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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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, 1996
[ ] 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, 1996 were $6,570,000.
As of February 20,1997 the registrant had issued and outstanding 1,359,274
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 February 20, 1997, was approximately $489,660. 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
None
Transitional Small Business Disclosure Format Yes [ ] No [X]
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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 until April 25, 1994 when
Patrizio Restaurant, Inc., a Texas corporation and Patrizio North, Inc., a
Texas corporation, were merged (the "Merger") with and into Patrizio
Acquisition, Inc., a Texas corporation and wholly-owned subsidiary of
Company. At the effective time of the Merger, the name of Patrizio
Acquisition, Inc. was changed to Patrizio Restaurant, Inc.
Prior to the Merger, Patrizio Restaurant, Inc. owned and operated an
upscale Italian food restaurant in Dallas, Texas (Patrizio I) and Patrizio
North, Inc. owned and operated a similar restaurant in Plano, Texas (Patrizio
II). 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 $5.00 to $8.97. Alcoholic
beverages, which are served primarily with meals (as opposed to bar service)
generated approximately 27% and 25% of all restaurant revenues for 1996 and
1995, 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.
EMPLOYEES
As of December 31, 1996, the Company employed six persons in its corporate
headquarters and approximately 170 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.
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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. The federal minimum wage per hour was
increased from $4.25 to $4.75 for non-service personnel effective October 1,1996
and will increase from $4.75 to $5.15 effective September 1, 1997.
Prior to the Merger, effective November 3, 1990, Patrizio Restaurant, Inc.,
and on October 21, 1993, Patrizio North, Inc. elected to become non-subscribers
of the Texas Workers' Compensation Act. Upon this election, excess liability
insurance was acquired. Although this election has been favorable, the Texas
Workers' Compensation Act has undergone certain favorable reforms, with further
changes expected. Effective February 1, 1997, Patrizio Restaurant, Inc. elected
to re-enter the Texas Workers' Compensation program.
ITEM 2. DESCRIPTION OF PROPERTIES
As of December 31, 1996, 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 for both
restaurant leases. 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.
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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.
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1996: High Bid Low Bid
First Quarter 4.00 2.25
Second Quarter 4.00 2.50
Third Quarter 5.00 2.50
Fourth Quarter 5.50 3.00
1995: High Bid Low Bid
First Quarter 4.50 3.00
Second Quarter 6.50 3.00
Third Quarter 5.50 4.00
Fourth Quarter 4.00 2.00
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As of February 20, 1997, 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
The Company owns and operates two upscale Italian restaurants. Patrizio I,
located in Dallas, Texas, was opened in 1989 and Patrizio II, located in Plano,
Texas opened in 1994.
Included in general and administrative expenses for year ended December 31,
1996 are pre-acquisition costs and due-diligence costs of approximately $491,800
incurred in connection with the Company's efforts to acquire a fourteen-store
Italian restaurant chain out of Chapter 11 bankruptcy. During the fourth
quarter of 1996, the Company gave notice through its attorney of the termination
of its intent to acquire the acquisition target's assets.
In order to partially fund the pre-acquisition costs, the majority
shareholder of the Company advanced to the Company in exchange for demand
promissory notes bearing interest at rates from 8.25% to 9.25% per annum
$200,000 during the fourth quarter of 1996 and $80,000 subsequent to December
31, 1996. Effective January 1, 1997, all notes to stockholder were modified to
bear interest at 9.25% per annum.
CAPITAL RESOURCES AND LIQUIDITY:
As of December 31, 1996, the Company's cash and short-term investments were
approximately $118,100. Management believes that sales at the current annual
levels will provide sufficient cash flow to fund operations at existing
restaurants for the foreseeable future. In addition, proceeds from notes from
the majority shareholder, as well as possible future advances from the majority
shareholder, will fund pre-acquisition costs not funded by cash flow from
operations.
RESULTS OF OPERATIONS:
The Company's restaurant revenues increased from $5,796,000 to $6,570,000
(13.4%) for the years ended December 31, 1995 and 1996, respectively; loss from
operations increased 27.5% from $631,300 in 1995 to $805,200 in 1996; and net
loss increased 25.3% from $632,200 in 1995 to $792,400 in 1996.
Restaurant revenues for the year ended December 31, 1996 increased $774,000
(13.4%) from the same period in
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1995, primarily due to increased revenues generated from Patrizio II.
Patrizio I accounted for 55.8% of annual revenues in 1996 and 60.7% of the
revenues for year ended December 31, 1995. Patrizio II restaurant revenues
for the year ended December 31, 1996 increased 27.3% over the year ended
December 31, 1995.
