<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 28, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) EXCHANGE ACT For the
transition period from to
Commission file number 0-17975
REDHEADS, INC,
(Exact name of business issuer as specified in its charter)
Delaware 95-4169432
(State or other jurisdiction of incorporation or organization(IRS
Employer Identification No.)
Fifty South Buckhout Street, Irvington, New York 10533
(Address of principal executive offices)
(914) 591-4444
(Issuer's telephone number)
(Former name, former address and formal fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes. . No.X..
APPLICATION ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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...No.X.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,386,439 as of December 28, 1997.
Page 1 of 23
<PAGE> 2
Redheads, Inc, AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of May 25, 1997 (audited),
September 28, 1997 (unaudited) and December 29, 1996
(audited)...................................................................... 3
Consolidated Statement of Operations for the thirteen weeks ending
September 28, 1997 and thirteen ended September 30, 1996
(Unaudited).................................................................... 4
Consolidated Statement of Operations for the twenty one weeks ending
May 25, 1997, eighteen weeks ended September 28, 1997 and thirty nine
Ended September 30, 1996
(Unaudited).................................................................... 5
Consolidated Statement of Cash Flows as of May 25, 1997 (unaudited),
September 28, 1997 (unaudited) and December 29, 1996
(audited)...................................................................... 6
Consolidated Statement of Accumulated Deficit
For the thirteen weeks ended September 28, 1997
(Unaudited).................................................................... 7
Notes to Consolidated Financial Statements
(Unaudited).................................................................... 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................................. 10-19
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 20-21
Item 2. Changes in Securities............................................................ 21
Item 3. Defaults Upon Senior Securities.................................................. 21
Item 4. Other Information................................................................ 21
Item 5 Exhibits and Reports on Form 8-K................................................. 22
Signature Page ................................................................................. 23
</TABLE>
Page 2 of 23
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MAY 25, 1997 SEP. 28, 1997 DEC. 29, 1996
<S> <C> <C> <C>
CURRENT ASSETS
Cash 144,554 190,990 58,332
Accounts Receivable - Credit Cards 39,194 1 0
Inventories 72,324 80,192 80,840
Other Current Assets 2,052,242 1,578,296 293,057
--------- --------- -----------
TOTAL CURRENT ASSETS 2,308,314 1,849,478 432,229
Fixed Assets 1,943,396 2,026,052 1,942,966
Other Assets 186,617 417,392 296,669
Long Term Note Receivable 684,777 680,862 0
--------- --------- -----------
TOTAL LONG TERM ASSETS 2,814,790 3,124,306 2,239,634
TOTAL ASSETS 5,123,104 4,973,784 2,671,863
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Liabilities Subject to compromise 0 0 15,415,682
Trade accounts 388,048 398,969 3,739,586
Notes Payable 201,581 214,718 (A)
Sales and payroll taxes payable 53,549 66,471 99,496
Current portion of long-term debt 34,973 200,000 2,979,530
Loans Payable - Taxes 381,605 381,605 0
Reserves For Liabilities 176,539 270,957
Accrued Expenses 641,946 622,887 (A)
--------- --------- -----------
TOTAL CURRENT LIABILITIES 1,878,241 2,155,606 22,234,295
LONG-TERM DEBT 0 0 0
COMMITMENT & CONTINGENCIES
REDEEMABLE 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
10,000 Preferred stock -
$10. par value; authorized - shares
issued and outstanding - 198 0 0 1,980,000
STOCKHOLDERS' DEFICIT
Series A 8% Cumulative Exchangeable
$.001 par value; authorized
2,006,000; issued and
outstanding - 5,333 shares as
of May 25, 1997 and Sept. 28,
1997, respectively 40,000 40,000 0
