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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM DECEMBER 30, 1996 TO DECEMBER 28, 1997
COMMISSION FILE NUMBER 0-17975
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REDHEADS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4169432
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
50 SOUTH BUCKHOUT STREET
IRVINGTON, NEW YORK 10533
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
(914) 591-4444
(REGISTRANT'S TELEPHONE NUMBER)
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Title of Class
/ / Common Stock, par value $0.001 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of 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. / /.
Registrant's revenues for the most recent calendar year: $ 9,679,825.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 28, 1997 was $2,869,175.10 (based on 869,447
shares held by non-affiliates and computed based on the administrative price for
which claims were converted to shares of Common Stock pursuant to the Company's
plan of reorganization).
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes /X/ No / /
As of April 8, 1998, the Registrant had 2,390,756 shares of its $0.001 par
value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
MAGIC RESTAURANTS, INC.
(FORMER NAME)
JULY 1 TO JUNE 30
(FORMER FISCAL YEAR)
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TABLE OF CONTENTS
Page
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PART I ......................................................................................................... 3
Item 1. Description of the Business................................................................... 3
Item 2. Description of Properties..................................................................... 11
Item 3. Legal Proceedings............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................................... 13
PART II ........................................................................................................ 14
Item 5. Market for Common Equity and Related Stockholder Matters...................................... 14
Item 6. Selected Consolidated Financial Data.......................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................. 18
Item 8. Financial Statements.......................................................................... 30
Item 9. Changes in And Disagreements With Accountants on Accounting And
Financial Disclosure.......................................................................... 31
PART III ....................................................................................................... 31
Item 10. Directors and Executive Officers of the Registrant............................................ 32
Item 11. Executive Compensation........................................................................ 35
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 37
Item 13. Certain Relationships and Related Transactions................................................ 38
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 39
SIGNATURES ..................................................................................................... 41
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PART I
This document contains certain forward looking information about the
Company, its business and its anticipated future performance. When used in this
document, the words "anticipate," "believe," "expect," "estimate," "project,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties, and assumptions by
the management of the Company and may not prove to be correct. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, believed, expected, estimated, or projected. These assumptions
include: (i) the receipt of adequate additional capital on a timely basis to
enable the Company to implement its business plans; (ii) the availability of
suitable restaurant leaseholds and the Company's ability to successfully
negotiate and enter into binding lease agreements; (iii) the successful
conversion and integration of existing Red Robins and other restaurants into the
Company's current business operations; and (iv) the continuation of favorable
economic conditions.
All of these assumptions are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company. Accordingly, there can be no assurance that actual results will meet
expectations or will not be materially lower than the results contemplated in
this document.
1. DESCRIPTION OF THE BUSINESS
INTRODUCTION
The Company owns and operates five casual dining, table service
restaurants in New York and New Jersey under the name "Redheads Bistro/Bar" and
"Red Robin Burgers & Spirits Emporium." The Company is currently converting its
remaining Red Robin facility to the Redheads concept.
The Redheads Bistro/Bar concept is based upon the uniqueness, flair and
style associated with being a redheaded person. Redheads are honored as a "breed
apart" from the ordinary; a group of people with a flair for life and
unpredictable nature. These elements are presented in homage to famous Redheads
from celebrities to animated characters depicted in hundreds of posters,
photographs and sculptures which reflect the redheads state of mind. Guests are
encouraged to "expect the unexpected" and to absorb some of the fun, irreverence
and unpredictable nature of being a redhead.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
The Company and all of its subsidiaries filed petitions for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
on April 6, 1995 (the "Petition Date"), and all operated as debtors and
debtors-in-possession through the entirety of their Chapter 11 cases.
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On May 30, 1997 (the "Plan Effective Date"), the Second Amended Plan of
Reorganization for the Company and its subsidiaries (the "Plan"), which was
confirmed by court order dated December 30, 1996, became effective. In
connection with its reorganization, the Company caused its name to be changed to
"Redheads, Inc." and its Certificate of Incorporation and By-Laws to be amended
and restated. In addition, the Plan caused all equity securities issued prior to
the Plan Effective Date to be cancelled and extinguished. Under the Plan, the
Company issued on the Plan Effective Date a total of 2,235,743 shares of Common
Stock and 28,775 shares of Series A 12% Cumulative Convertible Preferred Stock
to certain claimants entitled to distributions under the Plan. Pursuant to the
Plan certain subsidiaries also issued preferred stock to certain claimants. See
"Item 5--Market for Common Equity and Related Stockholder Matters."
Subsequently, in June, 1997, the Company purchased the "Redheads
Bistro/Bar" concept and one operating Redheads Bistro/Bar restaurant located in
Middletown, New Jersey. For additional discussion of the terms of the purchase
of the Redheads concept and the Plan, see "Item 1. Business--The Redheads
Purchase" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
As of the time of the filing of its Chapter 11 petition for relief, the
Company operated and managed 15 restaurants in the New York and Washington, D.C.
metropolitan areas. In the New York metropolitan area, as of the Petition Date,
the Company operated six "Red Robin Burger and Spirits Emporium" restaurants
pursuant to franchise agreements under which Red Robin International, Inc.
licensed to the Company certain proprietary operating systems, trade dress, and
other specialized property. In the Washington, D.C. metropolitan area the
Company operated nine "The American Cafe" restaurants, which had been purchased
in March, 1994 from Monolith Enterprises, Inc., a subsidiary of W.R. Grace & Co.
In November 1997 after having closed the last American Cafe operations
at the end of 1996, agreement was reached by which Ruby Tuesday, Inc., a Georgia
corporation, purchased the American Cafe trademarks and all rights and interest
therein for $100,000.
In March, 1995, prior to the Petition Date, the Company had divested
itself of ownership of (i) the "Carmella's Cafe" restaurant concept and the five
upstate New York restaurants operating as "Carmella's Cafes," and (ii) minority
interests in two "Spiga" Italian-style family restaurants located in Westchester
County, New York.
While operating under Chapter 11 the Company ceased operations at all
of its restaurants in the Washington, D.C. metropolitan area and two of its
restaurants in the New York metropolitan area. As a result, on the Plan
Effective Date the Company operated four restaurants, all in the New York
metropolitan areas. Subsequent to the Plan Effective Date, the Company acquired
one restaurant, so that as of the date this Report is filed, the Company
operates a total of five restaurants. In addition as of February 1998
negotiations were underway for the purchase of another restaurant, currently
operating as a Redheads, whose gross sales were estimated at $60,000 weekly.
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In September of 1996, the Company began redirecting its strategic focus
towards development, ownership, and operation of a multi-unit, mid-scale, casual
dining concept operating under the name Redheads Bistro/Bar. In furtherance of
this strategic redirection, during the twenty-six week transition period ended
December 29, 1996, the Company ceased all restaurant operations under The
American Cafe concept, closed down two Red Robin restaurants in Smithhaven and
Staten Island New York, and caused the restaurant in Levittown, New York,
formerly operating as a Red Robin restaurant, to be converted to a Redheads
Bistro/Bar. The company acquired rights to the Redheads Bistro/Bar concept in
June, 1997. See "The Redheads Purchase." Pursuant to an agreement with Red Robin
International entered into in connection with consummation of the Plan, the
Company is required to cease operating its three restaurants in Yonkers, New
York, Secaucus, New Jersey, and Brooklyn, New York as Red Robin restaurants by
no later than December 31, 1997. As of March 31, 1998 the Company caused the
conversion of the Yonkers, New York (reopened November 28, 1997) and Secaucus,
New Jersey (reopened March 4, 1998) restaurants to Redheads Bistro/Bar, however,
the company has not as yet converted the Brooklyn, New York facility and there
can be no assurance Red Robin will not pursue its legal remedies in the future.
Failure to convert the restaurants as required by the Bankruptcy Court order
could result in litigation and the grant of injunctive relief against the
Company, and the imposition of unspecified monetary damages against the Company.
The Company is proceeding with its plans to convert its Brooklyn location as
directed by the court. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--The Reorganization Proceedings;
Confirmation and Effectiveness of the Company's Reorganization Plan."
THE REDHEADS RESTAURANT CONCEPT AND MENU
The Company believes that the trend in eating out is toward casual,
moderately priced, full-menu table service restaurants serving well-prepared,
high quality foods. The Company's restaurants offer large portions of high
quality, fresh food at moderate prices. The per person check average at the
Company's "Redheads" restaurants is approximately $9.75 for lunch and $12.75 for
dinner, with an average per restaurant seating capacity of approximately 250.
The Company believes that its restaurants are distinguishable from many
other casual, moderately priced full-menu table service restaurants by its
theme, decor and its menu. The theme, decor and menu are intended to appeal to a
varied clientele, including families, business patrons, casual diners, and
shoppers.
The restaurants are sophisticated yet comfortable and casual, with
lively colors, natural woods, plants, and brass fixtures. The bar area has
several large and small video screens, electronic and non-electronic games,
various entertainment features, caters to singles, couples, informal groups, and
late night dinner and drink crowds in an entertainment driven atmosphere that
often features live musical entertainment. Bars are well stocked with selections
from microbrewerys and boutique wineries along with a full liquor offering. The
restaurants also have a satellite dish and multiple television screens
throughout the bar and dining facilities.
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Casually dressed redheaded mannequins are playfully placed throughout
the restaurant, and the walls are extensively adorned with photos and prints
featuring all varieties of redheaded people, models, and personalities, of all
ages. Local patrons are encouraged to post photos of their own favorite redhead
friend, relative, or personality along the thin strip boards that traverse much
of the seating area.
The international menu is diverse in its offering, catering to a
variety of tastes and budgets. In addition to the daily featured specials, the
menu offers unique dishes in every category, including the "Mozzarella Tower"
appetizer, "Wisconsin Bisque," as well as "Thomas Jefferson Philly Cheesteak",
"Pacific Rim Pot Stickers", "Thai Pepper Beef Wraps", "Winston Churchill's
Shepards Pie", and old standards like "Chicken Parmigiana" and "Corned Beef and
Cabbage." Coffees, including espressos, and desserts are also offered. The
menu's breadth, coupled with specials, caters to lunch, early-bird, evening
dinner, and late night appetites. The portions are generous, and menu items
range from $4.95 for appetizers to $16.95 for certain steak and seafood entree
selections.
Three of the restaurants offer a prominently displayed sushi bar,
staffed by sushi chefs. The Company believes the trend in casual restaurant
dining is moving to eclectic menus accented by ethnicity of taste. The Company
addresses this trend through the addition of certain new design elements known
as modular dining, which in addition to a sushi bar could include a Spanish
tapas bar, a raw oyster bar, a hibatchi bar and/or a coffee bar. Menus are
adjusted to reflect the needs and dining preferences of the individual
restaurant market trade areas.
The service staff dresses casually, wearing Redheads-styled red polo
shirts and dark or khaki slacks or shorts, depending on the season.
Soon after acquiring the Redheads concept in June, 1997, the Company
hired David C. Sederholt as Executive Vice President and Chief Operating
Officer. Mr. Sederholt, an experienced restaurant operator, is directing the
growth and development of the Redheads Bistro/Bar concept. The Company is
implementing a number of operational changes within the concept that are
expected to significantly reduce food and labor costs, without affecting food or
service quality. The Company has recently enhanced control systems and training
manuals and programs to standardize Redheads Bistro/Bar operating procedures;
these manuals and programs are expected to improve productivity and reduce
employee turnover.
The Company believes that the success of the Redheads Bistro/Bar
concept depends on a number of factors including location, management, operating
practices, and employees.
The Company attempts to capture a significant portion of the market
share for food and beverage services in the immediate business area where its
restaurants are located. To this end, each restaurant provides take-out service
and has fax machines through which it accepts orders. The Company also caters
special events in its restaurants, and offers catering sales and events planning
managers to develop additional business in this area.
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The Company's restaurants make extensive use of computerization,
providing management with precise information on hourly sales and labor costs.
In addition to the tight labor controls this minimizes the need to carry large
quantities of food inventory and generally results in a higher quality of food
inventory. Each of the Company's restaurants uses a computerized point-of-sale
system that tracks all food and drink orders and expeditiously fulfills them.
This enables the servers and managers to remain on the restaurant floor and be
available to serve patrons.
DEVELOPMENT PLANS AND SITE STRATEGY
The Company's long-term objective is to continue to expand the Redheads
concept through the opening of Company owned and operated restaurants in
strategically desirable markets in New York and New Jersey. The Company intends
to concentrate on developing a strong presence in the geographic markets within
a 75 mile radius of New York City to achieve penetration levels that could
improve the Company's competitive position, marketing share, and profitability.
The Company intends to open at least one new Redheads Bistro/Bar restaurant each
quarter. The new restaurants will most likely be created by acquisition and
conversion of existing restaurants currently operated by third parties in order
to realize a high return on investment for each new restaurant.
The Company considers restaurant site selection to be critical to its
long-term success and will devote significant resources to the investigation and
selection of new locations. The site selection process will focus on a variety
of factors, including: area demographics, such as target population density and
household income levels; area psycho graphics, such as dominant or prevalent
lifestyle characteristics and purchase behaviors; site characteristics, such as
visibility, accessibility, traffic volume, proximity to activity centers, area
growth potential; and competitive factors specific to the local market.
The rate at which the Company will be able to open new restaurants will
be dependent upon availability of the necessary capital and its success in
locating satisfactory sites, negotiating acceptable lease or purchase terms,
securing appropriate local governmental permits and approvals, and finding
strong local restaurant talent.
The Company leases and operates both free-standing and in-line
restaurants. Free-standing restaurants are not attached to any other building,
while in-line restaurants are part of a shopping mall or office complex. The
Company anticipates that expansion will normally be through acquisition and
conversion of restaurants, currently owned by third parties that are marginally
profitable, not profitable or closed. The estimated cost of converting an
operating restaurant to the Redheads Bistro/Bar concept is approximately $65 per
square foot, although the actual amount will vary by location depending upon the
work required.
SUPPLIERS
The Company purchases food and other supplies for its restaurants from
various wholesalers on a daily basis. The Company's ability to maintain a
consistent quality of its products depends upon acquiring quality food products
and related items from reliable sources. While the Company
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believes that there are multiple sources for most food products in the greater
New York metropolitan area, the Company is still subject to the common risks
associated with restaurant supply relationships, such as those relating to
freshness, quality, selection, price and availability.
The cost of the Company's supplies depends upon the extent to which the
Company is able to negotiate satisfactory arrangements with suppliers and the
availability of and demand for various items. The combined unit volume of
purchases by each of its restaurants has enabled the Company to obtain volume
discounts and negotiating leverage in certain instances. During the last quarter
of 1997 the Company aggressively sought and received credit terms from many of
its vendors.
The Company may be materially adversely affected by external events,
such as local weather conditions affecting the price and supply of various
items, as well as strikes within the food or transportation industries, which
may limit the ability of suppliers to furnish food to the Company on a timely
and cost-effective basis. Generally, however, all essential food and beverage
products are available, or upon short notice can be made available, from
alternative qualified suppliers.
Because of the relatively rapid turnover of perishable food products,
inventories in the restaurants, consisting primarily of food, beverages, and
supplies, have a modest aggregate dollar value relative to revenues.
MARKETING
The Company primarily targets the 18 to 49 year old age group, which
constitutes slightly less than half of the United States population. Members of
this population segment generally grew up frequenting fast food restaurants; but
the Company believes that, with increasing maturity, they prefer a broader, more
adult, casual dining and bar experience. To attract this target group, the
Company has used various types of advertising and promotions, especially in
connection with the opening of new restaurants. Marketing programs are
regionalized to address the specific requirements of each trade area. Marketing
programs consist primarily of public relations campaigns, advertisements in
local newspapers, radio commercials, distributing flyers, and sponsoring local
activities. The Company expects to employ television advertising during 1998.
The Company also plans to develop dining frequency promotional campaigns to
increase repeat business from its existing customer base. The Company expects to
rely primarily on targeted marketing efforts and positive word-of-mouth
endorsements from existing customers. In addition, the Company has added
Catering Sales & Special Events planners to directly market banquet, meetings,
and on and off premise events.
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SEASONALITY
The Company's business is seasonal in nature, with revenues and, to a
greater degree, operating incomes lower in the winter and fall (excluding the
year-end holiday shopping period) than in the spring and summer. This seasonal
effect is largely caused by colder and more inclement weather that keeps people
at home, and by reduced overall consumer spending in the fall in advance of the
year-end holiday season. Free-standing restaurant sales are higher in the late
spring and early summer months; sales at mall-based restaurants generally reach
their highest level during the year-end holiday season.
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COMPETITION
The retail food and beverage service industry is intensely competitive,
especially within the New York-Northern New Jersey metropolitan area. The
Company competes with other full menu table service restaurants and fast food
restaurants for location, service, personnel, perceived quality, variety, and
value of the food and ambiance offered. The Company competes with food service
operations, with locally-owned operations, and with national and regional
chains, like T.G.I.Friday's, Applebee's, Bennigan's, Chili's, Ground Round,
Houlihan's, and Lone Star Steakhouse, among others, several of whom have greater
financial and other resources, longer operating histories, substantially more
facilities, and greater name recognition than Redheads. Barriers to entry are
not substantial in the restaurant industry. Generally, however, locations and
restaurants comparable to the Company's restaurants require substantial capital
to open and operate.
The Company has no control over the number of competitive restaurants
that may open in the proximity of the Company's restaurants. Many of these
restaurants may enjoy much broader consumer recognition. Increasing competitive
pressure may require additional advertising and promotional expenditures, the
amount and timing of which may be determined in part by the need to respond to
the advertising of competitors.
