0 million, approximately
$2,365,600 of the amount was paid to Mr. Knox to reimburse him for advances he
had made personally to fund the construction of Patrizio II. The consideration
received by Mr. Knox pursuant to the Merger Agreement was determined by
negotiations between the parties, and is supported by appraisals prepared by
three (3) separate independent business valuation companies and a fairness
opinion prepared by one (1) of the valuation companies. The cash portion of the
purchase price paid to Mr. Knox in the Merger was funded from existing cash
balances.
Prior to the Merger, Patrizio I owned and operated an upscale Italian food
restaurant in Dallas, Texas, and Patrizio II owned and operated a similar
restaurant in Plano, Texas. All assets acquired in the Merger, which include the
two existing restaurants, the "Patrizio" concept, design and motif, and other
assets used in the day-to-day operations of the two existing restaurants, will
continue to be utilized in operating the existing two restaurants.
PATRIZIO RESTAURANT, INC.
The Company's primary business is operating full service restaurants under
the name "Patrizio" that offer moderately priced, high quality, Italian-style
cuisine and alcoholic beverages. The Company continually evaluates and revises
its menu to improve its products. The restaurants are open daily for lunch and
dinner and offer entrees that generally range from $4.90 to $8.77. Alcoholic
beverages, which are served primarily with meals (as opposed to bar service)
generated approximately 25% and 27% of all restaurant revenues for 1995 and
1994, respectively. Patrizio I opened September 1989 and seats approximately 235
people including approximately 75 people outdoors, weather permitting, and is
approximately 4,268 square feet. Patrizio II opened March 1994 and seats
approximately 320 people including approximately 120 people outdoors, weather
permitting, and is approximately 6,288 square feet. The Company utilizes local
advertising, which emphasizes the restaurants as New York style "trattorias"
featuring eighteenth century Italian paintings, antique European bar and
beautiful old world rugs with everything prepared with the freshest of
ingredients.
NEW RESTAURANT CONSTRUCTION
The Company anticipates opening additional Patrizio restaurants in other
cities sometime in the future using the same "Patrizio" concept, design and
motif as the two existing restaurants, but at this time has not identified any
specific additional locations.
SERVICE MARKS
The Company has obtained federal registration of the service marks
"Patrizio" and the Patrizio design. These service marks are of material
importance to the operation of the Company's business.
2
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PROPOSED REVERSE SPLIT
The Company has called a Special Meeting of Stockholders to be held
March 15, 1996, for the purpose of approving a one-for-eight reverse split of
its Common Stock and other amendments to the Company's Certificate of
Incorporation. The proposals must be approved by the affirmative vote of at
least 80% of the outstanding shares of Common Stock. Because one stockholder
holds more than 80% of the Common Stock and has informed the Company that he
will vote his shares in favor of each proposal, approval of the proposals is
assured. The reverse split and the other amendments will become effective
with the filing of a certificate of amendment with the State of Delaware.
The Company anticipates that the filing will be made on March 15, 1996.
Approval of the one-for-eight reverse split of the Company's Common Stock
will result in the Company giving retro-active effect of such stock split in
future financial statement disclosures.
EMPLOYEES
As of December 31, 1995, the Company employed seven persons in its
corporate headquarters and approximately 160 in its restaurants. None of the
employees are covered by collective bargaining agreements and the Company has
never experienced a work stoppage, strike or labor dispute. The Company
considers its employee relations to be good.
COMPETITION
The restaurant business is highly competitive and competition among
restaurants serving Italian cuisine is increasing. The Company believes that the
principal competitive factors in its restaurant business are quality, value,
service, atmosphere, and location. The Company believes that its competitive
position is enhanced by its quality food, up-scale atmosphere and moderately
priced menu.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state, and local laws affecting
its business. Many stringent and varied requirements of local governmental
bodies with respect to zoning, land use, and environmental factors have
increased and can be expected to continue to increase both the cost of and the
time required for constructing new restaurants as well as the cost of operating
Company restaurants. The Company's restaurants are subject to various health,
sanitation, and safety standards and are also subject to state and local
licensing and regulation with respect to the service of alcoholic beverages. The
service of alcoholic beverages is material to the business of the Company. The
failure to receive or retain, or a delay in obtaining, a liquor license in a
particular location could adversely affect the Company's operations in that
location. Liquor licenses must be renewed annually. The Company has not
encountered any significant problems relating to alcoholic beverage licenses and
permits to date.
The Company may be subject in certain states to "dram-shop" statutes, which
may establish liability for improper alcoholic beverage service. The Company
carries liquor liability coverage as part of its existing comprehensive general
liability insurance.
The Company is also subject to state and federal labor laws. These include
the Fair Labor Standards Act, which governs such matters as minimum wages,
overtime, and other working conditions; the Immigration and Naturalization Act,
which governs employee citizenship requirements, and the Americans with
Disabilities Act, which governs non-discriminating employment practices and
reasonable accommodations for disabled persons, both employees and customers. A
significant portion of the Company's food service personnel are paid at rates
related to the federal minimum wage; and accordingly, increases in the minimum
wages increase the Company's labor costs. The federal minimum wage per hour was
increased from $2.09 to $2.13 for service personnel and from $3.80 to $4.25 for
all other hourly employees in April 1991.
Effective November 3, 1990, Patrizio I, and on October 21, 1993, Patrizio
II, elected to become non-subscribers of the Texas Workers' Compensation Act.