Cost of sales as a percent of restaurant revenues decreased from 30.0% for
the year ended December 31, 1995 to 29.6% for the same period in 1996.
Restaurant expenses totaled $3,579,200 for the year ended December 31, 1996, a
10.0% increase over 1995. Restaurant expenses were 50.3% of revenue at Patrizio
I compared to 51.2% in the prior year. Patrizio II's restaurant expenses were
59.7% of revenue in 1996 compared to 63.4% in 1995. Patrizio II's decrease is
due to increased efficiencies in scheduling and purchasing and the 27.3%
increase in revenues for the 1996 over 1995.
Depreciation and amortization was $374,800 for the year ended December 31,
1996 and $348,200 for the year ended December 31, 1995. The increase is due
primarily to the full year's depreciation and amortization of leasehold
improvements made to Patrizio I at the end of 1995.
General and administrative expenses were $1,479,000 for the year ended
December 31, 1996, compared to $1,085,100 in 1995. Included in the 1996 balance
is $491,800 of pre-acquisition and due diligence costs associated with the
potential acquisition of a fourteen-unit Italian chain. Therefore, the change
in general and administrative costs between 1995 and 1996 is comprised of a
decrease of $97,900 in costs unrelated to the acquisition and an increase of
$491,800 in pre-acquisition costs. The decrease is primarily due to a reduction
in corporate office space effective January 1996 and to continued efforts in
monitoring costs on a corporate level.
Interest expense-stockholder of $25,900 reflects an increase of $13,300
over the 1995 expense of $12,600 as a result of increased principal amounts
outstanding in 1996. Principal additions of $150,000 and $200,000 were made in
the fourth quarters of 1995 and 1996, respectively.
Other income was $37,400 for the year ended December 31, 1996 and $11,600
for the year ended December 31, 1995. The majority of the increase from 1995 to
1996 is comprised of $33,000 from affiliates for accounting and management
services. In prior years, these services were provided in exchange for defined
services in accordance with agreements in place at the time.
As described in note 6 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. Enactment of recent legislation increased
the minimum wage by $0.90 per hour over a two-year period effective October 1,
1996. Operating margins at the restaurant level have been maintained through
rigorous food cost control, procurement efficiencies and minimal menu price
adjustments. The cost of taxes, maintenance and insurance all have an impact on
the Company's occupancy costs, which continued to increase during the period.
Management believes the current practice of maintaining operating margins
through a combination of small 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, including the
increase in the minimum wage.
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.
FORWARD-LOOKING STATEMENTS
Certain of the statements made in this report are forward-looking
statements that involve a number of risks and uncertainties. Statements that
should generally be considered forward-looking include, but are not limited to,
those that contain the words "estimate," "anticipate," "in the opinion of
management," "believes," and similar phrases. Among the
5
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factors that could cause actual results to differ materially from the
statements made are the following: general business conditions in the local
market served by the Company's restaurants, competitive factors such as
changes in the locations, menus, pricing or other aspects of competitors'
operations, the weather in each of the locations, expense pressures relating
to labor and supplies, and unanticipated general and administrative expenses,
including the costs of additional acquisitions, expansion or financing.
ACCOUNTING MATTERS
In June 1996, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996. SFAS No. 125 has been amended by SFAS No. 127 which amends the effective
date of certain provisions for these transactions occurring after December 31,
1997. Management of the Company believes that the impact from adopting the
provisions of SFAS No. 125 will not be material.
In February 1997, the FASB adopted SFAS No. 128, "Earnings Per Share",
which provides accounting and reporting standards for calculating earnings per
share after December 15, 1997. Management of the Company believes that the
impact from adopting the provisions of SFAS No. 128 will not be material.
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information concerning the directors and
executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Jack D. Knox 59 Chairman of the Board,
President and Director
Dorothy L. Douglas 52 Secretary and Treasurer
G. Michael Boswell 56 Director
R. Ted Enloe, Jr. 58 Director
Richard Mullen 57 Director
The Bylaws of the Company provide that the Board of Directors shall consist
of not fewer than two nor more than 15 members and that the number of the
directors, within such limits, shall be determined by resolution of the Board of
Directors at any meeting. The Certificate of Incorporation and the Bylaws of
the Company provide for the division of the Board of Directors into three
classes, with each class having a three-year term of office expiring in
different years. Currently, the Board of Directors of the Company is composed
of four directors, with the term of G. Michael Boswell expiring in May
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1997, the term of Robert Ted Enloe III expiring in May 1998, and the terms of
Jack D. Knox and Richard T. Mullen expiring in May of 1999 or until their
successor shall have been duly elected and qualified.