CUSTOMER DEPENDENCE
No material part of the business of the Company is dependent upon a
single customer, or very few customers, the loss of any one of which would have
a material adverse effect on the Company.
GOVERNMENT REGULATION
The Company's restaurants are subject to licensing and regulation by
various government agencies, including those dealing with alcohol control,
health, sanitation, fire, building, planning, on-site dancing and live
entertainment, and local traffic patterns. Delays in obtaining, or denials of,
necessary licenses or approvals could have a material adverse impact upon the
Company's development of new restaurants and, consequently, the Company's
prospects. The Company is also subject to Federal and state laws pertaining to
fair labor standards, which govern such matters as working conditions and
minimum wages.
The Company has obtained liquor licenses for all of its present
locations, and does not anticipate any difficulty in obtaining liquor licenses
in the future. In New Jersey, the number of liquor licenses which may be granted
in any one municipality is limited and subject to local regulation. For this
reason, the acquisition of a liquor license may be time-consuming, difficult and
expensive, and the loss of a liquor license could have a materially adverse
impact upon the Company's prospects. In connection with the maintenance of its
liquor licenses, the Company is required to notify a local regulatory authority
in the event of certain changes in stock ownership of the licensed corporation
and changes in management of its New Jersey restaurants.
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Sales of alcoholic beverages represent approximately 20% of the
Company's food and beverage revenues. The temporary suspension or permanent loss
of any liquor license, or the inability to obtain a liquor license, could have a
materially adverse effect on the Company's sales and results of operations.
MANAGEMENT AND OTHER EMPLOYEES
As of December 28, 1997, the Company employed 316 persons, of whom 10
were executive and administrative personnel, 19 were managerial employees
involved in restaurant operations, 77 were kitchen personnel, and 210 were
restaurant service personnel. All of the restaurant service personnel are
part-time employees. All non-managerial restaurant employees are paid on an
hourly basis. The Company believes that it enjoys generally good relationships
with its employees. None of the Company's employees are covered by a collective
bargaining agreement.
The Company seeks to attract and retain high caliber restaurant
managers by providing them with an appropriate balance of autonomy, direction
and attractive financial incentives. To those incentives, the Company has
developed a management incentive program under which new general managers will
work with senior management to prepare quarterly budgets and performance plans
for their restaurants. More experienced general managers, who have demonstrated
the ability to achieve planned objectives, may be promoted to the district
manager level. The Company believes that by providing its general managers and
district managers with short and long-term financial incentives, it will
continue to attract and retain high caliber personnel. Company policy strongly
favors promoting existing non-management employees into management positions.
Management trainees must demonstrate their ability in every area of restaurant
operations before being considered for promotion.
TRADEMARKS
The Company is endeavoring to secure federal trademark and service mark
rights to the name and mark of "Redheads." A third party has an existing federal
service mark registration for "The Redhead" for "nightclub and cocktail lounge
services," which could preclude a registration by the Company. It appears,
however that the Company made "prior use," and may have a basis to bring a
cancellation proceeding with respect to the registered mark. The Company is
advised that its prior use of the name and mark protects its use of the name for
those restaurants which made such prior use. The Company may be precluded,
however, from use of the name and mark in the Chicago, Illinois market for as
long as the registrant conducts business there under "The Redhead" name. The
Company's current plan is to concentrate growth on the East Coast, and in the
Middle Atlantic states in particular, where the first use of the trademark and
service mark have been established.
In November 1997, after having closed the last American Cafe operations
at the end of 1996, agreement was reached by which Ruby Tuesday, Inc., a Georgia
corporation, purchased the American Cafe trademarks and all rights and interest
therein for $100,000.
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ENVIRONMENTAL COMPLIANCE
Compliance with federal, state, and local laws and regulations which
have been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, is not
expected to have a material affect upon the capital expenditures, earnings, or
competitive position of the Company.
ITEM 2. DESCRIPTION OF PROPERTIES
All of the Company's restaurant locations are held under long term
leases. The Company's leases generally provide for a fixed base rent plus
additional rent based on the level of sales generated by the restaurant. Most of
the Company's leases require the Company to pay all or a portion of the costs of
owning and operating the premises, including the cost of insurance, taxes and
maintenance.
RESTAURANT LOCATIONS
The following chart sets forth the restaurants as of December 28, 1997
that are currently owned and/or operated by the Company through its wholly-owned
corporate subsidiaries, as listed below:
<TABLE>
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LOCATION PRESENT CONCEPT EST. SEATING SQ. FOOTAGE TERM (1)
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Brooklyn, NY Red Robin 250 6,500 May 1986 - Jan. 2005
Levittown, NY Redheads 340 10,000 Sept. 1993 - Aug. 2013
Yonkers, NY Red Robin 260 8,400 July 1988 - June 2012
Middletown, NJ Redheads 210 6,000 Apr. 1991 - Mar. 2006
Secaucus, NJ Red Robin 220 8,250 Oct. 1989 - Sept. 2009
</TABLE>
(1) Assumes that the Company exercises all of its extension options.
The Company's administrative headquarters are located at Fifty South
Buckhout Street, Irvington, New York 10533, where the Company leases
approximately 4,000 square feet of office space under a five year lease. The
monthly lease payment is approximately $2,000, net of taxes, insurance, and
maintenance. The Company has been operating from this space since 1997.
The Company believes that its current facilities are adequate for their
present and future intended uses and that its properties are in good condition,
well maintained, and adequately insured.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
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Pursuant to the Plan, the Bankruptcy Court retained jurisdiction to
hear and determine any objections to claims. Certain prepetition unsecured
claims against the Company, subject to resolution and discharge in the Chapter
11 cases, have not been resolved. However pursuant to the Plan, 125,000 shares
of the Company's Common Stock are allocated for distribution to all such
claimants, and no other stock or assets of the Company may be claimed by such
claimants. As a result, the resolution of such disputed claims will not affect
the Company.
The Company is also presently appealing an order of the Bankruptcy
Court requiring the Company to pay approximately $100,000 to Bowie Produce,
Inc., a prepetition produce vendor, pursuant to the Perishable Agricultural
Commodities Act ("PACA"). The resolution of these matters is not expected to
become final until the latter part of fiscal year 1998. The Company believes
that an adverse decision to the Company in each of these matters will not
materially affect the Company's operations, and further that it will have
sufficient cash available to pay any judgments that may be entered with finality
against the Company.
In July, 1997, Mr. Gallagher, one of the former owners of the Redheads
concept, tendered his resignation to the Company and embarked upon design and
construction of another concept restaurant named "Jersey Girls." Upon review of
the completed facility and discussions with Mr. Gallagher and others, the
Company believes that Mr. Gallagher, his partners, his affiliates and the
designer, Mr. Greg Sheridan may have infringed upon the trade dress of the
Redheads concept. The Company, in exchange for certain design features, has
released Mr. Sheridan from any further legal action. The Company is reviewing
the possibility of bringing legal action against the parties believed to be
infringing. The Company is unable at this time to determine the likely outcome
of this dispute. Failure to obtain injunctive relief against these infringing
parties could have a materially adverse effect upon the Company's rights in its
proprietary trade dress.
The Company is required by an order of the Bankruptcy Court, entered
into in connection with the Plan, to remove all Red Robin trade dress from its
restaurant locations in Secaucus, New Jersey, Yonkers, New York, and Kings
Plaza, Brooklyn, on or before December 31, 1997. Failure to remove the trade
dress as required by the Bankruptcy Court order could result in litigation and
the grant of injunctive relief against the Company, and the imposition of
unspecified monetary damages against the Company. The Company has proceeded with
the conversions as directed by the court. As of November 1997 and March 1998 the
Yonkers and Secaucus locations (respectively) had been successfully converted
and only the Kings Plaza location was in violation of this order. The Company
has notified Red Robin of its violation and intent to convert the unit during
the third quarter of 1998. The Company continues to pay royalty fees to Red
Robin.
In January 1998 The Company came to agreement with Mr. Michael Ezzo of
Carmella Cafes with regard to a note held by The Company for the March 6, 1995
sale of the Carmella Cafes. The agreement forgives all unpaid interest through
Dec. 31, 1997 ($173,821) and reduces the interest rate from 11% to 7% contingent
on receipt of all payments due on a timely basis. The note was restructured to
7% with a 20 year term and quarterly payments of $12,990.89 commencing April 30,
1998.
13
<PAGE> 14
Other than as discussed in this Item 3, there are no other legal
proceedings to which the Company is a party that are material to the Company's
business.
POTENTIAL DRAM SHOP LIABILITY
All restaurants in New Jersey and New York are subject to dram shop
legislation which imposes liability on licensed alcoholic beverage servers for
injuries or damages caused by their negligent service of alcoholic beverages to
a visibly intoxicated person or to a minor, if such service is the proximate
cause of the injury or damage and such injury or damage is reasonably
foreseeable. Additional restaurants established or acquired by the Company in
the future are likely to be subject to similar potential liability in New Jersey
and New York or elsewhere. While the Company maintains insurance which it
believes is adequate to protect against such liability, there can be no
assurance that it will not be subject to a judgment in excess of its insurance
coverage or that it will be able to continue to obtain insurance coverage at
reasonable costs or at all. The imposition of a judgment substantially in excess
of the Company's insurance coverage would have a material adverse effect on the
Company. The failure or inability of the Company to maintain insurance coverage
could materially and adversely affect the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock issued pursuant to the Plan has not been publicly
traded since the Plan Effective Date. Prior to the Plan Effective Date, the
Company's then issued Common Stock was quoted for trading on the NASDAQ (symbol
"MGIK"), until it was de-listed on April 10, 1995. Pursuant to its obligations
under the Plan, the Company will use reasonable efforts to have the Common Stock
quoted for trading on the automated quotation system maintained by the National
Quotation Bureau, Inc (symbol "REDH").
The following table sets forth the quarterly high and low sales prices
for the then issued Common Stock of the Company for the two years preceding year
end December 28, 1997. The source of these quotations is the National Quotations
Bureau. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
1995
Second quarter................................................ $ 0.01 $ 0.06
Third quarter................................................. $ 0.01 $ 0.06
Fourth quarter................................................ $ 0.01 $ 0.06
1996..........................................................
First quarter................................................. $ 0.01 $ 0.12
Second quarter................................................ $ 0.01 $ 0.12
Third quarter................................................. $ 0.01 $ 0.12
Fourth quarter................................................ $ 0.01 $ 0.12
1997
First quarter................................................. $ 0.01 $ 0.12
</TABLE>
HOLDERS
As of December 28, 1997, there were approximately ??? holders of record
of the Company's Common Stock.
DIVIDENDS
Common Stock. No dividends have been declared in respect of the
Company's Common Stock since the April 6, 1995 Petition Date. The Company is not
prohibited or restricted from paying dividends on the Common Stock, but the
Company does not anticipate paying any dividends to holders of the Company's
Common Stock in the foreseeable future.
15
<PAGE> 16
Series A 12% Cumulative Convertible Preferred Stock. The Company is
obligated to pay dividends to the holders of the Series A 12% Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") that was issued under
the Plan at a rate equal to tweleve percent (12%) per annum on the $75 stated
value. The dividends are payable annually through the issuance of shares of
Common Stock of the Company at a price equal to 80% of the average bid price for
the Common Stock during the preceding 12 months. To the extent these funds are
legally available, beginning May 30, 2000, the Company has the option to
purchase, at a cash price equal to $75. Per share, plus accrued and unpaid
dividends, portions of Series A Preferred Stock, so that the stock would be
retired within seven years. For the first three years after the issuance, at the
election of the holders and with the consent of the Company, the Series A
Preferred Stock is exchangeable for shares of common stock. After this time the
stock is not exchangeable at the holders option. As of December 28, 1997, a
total of 42,108 shares of the Series A Preferred Stock was outstanding, and all
of such shares were held by Teleferscot International, Ltd., ("Teleferscot").
Any newly issued Series A Preferred Stock will be entitled to dividends on the
same terms as the currently outstanding shares of Series A Preferred Stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Reorganization Proceedings; Confirmation and Effectiveness of
the Company's Reorganization Plan" for further discussion of the nature and
terms of the Series A Preferred Stock.
As of December 28, 1997 the Company has $123,000 of dividends in
arrears for Series 12% Cumulative Convertible Preferred Stock.
R.B.B. of Secaucus and R.B.B. of Yonkers Preferred Stock. Pursuant to
the Plan, R.B.B. of Secaucus, Inc. and R.B.B. of Yonkers, Inc. issued 8%
Cumulative Exchangeable Preferred Stock (the "Subsidiary Preferred Stock") in
exchange for a release of prepetition liability of approximately $400,000. Each
issuing subsidiary owns and operates the restaurant unit located in the city
designated in the corporate name of the particular issuing subsidiary.
Dividends are payable on the Subsidiary Preferred Stock at a rate of 8%
per annum based on the liquidation preference of $75 per share. The dividends
are payable semi-annually, to the extent funds are legally available therefor.
At the election of the issuing subsidiary such dividends may be paid by issuance
of shares of Common Stock of the Company, valued for this purpose at the closing
price as of the 10th business day preceding declaration of the dividend.
Further, to the extent funds are legally available therefor, on May 30, 2000,
May 30, 2001, and May 30, 2002, each issuing subsidiary will offer to purchase,
at a cash price equal to $75 per share, plus accrued and unpaid dividends,
one-sixth, one-third, and one-half, respectively of the Subsidiary Preferred
Stock issued under the Plan; provided, however, that if at any time the closing
bid price of the Common Stock exceeds $5 per share for 40 consecutive trading
days, any such mandatory repurchase obligation shall expire.
Levittown Preferred Stock. R.B.B. of Levittown, Inc. has also issued
its own 8% Cumulative Exchangeable Preferred Stock (the "Levittown Preferred
Stock"). On May 25,1997 the company issued 13,111 shares of 8% Levittown
Preferred Stock. Dividends are payable on the Levittown Preferred Stock in cash
at a rate of 8% per annum based on the liquidation preference of $75 per
16
<PAGE> 17
share. The dividends are payable semi-annually, to the extent funds are legally
available therefor. Further, to the extent funds are legally available therefor,
beginning on May 30, 1998, and monthly thereafter, the Levittown subsidiary will
offer to purchase one forty-eighth (1/48) of the shares of the Levittown
Preferred Stock issued under the Plan to the holder. The purchase price for such
repurchase is equal to the liquidation preference of $75 per share, plus accrued
and unpaid dividends. For the first three years after issuance, at the election
of the holders and with the consent of the Company, Levittown Preferred Stock
and the Subsidiary Preferred Stock is exchangeable for shares of common stock.
After this time, the stock is not exchangeable at the holders option.
As of December 28, 1997 the Company has $58,000 of dividends in arrears
for Series A 8% Cumulative Excahngeable Preferred Stock.
For further discussion of certain material terms of the Subsidiary
Preferred Stock and the Levittown Preferred Stock, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation--The
Reorganization Proceedings; Confirmation and Effectiveness of the Company's
Reorganization Plan."
CERTAIN RIGHTS OF PREFERRED SHAREHOLDERS
The Company's charter provisions forbid mergers or consolidations in
which the Company is not the survivor, and certain asset sales, without the
consent of holders of a majority of the shares of the Series A Preferred Stock,
voting as a single class.
The Subsidiary Preferred Stock and the Levittown Preferred Stock each
provide that if the issuing subsidiary of the preferred stock fails to pay three
consecutive semiannual dividends or fails to make one mandatory repurchase, then
the holders of such stock in such subsidiary, voting as a single class, shall be
entitled to elect one director to the Board of Directors of the issuing
subsidiary. Such director will serve until all accrued dividend and mandatory
repurchase payments are brought current.
The certificates of incorporation of the subsidiaries issuing the
Subsidiary Preferred Stock each provide that the subsidiary may not create,
incur, assume, or otherwise become or be liable for any indebtedness for
borrowed money or for the deferred purchase price of property (except to the
Company or another subsidiary of the Company).
The certificate of incorporation of R.B.B. of Levittown provides that
it may not create, incur, assume, or otherwise become or be liable for any
indebtedness for borrowed money or for the deferred purchase price of property.
Further, the charter provides that the issuing subsidiary will not sell,
transfer, or dispose of the assets of the subsidiary, except for cash in the
ordinary course of business at then fair market value.
17
<PAGE> 18
The certificate of incorporation of R.B.B. of Levittown also provides
it may not enter into mergers or consolidations in which R.B.B. of Levittown is
not the survivor, or into certain asset sales, without the consent of holders of
a majority of the shares of the Levittown Preferred Stock, voting as a single
class.
Holders of the Levittown Preferred Stock also have the right, if a
default in payment of dividends or mandatory repurchase is uncured for 60 days
or if the covenant on incurrence of indebtedness or ownership of the subsidiary
assets is breached, to require the Company to deliver to the holder all
outstanding shares of common stock of R.B.B. of Levittown, Inc. in exchange for
the Levittown Preferred Stock.
18
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the
Company's consolidated financial statements. The consolidated financial data set
forth below as of December 28, 1997, June 30, 1996 and July 2, 1995, and for the
twenty-six week transition period ended December 29, 1996 are derived from the
Company's audited financial statements, which have been audited by Cogen Sklar,
LLP, the Company's independent certified public accountants. The consolidated
financial data for the twenty-six week period ending December 31, 1995 set forth
below are derived from the Company's unaudited financial statements.