Upon this election, excess liability insurance was acquired. Indications are
that this election has been favorable; however, the Texas Workers' Compensation
Act has undergone certain favorable reforms, with further changes expected.
Management intends to review this election periodically.
3
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ITEM 2. DESCRIPTION OF PROPERTIES
As of December 31, 1995, the Company owned two restaurants, each located in
a strip shopping center. The Patrizio I lease expires in 1998 and the Patrizio
II lease expires in 2003 excluding renewal options not yet exercised. The leases
provide for rentals generally competitive with rates in the same area. The
Company's corporate office is located at the Crescent Court, with its lease
expiring in 1998 excluding renewal options not yet exercised.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock began trading in the over-the-counter market and
is quoted on the National Association of Securities Dealers Automated Quotation
System (NASDAQ) under the symbol "SIXX." The following table sets forth the
high and low closing bid prices for the Common Stock of the Company as reported
in the consolidated transaction reporting system for the calendar periods
indicated. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1995: HIGH BID LOW BID
<S> <C> <C>
First Quarter 9/16 3/8
Second Quarter 13/16 3/8
Third Quarter 11/16 1/2
Fourth Quarter 1/2 1/4
1994:
First Quarter 3/4 11/16
Second Quarter 1-7/16 11/16
Third Quarter 1-1/4 11/16
Fourth Quarter 1-1/16 9/16
--------------------------------------------------------------------------
</TABLE>
As of March 1, 1996, there were approximately 2,200 holders of record of
the Company's Common Stock. The Company has not paid cash dividends and has no
plans to pay dividends at the present time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Prior to April 25, 1994, the Company's assets consisted primarily of cash
and cash equivalents. On that date, Patrizio I and Patrizio II were merged with
and into a subsidiary of the Company in exchange for the payment by the Company
of approximately $3.0 million in cash and 6,163,934 shares of the Company's
common stock. Prior to the Merger, Patrizio I owned and operated an upscale
Italian food restaurant in Dallas, Texas and Patrizio II owned and operated a
similar restaurant in Plano, Texas. All assets acquired in the Merger, which
include the two existing restaurants, the "Patrizio" concept, design and motif,
and other assets used in the day-to-day operations of the two existing
restaurants, are utilized in operating the existing two restaurants. Prior to
the Merger, Jack D. Knox, the chairman, president, and a director of the
Company, owned 100% of the outstanding
4
<PAGE>
capital stock of Patrizio I and Patrizio II and approximately 51% of the
Company's outstanding common stock. As a result of the common control of
entities, which occurred effective January 1, 1994, the Merger was treated in
a manner similar to a pooling of interests for financial accounting purposes.
Accordingly, the assets acquired and liabilities assumed were recorded at
their historical costs and the results of operations of Patrizio I and
Patrizio II are consolidated from the effective date at which common control
was established. Thus, the Company's financial position and results of
operations as of and for the year ended December 31, 1994 present the
consolidated financial information of the Company and its subsidiaries as if
the Merger occurred January 1, 1994.
CAPITAL RESOURCES AND LIQUIDITY:
Since 1990, the Company reviewed numerous opportunities to acquire an
operating business utilizing its cash and cash equivalents. As described
elsewhere in this document, the Company acquired the design and concept rights
of Patrizio and two Patrizio Italian-themed restaurants effective April 25,
1994. This transaction utilized approximately $2,967,700 of the Company's cash
and short-term investments which totaled approximately $3,594,100 at March 31,
1994. As of December 31, 1995, $359,600 is payable to Mr. Knox for advances
made to the Company. In addition to the cash consideration, the Company issued
6,163,934 shares of common stock to Mr. Knox.
As of December 31, 1995, the Company's cash and short-term investments were
approximately $99,200. Management believes that sales at the current annual
levels will provide sufficient cash flow to fund operations at existing
restaurants for the foreseeable future, assuming further reductions of general
and administrative expenses continue. However, future restaurant expansion will
require additional capital from outside sources.
RESULTS OF OPERATIONS:
The Company entered the casual dining segment of the restaurant industry as
a result of its Merger with Patrizio I and Patrizio II on April 25, 1994. Prior
to the Merger, the Company had no operating business.
The Company's revenues increased 8.8% in 1995 compared to the prior year.
Patrizio I contributed a full year's revenue and Patrizio II contributed
approximately nine months' revenue for the year ended December 31, 1994.
Patrizio I revenues were $3,517,400 in 1995, up 5.3% from the comparable period
in 1994. Patrizio II revenues were $2,278,600 in its first full year of
operation, compared to $1,989,600 in 1994.
Cost of sales averaged 30% of revenues for the year ended December 31, 1995
compared to 28.6% of revenues for the year ended December 31, 1994. This
percentage is higher because of increased food costs without menu price
increases.
Operating expenses totaled $3,255,900 for the year ended December 31, 1995.
Operating expenses were 51.2% of revenue at Patrizio I compared to 51.4% in the
prior year. Patrizio II's operating expenses were 63.4% of revenue in 1995
compared to 75.9% in 1994. Patrizio II's lower percentage of revenue is due to
increased efficiencies in scheduling and purchasing compared to the first year
of operation.
Depreciation and amortization was $326,400 for the year ended December 31,
1995, reflecting a full year's operations for both restaurants. The prior year
reflected depreciation for Patrizio II commencing in March 1994. The Patrizio I
assets acquired in 1994 by the Company were recorded at historical costs and
depreciated in a manner consistent with the predecessor company.