The following is a brief account of the business experience, during the
past five years, of each director and executive officer of the Company. Each of
the directors and the officers is a citizen of the United States.
Jack D. Knox has been Chairman of the Board and President of the Company
since January 1988. Mr. Knox served as President of Summit Energy, Inc.,
Dallas, Texas, an American Stock Exchange listed oil and gas company, from its
inception in 1970 through April 1989, and as a director through January 1990.
Mr. Knox is also director of El Chico Restaurants, Inc., a restaurant company
listed on the NASDAQ.
Dorothy L. Douglas was elected Treasurer of the Company in April 1988 and
Secretary in May 1990. Ms. Douglas also served as Secretary of Caspen Oil, Inc.
from December 1987 until May 1990. Prior to joining Caspen Oil, Inc. in
February 1986 as Administrative Assistant to Jack D. Knox, Ms. Douglas was
employed by May Petroleum Inc. from May 1965 until January 1986, serving as
Administrative Vice President from 1975 until 1980 and as Secretary from 1974
until 1986.
G. Michael Boswell has been a director of the Company since April 1988. He
served as Secretary of the Company from January 1988 to May 1990. Mr. Boswell
is presently involved in private investments and the practice of law. He served
as the Chariman of the Board and President of Sunshine Mining Co., Dallas,
Texas, a New York Stock Exhange listed silver mining, precious metals, and oil
and gas producing company, from October 1977 to November 1992. Mr. Boswell is
also a director of a wholly-owned special purpose subsidiary of Mesa, Inc., a
New York Stock Exchange listed company.
Robert Ted Enloe III has been a director of the Company since February
1993. He is the managing general partner of Balquita Partners, Ltd., a real
estate and securities investment partnership. He served as President of
Liberte' Investors from March 1995 until August 1996 and was chief executive
officer from April 1992 until August 1996. Mr. Enloe also serves as a director
of Compaq Computer Corporation, a computer manufacturer, and Liberte' Investors,
Inc., a holding company seeking acquisitions of operating companies. In
connection with a previously planned and announced restructuring of its debt,
Liberte' filed a petition for protection under Chapter 11 of the Federal
bankruptcy laws in October of 1993.
Richard T. Mullen has been a director of the Company since February 1993.
He is President of The Mullen Company, Dallas, Texas, a real estate brokerage,
development, and management company, and has served in this position for more
than five years.
There is no family relationship among the nominees or present directors and
any executive officer of the Company.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10 percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10-percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Company believes that during
1996 all filing requirements applicable to its officers, directors, and greater
than 10-percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The total compensation paid during 1996, 1995 and 1994 to the Chief
Executive Officer of the Company, Jack D. Knox, is set forth below in the
following Summary Compensation Table:
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SUMMARY COMPENSATION TABLE
<TABLE>
Long Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
Other Underlying
Annual Options/ All Other
Name Year Salary Bonus Comp. SARs(#) Compensation
- ------------ ---- ----------- ----- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Knox 1996 $ --(1) $-- $3,436(2) -- $2,545(3)
Chairman of the Board 1995 $ --(1) $-- $2,727(2) -- $1,750(3)
and President (Chief 1994 $25,000(1) $-- $4,727(2) -- $1,740(3)
Executive Officer)
</TABLE>
(1) Mr. Knox has not received a salary from the Company since April 30, 1994.
However, during 1994 and 1995, Mr. Knox and affiliates received payments
from, and certain services provided by, the Company pursuant to agreements
entered into in connection with the Merger. See "Certain Relationships and
Related Transactions."
(2) Consists of payment by the Company with respect to Mr. Knox's percentage of
personal use of a company car and $1,800, $600 and $1,500 for the years
ended December 31, 1996, 1995 and 1994, respectively, in fees paid to Mr.
Knox as a director of the Company.
(3) Reflects the Company-paid premium for a life insurance policy on the life
of Mr. Knox, the beneficiary of which is Mr. Knox's estate.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date, with
respect to (i) any person known to the Company to be the beneficial owner of
more than 5% of the Common Stock, (ii) the number of shares of Common Stock
beneficially owned by each director and nominee for director, (iii) the number
of shares of Common Stock beneficially owned by each executive officer named in
the Summary Compensation Table presented below under the heading "Compensation
of Directors and Executive Officers," and (iv) the number of shares of Common
Stock owned by all directors and officers of the Company as a group.