The information should be read in conjunction with and is qualified by
reference to "Item 8. Financial Statements and Supplementary Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," both of which are included elsewhere in this report.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
(AUDITED) (AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
FY ENDED FY ENDED FY ENDED 26 WKS ENDED 26 WKS ENDED
12/28/97 06/30/96 7/2/95 12/29/96 12/31/95
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues 9,679,825 26,458,229 37,184,935 7,700,920 13,759,915
Total Operating Expenses 10,831,067 29,114,318 46,454,926 8,106,379 13,906,250
Loss from Operations (1,151,242) (2,658,089) (9,269,991) (1,186,222) (971,930)
Loss from Restructuring & Other Expense (907,958) (3,626,139) (4,964,315) (1,940,191) (610,411)
Extraordinary Gain (Loss) 15,988,136 0 0 0 0
Gain (Loss) Aft. Restruc., Other, & Extraord. Item 13,928,936 (6,183,228) (14,234,306) (3,126,413) (1,582,341)
Per Share Gain (Loss) from Operations
Before Restruc. & Other Exp. ($0.27) ($0.37) ($1.33) ($0.16) ($0.14)
Per Share Gain (Loss) on Restruct. Expense ($0.21) ($0.49) ($0.71) ($0.27) ($0.09)
Per Share Gain Extraordinary Items $3.76 0 0 0 0
Per Share Gain (Loss) After Restructuring
Other Expenses & Extraordinary Item $3.27 ($0.85) ($2.04) ($0.43) ($0.23)
Weighted Average Shares used in computing
loss per Common Share (1) 4,257,731 7,241,546 6,976,865 7,241,546 6,976,865
</TABLE>
- --------------------------------------
(1) Pursuant to the Company's confirmed Plan, all shares of Common Stock
outstanding prior to the May 30, 1997 effective date of the Plan were canceled
and extinguished.
19
<PAGE> 20
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
(AUDITED) (AUDITED)
12/28/97 12/29/96
----------------------------------
<S> <C> <C>
Cash 180,082 58,332
Current Assets 939,125 432,229
Total Assets 4,549,398 2,671,864
Current Liabilities 1,520,371 22,234,296
Total Liabilities 1,520,371 24,214,296
Stockholders' Equity (Deficit)(1) 3,029,027 (21,542,432)
Working Capital (Deficit) (581,246) (21,802,067)
</TABLE>
- ----------------------------------
(1) Subsequent to the effectiveness of the Plan the Company has accounted for
the reorganization using "fresh-start" reporting. Accordingly, all assets
and liabilities are restated to reflect their reorganization value, which
approximates fair value at the date of reorganization. Applying principles
of "fresh-start" reporting resulted in elimination of the Stockholders'
Deficit and $22,435,338 of Total Liabilities against the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company owns and operates five casual dining, table service
restaurants in New York and New Jersey under the name "Redheads Bistro/Bar" and
"Red Robin Burgers & Spirits Emporium." The Company was originally organized as
a Delaware corporation on July 14, 1988 under the name Wetherly Ventures
Associates, Inc., which name was subsequently changed to Magic Restaurants, Inc.
on October 28, 1988.
Each of the Company's five restaurants is operated through a separate
wholly-owned subsidiary of the Company. Those subsidiaries are R.B.B. of
Levittown, Inc.; R.B.B. of Brooklyn, Inc.; R.B.B. of Yonkers, Inc.; R.B.B. of
Secaucus, Inc.; and R.B.B. of Middletown, Inc.
20
<PAGE> 21
THE REORGANIZATION PROCEEDINGS; CONFIRMATION AND EFFECTIVENESS OF THE COMPANY'S
REORGANIZATION PLAN
GENERALLY. On April 6, 1995, the Company (then Magic Restaurants, Inc.)
and its 17 wholly-owned subsidiaries filed petitions for relief under Chapter 11
of Title 11 of the United States Code in the Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"), thereby commencing their Chapter 11 cases
(the "Reorganization Cases"). While under the protection of Chapter 11, actions
to collect on all claims against the Company that were in existence prior to the
filing of the petitions for relief, whether secured or unsecured, were stayed
while the Company and its subsidiaries reorganized their businesses as debtors
and debtors-in-possession. These claims are reflected in the Company's December
29, 1996 audited balance sheet as "liabilities subject to compromise."
Additional claims may arise subsequent to the petition date from rejection of
executory contracts and unexpired leases and from determination by the
Bankruptcy Court (or otherwise agreed by the claimant) of allowed claims for
contingencies and other disputed amounts. The Company received Bankruptcy Court
approval to pay or otherwise honor certain of its prepetition obligations,
including employee wages, which the Company did primarily in the last quarter of
the fiscal year ended July 2, 1995.
The lack of liquidity that precipitated the Company's Chapter 11 filing
stemmed from under-capitalization, the collapse of its stock price, the
concomitant inability to obtain equity or debt financing through the public
capital markets, rising interest costs of nearly $1 million annually, mounting
amortization and accelerations of nearly $4 million in notes payable, high level
of general and administrative expenses, and delays in closing several
unprofitable restaurant locations.
POSTPETITION FINANCING. Pursuant to several orders of the Bankruptcy
Court following commencement of the Reorganization Cases, the Company was
authorized to continue to use "cash collateral" in the ordinary course of its
business. Pursuant to these Orders, and as protection of certain secured
creditors' interests in such cash collateral, these secured creditors were
granted replacement liens on the postpetition accounts and inventory of the
Company and its subsidiaries to the extent of their use of the cash collateral.
On the Petition Date, the Company filed a motion for an order
authorizing it to obtain up to $1.5 million in credit through the issuance of
certain debt securities (the "Postpetition Senior Secured Notes"). The
Bankruptcy Court entered an order authorizing such debt. The order was
subsequently amended to authorize the issuance of up to $2.5 million in
Postpetition Senior Secured Notes. A total of $2.5 million was advanced during
the Company's reorganization through the issuance of these Postpetition Senior
Secured Notes.
The Postpetition Senior Notes, among other things, (a) carried an
interest rate of 12 percent (12%) per annum; (b) allowed for the payment of up
to a ten percent commission on borrowings to "finders" or broker representatives
of noteholders; (c) constituted administrative superpriority claims; and (d)
liens on all the Company's assets, junior only to valid preexisting liens
existing as of the Petition Date.
21
<PAGE> 22
OPERATIONAL RESTRUCTURING OF THE BUSINESS. The operational problems
encountered by the Company prior to filing Chapter 11 increased in the first
several months following the filing. Once the Company filed for Chapter 11
relief, sales dropped significantly. In addition, some of the Company's
employees left the Company and were hired by the Company's direct competition.
Finding replacements for these employees took substantial time, and generally
required training and promotion of in-house talent. As a result of these
problems, same store sales for the Red Robin restaurants were nearly 17% lower
in 1995 than the prior year's sales levels. Similarly, same store sales for The
American Cafe restaurants were down in 1995 approximately 8% from the prior
year's sales levels.
To turn around the Company's operating business, the new management
team implemented hundreds of corrective changes at both the corporate and unit
levels, including: food cost factors, training and personnel factors, service
improvements, staff and overhead reductions, outsourcing of certain service
needs, point-of-sale equipment upgrades, and new marketing efforts. As a result,
same store sales at several of the Red Robin locations by the end of fiscal year
ended June 30, 1996 were even with, or ahead of, the previous year's sales.
SELECTION AND PURCHASE OF THE REDHEADS CONCEPT. In September of 1996
the Company began redirecting its strategic focus towards development,
ownership, and operation of a multi-unit, mid-scale, casual dining concept
operating under the name Redheads Bistro/Bar. In furtherance of this strategic
redirection, during the twenty-six week transition period ended December 29,
1996, the Company ceased all restaurant operations under The American Cafe
concept, closed down two marginal Red Robin restaurants in Smithhaven and Staten
Island New York, and caused the restaurant in Levittown, New York, formerly
operating as a Red Robin restaurant, to be converted to a Redheads Bistro/Bar.
Pursuant to an agreement with Red Robin International, entered into in
connection with consummation of the Plan, the Company is required to cease
operating its three restaurants in Yonkers, New York, Secaucus, New Jersey, and
Kings Plaza Brooklyn, New York as Red Robin restaurants by no later than
December 31, 1997. The Company intends to cause each of these three restaurants
to be converted to a Redheads Bistro/Bar in accordance with that agreement.
Failure to remove the trade dress as required by the Bankruptcy Court order
could result in litigation and the grant of injunctive relief against the
Company, and the imposition of unspecified monetary damages against the Company.
The Company is proceeding with the conversions as directed by the court. As of
January 1998 the Yonkers location had been successfully converted, the Secaucus
unit was closed for conversion and only the Kings Plaza location was in
violation of this order.
On June 11, 1997 the Bankruptcy Court overseeing the Chapter 11 cases
of Red One, Inc., Mr. Gallagher entered an order authorizing the sale of the
Redheads Bistro/Bar concept and the Middletown Redheads Bistro/Bar facility to
the Company. The Company purchased the trade name, trade dress elements, and all
related intellectual property rights in the Redheads Bistro/Bar concept for
$100,000, and purchased the Middletown Redheads Bistro/Bar for $175,000 cash,
plus assumption of the underlying lease. The closing of this sale occurred on
June 23, 1997, and ownership of the Redheads concept and the Middletown Redheads
Bistro/Bar transferred to the
22
<PAGE> 23
Company. No appeals of the order authorizing the sale were filed, and the
property was transferred, by the Bankruptcy Court order, free and clear of all
liens, claims, and encumbrances.
THE REORGANIZATION PLAN. By order of the Bankruptcy Court entered on
December 30, 1997, the Bankruptcy Court confirmed the Company's Second Amended
Plan of Reorganization. The Plan became effective by its terms on May 30, 1997.
Prior to such date the Company's name was changed to Redheads, Inc. The Plan
addressed the treatment of all claims against and equity interests in the
Company through the Plan Effective Date in the following manner:
Postpetition Series A Notes. The holders of $2,520,000 of the
Postpetition Series A Notes received 1,896,983 shares of the Company's Common
Stock in exchange for their notes and interest due of approximately $325,000.
Postpetition Series B Notes. Teleferscot, the holder of $1,700,000 in
Postpetition Series B Notes received 23,442 shares of the Company's newly issued
12% Series A Preferred Stock (MRI) in exchange for the notes and interest due of
approximately $58,150. The holder of the Series A Preferred Stock is authorized
under the terms thereof to exchange one share of Series A Preferred Stock for
(a) 5 shares of Common Stock through May 30, 1998, (b) 3.75 shares of Common
Stock from May 31, 1998 through May 30, 1999, and (c) 3 shares of Common Stock
from May 31, 1999 through May 30, 2000. The Series A Preferred Stock carries a
$75 liquidation preference per share (plus accrued and unpaid dividends) and is
callable by the Company at any time at the liquidation preference price. The 12%
Series A Preferred Stock also grants the Company an option to repurchase a
percentage of the Series A Preferred Stock, each year, at $75 per share
commencing on May 30, 2000. If the Company exercised all such options it would
retire the Series A Preferred Stock by May 30, 2004.
Postpetition Liabilities. Approximately $1,882,000 of postpetition
liabilities were exchanged for 5,333 shares of newly issued 8% Subsidiary
Preferred Stock and 213,760 shares of newly issued Common Stock. The holders of
the Subsidiary Preferred Stock are authorized under the terms thereof (with the
Company's consent), to exchange one share of Preferred Stock for (a) 5 shares of
Common Stock through May 30, 1998, (b) 3.75 shares of Common Stock through May
30, 1999, and (c) 3 shares of Common Stock through May 30, 2000. The Subsidiary
Preferred Stock carries a $75 liquidation preference per share (plus accrued and
unpaid dividends) and is callable by the Company at any time at the liquidation
preference price. The present holder of all Subsidiary Preferred Stock is Red
Robin International, which holds 1,778 shares of Subsidiary Preferred Stock of
R.B.B. of Secaucus, Inc., 1,777 shares of R.B.B. of Yonkers, Inc. and 1,777
shares of R.B.B. of Levittown, Inc.
Secured Claims. Secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for payables of $209,000 in
cash, and 11,333 shares of Levittown Preferred Stock. The present holder of this
8% Levittown Preferred Stock is Keybro Enterprises, Inc., with 11,333 shares.
23
<PAGE> 24
Trade and Other Miscellaneous Claims. The holders of approximately
$13,456,000 of trade and miscellaneous claims received 125,000 shares of Common
Stock of the Company, to be shared pro rata among certain of the claimants.
Approximately $26,000 of these liabilities remained intact.
Pre-Plan Effective Date Equity Interests. All equity interests
outstanding prior to the Plan Effective Date were canceled and extinguished
without compensation.
The Company is presently appealing an order of the Bankruptcy Court
requiring the Company to pay approximately $100,000 to Bowie Produce, Inc., a
prepetition produce vendor, pursuant to the Perishable Agricultural Commodities
Act ("PACA"). The resolution of these matters is not expected to become final
until the latter part of fiscal year 1998. The Company believes that an adverse
decision to the Company in this matter will not materially affect the Company's
operations, and further that it will have sufficient cash available to pay any
judgments that may be entered with finality against the Company.
COMMITMENTS AND CONTINGENCIES
(a) The Company operates its restaurants under various operating leases
expiring through August 2013. The executive offices are located in Irvington,
New York and are leased on a month to month basis. Rent expense for the fifty
two weeks ending December 28, 1997, June 30, 1996 and the twenty six weeks ended
December 29, 1996 was $968,545 $2,548,805 and $695,453 respectively. Total rent
expense for the thirteen week period ending September 28, 1997 and September 30,
1996 was $262,841 and $621,170 respectively.
Future minimum rent payments
<TABLE>
<CAPTION>
Fifty-Two/ Fifty-Three Weeks
Ending December
---------------
<S> <C>
1998 $990,273
1999 1,023,488
2000 1,049,663
2001 1,056,699
2002 1,046,695
Thereafter 8,819,518
---------
</TABLE>
THE REDHEADS PURCHASE
Central to the Company's restructuring strategy was acquisition of the
Redheads Bistro/Bar concept from its owners, Red One, Inc., a New Jersey
corporation and J. Michael
24
<PAGE> 25
Gallagher. Red One, Inc. and Mr. Gallagher were operating under Chapter 11. On
June 11, the Bankruptcy Court overseeing the Chapter 11 cases of Red One, Inc.,
and Mr. Gallagher entered an order authorizing the sale of the Redheads concept
and the Middletown Redheads Bistro/Bar in Middletown, New Jersey, to the
Company. The Company purchased the trade name, trade dress elements, and all
related intellectual property rights in the Redheads concept for $100,000, and
purchased the Middletown Redheads Bistro/Bar for $175,000 cash, plus assumption
of the underlying lease. The sale closed on June 23, 1997, and ownership of the
Redheads Bistro/Bar concept and the Middletown Redheads Bistro/Bar were
transferred to the Company. No appeals of the order authorizing the sale were
filed, and the property was transferred, by Court order, free and clear of all
liens, claims, and encumbrances.