Series A 8% Cumulative Exchangeable
$.001 par value; authorized
15,000; issued and outstanding -
11,333 shares as of May 25,
1997 and Sept. 28, 1997,
respectively 85,000 85,000 107
Series A 12% Cumulative Convertible
$.001 par value; authorized
5,000,000; issued and
outstanding - 23,442 shares as
of May 25, 1997 and 28,775 for
Sept. 28, 1997 175,815 215,815
Common stock - $.001 par value;
authorized - 23,024,000 shares;
issued and outstanding -
2,235,743 shares as of May 25,
1997 and June 29, 1997,
respectively and 7,224,000 as
of Dec. 29, 1996 2,236 2,236 7,244
Additional paid-in capital 1,141,813 1,501,813 13,887,520
Accumulated deficit 0 (426,685) (35,437,302)
--------- --------- -----------
1,444,863 1,418,178 (21,542,431)
--------- --------- -----------
Plus: subscriptions receivable 1,800,000 1,400,000 0
TOTAL STOCKHOLDERS' EQUITY 3,244,863 2,818,178 (19,562,431)
--------- --------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 5,123,104 4,973,784 2,671,863
========= ========= ===========
</TABLE>
(A) Accrued Expenses & Notes Payable included in Trade Payables
Page 3 of 23
<PAGE> 4
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS ENDING 13 WEEKS ENDING
SEP. 28, 1997 SEP. 30, 1996
---------------------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES 2,553,576 100.00% 5,414,313 100.00%
COST OF SALES 766,366 30.01% 1,860,972 34.37%
--------- ----------
GROSS PROFIT 1,787,210 69.99% 3,553,341 65.63%
--------- ----------
OPERATING EXPENSES
Labor costs 874,028 34.23% 1,939,450 35.82%
Occupancy costs 335,392 13.13% 835,477 15.43%
Other Operating Expense 635,666 24.89% 1,394,401 25.75%
Depreciation 86,229 3.38% 223,852 4.13%
--------- ----------
TOTAL OPERATING EXPENSES 1,931,315 75.63% 4,393,180 81.14%
--------- ----------
INCOME (LOSS) FROM RESTAURANT OPERATIONS (144,105) -5.64% (839,839) -15.51%
--------- ----------
General and administrative expenses 156,396 6.12% 246,884 4.56%
--------- ----------
INCOME (LOSS) FROM OPERATIONS (300,501) -11.77% (1,086,723) -20.07%
--------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) 0 0.00% (150,387) -2.78%
Other income (expense) net (59,476) -2.33% (192,541) -3.56%
--------- ----------
TOTAL OTHER INCOME (EXPENSE) (59,476) -2.33% (342,928) -6.33%
REORGANIZATION EXPENSE
Professional fees (32,268) -1.26% (361,802) -6.68%
Loss on abandonment or disposition
of restaurants 0 0.00% 0 0.00%
Forgiveness of Debt 0 0.00% 0 0.00%
Closing of American Cafe restaurants 0 0.00% (0) -0.00%
--------- ----------
TOTAL OTHER INCOME (EXPENSE) (32,268) -1.26% (361,802) -6.68%
--------- ----------
NET INCOME (LOSS) (392,245) -15.36% (1,791,453) -33.09%
========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 2,235,743 7,244,000
INCOME (LOSS) PER COMMON SHARE (0.18) (0.25)
</TABLE>
Page 4 of 23
<PAGE> 5
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
21 WEEKS ENDING 18 WEEKS ENDING 39 WEEKS ENDING
MAY 25, 1997 SEPT 28, 1997 SEPT 30, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SALES 3,735,855 100.00% 3,492,885 100.00% 18,110,627 100.00%
COST OF SALES 1,077,107 28.83% 1,028,823 29.45% 5,671,960 31.32%
---------- --------- ----------
GROSS PROFIT 2,658,747 71.17% 2,464,062 70.55% 12,438,668 68.68%
---------- --------- ----------
OPERATING EXPENSES
Labor costs 1,174,177 31.43% 1,167,505 33.43% 6,021,534 33.25%
Occupancy costs 506,279 13.55% 436,661 12.50% 2,462,656 13.60%
Other Operating Expense 840,281 22.49% 846,985 24.25% 4,863,506 26.85%
Depreciation 139,027 3.72% 114,163 3.27% 701,020 3.87%
---------- --------- ----------
TOTAL OPERATING EXPENSES 2,659,763 71.20% 2,565,313 73.44% 14,048,716 77.57%
---------- --------- ----------
INCOME (LOSS) FROM RESTAURANT OPERATION (1,015) -0.03% (101,251) -2.90% (1,610,048) -8.89%
---------- --------- ----------
General and administrative expenses 610,489 16.34% 214,068 6.13% 862,580 4.76%
---------- --------- ----------
INCOME (LOSS) FROM OPERATIONS (611,505) -16.37% (315,319) -9.03% (2,472,628) -13.65%
---------- --------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) (323,864) -8.67% 11,789 0.34% (452,426) -2.50%
Other income (expense) net (22,158) -0.59% (65,990) -1.89% (43,196) -0.24%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE) (346,022) -9.26% (54,201) -1.55% (495,622) -2.74%