AMOUNT PERCENT
NAME & ADDRESS OF BENEFICIALLY OF
BENEFICIAL OWNER OWNED (1) CLASS
----------------- ------------ -------
Jack D. Knox 1,095,898 80.6%
300 Crescent Court, #1630
Dallas, Texas
G. Michael Boswell 6,375(2) less than 1.0%
Danbury, Texas
Robert Ted Enloe III 6,375(2) less than 1.0%
Dallas, Texas
Richard T. Mullen 6,375(2) less than 1.0%
Dallas, Texas
All Directors and
Officers as a Group
(5 persons) 1,115,143(2) 82.0%
__________________
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(1) Each person has sole voting and dispositive power over the shares
indicated.
(2) Does not include 6,875 shares each of Common Stock issuable upon exercise
of stock options granted to Messrs. Boswell, Enloe and Mullen that were
canceled effective December 27, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 25, 1994, a subsidiary of the Company merged (the "Merger") with
entities wholly-owned by the Company's majority shareholder to own and operate
two existing upscale Italian food restaurants, the restaurant concept, design
and motif and the other assets used in the day-to-day operation of the
restaurants.
In connection with the Merger, 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 one and one-half percent of the gross restaurant revenues of the
Company. The gross revenues of the Company subject to the one and one-half
percent 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 $98,700 and $86,900
during 1996 and 1995, respectively, which amounts are included in general and
administrative expenses. There was no payment of the consulting fee earned in
1996; accordingly, it is included in payable to affiliates. Payment of the
$86,900 consulting fees earned in 1995 was forgiven by Mr. Knox so that the
Company could retain 100% of all cash flows generated by restaurant operations.
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 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 $32,900 and $29,000 in 1996 and 1995,
respectively, included in general and administrative expenses, from the Company
for its use of the Patrizio concept. There was no payment of the royalty fee
earned in 1996; accordingly, it is included in payable to affiliates. Payment
of the developer's royalty earned in 1995 was forgiven by Mr. Knox so that the
Company could retain 100% of all cash flows from restaurant operations. Such
amount was treated as an equity contribution by Mr. Knox in 1995.
The third agreement, entered into at the time of the merger, and terminable
by either party upon 30 days notice, provides 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
canceled and the Patrizio restaurants no longer receive laundry services from an
affiliated company. Under the terms of the cancellation, the Company will
receive $2,500 per month ( $30,000 each year) it continues to provide in-house
accounting services to Mr. Knox and the affiliated company. Effective July 1,
1996, the Company received $3,000 per month for such services; accordingly,
$33,000 is included in other income.
The notes payable to Mr. Knox are unsecured and payable on demand. Notes
totaling $359,600, bearing interest at 6% per annum, were outstanding at
December 31, 1995. During 1996, $20,000, $100,000 and $100,000 of notes were
issued bearing interest rates at 6%, 8.25%, and 9.25% per annum, respectively,
for a total outstanding at December 31, 1996 of $579,600. Interest expense for
such notes aggregated approximately $25,900 and $12,600 in 1996 and 1995,
respectively, with the corresponding amount of accrued interest reflected in
payable to affiliates at December 31, 1996 and 1995. Effective January 1, 1997,
the interest rates of notes bearing 6% and 8.25% (totaling $479,600) were
modified to bear interest at 9.25% per annum. Subsequent to December 31, 1996,
an additional $80,000 of notes payable to stockholder were issued bearing
interest at 9.25% per annum. The notes are unsecured and payable on demand.
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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 Amendment to Certificate of Incorporation of the Company,
filed on March 15, 1996.
3.4 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).
3.5 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
10
<PAGE>
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
April 23, 1994, and incorporated herein by reference).
10.6 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-K for the
year ended December 31, 1994, and incorporated herein by
reference).
(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.
11
<PAGE>
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: April 10, 1997
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.