25
<PAGE> 26
SUMMARY OF HISTORICAL RESULTS OF OPERATIONS
The table that follows sets forth for the periods indicated the
Company's statements of operations, with operating expenses, loss, and other
income or expense items listed as a percentage of total revenues for such
periods:
<TABLE>
<CAPTION>
(AUDITED) (AUDITED) (AUDITED)
52 WEEKS 52 WEEKS 52 WEEKS
DEC. 28, 1997 JUNE 30, 1996 JULY 2, 1995
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SALES 9,679,825 100.00% 26,456,229 100.00% 37,184,935 100.00%
COST OF SALES 2,827,958 29.21% (7,823,258) -29.57% 10,735,704 28.87%
---------- ---------- ------------
GROSS PROFIT 6,851,867 70.79% 18,632,971 70.43% 26,449,231 71,13%
---------- ---------- ------------
OPERATING EXPENSES
Labor costs 3,108,513 32.11% 9,327,255 36.26% 13,746,467 38.87%
Occupancy costs 1,251,869 32.11% 3,486,573 35.26% 5,039,140 35.97%
Other Operating Expense 2,301,863 12.93% 6,870,738 13.18% 6,533,574 13.56%
Depreciation 379,663 23.78% 1,099,007 26.97% 1,547,878 17.57%
---------- ---------- ------------
TOTAL OPERATING EXPENSES 7,041,909 72.76% 20,783,573 78.68% 26,867,059 72.26%
---------- ---------- ------------
INCOME (LOSS) FROM RESTAURANT OPERATIONS (190,042) -1.98% (2,150,602) -8.13% (417,828) -1.12%
---------- ---------- ------------
General and administrative expenses 961,200 9.83% 507,487 1.92% 8,852,163 23.81%
INCOME (LOSS) FROM OPERATIONS (1,151,242) -1.96% (2,658,089) -8.13% (9,269,991) -1.12%
---------- ---------- ------------
OTHER INCOME (EXPENSE)
Interest income (expense) (325,089) -3.36% (514,725) -1.95% (832,729) -2.24%
Other income (expense) net (68,802) -0.71% 239,900 0.91% 628,891 1.69%
---------- ---------- ------------
TOTAL OTHER INCOME (EXPENSE) (393,892) -4.07% (274,825) -1.04% (203,838) -0.55%
---------- ---------- ------------
REORGANIZATION EXPENSES
Professional fees (522,081) -5.39% (859,155) -3.26% 0 0.00%
Loss on abandonment or disposal of restaurants 8,014 0.08% 0 0.00% (1,589,417) ERR
Closing of American Cafe restaurants 0 0.00% (2,391,159) 9.04% 0 0.00%
Write off of goodwill 0 0.00% 0 0.00% (3,171,060) -8.53%
---------- ---------- ------------
TOTAL REORGANIZATION EXPENSES (514,067) -5.31% (3,250,314) -12.28% (4,760,477) -12.80%
---------- ---------- ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,059,200) -72.82% (6,183,228) 79.04% (14,234,306) - 132.59%
EXTRAORDINARY ITEM
Forgiveness of Debt 15,988,136 165.17% 0 0.00% 0 -4.27%
---------- ---------- ------------
NET INCOME (LOSS) 13,928,936 148.90% (6,183,228) -23.37% ($14,234,306) -38.28%
========== ========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,258,722 7,244,000 6,976,865
========== ========== ============
INCOME (LOSS) PER COMMON SHARE
Loss from operations (0.48) (0.85) (2.04)
Extraordinary 3.75 0.00 0.00
------ ------ ------
$ 3.27 ($0.85) ($2.04)
====== ====== ======
RESTAURANTS OPEN AT BEGINNING OF PERIOD 4 15 26
RESTAURANTS OPENED IN PERIOD 1 2 2
RESTAURANTS CLOSED IN PERIOD 0 2 13
RESTAURANTS OPEN AT END OF PERIOD 6 15 15
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
(AUDITED) (UNAUDITED)
26 WEEKS 26 WEEKS(1)
DECEMBER 29, 1996 DECEMBER 31, 1995
------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES 7,700,920 100.00% 13,759,915 100.00%
COST OF SALES 2,279,267 -29.60% 4,008,618 -29.13%
------------ -----------
GROSS PROFIT 5,421,653 70.40% 9,751,297 70.87%
------------ -----------
OPERATING EXPENSES
Labor costs 2,741,441 35.60% 4,855,091 35.28%
Occupancy costs 990,332 12.86% 1,835,818 13.34%
Other operating expense 1,750,187 22.73% 2,584,884 18.79%
Depreciation 345,152 4.48% 621,839 4.52%
------------ -----------
TOTAL OPERATING EXPENSES 5,827,112 75.67% 9,897,632 71.93%
------------ -----------
INCOME (LOSS) FROM RESTAURANT OPERATIONS (405,459) -5.27% (146,335) -1.06%
------------ -----------
General and administrative expenses 780,763 10.14% 825,595 6.00%
------------ -----------
INCOME (LOSS) FROM OPERATIONS (1,186,222) -15.40% (971,930) -7.06%
------------ -----------
OTHER INCOME (EXPENSE)
Interest income (expense) (333,699) -4.33% (212,686) -1.55%
Other income (expense) net (151,146) -1.96% 90,555 0.66%
------------ -----------
TOTAL OTHER INCOME (EXPENSE) (484,845) -6.30% (122,132) -0.89%
------------ -----------
REORGANIZATION EXPENSES
Professional fees (102,295) -1.33% (488,279) -3.55%
Loss on abandonment or disposal of restaurants (1,353,050) -17.57% 0 0.00%
Closing of American Cafe restaurants 0 0.00% 0 0.00%
------------ -----------
TOTAL REORGANIZATION EXPENSES (1,455,345) -18.90% (488,279) -3.55%
------------ -----------
NET INCOME (LOSS) (3,126,413) -40.60% (1,582,341) -11.50%
============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,244,000 6,976,885
============ ===========
INCOME (LOSS) PER COMMON SHARE ($0.43) ($0.23)
============ ===========
RESTAURANTS OPEN AT BEGINNING OF PERIOD 15 15
RESTAURANTS OPENED IN PERIOD 1 1
RESTAURANTS CLOSED IN PERIOD 12 2
RESTAURANTS OPEN AT END OF PERIOD 4 14
</TABLE>
- --------
(1) The Company did not break out general and administrative expenses from
other operating expenses at December 31, 1995 so G & A was estimated at 6% of
gross sales.
27
<PAGE> 28
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 28, 1997 TO THE FISCAL YEAR ENDED
DECEMBER 29, 1996(2)
Total revenues decreased $16,776,404 or 63% to $9,679,825 in fiscal
year ended December 28, 1997 ("Fiscal Year 1997") from $26,456,229 in the fiscal
year ended June 30, 1996 ("Fiscal Year 1996"). Total Operating expense decreased
$13,741,664 or 66% to $7,041,909 in Fiscal Year 1997 from $20,783,573 in the
Fiscal Year 1996. Loss from operations decreased $1,506,847 or 57% to $1,151,242
in Fiscal Year 1997 from $2,658,089 in the Fiscal Year 1996. The decreases were
attributable primarily to the closure in the third and fourth quarters of 1996
of nine The American Cafe units and two Red Robin units, the discontinuance of
promotional sales such as Transmedia and IGT in addition to cost control
measures put in place by new management.
Food and beverage expense decreased $4,995,300 or 64% to $2,827,958 for
Fiscal Year 1997 from $7,823,258 for Fiscal Year 1996, principally as a result
of the decreased sales volumes caused by the closure of 11 restaurants by
December 29, 1996. Food and beverage expenses as a percentage of food and
beverage revenues were 29.2% in Fiscal Year 1997 compared with 29.6% in Fiscal
Year 1996, reflecting the increased weighted average of sales in The American
Cafe units (which maintained higher food costs percentages) than with Red Robin
restaurant units.
Restaurant labor and related expenses decreased $6,218,742 or 66% to
$3,108,513 in Fiscal Year 1997 from $9,327,255 in Fiscal Year 1996, primarily
because of the many unit closures that had been effected by the end of December
29, 1996, but also because of improved productivity, scheduling, and training.
Restaurant labor expenses as a percentage of revenues decreased to 32.1% in
Fiscal Year 1997 from 35.3% in Fiscal Year 1996.
Restaurant occupancy expenses decreased $2,234,704 or 64.1% to
$1,251,869 in Fiscal Year 1997 from $3,486,573 in Fiscal Year 1996, primarily
because of the many unit closures that had been effected by December 29, 1996.
In the 1997 period, restaurant occupancy charges as a percentage of revenues
decreased to 12.9% from 13.2% in the 1996 Period.
Other Operating expenses decreased $4,568,874 or 67% to $2,301,863 in
Fiscal Year 1997 from $6,870,738 in Fiscal Year 1996. This decrease is primarily
due to unit closures, the discontinuance of promotional incentives such as
Transmedia and IGT and the continually improving cost cutting measures employed
by management. General and administrative expenses as a percentage of revenues
decreased to 23.8% in Fiscal Year 1997 from 26.0% in Fiscal Year 1996.
- --------
(2)These two periods do not run consecutively due to the change in
accounting periods from fiscal year ending June to fiscal year ending December.
28
<PAGE> 29
Depreciation and amortization expense decreased $719,344 or 65% to
$379,663 in Fiscal Year 1997 from $1,099,007 in Fiscal Year 1996, primarily as a
result of the Company's divestiture of a number of units by December 1996.
General and administrative expenses increased $453,713 or 89% to
$961,200 in Fiscal Year 1997 from $507,487 in Fiscal Year 1996. This increase is
partially due to a one time $228,136 stock compensation paid May 1997. General
and administrative expenses consist of, among other things, executive salaries,
other administrative compensation corporate office expense and corporate
overhead expenses. General and administrative expenses as a percentage of
revenues increased to 9.9% in Fiscal Year 1997 from 1.9% in Fiscal Year 1996.
Interest expense-net decreased $189,636 or 36.8% to $393,892 in Fiscal
Year 1997 from $514,725 in Fiscal Year 1996, principally as a result of the pay
down of certain secured loans and the reduction in DIP financing as a result of
the emergence from Chapter 11 proceedings. Interest expense-net as a percentage
of revenues increased to 3.3% in Fiscal Year 1997 from 2.0% in Fiscal Year 1996.
Other income (expense) decreased $308,702 or 129% to $(68,802) in
Fiscal Year 1997 from $239,900 in Fiscal Year 1996, primarily because of the
loss of banquet and video revenue from the closure of American Cafes units
effected by December 1996. Other income (expenses) as a percentage of revenues
increased to .7% in the 1997 Period from -.9% in the 1996 Period.
Professional Fees decreased $337,074 or 39% to $522,081 in Fiscal Year
1997 from $859,155 in Fiscal Year 1996, primarily due to a reduction in legal
and GMB management fees associated with the Chapter 11 cases. Professional Fees
as a percentage of revenues increased to 5.3% in the 1997 Period from 3.3% in
the 1996, this is reflective of lower sales volumes.
The Company recognized a loss on the closing of The American Cafe
Restaurants of $2,391,159 in Fiscal Year 1996, this represented 9% of revenue.
The Company recognized an extraordinary gain of $15,988,136 from the
forgivness of debt upon the emergence from its Chapter 11 cases. In Fiscal Year
1997, this represents 144% of revenue.
The Company's net Gain in Fiscal Year 1997 was $13,928,936 as compared
to a net loss of $6,183,228 in Fiscal Year 1996. This represents a decrease of
$20,112,164 or 325% in net loss.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1996 TO THE FISCAL YEAR ENDED
JULY 2, 1995
Total revenues decreased $10,728,706 or 29% to $26,456,229 in fiscal
year ended June 30, 1996 ("Fiscal Year 1996") from $37,184,935 in the fiscal
year ended July 2, 1995 ("Fiscal Year 1995"). Total Operating expense decreased
$14,428,162 or 40% to $21,291,060 in Fiscal Year 1996 from $35,719,222 in the
Fiscal Year 1995. Loss from operations decreased $6,611,902 or 71% to $2,658,089
in Fiscal Year 1996 from $9,269,991 in the Fiscal Year 1995.
29
<PAGE> 30
The decreases were attributable primarily to the sale by the Company in March,
1995 of its five Carmella's Cafe units, the prepetition closure of six The
American Cafe units the closure of two Red Robin units and cost control measures
put in place by new management.
Food and beverage expense decreased $2,912,446 or 27% to $7,823,258 for
Fiscal Year 1996 from $10,735,704 for Fiscal Year 1995, principally as a result
of the decreased sales volumes caused by the closure of 13 restaurants by the
end of Fiscal Year 1995. Food and beverage expenses as a percentage of food and
beverage revenues were 29.6% in Fiscal Year 1996 compared with 28.9% in Fiscal
Year 1995, reflecting the increased weighted average of sales in The American
Cafe units (which maintained higher food costs percentages) following the
closure of two Red Robin and five Carmella's Cafe restaurant units.
Restaurant labor and related expenses decreased $4,419,212 or 32% to
$9,327,255 in Fiscal Year 1996 from $13,746,467 in Fiscal Year 1995, primarily
because of the many unit closures that had been effected by the end of Fiscal
Year 1995, but also because of improved productivity, scheduling, and training.
Restaurant labor expenses as a percentage of revenues decreased to 35.3% in
Fiscal Year 1996 from 37.0% in Fiscal Year 1995.
Restaurant occupancy expenses decreased $1,552,567 or 32.2% to
$3,486,573 in Fiscal Year 1996 from $5,039,140 in Fiscal Year 1995, primarily
because of the many unit closures that had been effected in Fiscal Year 1995. In
the 1996 period, restaurant occupancy charges as a percentage of revenues
decreased to 13.2% from 13.6% in the 1995 Period.
General and administrative expenses decreased $8,007,512 or 52% to
$7,378,225 in Fiscal Year 1996 from $15,385,737 in Fiscal Year 1995. This
decrease reflects the immediate impact management had on eliminating wasteful
general and administrative expenses upon their succeeding prior management in
April, 1995 at the commencement of the Company's Chapter 11 cases. General and
administrative expenses as a percentage of revenues decreased to 27.9% in Fiscal
Year 1996 from 41.4% in Fiscal Year 1995.
Depreciation and amortization expense decreased $448,871 or 29% to
$1,099,007 in Fiscal Year 1996 from $1,547,878 in Fiscal Year 1995, primarily as
a result of the Company's divestiture of a number of units in Fiscal Year 1995.
Interest expense-net decreased $318,004 or 38.2% to $514,725 in Fiscal
Year 1996 from $832,729 in Fiscal Year 1995, principally as a result of the
paydown of certain secured loans prepetition and the cessation of certain
interest payable obligations upon the commencement of the Company's Chapter 11
case. Interest expense-net as a percentage of revenues decreased to 2.0% in
Fiscal Year 1996 from 2.3% in Fiscal Year 1995.
Other income (expense) decreased $388,991 or 61.9% to $239,900 in
Fiscal Year 1996 from $628,891 in Fiscal Year 1995, primarily because of the
unit closures effected by the end of Fiscal Year 1995. Other operating expenses
as a percentage of revenues decreased to .9% in the 1996 Period from 1.7% in the
1995 Period. A significant portion of this decrease is attributable to the loss
of banquet related income lost with the closure of The American Cafes.
30
<PAGE> 31
Restructuring expenses, primarily representing the fees and expenses of
professionals and restaurant management consultants employed in the Company's
Chapter 11 case, were $859,155 in Fiscal Year 1996. The Company has not employed
any restaurant consultants since February, 1996.
The Company recognized a loss on disposal of restaurants $1,589,417 in
Fiscal Year 1995 from the sale, closure, or liquidation of the Carmella
restaurant units and certain other assets of the Company. This represented 4.3%
of revenue.
The Company recognized a loss on the closing of The American Cafe
Restaurants of $2,391,159 in Fiscal Year 1996, this represented 9% of revenue.
The Company recognized a loss on the write off of goodwill of
$3,171,060 relating to the sale, closure, or liquidation of restaurants and
other assets of the Company in Fiscal Year 1995.
This represented 8.5% of revenue.
The Company's net loss in Fiscal Year 1996 was $6,183,228 as compared
to a net loss of $14,234,306 in Fiscal Year 1995. This represents an $8,051,078,
or 56.6% decrease in net loss which reflects the substantial benefit brought to
bear by the new management team appointed at the outset of the Company's Chapter
11 case.
COMPARISON OF THE TWENTY-SIX WEEK PERIODS ENDED DECEMBER 29, 1996 AND
DECEMBER 31, 1995
Total revenues decreased $6,058,995 or 44% to $7,700,920 for the
twenty-six week transition period ended December 29, 1996 (the "1996 Period")
from $13,759,915 for the twenty-six weeks ended December 31, 1995 (the "1995
Period"). The decrease was attributable primarily to the closure of the
Company's nine The American Cafe restaurants in the 1996 period. Alcoholic
beverage revenues, as a percentage of food and beverage revenues, were 18% for
the 1996 period compared to 16% for the comparable 1995 period. This reflects
the effects of the closure of The American Cafe, which averaged lesser liquor
sales volume than did the Red Robin restaurants.
Food and beverage expense decreased $1,729,352 or 43% to $2,279,267 for
the 1996 Period from $4,008,618 for the comparable 1995 Period, principally as a
result of the closure of The American Cafe units. Food and beverage expenses as
a percentage of food and beverage revenues were 29.6% and 29.1% for the 1996
Period and the 1995 Period, respectively.
Labor costs and related expenses decreased $2,113,650 or 43.5% to
$2,741,441 for the 1996 Period from $4,855,091 for the comparable 1995 Period,
primarily because of the closure of The American Cafe, but also because of
improved productivity, scheduling, and training. Restaurant labor expenses as a
percentage of revenues increased slightly to 35.6% in the 1996 Period from 35.3%
in the 1995 Period primarily due to the high labor cost associated with the
opening of the Levittown, New York Redhead Bistro/Bar concept.
31
<PAGE> 32
Restaurant occupancy expenses decreased $845,486 or 46.1% to $990,332
for the 1996 Period from $1,835,818 for the 1995 Period, primarily because of
the closure of The American Cafe units. The higher occupancy charges relative to
sales at The American Cafe also contributed to the lower restaurant occupancy
expenses as a percentage of revenues once these units were closed. In the 1996
period, restaurant occupancy charges as a percentage of revenues decreased to
12.8% from 13.3% in the 1995 Period.
Other Operating expenses decreased $834,486 or 46.1% to $990,332 for
the 1996 Period from $1,835,818 for the 1995 Period. This decrease reflects the
effects of the consolidation and streamlining of the Company's operations. Other
Operating expenses as a percentage of revenues decreased to 12.8% in the 1996
period from 13.3% in the 1995 period.
Depreciation and amortization expense decreased $276,687 or 44.5% to
$345,152 for the 1996 Period from $621,839 for the 1995 Period, primarily as a
result of the Company's divestiture of The American Cafe, Red Robin and Carmella
Cafe units.
The General and administrative expenses(3) decreased $44,832 or 5.4% to
$780,763 for the 1996 Period from $825,595 for the 1995 Period. General and
administrative expenses consist of, among other things, executive salaries,
other administrative compensation, corporate office rent, and corporate overhead
expenses. General and administrative expenses as a percentage of revenues
increased to 5.3% in the 1996 Period from 6.0% in the 1995 Period, due to the
estimate and because of the increased costs associated with the closure of The
American Cafe units, the start-up of the Redheads concept, and the work
associated with preparing for conversion of the Company's remaining restaurant
units.
Other Operating expenses decreased $834,486 or 46.1% to $990,332 for
the 1996 Period from $1,835,818 for the 1995 Period. This decrease reflects the
effects of the consolidation and streamlining of the Company's operations. Other
Operating expenses as a percentage of revenues decreased to 12.8% in the 1996
period from 13.3% in the 1995 period.
Interest expense-net increased $121,013 or 57% to $333,699 for the 1996
Period from $212,686 for the 1995 Period, principally as a result of the
interest expense accrued in connection with loan advances made to the Company
during the Company's Chapter 11 case by certain postpetition lenders, the
principal amount of which exceeded $2.9 million as of the end of the 1996
Period. Interest expense-net as a percentage of revenues increased to 4.3% in
the 1996 Period from 1.6% in the 1995 Period.
Other income (expense) increased $241,701 or 266.9% to $(151,146) for
the 1996 Period from $90,555 for the 1995 Period, primarily resulting from the
closure of The American Cafe units. The benefits of the closure were offset in
part by the increased expenses associated with their closure, as well as to
increased operating costs in the 1996 Period associated with the
- --------
(3)The Company did not break out general and administrative expenses
from other operating expenses at this time so a 6% of gross sales estimate was
used.