General and administrative expenses were $1,106,900 for the year ended
December 31, 1995, compared to $1,212,100 in 1994. The decrease reflects lower
professional fees related to the merger completed in 1994.
Interest expense-stockholder of $12,600 reflects an increase of $5,800 over
1994's expense of approximately $6,800 as a result of increased principal
amounts outstanding in 1995.
5
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Interest income was $100 for the year ended December 31, 1995 compared to
$36,500 for the year ended December, 31, 1994. This decrease reflects lower
amounts invested in short-term investments as a result of cash utilized as
consideration in the 1994 Merger. Other income of $118,700 for the year ended
December 31, 1994 was primarily generated by the Company's recovery of all
remaining escrowed funds related to the Yates Field litigation.
As described in note 7 to the Company's audited consolidated financial
statements, no federal or state income taxes were payable by the Company during
the years presented and none was provided for in the consolidated financial
statements.
IMPACT OF INFLATION
The Company is subject to the effect of inflation on its restaurant labor,
food and occupancy costs. The Company employs workers who are paid hourly rates
based upon the federal minimum wage, which last increased in 1991. Operating
margins at the restaurant level have been maintained through rigorous food cost
control, procurement efficiencies and, at last resort, menu price adjustments.
Competitive pressures and the Company's strategy of providing an upscale dining
experience for a moderate expense preclude the Company from frequent menu price
adjustments. The cost of new construction, taxes, maintenance and insurance
costs all have an impact on the Company's occupancy costs, which continued to
increase. Management believes the current practice of maintaining operating
margins through a combination of infrequent menu price increases and cost
controls, careful evaluation of property and equipment needs, and efficient
purchasing practices is the most effective means to manage the effects of
inflation.
SEASONALITY
The Company's business is somewhat seasonal in nature, with restaurant
revenues being stronger in the spring and autumn when patrons can be seated
comfortably on each restaurant's outdoor patio.
ACCOUNTING MATTERS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recovered.
This Statement is effective for financials statements for fiscal years beginning
after December 15, 1995. The Company does not expect that its adoption will
have a material effect on its financial position or results of operations.
On October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. This Statement is effective for transactions entered into
in fiscal years that begin after December 15, 1995, with possible pro forma
disclosures for awards granted is fiscal years that begin after December 15,
1994. The Company has not determined whether it will adopt a FAIR VALUE BASED
METHOD or retain the INTRINSIC VALUE BASED METHOD of accounting for employee
stock-based compensation.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements are set forth herein commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has nothing to report under this item.
6
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This information set forth under the heading "Directors and Executive
Officers" contained in the definitive Proxy Statement regarding the Annual
Meeting of Shareholders of the Company to be held on May 14, 1996 (the
"Definitive Proxy Statement"), sets forth certain information with respect to
the directors of the Company, one of whom is also an executive officer, and
compliance with Section 16(a), and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
This information required by this item is incorporated by reference from
the Definitive Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information required by this item is incorporated by reference from
the Definitive Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information required by this item is incorporated by reference from
the Definitive Proxy Statement.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS:
The Consolidated Financial Statements are listed in the Index to
Consolidated Financial Statements on page F-1 of this report.
(2) FINANCIAL STATEMENT SCHEDULES:
None.
(3) EXHIBITS:
3.1 Certificate of Incorporation of the Company (filed as
exhibit 3.1 of the Company's General Form of Registration of
Securities on Form 10 filed April 29, 1988, and incorporated
herein by reference).
3.2 Amendment to Certificate of Incorporation of the Company,
filed on January 22, 1990 (filed as exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference).
3.3 Bylaws of the Company (filed as exhibit 3.2 of the Company's
General Form for Registration of Securities on Form 10 filed
April 29, 1988, and incorporated herein by reference).
7
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3.4 Amendment to Bylaws of the Company, adopted June 29, 1990
(filed as exhibit 3.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference).
10.1 Agreement and Plan of Merger, by and among Sixx, the
Subsidiary, Patrizio I, Patrizio II and Jack D. Knox
("Knox"), dated as of April 25, 1994 with exhibits and
disclosure schedules (filed as exhibit 2.1 to the Company's
Current Report on Form 8-K filed April 23, 1994, and
incorporated herein by reference).
10.2 Consulting Agreement, by and between Sixx and Comico
Corporation ("Comico"), dated as of April 25, 1994 (filed
as exhibit A of Exhibit 2.1 to the Company's Current
Report on Form 8-K filed April 23, 1994, and incorporated
herein by reference).
10.3 Registration Rights Agreement, by and between Sixx and
Knox, dated April 25, 1994 (filed as exhibit B of Exhibit
2.1 to the Company's Current Report on Form 8-K filed
April 23, 1994, and incorporated herein by reference).
10.4 Developer's Royalty Agreement, by and between Sixx and
Knox, dated as of April 25, 1994 (filed as exhibit C of
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed April 23, 1994, and incorporated herein by reference).
10.5 Agreement for Continued Mutual Services, by and among
Sixx, Cafe Pacific, Inc., the Subsidiary, Comico and Knox,
dated as of April 25, 1994 (filed as exhibit D of Exhibit
2.1 to the Company's Current Report on Form 8-K filed
April 23, 1994, and incorporated herein by reference).
10.6 Audited Financial Statements of Patrizio Restaurant,
Inc. ((Patrizio I) as of December 31, 1993 and 1992 and
for each of the years in the three-year period ended
December 31, 1993 (filed as exhibit F-1 to Amendment No. 1
of the Company's Current Report on Form 8-K/A dated
April 23, 1994, as amended, and incorporated herein by
reference).