SIGNATURES TITLES DATE
---------- ------ ----
/s/ JACK D. KNOX Chairman of the Board, April 10, 1997
- ------------------------------ President, and Director
Jack D. Knox (Principal Executive Officer)
/s/ CATHERINE E. BLAIR Chief Financial Officer
- ------------------------------ (Principal Financial and
Catherine E. Blair Accounting Officer)
/s/ G. MICHAEL BOSWELL Director April 10, 1997
- ------------------------------
G. Michael Boswell
/s/ ROBERT TED ENLOE III Director April 10, 1997
- ------------------------------
Robert Ted Enloe III
/s/ RICHARD T. MULLEN Director April 10, 1997
- ------------------------------
Richard T. Mullen
12
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
PAGE
----
<S> <C>
Independent Auditors' Report................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995...................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995................................................. 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, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Dallas, Texas
February 21, 1997
F-2
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(Rounded to nearest hundred, except share and per share amounts)
<TABLE>
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 118,100 99,200
Accounts receivable 57,400 78,500
Inventories 75,800 67,800
Prepaid expenses 56,400 63,600
----------- ----------
Total current assets 307,700 309,100
Net property and equipment (note 2) 2,082,400 2,435,800
Other assets 13,700 23,400
----------- ----------
$ 2,403,800 2,768,300
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 262,500 115,900
Accrued liabilities (note 3) 196,100 237,400
Payable to affiliates (note 9) 179,200 34,300
Notes payable to stockholder (note 9) 579,600 359,600
----------- ----------
Total current liabilities 1,217,400 747,200
Deferred rent liabilities (note 4) 31,200 69,400
----------- ----------
Total liabilities 1,248,600 816,600
----------- ----------
Stockholders' equity (notes 7 and 8):
Common stock of $.01 par value. Authorized 12,000,000
shares; 1,359,274 shares in 1996 and 1,360,169 shares
in 1995 issued and outstanding 13,600 13,600
Additional paid-in capital 4,408,900 4,413,000
Accumulated deficit (since August 1, 1989) (3,267,300) (2,474,900)
----------- ----------
Total stockholders' equity 1,155,200 1,951,700
Commitments and contingent liability (note 5)
----------- ----------
$ 2,403,800 2,768,300
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995
(Rounded to nearest hundred, except per share amounts)
1996 1995
---- ----
Restaurant revenues $ 6,570,000 5,796,000
----------- ----------
Costs and expenses:
Cost of sales 1,942,200 1,738,100
Restaurant expenses 3,579,200 3,255,900
Depreciation and amortization 374,800 348,200
General and administrative expenses (note 9) 1,479,000 1,085,100
----------- ----------
Total costs and expenses 7,375,200 6,427,300
----------- ----------
Loss from operations (805,200) (631,300)
Nonoperating income (expense):
Interest expense - stockholder (note 9) (25,900) (12,600)
Interest income 1,300 100
Other income (note 9) 37,400 11,600
----------- ----------
Net loss $ (792,400) (632,200)
----------- ----------
----------- ----------
Loss per common share $ (.58) $ (.46)
----------- ----------
----------- ----------
Weighted average common shares outstanding 1,359,460 1,360,169
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996 and 1995
(Rounded to nearest hundred, except share amounts)
<TABLE>
Common Stock Additional Total
-------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 (note 7) 1,360,169 $ 13,600 4,297,100 (1,842,700) 2,468,000
Consulting and developer's royalty
fees contributed by stockholder (note 9) - - 115,900 - 115,900
Net loss - - - (632,200) (632,200)
--------- -------- --------- ---------- ---------
Balance at December 31, (note 7) 1,360,169 13,600 4,413,000 (2,474,900) 1,951,700
Cash paid in lieu of fractional shares (note 7) (895) - (4,100) - (4,100)
Net loss - - - (792,400) (792,400)
--------- -------- --------- ---------- ---------
Balance at December 31, 1996 (note 7) 1,359,274 $ 13,600 4,408,900 (3,267,300) 1,155,200
--------- -------- --------- ---------- ---------
--------- -------- --------- ---------- ---------
</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, 1996 and 1995
(Rounded to nearest hundred)
1996 1995
---------- ---------
Cash flows from operating activities:
Net loss $(792,400) (632,200)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 374,800 348,200
Gain on sale of property and equipment (7,900) -
Consulting and developer's royalty fees
contributed by stockholder - 115,900
Changes in assets and liabilities:
Accounts receivable 21,100 (17,200)
Inventories (8,000) 12,100
Prepaid expenses 7,200 33,500
Other assets 9,700 700
Accounts payable 146,600 73,400
Accrued liabilities (41,300) 25,100
Payable to affiliates 144,900 (5,200)
Deferred rent liabilities (38,200) (29,600)
--------- --------
Net cash used in operating activities (183,500) (75,300)
--------- --------
Cash flows from investing activities:
Additions to property and equipment, net (23,200) (226,600)
Proceeds from sale of property and equipment 9,700 -
--------- --------
Net cash used in investing activities (13,500) (226,600)
--------- --------
Cash flows from financing activities:
Additions to loans from stockholder 220,000 150,000
Cash paid in lieu of fractional shares
for reverse stock split (4,100) -
--------- --------
Net cash provided by financing activities 215,900 150,000
--------- --------
Net increase (decrease) in cash and equivalents 18,900 (151,900)
Cash and cash equivalents at beginning of year 99,200 251,100
--------- --------
Cash and cash equivalents at end of year $ 118,100 99,200
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(rounded to nearest hundred, except share amounts)
(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 the Yates Field litigation, the assets of
the Company consisted principally of cash and cash equivalents until
April 25, 1994 when the Company merged (the Merger) with Patrizio
Restaurant, Inc. and Patrizio North, Inc., both Texas corporations
wholly-owned by the Company's majority shareholder. The Company and
its subsidiaries own and operate two full service, Italian concept
Patrizio restaurants located in the Dallas, Texas metropolitan area.