32
<PAGE> 33
training, systems development, and start-up of the Redheads Bistro/Bar concept
during that period and the conversion of the Levittown, New York location to the
Redheads Bistro/Bar concept. Other expenses as a percentage of revenues
increased to 2.0% (expense) in the 1996 Period from .6% (income) in the 1995
Period.
Restructuring expenses, primarily professionals in the Company's
Chapter 11 case, decreased $385,984 or 79.1% to $102,966 in the 1996 Period from
$488,279 in the 1995 Period. The high costs of administering the Company's
Chapter 11 case during the 1996 Period occurred when the Company was engaged in
a number of highly contested proceedings as it moved towards confirmation in the
1996 Period of its Plan kept restructuring expenses at an elevated level in the
1996 Period. The higher legal costs were offset by the termination of a
consulting contract for restaurant management services during 1996 resulting in
lower overall restructuring expenses. Restructuring expenses as a percentage of
revenues increased to (1.3%) in the 1996 Period from 3.6% in the 1995 Period.
The Company recognized a loss on disposal of restaurants in the 1996
Period of $1,353,050, primarily from the closure of The American Cafe units and
the Staten Island and Smithhaven Red Robin locations.
The Company's net loss for the 1996 Period was $3,126,413, as compared
to a net loss of $1,582,341 for the 1995 Period. The increase, 97.6%, was
primarily attributable increased expenses associated with the closure of The
American Cafe units, the increased expense associated with the start-up of the
Redheads concept and the conversion of the Levittown location to a Redheads
Bistro/Bar. The loss as a percentage of revenue increased to 40.6% in the 1996
Period from 11.5% in the 1995 Period.
FINANCIAL CONDITION AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Since inception, the Company has incurred losses
from operations. As of December 28, 1997 and December 29, 1996, the Company had
an accumulated deficit of $715,836 and $35,437,302 respectively. During the
Fifty-Two weeks ended December 29, 1996, net cash flow used in operations
totaled $1,820,628. During the Thirty-one weeks ended December 29, 1997, net
cash flow used in operations totaled $742,221.
As of December 29, 1996, the Company had negative working capital of
$21,802,066, as compared to negative working capital of $157,158 as of December
28, 1997.
The Company has, upon the effectiveness of its confirmed Plan,
accounted for the reorganization using "fresh-start" reporting. Accordingly, all
assets and liabilities are restated to reflect their reorganization value, which
approximates fair value at the date of reorganization. Application of the
principles of "fresh-start" reporting resulted in elimination of the
stockholders' deficit and caused $22,435,338 of total liabilities to be
extinguished, as provided specifically in the Plan itself. See "--The
Reorganization Proceedings; Confirmation and
33
<PAGE> 34
Effectiveness of the Company's Reorganization Plan" for further discussion of
the consequences of the Plan's confirmation and effectiveness.
The Company does not have trade accounts receivable, since sales are
for cash or by credit card receipts, which are usually paid within one week. The
Company does not maintain substantial inventories due to the relatively brief
shelf life and frequent turnover of food products and liquor. The restaurants
receive deliveries of food and liquor no less frequently than every other day.
Additionally, the Company has been able to obtain modest amounts of trade credit
for purchasing food, liquor, and restaurant supplies.
Increases in food and labor costs and interest rates can have a direct
affect on the Company's operations. The Company believe it has responded
appropriately to such increases, some of which are passed through to the
consumer. The federal minimum wage required to be paid to employees has
increased, however many of the Company's employees are paid hourly rates higher
than the federal minimum wage.
The Company's current leases require, and future leases may require,
the Company to pay taxes, maintenance, insurance, repairs and utility costs
which are also subject to inflation, and in addition, some leases contain, and
future leases may contain, escalations of annual rentals based upon limited
increases in specific cost-of-living indices, none of which are controllable by
the Company.
Increases in interest rates will adversely affect the Company's ability
to obtain financing necessary for the establishment of additional restaurants
and additional working capital needs.
INVESTING ACTIVITIES. In November, 1997, the Company caused its Red
Robin restaurant unit in Yonkers, New York to be converted to a Redheads
Bistro/Bar. This first unit conversion by the Company to the Redheads Bistro/Bar
concept cost the Company approximately $65 per square foot or approximately
$546,000.
The Company is required by an order of the Bankruptcy Court, entered
into in connection with the Plan, to remove all Red Robin trade dress from its
restaurant locations. As of November 28, 1997 the Yonkers, New York unit had
been converted. As of March 1998 the Secaucus, New Jersey had been converted and
only Kings Plaza, Brooklyn remained unconverted, in violation of the order.
Failure to remove the trade dress as required by the Bankruptcy Court order
could result in litigation and the grant of injunctive relief against the
Company, and the imposition of unspecified monetary damages against the Company.
The Company has notified Red Robin of its violation and intent to convert the
unit during the third quarter of 1998. The Company continues to pay royalty fees
to Red Robin.
FINANCING ACTIVITIES. To fund these units' conversion to the Redheads
Bistro/Bar concept and costs associated with the emergence from bankruptcy, as
well as other costs, the Company obtained a funding commitment from Teleferscot
to provide up to $3.5 million. Through December 28, 1997 the Company received
approximately $3,100,000 of the committed
34
<PAGE> 35
funding. As of March, 1998 the Company had drawn down on the remaining amount
available under commitment in order to fund the Secaucus unit conversion to the
Redheads Bistro/Bar concept. In exchange for each $75 drawn down under the
funding commitment, Teleferscot will receive 1 additional share of the Company's
Series A Preferred Stock.
Before the filing of the Chapter 11 case, the Company funded its
growth, operating losses, and expansion costs primarily through a combination of
public and private offerings of debt and equity, through bank loans, and
operating cash flows, including the continued modest extensions of trade credit
to the Company. To fund the Company's losses during the Chapter 11 case, the
Company relied primarily upon the issuance of Bankruptcy Court approved
debtor-in-possession secured loans, of which a total of nearly $2.5 million was
advanced between the April 6, 1995 Petition Date and the close of the Transition
Period ended December 29, 1996.
It is management's belief that profitability will be achieved by
opening or acquiring additional restaurants to provide an expanding revenue base
to absorb fixed corporate overhead charges. The Company anticipates that
revenues will exceed the increased expenditures associated with the construction
and acquisition of additional restaurants.
The poor performance of any one restaurant could have a materially
adverse effect upon the financial condition of the Company. However, the Company
believes, although there can be no assurance, that the adverse effect of the
results of any one restaurant will diminish as the number of restaurants
operated by the Company increases. While the Company believes that management
efficiencies and marketing strategies will limit declines in existing store
revenues, there can be no assurance that future declines in existing restaurant
revenues will not occur and adversely affect the Company.
Since May 30, 1997, the effective date of the plan of reorganization,
the Company lost $715,836. As of December 28, 1997, its working capital was
($157,158). The company anticipates that it will require additional working
capital to fund operations and complete the conversion of its existing store to
the Redheads concept. The Company also will need additional capital to acquire
new restaurant operations and integrate these restaurants into current
operations. The Company believes that it will have sufficient capital to meet
these obligations through the improvement of current operations, additional
revenues generated from new restaurants and the completion of a private
placement of equity in the amount of approximately $2,000,000 anticipated in the
second quarter of calendar 1998. The Company has signed a letter of intent with
an investment banker for a private financing of $2,000,000. However, there can
be no assurance that the offering or any restaurant acquisition will be
completed, or that the Company will have sufficient capital to support
operations and implement its business plans.
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Certified Public Accountants..............................
Consolidated Balance Sheet......................................................
Consolidated Statement of Operations............................................
Consolidated Statement of Cash Flows............................................
Consolidated Statement of Changes in Stockholders' Equity.......................
Notes to Consolidated Financial Statements......................................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles O. Olson, Jr.(2)............................. 40 President, Chief Executive Officer & Director
David C. Sederholt................................... 46 Executive Vice President & Chief Operating
Officer, Secretary
A. Keith Hebert ..................................... 38 Vice President - Director of Operations
Pierpaolo Matteuzzi(2)............................... 45 Director
John E. McConnaughy, Jr.(1)(2)....................... 67 Director
Julio Pasini(1)...................................... 43 Director
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
CHARLES O. OLSON, JR. Mr. Olson was elected a director of the Company
at its annual meeting held on July 21, 1994 and has served as its President
since April 6, 1995, the Petition Date. He has been, since January 1994, a
principal of RehCam Investments, a private Houston, Texas investment firm. He
has also been, since 1987, the sole principal of Rye Management, Inc., a
financial consulting firm. Until October 1993, Mr. Olson served for more than
five years as President of Capital Holdings, Inc., a private financial
management firm in Houston. Mr. Olson received a B.A. (Accounting) from the
University of Houston in 1981. He is currently on the Board of Directors of SLB
Snacks Corporation.
DAVID C. SEDERHOLT. Mr. Sederholt joined the Company as Executive Vice
President and Chief Operating Officer in July, 1997. From 1991 until joining the
Company, Mr. Sederholt served as President and Chief Operating Officer of
Rattlesnake Holding Co., Inc. and its subsidiary Rattlesnake Grill Restaurants.
Mr. Sederholt co-founded and developed the Rattlesnake concept in 1991. Mr.
Sederholt was responsible for the reduction of labor and food cost through
creation and continual modification of the menu, while furthering the market
identity of the concept. Mr. Sederholt additionally served as Chief Financial
Officer at Rattlesnake from 1992 to 1996. From 1986 through 1991, Mr. Sederholt
served as Managing Partner of Atlantic Professional Resources, Inc., a
management and marketing consulting firm serving the foodservice and hospitality
industries. From 1983 through 1986, he served as Corporate Director of Food and
Beverage for Huckleberry's restaurants, a multi-unit company with restaurants in
New York, Connecticut, and Florida. Mr. Sederholt received a B.S. (Biology and
Chemistry) from Pace University.
A. KEITH HEBERT. Mr. Hebert has served as Vice President - Director of
Operations since joining the Company in July, 1995. From 1982 to 1986 Mr. Hebert
operated his own restaurant, Checkers Pizza, which he sold in 1986. From 1986 to
1989 Mr. Hebert acted as Regional Director for Nachos (now known as Two Pesos)
restaurant in Houston, Texas. Mr. Hebert joined the Casa
37
<PAGE> 38
Ole/Crazy Jose's chain of restaurants in 1990 and, until joining the Company,
served in various positions of increasing responsibility eventually being
appointed vice president.
PIERPAOLO MATTEUZZI. Mr. Matteuzzi became a director of the Company in
1997. Mr. Matteuzzi has served since 1987 as managing director of Sogevalor,
S.A., a Swiss portfolio managing company. In the 12 years prior to joining
Sogevalor, Matteuzzi ascended to senior management of an international finance
department in a major Swiss bank.
JOHN E. MCCONNAUGHY, JR. Mr. McConnaughy became a director of the
Company in 1997. Until 1994, Mr. McConnaughy was Chairman of the Board and Chief
Executive Officer of GEO International Corporation, a New York Stock Exchange
company specializing in graphic systems, quality laboratories, and oil field
equipment and services. He remains a director of GEO International Corporation.
From 1969 until 1985, Mr. McConnaughy served as Chairman of the Board and Chief
Executive Officer of Peabody International Corporation. During his tenure at
Peabody, the company's sales grew from approximately $23 million to $850
million. He was named outstanding Chief Executive Officer for his industry group
(Environmental Control) by Financial World Magazine in 1975, 1976, and 1978. He
is currently on the Board of Directors of Mego Corporation, Transact
International, Inc., Pets Choice, Ltd., Cryptologics International, Inc.,
Pantopec International, Inc., Oxi-Gene, Inc., and Riddell, Inc. He also serves
on the Board of Trustees of Strang Cancer Prevention Center and the Harlem
School for the Arts. Mr. McConnaughy has been a director of the Company since
the Plan Effective Date.
JULIO M.V. PASINI. Mr. Pasini became a director of the Company in 1997.
Mr. Pasini has been Chief Executive Officer of Dumont Investments, Inc. since
its inception in January 1996. Dumont Investments, Inc. is a money management
company with investments in the USA. Prior to joining Dumont Mr. Pasini was at
Swiss Bank Corporation holding a variety of positions in Financial Institutions
and Capital Markets, culminating with the global responsibility of developing
and servicing relationships with Italian banks and investment funds.
Executive officers are appointed by the Board of Directors and serve at
the pleasure of the Board of Directors. All directors hold office until the next
annual meeting of stockholders or until their successors are elected and
qualified.
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors (i)
review the results and scope of the annual audit and other services provided by
the Company's independent auditors, (ii) reviews and evaluates the Company's
internal audit and control functions and (iii) monitors transactions between the
Company and its employees, officers and directors. Charles Olson, Jr., Pierpaolo
Matteuzzi and John McConnaughy, Jr. are members of the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors administers the Company's stock option and stock purchase plans and
designates compensation levels for the Company's executive officers and
directors. Julio Pasini and John McConnaughy, Jr. are members of the
Compensation Committee.
38
<PAGE> 39
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than ten percent of the Company's Common
Stock or the Company's Preferred Stock, to file reports of ownership and changes
in ownership with the Commission. During the entire Transition Period the
Company was operating under Chapter 11 and none of the persons serving as
officers and directors filed any reports under Section 16(a) of the Exchange
Act.
COMPENSATION OF DIRECTORS
Until otherwise authorized, the directors of the Company are not paid
or reimbursed for out-of-pocket expenses for each Board meeting attended by such
director. During the period from July 1, 1995 to December 31, 1995 none of the
directors were compensated for any service provided as a director.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation of the Company, as amended,
provides that no director of the Company shall be liable to the Company for
monetary damages for breach of fiduciary duty or care as a director except for
liability for breach of the director's duty of loyalty, for acts not in good
faith, intentional misconduct or knowing violations of law, for unlawful payment
of dividends or stock purchases or redemptions or for transactions in which the
directors derived an improper personal benefit. The By-Laws of the Company
provide for the indemnification of officers and directors to the fullest extent
permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) in connection with the
securities being registered, the Company will, unless in the opinion of counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information, concerning the annual and
long-term compensa tion of the Company's chief executive officer and other
individuals acting in a similar capacity for the past three fiscal years. No
information is included regarding compensation paid to other executive officers
during such three year period because no such executive officer earned annual or
39
<PAGE> 40
long-term compensation in excess of $100,000. Except as set forth in the tables
below, no bonus, other annual compensation, long-term compensation (in the form
of restricted stock awards, options, stock appreciation rights, long-term
incentive plans, or otherwise), or other forms of compensation were paid to the
Company's chief executive officer, any other individuals acting in a similar
capacity, or any other executive officer of the Company at any time during such
periods as are reflected in the tables set forth below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
FISCAL YEAR STOCK ALL OTHER
NAME AND PRINCIPAL POSITION OR PERIOD SALARY ($) BONUS ($) AWARD COMPENSATION
--------------------------- --------- ---------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
Charles Olson, Jr ....................... 1997 $ 66,000 $0 $ 0
President/CEO 1996-T $ 33,500 $0 $27,000
1996 $ 99,500 $0 $54,000
David Sederholt.......................... 1997 $ 50,000 $0 $33,000
EVP/COO
Steven R. Jakubowski..................... 1996-T $ 0 $0 $60,000
Chief Operating Officer 1996 $ 80,000 $0 $40,000
1996 $ 30,000 $0 $ 0
</TABLE>
- -------------
EMPLOYMENT CONTRACTS
The Company has no employment contract with any of its executive
officers other than Mr. Sederholt. It is anticipated that the Company will enter
into an employment agreement with Mr. Olson prior to the end of fiscal year
1997, the terms of which are under discussion and review by the Company's board
of directors.
The employment contract with Mr. Sederholt, entered into in July, 1997,
has a one year term and automatically renews for successive one year periods
unless terminated upon at least sixty days prior written notice. The contract
provides for a base salary of $100,000 annually. In addition, the Company
granted to Mr. Sederholt the right to purchase a number of shares equal to 1.75%
of the Company's issued and outstanding shares of Common Stock at an exercise
price of $1.50 per share (subject to customary anti-dilution provisions and
adjustment for certain other events such as stock splits and recapitalizations).
These options will vest 25% on each anniversary date of the employment contract.
The Company has no compensatory plan or arrangement with any of its
executive officers in the event of (i) that officer's resignation, retirement,
or termination in any other manner, (ii) a change-in-control of the Company, or
(iii) a change in such officer's responsibilities following a change-in-control
of the Company
40
<PAGE> 41
THE FISCAL YEAR 1997 STOCK OPTION PLAN
On the Plan Effective Date, as approved in the Confirmation Order of
the Bankruptcy Court, the Company adopted a long-term incentive plan (the
"Incentive Plan") providing for the issuance of stock options (the "Options") to
purchase shares of Common Stock, thereby entitling the holder thereof, upon
exercise, to receive the value or the increase in value of the shares of Common
Stock subject thereto.
The Options shall constitute either "incentive stock options" within
the meaning of Section 422A of the Internal Revenue Code ("ISO's") or
"nonqualified stock options" ("NQSO's"). All Options granted to non-employee
directors and consultants will constitute NQSO's. The Company believes that the
Incentive Plan will provide the Company with significant advantages in
attracting, retaining, and motivating key employees, officers, and directors of
the Company by providing such persons with incentives that are linked directly
to increases in stockholder value.