REORGANIZATION EXPENSE
Professional fees (478,116) -12.80% (43,965) -1.26% (1,032,931) -5.70%
Loss on abandonment or disposal of
restaurant 8,014 0.21% 0 0.00% 0 0.00%
Forgiveness of Debt 16,072,400 430.22% (13,200) -0.38% 0 0.00%
Closing of American Cafe restaurants 0 0.00% 0 0.00% (2,391,159) -13.20%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE) 15,602,298 417.64% (57,165) -1.64% (3,424,091) -18.91%
---------- --------- ----------
0
---------- --------- ----------
NET INCOME (LOSS) 14,644,771 392.01% (426,685) -12.22% (6,392,341) -35.30%
========== ========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,209,930 2,235,743 7,244,000
INCOME (LOSS) PER COMMON SHARE 2.03 (0.19) (0.88)
</TABLE>
Page 5 of 23
<PAGE> 6
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 97-DEC 96 SEPT 97-MAY 97 JUN 96-DEC 96
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITY
Net Income (Loss) 16,644,771 (426,685) (3,126,413)
Depreciation Amortization 139,027 114,163 333,814
Decrease (Increase) In Inventory 8,516 (7,868) 151,699
Decrease (Increase) In Other Current Assets And Accts. Rec. (1,798,380) 513,140 210,422
Decrease (Increase) In Other Assets (574,725) (226,860) 220,114
Loss On Sale Of Asset (8,014) 0 1,337,001
Restructuring Expense 478,116 68,965 0
Forgiveness Of Debt (16,072,400) 13,200 0
Increase (Decrease) In Trade Accounts And Notes Payable 0 0 0
And Accrued Expenses (17,923,693) (77,166) (242,231)
Increase (Decrease) In Sales And Payroll Taxes Payable (45,947) 12,922 (75,124)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (21,152,730) (16,190) (1,190,717)
CASH FLOW FROM INVESTING ACTIVITY
(Increase) Decrease In C.I.P. And Fixed Assets (139,457) (196,819) (676,518)
Increase (Decrease) In Cash Due To/From Affiliated Co's 0 0 0
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (139,457) (196,819) (676,518)
CASH FLOW FROM FINANCING ACTIVITY
Increase (Decrease) In Long Term Debt (2,944,557) 165,027 1,655,000
Increase (Decrease) In Loans Payable 381,605 0 0
Increase (Decrease) In Reserve For Liabilities 176,539 94,418 0
Change To Paid In Capital 23,649,121 360,000 0
Change To Preferred Cumulative Preferred (1,940,107) 0 (0)
Change To Preferred Cumulative Preferred 85,000 0 0
Change To Preferred Cumulative Preferred 175,815 40,000 0
Change To Common Stock (5,008) 0 (0)
Change To Preferred Stock Subscribed 1,800,000 (400,000) 0
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 21,378,408 259,445 1,654,999
Increase (Decrease) In Cash 86,222 46,436 (212,235)
Cash Beginning 58,332 144,554 270,567
Cash Ending 144,554 190,990 58,332
</TABLE>
Page 6 of 23
<PAGE> 7
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
TOTAL PIC
STOCKHOLDER PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN PREFERRED RETAINED
EQUITY STOCK STOCK/LEV STOCK/MRI STOCK STOCK CAPITAL STOCK SUBS. EARNINGS
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 29, 1997 3,210,424 40,000 85,000 215,815 1,501,813 2,236 0 1,400,000 (34,440)
0
0
0
0
NET INCOME JULY TO
SEPTEMBER, 1997 (392,245) (392,245)
0
0
0
-------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 28, 1997 2,818,178 40,000 85,000 215,815 1,501,813 2,236 0 1,400,000 (426,685)
=================================================================================================
SHARES OUTSTANDING AT
SEPTEMBER 28, 1997 4,333 11,333 28,775 2,235,743
</TABLE>
Page 7 of 23
<PAGE> 8
REDHEADS, INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of May 25, 1997,
September 28, 1997 and December 29, 1996, the results of operations for the
thirteen weeks September 28, 1997 and September 30, 1996, twenty one weeks ended
May 25, 1997 , eighteen weeks ended September 28, 1997 and thirty nine weeks
ended September 30, 1996, and the cash flows for the twenty one weeks ended May
25, 1997, eighteen weeks ended September 28, 1997 and thirty nine weeks ended
September 28, 1997. These results have been determined on the basis of generally
accepted accounting principles and practices applied consistently with those
used in the preparation of the Company's Annual Consolidated Financial
Statements included in the Company's Form 10-KSB for the year ended December 29,
1996.