10.7 Audited Financial Statements of Patrizio North, Inc.
(Patrizio II) as of December 31, 1993 and for the period
from March 4, 1993 (inception) through December 31, 1993
(filed as exhibit F-2 to Amendment No. 1 of the Company's
Current Report on Form 8-K/A dated April 23, 1994, as
amended, and incorporated herein by reference).
10.8 Form of Non-employee Director Stock Option Agreement by
and between Sixx Holdings, Incorporated and non-employee
directors, dated as of September 30, 1994 (filed as
exhibit 10.8 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed no current reports on Form 8-K during the last quarter of
the period covered by this report.
8
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 1996
SIXX HOLDINGS, INCORPORATED
By: /s/ Jack D. Knox
--------------------------------------
Jack D. Knox, Chairman of the Board,
President, and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and the dates indicated.
<TABLE>
<CAPTION>
Signatures Titles Date
---------- ------ ----
<S> <C> <C>
/s/ Jack D. Knox Chairman of the Board, President March 1, 1996
- --------------------------- and Director (Principal Executive
Jack D. Knox Officer)
/s/ Jean S. Baggett Chief Financial Officer (Principal March 1, 1996
- -------------------------- Financial and Accounting Officer)
Jean S. Baggett
/s/ G. Michael Boswell
- -------------------------- Director March 1, 1996
G. Michael Boswell
/s/ Robert Ted Enloe III
- -------------------------- Director March 1, 1996
Robert Ted Enloe III
/s/ Richard T. Mullen
- -------------------------- Director March 1, 1996
Richard T. Mullen
</TABLE>
9
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SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1995 and 1994. . . . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-7
</TABLE>
Schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or notes
thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sixx Holdings, Incorporated:
We have audited the consolidated financial statements of Sixx Holdings,
Incorporated and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Sixx Holdings,
Incorporated and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
Dallas, Texas
February 16, 1996
F-2
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(Rounded to nearest hundred, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 99,200 251,100
Accounts receivable 78,500 61,300
Inventories 67,800 79,900
Prepaid expenses 63,600 97,100
Deferred federal income taxes (note 7) - 23,300
---------- ---------
Total current assets 309,100 512,700
Net property and equipment (note 3) 2,435,800 2,557,400
Other assets 23,400 24,100
---------- ---------
$2,768,300 3,094,200
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 115,900 42,500
Accrued liabilities (note 4) 237,400 212,300
Payable to affiliates (note 10) 34,300 39,500
Notes payable to stockholder (notes 10 359,600 209,600
and 11) ---------- ---------
Total current liabilities 747,200 503,900
Deferred rent liabilities (note 5) 69,400 99,000
Deferred federal income taxes (note 7) - 23,300
Long-term debt - -
---------- ---------
Total liabilities 816,600 626,200
---------- ---------
Stockholders' equity:
Common stock of $.01 par value.
Authorized 12,000,000 shares;
10,881,356 shares issued and
outstanding in 1995 and 1994 108,800 108,800
Additional paid-in capital 4,317,800 4,201,900
Deficit (since August 1, 1989) (2,474,900) (1,842,700)
---------- ---------
Total stockholders' equity 1,951,700 2,468,000
Commitments and contingent liability
(note 6) ---------- ---------
$2,768,300 3,094,200
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994
(Rounded to nearest hundred, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Restaurant revenues $5,796,000 5,329,400
---------- ---------
Restaurant costs and expenses:
Cost of sales 1,738,100 1,523,100
Operating expenses 3,255,900 3,228,100
Depreciation and amortization 326,400 292,700
---------- ---------
Total restaurant costs and expenses 5,320,400 5,043,900
---------- ---------
Income from restaurant operations 475,600 285,500
General and administrative expenses (note 10) 1,106,900 1,212,100
Nonoperating income (expense):
Interest expense - stockholder (note 10) (12,600) (6,800)
Interest income 100 36,500
Other income (note 9) 11,600 118,700
---------- ---------
Net loss $ (632,200) (778,200)
---------- ---------
---------- ---------
Loss per common share $(.06) (.07)
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995 and 1994
(Rounded to nearest hundred, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------ PAID-IN -------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
------ ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,163,460 $ 61,600 6,528,200 (1,064,500) 1,446,038 $(1,669,600) 3,855,700
Shares issued in connection with
merger (note 2) 4,717,896 47,200 (2,326,300) - (1,446,038) 1,669,600 (609,500)
Net loss - - - (778,200) - - (778,200)
---------- --------- ---------- ---------- --------- ----------- ---------
Balance at December 31, 1994 10,881,356 108,800 4,201,900 (1,842,700) - - 2,468,000
Consulting and developer's
royalty fees contributed by
stockholder (note 10) - - 115,900 - - - 115,900
Net loss - - - (632,200) - - (632,200)
---------- --------- ---------- ---------- --------- ----------- ---------
Balance at December 31, 1995 10,881,356 $ 108,800 4,317,800 (2,474,900) - $ - 1,951,700
---------- --------- ---------- ---------- --------- ----------- ---------
---------- --------- ---------- ---------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
(Rounded to nearest hundred)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(632,200) (778,200)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 348,200 339,900
Consulting and developer's royalty fees
contributed by stockholder 115,900 -
Changes in assets and liabilities, net of
effect of merger in 1994:
Accounts receivable (17,200) (6,400)
Inventories 12,100 (37,500)
Prepaid expenses 33,500 (72,800)
Other assets 700 1,000
Accounts payable 73,400 (443,800)
Accrued liabilities 25,100 49,400
Payable to affiliates (5,200) 40,700
Deferred rent liabilities (29,600) 4,200
---------- -----------
Net cash used in operating activities (75,300) (903,500)
---------- -----------
Cash flows used in investing activities -
additions to property and equipment, net of
effect of merger in 1994 (226,600) (799,800)
---------- -----------
Cash flows from financing activities:
Additions to notes payable to stockholder 150,000 97,000
Payment to stockholder in connection with
merger - (602,100)
Additions to loans from stockholder - 1,157,000
Repayment of loans from stockholder - (2,365,600)
Distributions to stockholder - (192,000)
---------- -----------
Net cash provided by (used in)
financing activities 150,000 (1,905,700)
---------- -----------
Net decrease in cash and cash equivalents,
net of effect of merger in 1994 (151,900) (3,609,000)
Cash and cash equivalents at beginning of year 251,100 3,860,100
---------- -----------
Cash and cash equivalents at end of year $ 99,200 251,100
---------- -----------
---------- -----------
Supplemental schedule of noncash operating and
financing activity - consulting and developer's
royalty fees contributed by stockholder $ 115,900 -
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Sixx Holdings, Incorporated, a Delaware corporation (the Company), was
organized in January 1988 to hold the interests of Caspen Oil, Inc.