The Incentive Plan is administered by a committee (the "Compensation
Committee") of the Company's Board of Directors, consisting of no fewer than two
directors, none of whom may be employees of the Company and each of whom serves
at the pleasure of the Board of Directors. Currently the Compensation Committee
is composed of Messrs. Pasini and McConnaughy. This Board Committee has full
power to administer and to make all determinations as it deems necessary or
advisable for the proper administration of the Incentive Plan, including,
without limitation, the power to select from among the employees, consultants,
and directors eligible for awards, those individuals to whom awards will be
granted and the number of awards to be granted to such persons. The Compensation
Committee is authorized to interpret the Incentive Plan and may at any time
adopt such rules and regulations as it deems advisable.
Under the Incentive Plan, the Compensation Committee is authorized to
issue, pursuant to Options granted pursuant to the Incentive Plan, shares of
Common Stock representing, in the aggregate, up to 250,000 shares of Common
Stock. The eligible persons to whom options are actually granted under the
Incentive Plan and the number of shares subject to each such option shall be
determined by the Compensation Committee in its sole discretion in accordance
with the terms and conditions of the Incentive Plan.
Options awarded pursuant to the Incentive Plan shall vest and become
exercisable (subject to the other provisions of the Incentive Plan) at any time
over a four year period commencing the date issued. The Compensation Committee
or the Board of Directors, as the case may be, in its sole discretion, may
determine that a different vesting period should apply. At the time an Option is
granted under the Incentive Plan, the Compensation Committee may establish one
or more terms or conditions which are applicable to such Option and which are
not inconsistent with any provision of the Incentive Plan; provided that if such
Option is an incentive stock option, such terms and conditions shall not be
inconsistent with Section 422 of the Internal Revenue Code or any successor
provision.
The exercise price per share to be purchased pursuant to any Option
shall be fixed by the Compensation Committee at the time the Option is granted
and may be less than, equal to, or greater
41
<PAGE> 42
than the fair market value of one share on the date such Option is granted,
depending, in part, on the nature of the Option granted. The duration of any
Option granted under the Incentive Plan shall be for a period fixed by the
Compensation Committee, in its sole discretion, but generally not longer than
between five and ten years, depending on the nature of the Option granted.
The Incentive Plan may not be amended to effect the following changes
unless such amendment shall have been approved by the Board of Directors and,
within one year of such amendment, by the stockholders of the Corporation: (i)
increase the number of shares of stock which may be issued under the Incentive
Plan, except for changes in capitalization; (ii) materially modify the
requirements as to eligibility for participation; (iii) extend the duration
beyond that approved by the stockholders; or (iv) materially increase the
benefits accruing to participants under the Incentive Plan.
The Board of Directors may terminate or suspend the Incentive Plan at
any time, but without the consent of the participant, such termination or
suspension shall not affect any Options then outstanding. The Board of Directors
may amend the Incentive Plan, but may not, without the prior approval of its
stockholders, make any amendment that would, in accordance with the principles
of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, require the
approval of the holders of the Common Stock issued and outstanding.
The Incentive Plan has a term of ten (10) years through May 30, 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of August 31,
1997, regarding beneficial ownership of the Company Stock of each executive
officer or director of the Company, and all executive officers and directors as
a group, and each stockholder who is known by Company to beneficially own more
than five percent of the Common Stock of the Company.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
NAME AND ADDRESS (IF REQUIRED) OF BENEFICIAL OWNER COMMON STOCK (3) OF TOTAL
<S> <C> <C>
Charles O. Olson, Jr.(1) ..................... 1,039,048 41.8%
Mohammedali Hassanali ........................ 151,886 6.1%
Bellaty N.V(1) ............................... 668,705 26.9%
RehCam Investments L.P(1) .................... 153,698 6.1%
Chillington Corporation N.V(1) ............... 190,246 7.6%
Ali Khin ..................................... 156,550 6.3%
John E. McConnaughy, Jr ...................... 363,251 14.6%
Teleferscot International Limited(2) ......... 1,787,750 41.9%
David C. Sederholt ........................... 10,000 0.4%
Andrews & Kurth LLP .......................... 151,515 6.4%
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
NAME AND ADDRESS (IF REQUIRED) OF BENEFICIAL OWNER COMMON STOCK (3) OF TOTAL
- -------------------------------------------------- ---------------- --------
<S> <C> <C>
A. Keith Hebert........................................... 9,324 0.4%
All Officers and Directors as a Group
(6 Persons)............................................... 1,421,623 57.3%
</TABLE>
- ---------------------
(1) Charles Olson, Jr. is the president of Rye Management, Inc., (Rye) the
general partner of RehCam Investments Limited Partnership (RehCam).
Additionally Mr. Olson is a limited partner in RehCam. RehCam owns 153,698
shares. Mr Olson is the attorney in fact for Chillington Corporation N.V.
which owns 190,246 shares. Mr. Olson exercises voting and investment power
over the shares held by this entity, but disclaims beneficial ownership.
Mr. Olson is the attorney in fact for Bellaty N.V. which owns 668,705
shares. Mr. Olson exercises voting and investment power over the shares
held by this entity, but disclaims beneficial ownership. Mr. Olson owns
26,399 shares personally. Does not include shares, if any, available to Rye
Management, Inc. under the terms of the consulting agreement to be paid to
Rye as a reorganization bonus. (see Certain Relationship and Related
Transactions)
(2) Represents warrants, exercisable within 60 days, to purchase 750,000 shares
at $4.00 per share and 750,000 shares at $10.00 per share. The remaining
287,750 represents the right of Teleferscot (with the Company's consent),
as the owner of all outstanding Series A 12% Cumulative Convertible
Preferred Stock, to exchange one share of Preferred Stock for (a) 5 shares
of Common Stock through May 30, 1998, (b) 3.75 shares of Common Stock
through May 30, 1999, and (c) 3 shares of Common Stock through May 30,
2000.
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of May 25, 1997 are
deemed outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1995, the Bankruptcy Court overseeing the Company's Chapter 11 case,
in connection with the employment of Mr. Olson as President and Chief Executive
Officer, approved a consulting agreement between the Company and Rye Management,
Inc. ("Rye"), that was extensively negotiated between the Company and the
Creditors' Committee. Rye is a corporation owned and controlled by Mr. Olson.
The consulting agreement called for a reorganization bonus to be paid to Rye
upon the confirmation of the Plan. The consulting agreement assigns various
"Success Factors" that are based on the actual recovery (as a percentage of
Allowed Claims) realized by general unsecured creditors in the Chapter 11 cases.
The Success Factors range from 0, for a 0% recovery level, to 10.5, for a 50%
recovery level, to 20 for a 100% recovery level. The total reorganization bonus
due Rye will be equal to the aggregate in each Chapter 11 case, of (x) the
applicable Success Factor (taken as a percentage) times (y) the total
consideration paid to all claimants in the case under the Plan.
This reorganization bonus will be paid through the issuance of the
Company's Common Stock. Under the confirmed Plan, the number of shares issued
will be based on the sustained trading prices achieved for the Common Stock over
the three year period following the Plan Effective Date. The reorganization
bonus will be calculated based upon the highest average trading price achieved
by the Common Stock over the course of ten consecutive trading days during the
three years following the Effective Date (with average share volumes traded per
day in excess of 10,000 shares). The Company estimates that, on average, a total
of 18,000 shares would be issuable for each $1.00 of sustained price realized up
to $53 per share during the three year period.
43
<PAGE> 44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 28, 1997, December 29, 1996
Consolidated Statements of Operations for the Thirty-One weeks ended December
28, 1997, Twenty-One Weeks Ended May 25, 1997, the Twenty-Six Week Transition
Period Ended December 29, 1996 and Fifty-Two Weeks Ended June 30, 1996
Consolidated Statements of Stockholders' Equity for Period June 30, 1996 to
December 28, 1997
Consolidated Statements of Cash Flows for the Thirty-One weeks ended December
28, 1997, Twenty-One Weeks Ended May 25, 1997, the Twenty-Six Week Transition
Period Ended December 29, 1996 and Fifty-Two Weeks Ended June 30, 1996
Notes to Consolidated Financial Statements
</TABLE>
(a)(2)FINANCIAL STATEMENTS SCHEDULES
Not applicable.
(a)(3) EXHIBITS
The exhibits to this report have been included only with the copies of
this report filed with the Securities and Exchange Commission. Copies of
individual exhibits will be furnished to stockholders upon written request to
Treasurer, Redheads, Inc., One Executive Boulevard, Yonkers, New York 10701 and
payment of a reasonable fee.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Second Amended Plan of Reorganization and Order Confirming the Second Amended Plan of
Reorganization (December 30, 1996)
2.2 Statement of Immaterial Modifications to the Plan and Order Approving Immaterial
Modifications to the Plan (January 28, 1997)
3.1 Amended and Restated Certificate of Incorporation (May 30, 1997)
3.2 Amended and Restated Bylaws (May 30, 1997)
4.1 Form of Certificate representing shares of Common Stock
4.2 Form of Certificate representing shares of Series A 12% Cumulative Convertible Preferred Stock
10.1 Lease dated October, 1985 between Kings Plaza Shopping Center of Flatbush Avenue, Inc. and
Kings Plaza Shopping Center of Avenue, U., Inc., as lessor, and Registrant, as lessee
10.2 Lease dated March 23, 1988 between Hartz Mountain Development Corp., as lessor, and Registrant,
as lessee
10.3 Lease dated September 19, 1986 between Robert Martin Company, as lessor, and Registrant, as
lessee
10.4 Lease dated December 23, 1992 between Crescent Land Development Associates, as lessor, and
Registrant, as lessee, plus amendment thereto dated March 1, 1996
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
10.6 Commitment Letter dated as of May 30, 1997 between Teleferscot International Limited and
Registrant
10.7 Asset Purchase Agreement among Red One, Inc., J. Michael Gallagher (collectively, the owners
of the Redheads concept and the Middletown Redheads Bistro/Bar restaurant facility) and
Registrant dated May, 1997 and Order of the Court authorizing this acquisition
10.8 Employment Agreement dated July, 1997 between David C. Sederholt, Executive Vice President
and Chief Operating Officer, and Registrant
11.1 Statement regarding computation of per share earnings
21.1 List of Subsidiaries
24.1 A power of attorney, pursuant to which amendments to this Report may be filed, is included on
the signature page contained in Part IV of this Report
99.1 The Fiscal Year 1997 Stock Option Plan of Redheads, Inc., as approved by the Bankruptcy Court in connection
with confirmation of the Registrant's plan of reorganization
</TABLE>
(a)(4) REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during 1997.
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Yonkers, State of New York on April 14, 1998.
Redheads, Inc.
By: /s/ CHARLES O. OLSON, JR.
-------------------------
CHARLES O. OLSON, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of Redheads, Inc. (the "Company") hereby constitutes and appoints
Charles O. Olson, Jr., his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
report under the Securities Exchange Act of 1934, as amended, and any or all
amendments (including, without limitation, post-effective amendments), with all
exhibits and any and all documents required to be filed with respect thereto,
with the Securities and Exchange Commission or any regulatory authority,
granting unto such attorneys-in-fact and agent full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same, as fully to all intents
and purposes as he himself might or could do if personally present, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ CHARLES O. OLSON, JR. President & CEO, Director April 14, 1998
- -------------------------
Charles O. Olson, Jr.
/s/ JOHN E. McCONNAUGHY Director April 14, 1998
- -----------------------
John E. McConnaughy
/s/ PIERPAOLO MATTEUZZI Director April 14, 1998
- -----------------------
Pierpaolo Matteuzzi
/s/ JULIO PASINI Director April 14, 1998
- ----------------
Julio Pasini
</TABLE>
46
<PAGE> 47
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997
<PAGE> 48
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
C O N T E N T S
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIT) F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5 to F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-18
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Redheads, Inc.
(Formerly Magic Restaurants, Inc.)
Irvington, New York
We have audited the accompanying consolidated balance sheet of Redheads, Inc.
and Subsidiaries (formerly Magic Restaurants, Inc.) as of December 28, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the period May 26, 1997 (emergence date) to December 28, 1997 and the
consolidated balance sheet of Magic Restaurants, Inc. and Subsidiaries as
Debtor-in-Possession (Predecessor) as of December 29, 1996 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the period December 30, 1996 to May 25, 1997, the twenty-six weeks ended
December 29, 1996 and the fifty-two weeks ended June 30, 1996. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 in the first
paragraph present fairly, in all material respects, the consolidated financial
position of Redheads, Inc. and Subsidiaries (formerly Magic Restaurants, Inc.)
as of December 28, 1997 and the results of their operations and cash flows for
the period May 26, 1997 (emergence date) to December 28, 1997 and the
consolidated financial position of Magic Restaurants, Inc. and Subsidiaries as
Debtor-in-Possession (Predecessor) as of December 29, 1996 and the results of
their operations and cash flows for the period December 30, 1996 to May 25,
1997, the twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended
June 30, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company emerged from Chapter 11 of the U.S. Bankruptcy Code pursuant to a
confirmed plan of reorganization, effective May 25, 1997 (emergence date). Since
May 25, 1997, the Company incurred a net loss of $715,836 and at December 28,
1997 had a working capital deficit of $157,158. Continuation of the Company as a
going concern is dependent upon future successful operations and the ability to
generate sufficient cash flows from operations and capital/financing sources to
meet its obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
April 8, 1998
F-1
<PAGE> 50
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
(Predecessor)
December 28, December 29,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 180,082 $ 58,332
Inventory 83,376 80,840
Subscription receivable 400,000 --
Other current assets 336,202 293,057
----------- ------------
TOTAL CURRENT ASSETS 999,660 432,229
PROPERTY AND EQUIPMENT - NET 2,321,494 1,942,966
NOTES RECEIVABLE - Long-term, net of provision for losses of
$33,312 and $-0- 673,017 107,239
OTHER ASSETS 469,771 189,430
----------- ------------
TOTAL ASSETS 4,463,942 2,671,864
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses 967,944 3,739,587
Sales tax payable 71,224 99,496
Prepetition taxes payable 117,650 --
Postpetition senior secured notes payable -- 2,979,530
----------- ------------
TOTAL CURRENT LIABILITIES 1,156,818 6,818,613
----------- ------------
POSTPETITION TAXES PAYABLE - LONG-TERM 278,098 --
LIABILITIES SUBJECT TO COMPROMISE -- 15,415,682
REDEEMABLE 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
$10,000 par and redeemable value; authorized, issued and
outstanding - 198 shares -- 1,980,000
----------- ------------
TOTAL LIABILITIES 1,434,916 24,214,295
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
Series A 12% Cumulative Convertible - $0.001 par value;
5,000,000 shares authorized; 42,109
shares issued and outstanding 315,815 --
Series A 8% Cumulative Exchangeable - $0.001 par value;
1,017,000 shares authorized; 16,666
shares issued and outstanding 125,000 --
PREFERRED STOCK - $.001 par value; 1,000,000 shares authorized,
107,000 shares issued and outstanding as of December 29, 1996 -- 107
ADDITIONAL PAID-IN CAPITAL 2,401,812 --
NEW COMMON STOCK - $0.001 par value; 23,024,000 shares authorized;
2,386,439 shares issued and outstanding 2,386 --
OLD COMMON STOCK - $0.001 par value; 15,000,000 shares authorized;
7,244,000 shares issued and outstanding as of December 29, 1996 -- 7,244
ADDITIONAL PAID-IN CAPITAL 499,849 13,887,520
12% PREFERRED STOCK SUBSCRIBED 400,000 --
ACCUMULATED DEFICIT (715,836) (35,437,302)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 3,029,026 (21,542,431)
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,463,942 $ 2,671,864
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE> 51
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------------
Thirty-One Twenty-One Twenty-Six Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 28, May 25, December 29, June 30,
1997 1997 1996 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 5,943,970 $ 3,735,855 $ 7,700,920 $ 26,456,229
COST OF SALES 1,750,851 1,077,107 2,279,267 7,823,258
----------- ------------ ------------ ------------
GROSS PROFIT 4,193,119 2,658,748 5,421,653 18,632,971
----------- ------------ ------------ ------------
OPERATING EXPENSES
Labor costs 1,934,336 1,174,177 2,741,441 9,327,255
Occupancy costs 745,590 506,279 990,332 3,486,574
Other operating expenses 1,461,583 840,281 1,750,188 6,870,739
Depreciation and amortization 240,636 139,027 345,152 1,099,006
----------- ------------ ------------ ------------
4,382,145 2,659,764 5,827,113 20,783,574
----------- ------------ ------------ ------------
LOSS FROM RESTAURANT OPERATIONS (189,026) (1,016) (405,460) (2,150,603)
----------- ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
EXPENSES 350,711 610,489 780,763 507,487
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (539,737) (611,505) (1,186,223) (2,658,090)
OTHER INCOME (EXPENSE)
Interest expense (1,226) (323,864) (333,699) (514,725)
Other income (expense), net (46,644) (22,158) (151,146) 239,901
----------- ------------ ------------ ------------
(47,870) (346,022) (484,845) (274,824)
----------- ------------ ------------ ------------
REORGANIZATION EXPENSES
Professional fees (43,965) (478,116) (102,295) (859,154)
Gain (loss) on abandonment or disposal of
restaurants -- 8,014 (1,353,050) --
Closing of American Cafe restaurants -- -- -- (2,391,160)
----------- ------------ ------------ ------------
(43,965) (470,102) (1,455,345) (3,250,314)
----------- ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (631,572) (1,427,629) (3,126,413) (6,183,228)
EXTRAORDINARY ITEM - Gain (loss) from
extinguishment of debt, no applicable income
tax benefit (expense) (84,264) 16,072,400 -- --