The restaurants were opened on September 22, 1989 and March 14, 1994,
respectively.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements present the consolidated
financial information of the Company and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(c) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at December 31, 1996 and held
approximately $11,900 in money market funds at December 31, 1995. The
Company paid no income taxes or interest during the years presented.
(d) INVENTORIES
Inventories, consisting mainly of food and beverages, are stated at
the lower of cost or market; cost is determined using the first-in,
first-out method.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of accumulated
depreciation. Depreciation is calculated on the straight-line method
over the estimated useful lives of the assets which range from 2 to 10
years.
F-7 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
Leasehold improvements are amortized using the straight-line method
over the lesser of the life of the lease, including renewal options,
or the estimated useful lives of the improvements of generally 2 to 15
years. 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) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs
amounted to $23,800 and $42,700 in 1996 and 1995, respectively.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
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.
(i) LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of
shares outstanding during each year presented. Outstanding stock
options have not been included in the computations as their effect is
anti-dilutive.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
F-8 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
costs to sell. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(k) USE OF ESTIMATES
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 the 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.
(l) RECLASSIFICATIONS
Certain previously reported financial information has been
reclassified to conform to the 1996 presentation.
(2) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
DECEMBER 31
------------------------
1996 1995
----------- ----------
Leasehold improvements $ 2,201,200 2,200,200
Furniture, fixtures and equipment 1,426,400 1,408,400
----------- ----------
3,627,600 3,608,600
Less accumulated depreciation
and amortization (1,545,200) (1,172,800)
----------- ----------
$ 2,082,400 2,435,800
----------- ----------
----------- ----------
(3) Accrued Liabilities
Accrued liabilities consist of the following:
December 31
--------------------
1996 1995
-------- -------
Current portion - deferred
rent liabilities $ 33,000 33,000
Labor and related costs 42,400 99,400
Franchise, sales, liquor and
property taxes 61,100 56,500
Other 59,600 48,500
-------- -------
$196,100 237,400
-------- -------
-------- -------
F-9 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
(4) 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.
(5) LEASES
The Company leases its restaurant facilities, corporate office and storage
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 and the storage lease expires in March 1999. A
summary of rent expense follows:
YEARS ENDED DECEMBER 31
-----------------------
1996 1995
-------- -------
Minimum rentals $337,800 376,600
Contingent rentals 94,400 88,400
-------- -------
$432,200 465,000
-------- -------
-------- -------
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, 1996 are as follows:
1997 $ 337,800
1998 207,000
1999 165,600
2000 164,700
2001 169,100
Thereafter 415,000
----------
Total minimum lease payments $1,459,200
----------
----------
At December 31, 1996, 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 in April 1998.
F-10 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
(6) INCOME TAXES
No federal or state income taxes were payable by the Company during the
years presented and none have been provided in the accompanying
consolidated financial statements. The Company and its subsidiaries file a
consolidated tax return.
Actual income tax benefit differs from the "expected" income tax benefit
(computed by applying the U.S. federal corporate tax rate of 34% to net
loss before income taxes) as follows:
YEARS ENDED DECEMBER 31
-----------------------
1996 1995
---------- --------
Computed "expected" tax benefit $(269,400) (214,900)
Change in valuation allowance for
deferred tax assets allocated to
income tax expense 235,100 183,700
Consulting and developer's royalty
fees contributed by stockholder - 39,400
Expired capital loss 55,200 -
FICA tip tax credit (22,300) (11,200)
Other 1,400 3,000
--------- --------
Actual income tax benefit $ - -
--------- --------
--------- --------
The tax effects of the primary temporary differences giving rise to the
deferred federal income tax assets and liabilities as determined under
SFAS 109 are as follows:
DECEMBER 31
--------------------------
1996 1995
----------- ----------
Deferred tax assets:
Preopening costs capitalized
for tax purposes $ 28,500 42,700
Deferred rent costs in excess
of rent paid 21,800 34,800
Net operating loss carryforwards 1,462,400 1,261,000
Capital loss carryforwards 42,200 100,000
Alternative minimum tax credit
carryforwards 716,000 716,000
Consulting and developer's royalty
fees accrued for stockholder 52,800 -
FICA tip tax credit carryforwards 66,300 32,500
Other 8,900 6,400
----------- ----------
Total gross deferred tax assets 2,398,900 2,193,400
Less valuation allowance (2,368,800) (2,133,700)
----------- ----------
Net deferred tax assets 30,100 59,700
Deferred tax liabilities - basis in
property and equipment 30,100 59,700
----------- ----------
Net deferred taxes $ - -
----------- ----------
----------- ----------
F-11 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
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 present, management is unable to
conclude on a more likely than not basis that the net deferred assets will
be realized.