(Caspen) in the Yates Field Unit. Certain assets and operations of
Caspen, along with liabilities associated therewith and certain
litigation, were transferred to the Company on March 3, 1988. As a
result of the settlement of such Yates Field litigation, the assets of
the Company consisted principally of cash and cash equivalents until
1994.
On April 23, 1994, the Board of Directors of the Company changed the
fiscal year of the Company from July 31 to December 31.
On April 25, 1994, the Company merged with Patrizio Restaurant, Inc. and
Patrizio North, Inc. (as discussed in note 2) to own and operate the two
existing full service, Italian concept Patrizio restaurants. These
restaurants are located in the Dallas, Texas metroplex and were opened
on September 22, 1989 and March 14, 1994, respectively.
The preparation of the consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements present the consolidated financial
information of the Company and its subsidiaries as if the merger
(discussed in note 2) occurred January 1, 1994 (effective date of common
control). All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) STATEMENTS OF CASH FLOWS
The Company uses the indirect method to present cash flows from
operating activities and considers all highly liquid investments
purchased with a maturity of three months or less to be cash
equivalents. The Company held approximately $11,900 and $117,900 in
money market funds at December 31, 1995 and 1994, respectively. The
Company paid no income taxes or interest during the years presented.
(d) INVENTORIES
Inventories, consisting mainly of food, beverages and supplies, are
stated at the lower of cost or market; cost is determined using the
first-in, first-out method.
F-7 (Continued)
<PAGE>
(e) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and
amortization of property and equipment is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated useful lives (see note 3), principally on a straight-
line basis for financial reporting purposes, while accelerated methods
are used for tax purposes. Leasehold improvements are amortized over
the life of the respective lease or the service lives of the
improvements, whichever is shorter. A five-year lease renewal option
period is included in determining leasehold improvement useful lives for
the Company's restaurant facilities since, in management's opinion, such
renewal options will be exercised. Repairs and maintenance are charged
to operations as incurred.
(f) PREOPENING COSTS
Labor costs and costs of hiring and training personnel and certain other
costs relating to the opening of restaurants are expensed as incurred.
(g) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h) LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares
outstanding during each year presented, which were 10,881,356 for the
years ended December 31, 1995 and 1994. Outstanding stock options have
not been included in the computations as their effect is anti-dilutive.
(i) RECLASSIFICATIONS
Certain previously reported financial information has been reclassified
to conform to the 1995 presentation.
(2) THE MERGER
On April 25, 1994 (the Merger Date), Patrizio Restaurant, Inc., a Texas
corporation (Patrizio I) and Patrizio North, Inc., a Texas corporation
(Patrizio II), were merged (the Merger) with and into Patrizio Acquisition,
Inc., a Texas corporation and wholly owned subsidiary of the Company. At
the effective date of the Merger, the name of Patrizio Acquisition, Inc.
was changed to Patrizio Restaurant, Inc.
F-8 (Continued)
<PAGE>
Prior to the Merger, Jack D. Knox, the president, chief executive officer
and a director of the Company, owned 100% of the outstanding capital stock
of Patrizio I and Patrizio II and approximately 51% of the Company's
outstanding common stock. Pursuant to the terms of the Agreement and Plan
of Merger (the Merger Agreement), Mr. Knox exchanged the outstanding shares
of capital stock of Patrizio I and Patrizio II for, in the aggregate,
approximately $2,967,700 (of which $2,365,600 went to repay Mr. Knox for
personal funds advanced to build the Patrizio II restaurant) and 6,163,934
shares of the Company's common stock; of which 4,717,896 shares are
restricted and unregistered. As a result of the common control of the
entities, which occurred effective January 1, 1994, the Merger was treated
in a manner similar to a pooling of interests for financial accounting
purposes. Accordingly, the assets acquired and liabilities assumed are
presented at their historical costs in the accompanying consolidated
financial statements and the results of operations of Patrizio I and
Patrizio II are included from the effective date at which common control
was established.