----------- ------------ ------------ ------------
NET INCOME (LOSS) $ (715,836) $ 14,644,771 $ (3,126,413) $ (6,183,228)
=========== ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE OF COMMON STOCK
Loss from operations $ (0.36) $ (0.20) $ (0.43) (0.85)
Extraordinary (0.04) 2.22 -- --
----------- ------------ ------------ ------------
NET INCOME (LOSS) $ (0.40) $ 2.02 $ (0.43) $ (0.85)
=========== ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING OF COMMON STOCK 2,236,437 7,244,000 7,244,000 7,244,000
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 52
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JUNE 30, 1996 TO DECEMBER 28, 1997
<TABLE>
<CAPTION>
Series A Preferred Stock Preferred Paid-In
12% 8% Stock Capital
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ -- $ -- $ 107 $ --
Net loss for the twenty-six weeks ended December 29, 1996 -- -- -- --
-------- -------- ------ ----------
BALANCE AT DECEMBER 29, 1996 -- -- 107 --
Recapitalization upon emergence from bankruptcy 175,815 125,000 (107) 1,141,812
Net income for the twenty-one weeks ended May 25, 1997 -- -- -- --
Issuance of 18,666 shares of 12% Preferred Stock for partial
receipt of subscription receivable 140,000 -- -- 1,260,000
Issuance of 150,696 shares of Common Stock for settlement
of unpaid legal fees -- -- -- --
Net loss for the thirty-one weeks ended December 28, 1997 -- -- -- --
-------- -------- ------ ----------
BALANCE AT DECEMBER 28, 1997 $315,815 $125,000 $ -- $2,401,812
======== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
12%
New Old Preferred
Common Common Paid-In Stock Accumulated
Stock Stock Capital Subscribed Deficit
------ ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $ -- $ 7,244 $ 13,887,520 $ -- $(32,310,889)
Net loss for the twenty-six weeks ended December 29, 1996 -- -- -- -- (3,126,413)
------ ------- ------------ ----------- ------------
BALANCE AT DECEMBER 29, 1996 -- 7,244 13,887,520 -- (35,437,302)
Recapitalization upon emergence from bankruptcy 2,236 (7,244) (13,877,520) 1,800,000 20,792,531
Net income for the twenty-one weeks ended May 25, 1997 -- -- -- -- 14,644,771
Issuance of 18,666 shares of 12% Preferred Stock for partial
receipt of subscription receivable -- -- -- (1,400,000) --
Issuance of 150,696 shares of Common Stock for settlement
of unpaid legal fees 150 -- 499,849 -- --
Net loss for the thirty-one weeks ended December 28, 1997 -- -- -- -- (715,836)
------ ------- ------------ ----------- ------------
BALANCE AT DECEMBER 28, 1997 $2,386 $ -- $ 499,849 $ 400,000 $ (715,836)
====== ======= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 53
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------
Thirty-One Twenty-One Twenty-Six Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Dec. 28, 1997 May 25, 1997 Dec. 29, 1996 June 30, 1996
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING EXPENSES
Net income (loss) $ (715,836) $ 14,644,771 $(3,126,413) $(6,183,228)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation 206,149 134,941 333,814 1,070,554
Amortization 34,487 4,104 11,338 28,452
Provision for loss on note receivable 20,000 (523,736) - -
(Gain) loss from extinguishment of debt - (16,072,400) - -
Write-off of other assets - - 16,049 -
Loss on disposal of property and equipment 7,919 - 1,337,001 -
Loss on abandonment of American Cafe
restaurants - - - 1,923,305
(Increase) decrease in assets
Inventories (11,052) 8,516 151,699 (1,995)
Other current assets 88,071 1,620 360,422 471,361
Other assets (463,632) (1,292) 42,727 (2,898)
Increase (decrease) in liabilities
Liabilities subject to compromise - 115,829 - (14,997)
Accounts payable and accrued expenses 59,855 655,187 (242,230) 2,468,391
Sales and payroll taxes payable 17,675 (45,947) (75,124) (201,198)
Prepetition taxes payable 14,143 - - -
Deferred income - - - (7,500)
----------- --------------- ------------- ------------
Net cash used in operating activities (742,221) (1,078,407) (1,190,717) (449,753)
----------- --------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment - - 5,061 -
Capital acquisitions (592,166) (135,371) (681,579) (642,969)
Decrease in notes receivable 4,915 - - -
----------- --------------- ------------- ------------
Net cash used in investing activities (587,251) (135,371) (676,518) (642,969)
----------- --------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of postpetition senior secured notes
payable (35,000) - (145,000) (150,000)
Proceeds from postpetition senior secured notes
payable - 1,300,000 1,800,000 900,000
Proceeds from subscription receivable 1,400,000 - - -
----------- --------------- ------------- ------------
Net cash provided by financing activities 1,365,000 1,300,000 1,655,000 750,000
----------- --------------- ------------- ------------
INCREASE (DECREASE) IN CASH 35,528 86,222 (212,235) (342,722)
CASH - BEGINNING OF PERIOD 144,554 58,332 270,567 613,289
----------- --------------- ------------- ------------
CASH - END OF PERIOD $ 180,082 $ 144,554 $ 58,332 $ 270,567
=========== =============== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 54
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------
Thirty-One Twenty-One Twenty-Six Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Dec. 28, 1997 May 25, 1997 Dec. 29, 1996 June 30, 1996
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ -- $ -- $ 43,088 $203,717
========== =========== ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Preferred Stock for Preferred Stock
subscribed $1,400,000 $ -- $ -- $ --
========== =========== ======== =========
Conversion of liabilities to Preferred and Common
Stock
Accounts payable and accrued expenses $ 499,999 $ 1,511,000 $ -- $ --
Liabilities subject to compromise -- 1,680,000 -- --
Postpetition senior secured notes payable -- 4,603,625 -- --
---------- ----------- -------- ---------
Preferred and Common Stock $ 499,999 $ 7,794,625 $ -- $ --
========== =========== ======== =========
Reclassification of liabilities subject to compromise to:
Accounts payable and accrued expenses $ -- $ 234,612 $ -- $ --
Prepetition taxes payable -- 381,605 -- --
---------- ----------- -------- ---------
Liabilities subject to compromise $ -- $ 616,217 $ -- $ --
========== =========== ======== =========
Elimination of debt and equity against accumulated
deficit upon emergence from bankruptcy $ -- $36,720,480 $ -- $ --
========== =========== ======== =========
Note receivable from sale of American Cafe Restaurant
located in Tyson's Corner, Virginia $ -- $ -- $200,000 $ --
========== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 55
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of the Business
Redheads, Inc. and Subsidiaries (the "Company") are engaged in the development,
ownership and operation of restaurants that offer an upscale alternative to fast
food restaurants by providing high quality, moderately priced food, and quick
convenient full-menu table service. The Company operated nine American Cafe
restaurants located in the Washington, D.C., Maryland and Virginia areas. The
Company also operated six Red Robin Burger and Spirits Emporiums ("Red Robin"),
in the New York metropolitan area pursuant to a franchise granted by Red Robin
International, Inc., serving American style food with international specialties.
Additionally, the Company operated five Carmella Cafe restaurants and two Spiga
Italian-style family restaurants. In March 1995, the Company divested itself of
ownership of the Carmella Cafe and Spiga restaurants. On April 6, 1995 the
Company filed a voluntary petition for relief under Chapter 11 of Title II of
the Federal Bankruptcy Code. During the twenty-six week period ended December
29, 1996 the Company ceased operations of all American Cafe restaurants and two
Red Robin restaurants, located in Smithhaven, New York and Staten Island, New
York. On May 30, 1997, the Bankruptcy Court confirmed the Company's plan of
reorganization, effective May 25, 1997 for accounting purposes. Upon
confirmation, the Company's name was changed to Redheads, Inc. Upon emergence,
the Company had four restaurants in operation, located in Kings Plaza, New York;
Levittown, New York; Yonkers, New York and Secaucus, New Jersey. The Company has
converted these restaurants, with the exception of Kings Plaza and Secaucus,
into the Redheads Bistro/Bar concept as of December 28, 1997.
Management's Future Plans
The Company's consolidated financial statements have been prepared on the basis
that it is a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As reflected in
the financial statements, since May 25, 1997, the Company incurred a net loss of
$715,836 and at December 28, 1997 had a working capital deficit of $157,158.
The Company anticipates that it will require additional working capital to fund
operations and complete the conversion of its existing restaurant to the
Redheads concept. The Company also will need additional capital to acquire new
restaurant operations and integrate these restaurants into current operations.
The Company believes that it will have sufficient capital to meet these
obligations through the improvement of current operations, additional revenues
generated from new restaurants and the completion of a private placement of
equity in the amount of approximately $2,000,000, anticipated in the second
quarter of calendar 1998. The Company has signed a letter of intent with an
investment banker for this private financing. However, there can be no assurance
that the offering or any restaurant acquisition will be completed, or that the
Company will have sufficient capital to support operations and implement its
business plans.
Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
Redheads, Inc. and its subsidiaries at December 28, 1997 and for the period May
26, 1997 (emergence date under the confirmed plan of reorganization) to December
28, 1997. The accompanying consolidated financial statements include the
accounts of Magic Restaurants, Inc. and Subsidiaries as Debtor-in-Possession
(Predecessor) as of December 29, 1996 and for the twenty-one weeks ended May 25,
1997, the twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended
June 30, 1996. All material intercompany transactions have been eliminated in
consolidation.
Effective July 1, 1993, the Company adopted a fiscal year of fifty-two or
fifty-three weeks. Effective July 1, 1996, the Company changed its fiscal year
end to the last Sunday of December.
Fair Value of Financial Statements
The Company's financial instruments consist of cash, short-term receivables,
payables and accrued expenses. The carrying values of cash, short-term
receivables, payables and accrued expenses approximate fair value because of
their short maturities.
The carrying value of the fixed rate noncurrent notes receivable and current
portion of long-term debt approximate fair value since the interest rate
associated with the debt approximates the current market interest rate.
F-7
<PAGE> 56
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentration of Credit Risk Involving Cash
The Company maintains cash balances at several financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. During the year, the Company may have cash balances in these
financial institutions in excess of these limits. At December 28, 1997 balances
were in excess of insurable amounts by approximately $236,000.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. The cost of leasehold improvements is amortized
over the lesser of the length of the related leases or the estimated useful
lives of the assets. Depreciation is computed using the straight line method.
Inventory
Inventory consists of food, liquor, bar and other supplies and is stated at the
lower of cost (determined by the first-in, first-out method) or market.
License Fees and Deferred Leasing Expenses
License fees and deferred leasing expenses are amortized on a straight-line
method over the related license or lease.
Preoperating Cost
Preoperating costs, consisting primarily of training personnel, are amortized on
a straight-line method over one year.
Income Taxes
The Company accounts for income taxes on an asset and liability approach to
financial accounting. Deferred income tax assets and liabilities are computed
annually for temporary differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly, actual results could differ from those
estimates.
Recoverability of Long Lived Assets
Effective July 1, 1996 the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The 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 the asset may not be
recoverable. The Company is not aware of any events or circumstances which
indicate the existence of an impairment which would be material to the Company's
annual financial statements.
Accounting for Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of the grant over the amount the employee is required to pay to acquire the
stock (the intrinsic value method under Accounting Principles Board Opinion 25).
Such amount, if any, is accrued over the related vesting period, as appropriate.
Effective July 1, 1996 the Company implemented SFAS No. 123, "Accounting for
Stock-Based Compensation." The Statement encourages employers to account for
stock compensation awards based on their fair value on their date of grant.
Entities may choose not to apply the new accounting method but instead, disclose
in the notes to the financial statements the pro forma effects on net income and
earnings per share as if the new method had been applied. The Company has
adopted the disclosure-only approach of the Standard.
F-8
<PAGE> 57
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings (Loss) Per Share
Effective year ended December 28, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share" (EPS). This statement establishes standards for computing
and presenting EPS, replacing the presentation of currently required primary EPS
with a presentation of Basic EPS. For entities with complex capital structures,
the statement requires the dual presentation of both Basic EPS and Diluted EPS
on the face of the statement of operations. Under this new standard, Basic EPS
is computed based on weighted average shares outstanding and excludes any
potential dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
128 was effective for financial statements issued for periods ending after
December 15, 1997 and requires restatement of the prior years' earnings per
share.
Earnings (Loss) Per Share (continued)
Prior year amounts for net loss per common share were recomputed in accordance
with SFAS No. 128; however such recomputed amounts were unchanged from those
previously reported.
Basic earnings (loss) per share include the weighted average number of shares
outstanding during the year. Diluted earnings (loss) per share include the
weighted average number of shares outstanding and dilutive potential common
shares, such as warrants and convertible securities. Assumed conversion of the
warrants and convertible securities would be antidilutive, therefore, basic and
diluted earnings (loss) per share are the same.
Net loss applicable to common stockholders for the thirty-one weeks ended
December 28, 1997 has been increased by $181,000 of preferred dividends in
arrears.
Recently Issued Accounting Pronouncements
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components. The reporting and display requirements
of SFAS No. 130 are effective for fiscal years beginning after December 15,
1997. The Company presently intends to comply with this statement for its year
ended December 27, 1998.
During June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and related disclosures about products
and services, geographic areas and major customers. The reporting and disclosure
requirements of SFAS No. 131 are effective for periods beginning after December
15, 1997. The Company presently intends to comply with this statement for its
year ended December 27, 1998.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to
conform to 1997 presentations.
NOTE 2 - PLAN OF REORGANIZATION
The Company's confirmed plan of reorganization provided for the following:
Priority Tax Claims - Federal and state payroll, withholding and other taxes of
approximately $382,000 are payable in equal periodic installments over a period
ending six years after the date of assessment in an aggregate amount equal to
the amount of such allowed claim plus interest from the effective date on the
unpaid portion.
Secured Claims - The secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for payables of $209,000 and
11,333 shares of 8% preferred stock of the Levittown subsidiary.
F-9
<PAGE> 58
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PLAN OF REORGANIZATION (Continued)
Trade and Other Miscellaneous Claims - The holders of approximately
$13,456,000 of trade and miscellaneous claims received 125,000 shares of
the new common stock of the Company. $26,000 of claim liabilities remained
intact.
Postpetition Series A Senior Secured Notes - The holders of $2,520,000 of
Series A Senior Secured Notes received 1,896,983 shares of the new common
stock in exchange for their notes and interest due of approximately
$325,000.
$35,000 of Series A Senior Secured Notes remained intact.
Postpetition Series B Senior Secured Notes - The holders of $1,700,000 of
Series B Senior Secured Notes received 23,442 shares of new 12% preferred
stock of parent corporation in exchange for their notes and interest due of
approximately $58,000.
Postpetition Liabilities - Approximately $1,882,000 of postpetition
liabilities were exchanged for 5,333 shares of new 8% subsidiary preferred
stock and 213,760 shares of new common stock. Approximately $1,227,000 of
postpetition liabilities remained intact. Included in this amount was
approximately $500,000 due to certain professionals retained in the
bankruptcy case, which was exchanged for 150,696 shares of common stock of
the Company by December 28, 1997. No interest will accrue on the
outstanding unpaid balances due these professionals.
Other Disputed Postpetition Claims - The Company is a party to certain
litigation pending before the Bankruptcy Court. The first, Magic
Restaurants, Inc., et al. v. Nicolo and Joseph Ottomanelli, objects to the
$75,000 administrative claim filed by the Ottomanellis and seeks damages of
$250,000 by way of counterclaim. The Company is also presently appealing an
order of the Bankruptcy Court requiring the Company to pay approximately
$100,000 to Bowie Produce, Inc., a prepetition produce vendor, pursuant to
the Perishable Agricultural Commodities Act ("PACA"). The resolution of
these matters is not expected to become final until the latter part of the
fiscal year 1998. The Company believes that an adverse decision to the
Company in each of these matters will not materially affect the Company's
operations, and further that it will have sufficient cash available to pay
any judgements that may be entered with finality against the Company.
The Company accounted for the reorganization using fresh-start reporting because
holders of existing voting shares immediately before filing and confirmation of
the plan received less than 50% of the voting shares of the emerging entity and
its reorganization value is less than its postpetition liabilities and allowed
claims, as shown below:
<TABLE>
<S> <C>
Postpetition current liabilities $ 4,458,202
Liabilities deferred pursuant to Chapter 11 proceedings 19,855,378
------------
Total postpetition liabilities and allowed claims 24,313,580
Reorganization value 5,123,105
------------
Excess of liabilities over reorganization value $ 19,190,475
============
</TABLE>
It was determined that the Company's reorganization value approximated the net
book value of the assets immediately before May 25, 1997, the date of the plan
confirmation.
The following table ("Plan of Reorganization Recovery Analysis") summarizes the
adjustments required to record the reorganization and the issuance of the
various securities in connection with the implementation of the plan.