Net operating loss carryforwards of $4,301,000 for federal income tax
purposes expire between 2004 and 2011. Capital loss carryforwards of
$124,200 expire in 1998. The alternative minimum tax credit carryforward
of $716,000 is available for an indefinite period.
(7) REVERSE STOCK SPLIT
On February 19, 1996, the Board of Directors of the Company approved a one-
for-eight reverse stock split effective March 15, 1996. The reverse split
reduced the Company's issued stock by 9,521,187 shares. Common stock was
reduced by $95,200, with a corresponding increase to additional paid-in
capital, retaining the $.01 par value per share. The Company's
consolidated financial statements and all share amounts have been
retroactively restated to reflect the reverse stock split. There has been
no change in the authorized common shares.
In conjunction with the above reverse stock split, the Company paid $4,100
in lieu of a total of 895 fractional shares. This amount is reflected as a
decrease in shares outstanding and additional paid-in capital.
(8) STOCK OPTIONS
Options to purchase the Company's common shares were previously granted to
all nonofficer directors. The exercise price for options granted was the
market value at date of grant. Such options expired ten years from the
date of grant or date of vesting, as defined, and became 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. On
December 27, 1996, all of the options outstanding (43,125 shares with
exercise prices between $4.00 and $6.24 per share) were cancelled for total
consideration of $15,000.
The Company previously applied the provisions of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in
accounting for its outstanding stock options. As such, compensation expense
was recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
F-12 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
During 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-valued-based method
defined in SFAS No. 123 had been applied. As a result of the cancellation
of the outstanding stock options in 1996, the Company has not presented the
pro forma disclosures required by SFAS No. 123.
(9) RELATED PARTY TRANSACTIONS
In connection with the Merger (see note 1), the Company and Mr. Knox, a
majority shareholder, or entities affiliated with Mr. Knox, entered into
three additional agreements effective April 25, 1994. Under a five-year
Consulting Agreement, Mr. Knox agreed to serve without pay as an officer
and Chairman of the Board of the Company (if elected) and to provide,
through a 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 $98,700 and $86,900 during
1996 and 1995, respectively. The consulting fees are included in general
and administrative expenses. No payment of the 1996 consulting fees earned
was made in 1996 and, accordingly, they are included in payable to
affiliates. The 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. 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 which 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 number of
restaurants greater than 32. Pursuant to this agreement, Mr. Knox earned a
royalty for the Company's use of the Patrizio concept of approximately
$32,900 and $29,000 in 1996 and 1995, respectively. The royalty fees are
included in general and administrative expenses. No payment of the 1996
royalty fees earned was made in 1996 and accordingly, they are included in
payable to affiliates. Payment of the royalty earned in 1995 was forgiven
by Mr. Knox for reasons similar to those discussed above and, accordingly,
such amount was treated as an equity contribution.
F-13 (Continued)
<PAGE>
SIXX HOLDINGS, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(rounded to nearest hundred, except share amounts)
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 in 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 receives $2,500 per each month ($30,000 each
year) it continues to provide in-house accounting services to Mr. Knox and
the affiliated company. Effective July 1, 1996, the Company began to
receive $3,000 per month for such services and, accordingly, $33,000 is
included in other income.
The notes payable to stockholder are unsecured and payable on demand.
During 1996, $20,000, $100,000 and $100,000 of notes were issued bearing
interest at 6%, 8.25% and 9.25% per annum, respectively, for a total
outstanding at December 31, 1996 of $579,600. Notes totalling $359,600,
bearing interest at 6.00% per annum, were outstanding at December 31, 1995.