Certain information and footnote disclosures normally included in the
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that the accompanying
consolidated financial statements be read in conjunction with financial
statements and notes thereto incorporated by reference in the Company's Form
10-KSB for the year ended December 29, 1996.
Interim results of operations are not necessarily indicative of the
results to be expected for a full year.
2. 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 existing
operations at September 28, 1997 for the thirteen week period ending September
28, 1997 and September 30, 1996 was 230,829 and 217,162 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>
1997 $ 972,313
1998 1,020,423
1999 1,050,893
2000 1,075,642
2001 1,024,824
Thereafter 10,448,147
-----------
</TABLE>
Page 8 of 23
<PAGE> 9
3. CAPITALIZATION
Preferred Stock, Convertible 5%
All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation.
Preferred Stock
All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation.
Common Stock
All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation. A further
discussion of capitalization is in the section titled "The Reorganization Plan",
to follow.
4. ACQUISITION AND DIVESTITURES OF RESTAURANTS
1) While operating under chapter 11 The Company ceased operations at all of its
restaurants in the Washington D.C. area. The long term assets of 8 restaurants
in the Washington D.C. area. Were written off as of year end 1996.
2) In August 1996 The Company caused the conversion of its Levittown Long Island
Red Robin to a Redheads Bistro/Bar.
3) On December 15, 1996, the Company ceased operations in its Smithhaven, New
York location. As of December 29, 1996, the Company ceased operations in its
Staten Island, New York location. As of December 15, 1996, the Company ceased
operations in its Tysons Corner, Virginia location. The long term assets of all
operations were written off as of year end 1996.
4) On December 31, 1996 the Company sold the assets of its Tysons Corner
restaurant for $200,0000 to Kaboudan International, L.L.C.(the Purchaser). The
Purchaser assumed all obligations under the lease on that date.
5) 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
Page 9 of 23
<PAGE> 10
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 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.
5. 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 thirteen weeks ended September 28, 1997. The Company's federal state and
city tax returns have not yet been filed for the twenty six weeks ended December
29, 1996, the fifty two weeks ended June, 30 1996 and July 2, 1995.
As of December 29, 1996 the Company had approximately $30,029,000 of
net operating loss carry forwards expiring through 2011, available to face
future federal income taxes.
As a result of the change in control of the company is subject to
limitations on the future utilization of its federal net operating loss carry
forwards. 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 carry forwards. This limitation is
calculated by reference to the value the Company immediately before the change
date, multiplied by a discount factor, known as the "long term tax-exempt rate"
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(A) GENERAL
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,
Page 10 of 23
<PAGE> 11
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.
RESTAURANT LOCATIONS
<TABLE>
<CAPTION>
LOCATION PRESENT CONCEPT EST. SEATING SQ. FOOTAGE TERM(1)
<S> <C> <C> <C> <C>
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 7,500 July 1987-June 2012
Middletown, NJ Redheads 210 6,000 Apr 1991-Mar 2006
Secaucus, NJ Red Robin 250 8,250 Oct 1989-Sept 2009
</TABLE>
(1) Assumes that company exercises all extension options.
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 note holders; (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.
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
Page 11 of 23
<PAGE> 12
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.
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 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.
$35,000 of Series A Notes remained intact.
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
Series A Preferred Stock 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
Series A Preferred Stock also grants the Company an option to repurchase a
percentage of the
Page 12 of 23
<PAGE> 13
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 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. Approximately $1,227,025 of postpetition
liabilities remain intact, $500,000 of which is to professionals retained in the
bankruptcy case in addition to approximately 382,000 in tax claims. No interest
will accrue on the outstanding unpaid balances.