F-10
<PAGE> 59
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PLAN OF REORGANIZATION RECOVERY ANALYSIS
<TABLE>
<CAPTION>
R E C O V E R Y
-------------------------------------------------------------------------------------------
Account
Balances
Immediately Elimination
Prior to of Debt and Surviving Tax Preferred Stock
Reorganization Equity Debt Claims % Amount
-------------- ----------------- -------------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Postpetition liabilities $ 4,458,202 $ (3,037,064) $ 1,227,025 $ -- 13.3% $40,000
-----------
Claim Interest
Series A secured notes 3,004,229 (2,967,332) 35,000 -- -- --
Series B secured notes 1,806,888 (964,986) -- -- 58.4 175,815
Priority tax claim 381,605 -- -- 381,605 -- --
Secured claim 1,206,656 (591,218) 208,612 -- 28.3 85,000
Trade and other
miscellaneous claims 13,456,000 (13,429,875) 26,000 -- -- --
-----------
19,855,378
-----------
Preferred stock 1,980,000 (1,980,000) -- -- -- --
Common stock 7,000 (7,000) -- -- -- --
Additional paid-in capital 13,743,005 (13,743,005) -- -- -- --
Preferred stock subscribed 1,800,000 -- -- -- -- --
Deficit (36,720,480) 36,720,480 -- -- -- --
-----------
(19,190,475) -- -- -- -- --
----------- -------------- -------------- ---------- ------- --------
$ 5,123,105 $ -- $ 1,496,637 $ 381,605 100.0% $300,815
=========== ============== ============== ========== ======= ========
</TABLE>
<TABLE>
<CAPTION>
R E C O V E R Y
---------------------------------------------------------------------------------------
Additional
Paid-In
Capital Preferred
Preferred Stock Common Stock Total Recovery
Stock Subscribed % Amount Amount %
-------------- ---------- --------- ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Postpetition liabilities $ 153,899 $ -- 9.5% $ 214 $ 1,421,138 31.88%
Claim Interest
Series A secured notes -- -- 84.9 1,897 36,897 1.23
Series B secured notes 666,087 -- -- -- 841,902 46.59
Priority tax claim -- -- -- -- 381,605 100.00
Secured claim 321,826 -- -- -- 615,438 51.00
Trade and other
miscellaneous claims -- -- 5.6 125 26,125 0.19
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Additional paid-in capital -- -- -- -- -- --
Preferred stock subscribed -- 1,800,000 -- -- 1,800,000 100.00
Deficit -- -- -- -- -- --
-- -- -- -- -- --
------------ ----------- ------- --------- ------------
$ 1,141,812 $ 1,800,000 100.0% $ 2,236 $ 5,123,105
============ =========== ======= ========= ============
</TABLE>
F-11
<PAGE> 60
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITION
On June 23, 1997, the Company purchased a Redheads Bistro/Bar located in
Middletown, New Jersey together with the related intellectual property rights in
the Redheads concept, trade name and trade dress for $302,000 cash and the
assumption of the underlying lease. The acquisition has been accounted for by
the purchase method of accounting and the purchase price approximated the fair
value of the net assets required.
Unaudited proforma consolidated results of operations were not presented since
there was no historical financial information available that corresponded to the
periods presented.
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
-------- --------
<S> <C> <C>
Preoperation costs - net of accumulated
amortization of $18,799 $145,991 $ --
Current portion of notes receivable 6,845 223,801
Prepaid expenses 26,167 7,286
Credit card receivables 90,309 34,791
Escrow deposits 50,000 10,000
Other receivables 16,890 17,179
-------- --------
$336,202 $293,057
======== ========
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements $1,486,580 $2,790,208
Restaurant fixtures and equipment 212,115 877,692
Computer software 273,152 437,979
Equipment held under capital leases -- 628,935
Furniture and fixtures 520,438 366,198
---------- ----------
2,492,285 5,101,012
Less: Accumulated depreciation 206,149 3,266,020
---------- ----------
2,286,136 1,834,992
Construction in progress 35,358 107,974
---------- ----------
$2,321,494 $1,942,966
========== ==========
</TABLE>
NOTE 6 - NOTES RECEIVABLE - LONG-TERM
Notes receivable consist of three notes, with interest rates ranging from 5.0%
to 9.75%, maturing through January 2018, collateralized by property. The current
portion of notes receivable has been included in other current assets.
F-12
<PAGE> 61
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
-------- --------
<S> <C> <C>
Liquor license $250,000 $150,000
License fees - net 90,622 3,787
Deposits 32,777 22,208
Deferred leasing expenses - net 7,311 7,329
Deferred legal expenses - net 4,762 4,437
Deferred brokerage fees - net -- 1,669
Acquisition costs - net 23,542 --
Other receivables 60,757 --
-------- --------
$469,771 $189,430
======== ========
</TABLE>
License fees, deferred leasing expenses, deferred legal expenses, deferred
brokerage fees and acquisition costs are net of accumulated amortization of
$140,669, and $158,873 as of December 28, 1997 and December 29, 1996.
NOTE 8 - COMMITMENTS
The Company leases its executive office and remaining restaurant premises under
various operating leases expiring through August 2013. Rent expense for the
thirty-one weeks ended December 28, 1997, twenty-one weeks ended May 25, 1997,
twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended June 30,
1996 was $582,563, $385,982 $695,453 and $2,548,805.
Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
FIFTY-TWO / FIFTY-THREE
WEEKS
ENDING DECEMBER,
----------------
<S> <C>
1998 $ 990,273
1999 1,023,488
2000 1,049,663
2001 1,056,699
2002 1,046,965
Thereafter 8,819,518
---------
$13,986,606
===========
</TABLE>
F-13
<PAGE> 62
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - POSTPETITION SENIOR SECURED NOTES
Postpetition senior secured notes consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
-------------- ----------
<S> <C> <C>
Postpetition Series A senior secured notes payable to various individuals and
corporations, interest accruing at 12%, no stated maturity date,
collateralized by certain assets of the Company $ -- $2,379,530
Postpetition Series A senior secured notes payable to a corporation whose
president is the chief operating officer of the Company, interest accruing
at 12%, no stated maturity date, collateralized by
certain assets of the Company -- 200,000
Postpetition Series B senior secured notes payable to a
corporation, interest accruing at 12%, no stated maturity date, collateralized by -- 400,000
certain assets of the Company -------------- ----------
$ -- $2,979,530
============== ==========
</TABLE>
NOTE 10 - CAPITAL STOCK
Series A 12% Cumulative Preferred Stock
The Company's management is authorized to issue 5,000,000 shares of $0.001 par
value preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting control of others. During 1997, the Company accepted the
subscription for the purchase of 46,667 shares of Series A 12% Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") at approximately $75
per share, for a total of $3,500,000. As of December 28, 1997, $3,100,000 had
been received and 42,109 shares of Series A Preferred Stock had been issued. The
stock was valued at the maximum exchange rate of ten shares of Common Stock for
every one share of series A Preferred Stock. The Common Stock was valued at
$1.50 per share. The balance of the proceeds of $400,000 was received by April
8, 1998.
The Company is obligated to pay dividends to the holders of the Series A
Preferred Stock that was issued at a rate equal to 12% per annum on the $75
stated value. The dividends are payable annually through the issuance of shares
of Common Stock of the Company at a price equal to 80% of the average bid price
for the Common Stock during the preceding 12 months. To the extent funds are
legally available, beginning on May 30, 2000, the Company has the option to
purchase, at a cash price equal to $75 per share, plus accrued and unpaid
dividends, portions of the Series A Preferred Stock, so that the stock would be
retired within seven years. For the first three years after issuance, at the
election of the holders and with the consent of the Company, the Series A
Preferred Stock is exchangeable for shares of Common Stock. After this time the
stock is not exchangeable at the holders' option.
As of December 28, 1997, the Company has $123,000 of dividends in arrears for
Series A 12% Cumulative Convertible Preferred Stock.
F-14
<PAGE> 63
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
Series A 8% Cumulative Exchangeable Preferred Stock
On May 25, 1997, the Company issued 1,778 shares of Series A 8% Cumulative
Exchangeable Preferred Stock of both Secaucus and Levittown subsidiaries and
1,777 shares of Series A 8% Cumulative Exchangeable Preferred Stock of Yonkers
subsidiary ("Subsidiary Preferred Stock") in exchange for a release of a
prepetition liability of approximately $400,000. The stock was valued at the
maximum exchange rate of five shares of Common Stock for every one share of
Subsidiary Preferred Stock. The Common Stock was valued at $1.50 per share.
Dividends are payable on the Subsidiary Preferred Stock at a rate of 8% per
annum based on the liquidation preference of $75 per share. The dividends are
payable semi-annually, to the extent funds are legally available. At the
election of the issuing subsidiary such dividends may be paid by issuance of
shares of Common Stock of the Company, valued for this purpose at the closing
price as of the 10th business day preceding declaration of the dividend.
Further, to the extent funds are legally available, on May 30, 2000, May 30,
2001, and May 30, 2002, each issuing subsidiary will offer to purchase, at a
cash price equal to $75 per share, plus accrued and unpaid dividends, one-sixth,
one-third, and one-half, respectively of the Subsidiary Preferred Stock issued
under the Plan; provided, however, that if at any time the closing bid price of
the Common Stock exceeds $5 per share for 40 consecutive trading days, any such
mandatory repurchase obligation shall expire.
On May 25, 1997, the Company issued 13,111 shares of 8% Cumulative Exchangeable
Preferred Stock of Levittown subsidiary ("Levittown Preferred Stock") in
exchange for a release of a secured claim liability of approximately $850,000.
The stock was valued at the maximum exchange rate of five shares of Common Stock
for every one share of Levittown Preferred Stock. The Common Stock was valued at
$1.50 per share.
Dividends are payable on the Levittown Preferred Stock in cash at a rate of 8%
per annum based on the liquidation preference of $75 per share. The dividends
are payable semi-annually, to the extent funds are legally available. Further,
to the extent funds are legally available, beginning on May 30, 1998, and
monthly thereafter, the Levittown subsidiary will offer to purchase one
forty-eighth of the shares of the Levittown Preferred Stock issued under the
Plan to the holder. The purchase price is equal to the liquidation preference of
$75 per share, plus accrued and unpaid dividends. For the first three years
after issuance, at the election of the holders and with the consent of the
Company, the Subsidiary Preferred Stock and the Levittown Preferred Stock is
exchangeable for shares of Common Stock. After this time, the stock is not
exchangeable at the holders' option.
The Company's authorized and issued outstanding shares of Series A 8% Cumulative
Exchangeable Preferred Stock is as follows:
<TABLE>
<CAPTION>
Shares Shares Issued
Subsidiary Authorized and Outstanding
- ---------- ---------- ---------------
<S> <C> <C>
Yonkers 1,000,000 1,777
Levittown 15,000 13,111
Secaucus 2,000 1,778
--------- ------
1,017,000 16,666
========= ======
</TABLE>
As of December 28, 1997, the Company has $58,000 of dividends in arrears for
Series A 8% Cumulative Exchangeable Preferred Stock.
F-15
<PAGE> 64
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
Common Stock
On May 25, 1997, the Company issued shares of Common Stock as follows:
The Company issued 1,896,983 shares of Common Stock in exchange for the
release of $2,520,000 of series A Senior Secured Notes and interest due of
approximately $325,000.
The Company issued 125,000 shares of Common Stock valued at $187,500 for
the settlement of approximately $13,456,000 of trade and other
miscellaneous claims.
The Company issued 213,260 shares of Common Stock valued at $319,890 for
the settlement of approximately $1,111,000 of postpetition liabilities.
On May 30, 1997, the Company issued 500 shares of Common Stock in exchange
for consulting services.
On December 28, 1997, the Company issued 150,696 shares of Common Stock for
the settlement of $500,000 of unpaid legal fees.
Warrants
From time to time, the Company may issue warrants to purchase its Common Stock
to parties other than employees and directors. Warrants may be issued as an
incentive to help the Company achieve its goals, or in consideration for cash or
services rendered to the Company, or a combination of the above.
Effective July 1, 1996, the Company adopted FASB Statement 123, "Accounting for
Stock-Based Compensation," which requires compensation cost associated with
warrants issued to other than employees to be valued based on the fair value of
the warrants.
Prior to May 25, 1997, as part of the subscription for 46,667 shares of Series A
Preferred Stock, the Company issued three year warrants to purchase 1,500,000
shares of its Common Stock at a price of $2.00 per share and five year warrants
to purchase 1,500,000 shares of its Common Stock at a price of $5.00 per share.
The Black-Scholes model valued these warrants at zero based on the following
assumptions: no dividend yield, expected volatility of 0%, and a risk-free
interest rate of 5.5%.
Predecessor
Redeemable 5% Cumulative Convertible Preferred Stock
On September 4, 1994, the Company's management authorized and issued 220 shares
of redeemable 5% cumulative preferred stock for $1,870,000, net of commissions
of $330,000. The value assigned to these securities was $10,000 per share. The
holder of the preferred stock had the option to redeem the stock for $10,000 per
share. Additionally, each share was convertible into 1.25 to 4 shares of common
stock, depending on the market value and subject to certain restrictions.
On February 2, 1995, 22 shares of the preferred stock were converted to 222,222
shares of common stock at a conversion price of $0.45 per share, in accordance
with the agreement.
F-16
<PAGE> 65
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
Preferred Stock
The Company's management was authorized to issue 1,000,000 shares of $0.001 par
value preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting control of others. The Company had 107,000 shares of Series A
15% preferred stock issued and outstanding as of December 29, 1996. The shares
were redeemable by the Company's management at any time for $10 per share plus
any unpaid dividends. Dividends were cumulative. Liquidating distributions were
$10 per share plus any unpaid dividends.
NOTE 11 - REORGANIZATION EXPENSES
Loss on Abandonment or Disposal of Restaurants
For the twenty-six weeks ended December 29, 1996, the loss on disposal of
equipment is mainly due to the abandonment of equipment due to the closing of
the American Cafe restaurant located in Tyson's Corner, Virginia and the two Red
Robin restaurants located in Smithhaven, New York and Staten Island, New York.
Closing of American Cafe Restaurants
Prior to the June 30, 1996 year end, the management of the Company adopted a
formal plan to close all of its American Cafe restaurants, except the restaurant
located in Tyson's Corner, Virginia.
As of June 30, 1996 the Company recognized a $467,855 net loss from winding down
operations of these restaurants from July 1996 through October 1996.
Additionally, the Company recognized a loss of abandonment of the net book value
of the property and equipment at these restaurants in the amount of $1,923,305.
NOTE 12 - INCOME TAXES
The Company files a consolidated federal income tax return and certain combined
state and city returns.
There are no significant temporary differences for the thirty-one weeks ended
December 28, 1997, twenty-one weeks ended May 25, 1997, twenty-six weeks ended
December 29, 1996 and the fifty-two weeks ended June 30, 1996.
The Company's federal, state and local tax returns have not been filed for the
thirty-one weeks ended December 28, 1997, twenty-one weeks ended May 25, 1997,
twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended June 30,
1996.
As of December 28, 1997, the Company had approximately $15,300,000 of net
operating loss carryforwards expiring through 2011, available to offset future
federal income taxes.
As a result of the change in control described in Note 2, the Company is subject
to limitations on the future utilization of its federal net operating loss
carryforwards. These limitations, described in Section 382 of the Internal
Revenue Code, limit the amount of future taxable income which may be offset by
pre-change net operating loss and capital loss carryforwards. This limitation is
calculated by reference to the value of the Company immediately before the
change date, multiplied by a discount factor, known as the "long term tax-exempt
rate".
F-17
<PAGE> 66
REDHEADS, INC. AND SUBSIDIARIES
(Formerly Magic Restaurants, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (Continued)
There is no income tax benefit for operating losses for the thirty-one weeks
ended December 28, 1997, twenty-one weeks ended May 25, 1997, twenty-six weeks
ended December 29, 1996 and the fifty-two weeks ended June 30, 1996 due to the
following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the tax benefit of the net operating losses
described above were offset by a 100% valuation allowance. Management
believes that a valuation allowance is considered necessary since it is
more likely than not that the deferred net asset will not be realized
through future taxable income.
NOTE 13 - RELATED PARTY TRANSACTIONS
In 1995, the Bankruptcy Court overseeing the Company's Chapter 11 case, in
connection with the employment of Mr. Charles Olson, Jr. as President and Chief
Executive Officer, approved a consulting agreement between the Company and Rye
Management, Inc. ("Rye"), that was extensively negotiated between the Company
and the Creditors' Committee. Rye is a corporation owned and controlled by Mr.
Olson. The consulting agreement called for a reorganization bonus to be paid to
Rye upon the confirmation of the Plan. The consulting agreement assigns various
"Success Factors" that are based on the actual recovery (as a percentage of
Allowed Claims) realized by general unsecured creditors in the Chapter 11 cases.
This reorganization bonus will be paid through the issuance of the Company
Common Stock. Under the confirmed Plan, the number of shares issued will be
based on the sustained trading prices achieved for the Common Stock over the
three year period following the Plan Effective Date. The reorganization bonus
will be calculated based upon the highest average trading price achieved by the
Common Stock over the course of ten consecutive trading days during the three
years following the Effective Date (with average share volumes traded per day in
excess of 10,000 shares). The Company estimates that, on average, a total of
18,000 shares would be issuable for each $1.00 of sustained price realized up to
$53 per share during the three year period.
Mr. Olson also has a controlling interest in two companies and a partnership
that own shares of Redheads, Inc. Common Stock.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000837596
<NAME> REDHEADS, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<EXCHANGE-RATE> 1
<CASH> 180,082
<SECURITIES> 0
<RECEIVABLES> 590,211
<ALLOWANCES> 0
<INVENTORY> 83,376
<CURRENT-ASSETS> 999,660
<PP&E> 5,184,030
<DEPRECIATION> 2,897,893
<TOTAL-ASSETS> 4,463,943
<CURRENT-LIABILITIES> 1,156,818
<BONDS> 0
0
440,815
<COMMON> 2,386
<OTHER-SE> 2,585,826
<TOTAL-LIABILITY-AND-EQUITY> 4,463,943
<SALES> 9,679,825
<TOTAL-REVENUES> 9,679,825
<CGS> 2,827,808
<TOTAL-COSTS> 3,914,176
<OTHER-EXPENSES> 5,477,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325,089
<INCOME-PRETAX> 13,928,936
<INCOME-TAX> 13,928,936
<INCOME-CONTINUING> (2,059,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 15,988,136
<CHANGES> 0
<NET-INCOME> 13,928,936
<EPS-PRIMARY> 3.27
<EPS-DILUTED> 3.27
</TABLE>