The consideration received by Mr. Knox pursuant to the Merger Agreement was
determined by negotiations between the parties, and is supported by
appraisals prepared by three separate independent business valuation
companies and a fairness opinion prepared by one of the valuation
companies. The cash portion of the purchase price paid to Mr. Knox in
the Merger was funded from the Company's existing cash and included
payment to Mr. Knox for personal funds advanced by him in connection with
the construction of Patrizio II aggregating approximately $2,365,600.
Prior to the Merger, Patrizio I owned and operated an upscale Italian food
restaurant in Dallas, Texas, which opened for business in 1989, and
Patrizio II owned and operated a similar restaurant in Plano, Texas,
since its opening on March 14, 1994. All assets acquired in the Merger,
which include the two existing restaurants, the "Patrizio" concept,
design and motif, and other assets used in the day-to-day operations of
the two existing restaurants, continue to be utilized in operating the
existing two restaurants.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment and the range of estimated useful lives
used in the calculation of depreciation and amortization follows:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL -----------
LIFE RANGE 1995 1994
---------- ---- ----
<S> <C> <C> <C>
Leasehold improvements 2.5-14.5 years $ 2,200,200 2,026,100
Furniture, fixtures and equipment 2-10 years 1,408,400 1,355,900
----------- ---------
3,608,600 3,382,000
Less accumulated depreciation
and amortization (1,172,800) (824,600)
----------- ---------
$ 2,435,800 2,557,400
----------- ---------
----------- ---------
</TABLE>
F-9 (Continued)
<PAGE>
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995 1994
---- ----
<S> <C> <C>
Current portion - deferred rent liabilities $ 33,000 33,000
Labor and related costs 99,400 74,400
Franchise, sales, liquor and property taxes 56,500 74,600
Other 48,500 30,300
--------- -------
$ 237,400 212,300
--------- -------
--------- -------
</TABLE>
(5) DEFERRED RENT LIABILITIES
Deferred rent liabilities represent the difference between cash payments
for minimum lease rentals and the recognition of such minimum lease rentals
as expense on a straight-line basis over the respective terms of the
restaurant facility operating leases. Additionally, certain contingent
rent abatements and incentives earned relating to restaurant facility
leases are deferred and recognized on a straight-line basis over the
remaining respective lease terms.
(6) LEASES
(a) OPERATING LEASES
The Company leases its corporate office, storage and restaurant
facilities under operating leases. The restaurant facilities have lease
terms of ten years expiring in February 1998 and September 2003. These
restaurant leases have one or two renewal clauses of five years each
exercisable at the option of the Company and have provisions for
contingent rentals based on a percentage of revenues, as defined. The
corporate office lease expires in April 1998. A summary of rent expense
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1995 1994
---- ----
<S> <C> <C>
Minimum rentals $ 376,600 369,200
Contingent rentals 88,400 81,800
--------- -------
$ 465,000 451,000
--------- -------
--------- -------
</TABLE>
F-10 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(b) COMMITMENTS
Commitments for future minimum lease payments under operating leases
with an initial or remaining noncancelable lease term in excess of one
year at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 303,600
1997 301,500
1998 192,500
1999 164,700
2000 169,100
Later years 474,300
----------
Total minimum lease payments $1,605,700
----------
----------
At December 31, 1995, the Company remains contingently liable for
approximately $88,500 of future minimum rentals under a partial
corporate office lease assignment to a third party that expires April
1998.
(7) INCOME TAXES
No federal or state income taxes were payable by the Company during the
years presented and none have been provided for in the accompanying
consolidated financial statements.
The Company will file a consolidated federal income tax return for the year
ended December 31, 1995 that will include the operations of Patrizio
Restaurant, Inc. for the year ended December 31, 1995.
Prior to the Merger, Patrizio I elected to be taxed as an S corporation
under the Internal Revenue Code; therefore, all federal income taxes were
the responsibility of the stockholder prior to the Merger. Effective with
the Merger, Patrizio I's S corporation election was terminated and deferred
tax assets and liabilities were recognized by the Company on temporary
differences as of the date of change in tax status as required under
Statement 109.
(Continued)
F-11
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Actual income tax benefit differs from the "expected" income tax benefit
(computed by applying the U.S. federal corporate tax rate of 34% to loss
before income taxes) as follows:
Years ended December 31
--------------------------
1995 1994
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(214,900) (264,600)
Change in valuation allowance for deferred tax
assets allocated to income tax expense 155,600 247,700
Merger costs capitalized for tax purposes, not
for book - 43,900
Tax effect of Patrizio I, S corporation earnings
prior to Merger - (45,700)
Consulting and developer's royalty fees contributed
by stockholder 39,400 -
FICA tip tax credit 16,900 15,600
Other 3,000 3,100
--------- --------
Total $ - -
--------- --------
--------- --------
</TABLE>
The tax effects of the primary temporary differences giving rise to the
deferred federal income tax assets and liabilities as determined under
Statement 109 are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Preopening costs capitalized for tax purposes $ 42,700 56,900
Deferred rent costs in excess of rent paid 34,800 44,900
Net operating loss carryforwards 1,261,000 1,038,700
Capital loss carryforwards 100,000 100,000
Alternative minimum tax credit carryforwards 716,000 716,000
FICA tip tax credit carryforwards 32,500 15,600
Other 6,400 13,100
----------- -----------
Total gross deferred tax assets 2,193,400 1,985,200
Less valuation allowance (2,026,100) (1,870,500)
----------- -----------
Net deferred tax assets 167,300 114,700
----------- -----------
Deferred tax liabilities:
Basis in property and equipment 59,700 7,100
Basis differences in property and equipment
for Patrizio I upon conversion from S to C
corporation 107,600 107,600
----------- -----------
Total deferred tax liabilities 167,300 114,700
----------- -----------
Net deferred taxes $ - -
----------- -----------
----------- -----------
</TABLE>
(Continued)
F-12
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Included in the consolidated balance sheets:
<TABLE>
<CAPTION>
December 31
-------------------------
1995 1994
---- ----
<S> <C> <C>
Current deferred federal income tax asset $ - 23,300
Noncurrent deferred federal income tax liability - (23,300)
-------- --------
$ - -
-------- --------
-------- --------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Realization of deferred tax assets (in
excess of deferred tax liabilities) is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible.