Interest expense for such notes aggregated approximately $25,900 and
$12,600 in 1996 and 1995, respectively, with the corresponding amount of
accrued interest reflected in payable to affiliates at December 31, 1996
and 1995. Effective January 1, 1997, the interest rates of notes bearing
6.00% and 8.25% (totalling $479,600) were modified to 9.25%.
During 1997, an additional $80,000 of notes payable to stockholder were
issued bearing interest at 9.25% per annum. The notes are unsecured and
payable on demand.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
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 (see note 9) have an aggregate fair value of
approximately $374,000 and $318,800 at December 31, 1996 and 1995,
respectively. The fair values are based on discounted future cash flows
over an estimated four and three year period outstanding, respectively,
using an estimated 9.25% and 10% incremental borrowing rate, respectively.
Such estimates were determined by the Company based on future operating
cash flow and market interest rate assumptions.
F-14
<PAGE>
SIXX HOLDINGS, INCORPORATED
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SIXX HOLDINGS, INCORPORATED
Sixx Holdings, Incorporated (the "Corporation"), organized and existing
under and by virtue of the General Corporation Law of Delaware (the "DGCL")
does hereby certify:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth an amendment to the Certificate of Incorporation of
the Corporation (the "Amendment"), declaring the Amendment to be advisable
and calling for the submission of the proposed Amendment to the stockholders
of the Corporation for consideration thereof. The resolution setting forth
the proposed Amendment is as follows:
ARTICLE FOUR of the Certificate of Incorporation of the Corporation is
hereby amended so as to eliminate in its entirety existing paragraph III
thereof, which shall be replaced by the following Paragraph III:
III. Each holder of Voting Stock will be entitled to one vote for
each share of Voting Stock held. Cumulative voting will not be
permitted.
ARTICLE FOUR of the Certificate of Incorporation of the Corporation is
further amended to add thereto new Paragraph IV. to read as follows:
IV. (i) Effective immediately upon the filing of this
Amendment to the Certificate of Incorporation in the office of the
Secretary of State of the State of Delaware, each outstanding share of
previously existing Common Stock shall be and hereby is converted into
and reclassified as one-eighth of a share of Common Stock; provided,
however, that fractional shares of Common Stock will not be issued and
each holder of a fractional share of Common Stock shall receive in lieu
thereof a cash payment from the Corporation determined by multiplying
such fractional share of Common Stock by eight times the average closing
price of a share of previously existing Common Stock on the Nasdaq Stock
Market for the five trading days immediately preceding the effective
date, and upon such other terms as the officers of the Corporation, in
their sole discretion, deem to be advisable and in the best interests of
the Corporation.
(ii) Certificates representing reclassified shares are hereby
cancelled and upon presentation of the cancelled certificates to the
Corporation, the holders thereof shall be entitled to receive
certificate(s) representing the new shares into which such cancelled
shares have been converted.
<PAGE>
ARTICLE FIVE of the Certificate of Incorporation of the Corporation is
hereby amended so as to eliminate in its entirety Paragraph VI thereof.
ARTICLE SIX of the Certificate of Incorporation of the Corporation is hereby
amended so as to eliminate ARTICLE SIX in its entirety.
SECOND: That thereafter pursuant to a resolution of the Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the DGCL at
which meeting the necessary number of shares as required by statute were
voted in favor of the Amendment.
THIRD: That the Amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
FOURTH: That the Amendment shall be effective on the date this Certificate
of Amendment is filed and accepted by the Secretary of State of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Jack D. Knox, its President, and attested by Dorothy L. Douglas,
its Secretary, this 15th day of March, 1996.
SIXX HOLDINGS, INCORPORATED
By: /s/ Jack D. Knox
------------------------------------
Jack D. Knox
PRESIDENT
ATTEST: /s/ Dorothy L. Douglas
-------------------------
Dorothy L. Douglas
SECRETARY
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 118,100
<SECURITIES> 0
<RECEIVABLES> 57,400
<ALLOWANCES> 0
<INVENTORY> 75,800
<CURRENT-ASSETS> 307,700
<PP&E> 3,627,600
<DEPRECIATION> (1,545,200)
<TOTAL-ASSETS> 2,403,800
<CURRENT-LIABILITIES> 1,217,400
<BONDS> 0
0
0
<COMMON> 13,600
<OTHER-SE> 1,141,600
<TOTAL-LIABILITY-AND-EQUITY> 2,403,800
<SALES> 6,570,000
<TOTAL-REVENUES> 6,570,000
<CGS> 1,942,200
<TOTAL-COSTS> 7,375,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,900
<INCOME-PRETAX> (792,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (762,400)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