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $3,708,800 which are available
to offset future federal taxable income, if any, expiring in years 2004 -
2010. The Company has capital loss carryforwards of approximately $294,200
which are available to offset future federal taxable capital gains, if any,
expiring in years 1995 - 1998. Additionally, the Company has alternative
minimum tax credit carryforwards of approximately $716,000 which are
available to reduce future regular federal income taxes, if any, over an
indefinite period.
(8) STOCK OPTIONS
Options to purchase the Company's common shares have been granted to an
officer and all nonofficer directors. A summary of transactions follows:
<TABLE>
<CAPTION>
Option price
Number ----------------------
of shares Per share Total
--------- --------- ------
<S> <C> <C> <C>
Outstanding at December 31, 1993 225,000 $ .50 112,500
-----
-----
Cancelled (150,000) $ .50 (75,000)
-----
-----
Granted 90,000 $ .78 70,200
-------- ----- --------
-----
Outstanding at December 31, 1994 165,000 $.50-.78 107,700
--------
--------
Granted 180,000 $ .53 95,400
-------- ----- --------
-----
Outstanding at December 31, 1995 345,000 $.50-.78 203,100
-------- -------- -------
-------- -------- -------
</TABLE>
The option price for options granted is the market value at date of grant.
Such options must be exercised within ten years from the date of grant or
date of vesting, as defined, and become exercisable with respect to one-
third of the total option grant on each successive anniversary of the date
of grant, or date of vesting, as defined. No amounts are recorded until
options are exercised, at which time proceeds in excess of the par value of
the shares are credited to additional paid-in capital.
At December 31, 1995, a total of 105,000 common shares was exercisable at
prices ranging from $.50 to $.78 per share under the granted options.
Unexercised options begin to expire in January 2002.
(Continued)
F-13
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(9) ESCROW RECOVERY
In November 1994, the Company recovered funds previously held in escrow
pursuant to the terms of the Yates Field litigation (out of which the
Company was originally formed). The principal portion of such funds was
originally charged to expense by the Company as it was determined at the
time the funds were placed in escrow that future recovery was uncertain.
Certain conditions were, however, satisfied in 1994 that provided for
release of the funds. The original principal of approximately $87,900 and
accrued interest income on such funds while held in escrow of approximately
$25,200 are included in other income for the year ended December 31, 1994.
(10) RELATED PARTY TRANSACTIONS
In connection with the Merger (see note 2), the Company and Mr. Knox or
other entities affiliated with Mr. Knox entered into three additional
agreements effective April 25, 1994. Under a five-year Consulting
Agreement among the Company, Mr. Knox and a company owned by Mr. Knox, Mr.
Knox agreed to serve without pay as an officer and Chairman of the Board of
the Company (if elected) and to provide, through the separate company owned
by him, continued services to the Company with respect to site selection,
market analysis, design, construction, motif, menu design, menu items,
marketing and public relations relating to the Patrizio concept and any
additional concepts developed by Mr. Knox for the Company in exchange for
1 1/2% of the gross revenues of the Company. The gross revenues of the
Company subject to the 1 1/2% consulting fee are limited in the future to
those generated by a maximum of 32 restaurants, as defined. Pursuant to
this agreement, Mr. Knox, through the separate company, was entitled to
receive approximately $86,900 and $57,900 during 1995 and 1994,
respectively, which amounts are included in general and administrative
expenses. Payment of the consulting fees earned in 1995 was forgiven by
Mr. Knox to retain cash flows generated by restaurant operations in the
Company and, accordingly, such amount was treated as an equity contribution
in 1995. The Consulting Agreement is for an initial five-year term and may
be extended by either party for an additional five years.
Mr. Knox developed and refined the Patrizio concept, design, and motif over
a five-year period. The second agreement provides a developer's royalty
starting at 1/2 of 1% of gross revenues of the Company and escalates by 1/2
of 1% when six restaurants are opened, when twelve restaurants are opened,
and when eighteen restaurants are opened for a total potential royalty of
2%. The royalty paid on gross revenues is capped at 32 restaurants total
and no further royalty is paid on any restaurants numbering greater than
32. Pursuant to this agreement, Mr. Knox earned a royalty of approximately
$29,000 and $19,300 in 1995 and 1994, respectively, included in general and
administrative expenses, from the Company for its use of the Patrizio
concept. Payment of the developer's royalty earned in 1995 was forgiven by
Mr. Knox for reasons similar to those discussed above regarding forgiven
consulting fees and, accordingly, such amount was treated as an equity
contribution in 1995.
(Continued)
F-14
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
The third agreement, entered into at the time of the Merger, and terminable
by either party upon 30 days notice, provided for a continuation of the
laundry services to the Patrizio restaurants by an affiliated company upon
the same terms and conditions that were in effect prior to the Merger. In
return, the Company agreed to provide Mr. Knox and the affiliated company
in-house accounting services of the same type that are required by the two
Patrizio restaurants. Effective January 1996, this mutual services
agreement was cancelled and the Patrizio restaurants no longer receive
laundry services from an affiliated company. Under the terms of the
cancellation, the Company will receive $30,000 each year it continues to
provide in-house accounting services to Mr. Knox and the affiliated
company.
Prior to the Merger Date, the Company shared corporate administrative
functions, primarily accounting, with certain of the Company's affiliates.
The cost of these administrative functions was allocated to the companies
based on estimated employee time expended. Such costs consist primarily of
salaries and occupancy expenses.
The notes payable to stockholder are unsecured and payable on demand. The
notes bear interest at 6% per annum. Interest expense for such notes
aggregated approximately $12,600 and $6,800 in 1995 and 1994, respectively,
with the corresponding amount of accrued interest reflected in payable to
affiliates at December 31, 1995 and 1994.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107 (Statement 107), DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, effective January 1, 1995. Under Statement 107, the
Company is required to disclose the fair value of certain financial
instruments in its consolidated financial statements. Statement 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
The carrying amounts of cash and cash equivalents, accounts receivable,
payables and accrued liabilities approximate fair value due to the short
maturity of those instruments.
Notes payable to stockholder (as discussed in note 10) have an aggregate
fair value of approximately $318,800 at December 31, 1995, based on
discounted future cash flows over an estimated three year period
outstanding using an estimated 10% incremental borrowing rate. Such
estimates were determined by the Company based on future operating cash
flow and market interest rate assumptions.
F-15
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Company (filed as
exhibit 3.1 of the Company's General Form of Registration of
Securities on Form 10 filed April 29, 1988, and incorporated
herein by reference).
3.2 Amendment to Certificate of Incorporation of the Company,
filed on January 22, 1990 (filed as exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference).
3.3 Bylaws of the Company (filed as exhibit 3.2 of the Company's
General Form for Registration of Securities on Form 10 filed
April 29, 1988, and incorporated herein by reference).
3.4 Amendment to Bylaws of the Company, adopted June 29, 1990
(filed as exhibit 3.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference).
10.1 Agreement and Plan of Merger, by and among Sixx, the
Subsidiary, Patrizio I, Patrizio II and Jack D. Knox
("Knox"), dated as of April 25, 1994 with exhibits and
disclosure schedules (filed as exhibit 2.1 to the Company's
Current Report on Form 8-K filed April 23, 1994, and
incorporated herein by reference).
10.2 Consulting Agreement, by and between Sixx and Comico
Corporation ("Comico"), dated as of April 25, 1994 (filed
as exhibit A of Exhibit 2.1 to the Company's Current
Report on Form 8-K filed April 23, 1994, and incorporated
herein by reference).
10.3 Registration Rights Agreement, by and between Sixx and
Knox, dated April 25, 1994 (filed as exhibit B of Exhibit
2.1 to the Company's Current Report on Form 8-K filed
April 23, 1994, and incorporated herein by reference).
10.4 Developer's Royalty Agreement, by and between Sixx and
Knox, dated as of April 25, 1994 (filed as exhibit C of
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed April 23, 1994, and incorporated herein by reference).
10.5 Agreement for Continued Mutual Services, by and among
Sixx, Cafe Pacific, Inc., the Subsidiary, Comico and Knox,
dated as of April 25, 1994 (filed as exhibit D of Exhibit
2.1 to the Company's Current Report on Form 8-K filed
April 23, 1994, and incorporated herein by reference).
10.6 Audited Financial Statements of Patrizio Restaurant,
Inc. ((Patrizio I) as of December 31, 1993 and 1992 and
for each of the years in the three-year period ended
December 31, 1993 (filed as exhibit F-1 to Amendment No. 1
of the Company's Current Report on Form 8-K/A dated
April 23, 1994, as amended, and incorporated herein by
reference).
10.7 Audited Financial Statements of Patrizio North, Inc.
(Patrizio II) as of December 31, 1993 and for the period
from March 4, 1993 (inception) through December 31, 1993
(filed as exhibit F-2 to Amendment No. 1 of the Company's
Current Report on Form 8-K/A dated April 23, 1994, as
amended, and incorporated herein by reference).
10.8 Form of Non-employee Director Stock Option Agreement by
and between Sixx Holdings, Incorporated and non-employee
directors, dated as of September 30, 1994 (filed as
exhibit 10.8 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 99,200
<SECURITIES> 0
<RECEIVABLES> 78,500
<ALLOWANCES> 0
<INVENTORY> 67,800
<CURRENT-ASSETS> 309,100
<PP&E> 3,608,600
<DEPRECIATION> (1,172,800)
<TOTAL-ASSETS> 2,768,300
<CURRENT-LIABILITIES> 747,200
<BONDS> 0
0
0
<COMMON> 108,800
<OTHER-SE> 1,842,900
<TOTAL-LIABILITY-AND-EQUITY> 1,951,700
<SALES> 5,796,000
<TOTAL-REVENUES> 5,796,000
<CGS> 1,738,100
<TOTAL-COSTS> 5,320,400
<OTHER-EXPENSES> 1,106,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,600
<INCOME-PRETAX> (632,200)
<INCOME-TAX> (632,200)
<INCOME-CONTINUING> (632,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (632,200)
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