Secured Claims. Secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for $209,000 in cash, and
11,335 shares of Levittown Preferred Stock. The present holder of this Levittown
Preferred Stock is Keybro Enterprises, Inc., with 11,335 shares.
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.
Pre-Plan Effective Date Equity Interests. All equity interests
outstanding prior to the Plan Effective Date were canceled and extinguished
without compensation.
(B) RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997 AS COMPARED
WITH THE THIRTEEN WEEKS ENDED SEPTEMBER 30, 1996
Total revenues decreased $2,860,737, or 52.8% to $2,553,576 for the
thirteen weeks ended September 28, 1997, from $5,414,313 for the thirteen weeks
ended September 30, 1996. The decrease was attributable to the closure of eleven
locations, all of the remaining he American Cafes (nine locations) and Two Red
Robins (Smithhaven and Staten Island).
<TABLE>
<CAPTION>
LOCATION DATE CLOSED CONCEPT
<S> <C> <C>
Calverton 9/6/96 American Cafe
Capitol Hill 8/31/96 American Cafe
Columbia 9/28/96 American Cafe
Fair Oaks 8/31/96 American Cafe
National Place One 8/31/96 American Cafe
Landover 9/9/96 American Cafe
</TABLE>
Page 13 of 23
<PAGE> 14
<TABLE>
<S> <C> <C>
Oxon Hill 9/15/96 American Cafe
Hanover (BWI) 9/5/96 American Cafe
Tysons Corner 12/16/96 American Cafe
Smithhaven 12/16/96 Red Robin
Staten Island 12/29/96 Red Robin
</TABLE>
Same stores sales decreased approximately $203,769 or 9% for the thirteen
weeks ended September 28, 1997 from the same period a year ago. Alcoholic
beverage revenues, as a percentage of food and beverage revenues increased 3.5%
to 20.0% for the current year as compared to 17.0% a year ago.
Food and beverage expense decreased $1,094,606 or 58.8% to $766,366 for
the thirteen weeks ended September 28, 1997 from $1,985,737 for the thirteen
weeks ended September 30, 1996, principally due to the decrease in volume
attributable to restaurant closings. Food and beverage expenses as a percentage
of food and beverage revenues fell 4.4% to 30.0% for the thirteen weeks ended
September 28, 1997, from 34.4% thirteen weeks ended September 30, 1996,
respectively.
Restaurant labor and related expenses decreased $1,065,442 or 54.9% to
$874,028 for the thirteen weeks ended September 28, 1997, from $1,939,450 for
the thirteen weeks ended September 30, 1996. This was attributable to the
closure of eleven restaurants whose numbers were in the September 30, 1996
period and not in September 28, 1997. Restaurant labor expenses as a percentage
of food and beverage revenues decreased 1.6% to 34.2% from 35.8%, in the
respective periods.
Restaurant occupancy expenses decreased $500,085 or 59.9% to $335,392 for
the thirteen weeks ended September 28, 1997, from $835,477 for the thirteen
weeks ended September 30, 1996. This was attributable to the closure of eleven
restaurants whose numbers were in the September 30, 1996 period and not in
September 28, 1997. Restaurant occupancy expenses as a percentage of food and
beverage revenues decreased 2.3% to 13% from 15.3%, in the respective periods.
Other operating expenses decreased $758,735 or 54.4% to $635,666 for the
thirteen weeks ended September 28, 1997, from $1,394,401 for the thirteen weeks
ended September 30, 1996. This was also attributable to the closure of eleven
restaurants in the current period as compared to the same period a year ago.
Other operating expenses consist mainly of utilities, supplies, royalties,
insurance, maintenance and other overhead items. Other operating expenses as a
percentage of food and beverage revenues decreased .86% to 24.9% from 25.7%, in
the respective periods.
Depreciation decreased $137,623 or 61.5% to $86,229 for the thirteen
weeks ended September 28, 1997, from $223,852 for the year ended September 30,
1996. This decrease is attributable to the depreciation of fixed asset additions
in connection with the eleven restaurants in the prior period, which were not in
operation in the current period.
General and administrative expenses decreased $90,488 or 36.7% to
$164,088 for the thirteen weeks ended September 28, 1997, from $246,844 for the
thirteen weeks ended September 30, 1996. General and administrative expenses
consist of, among other things, executive salaries, other administrative
compensation, corporate office rent and corporate overhead expenses. General and
Page 14 of 23
<PAGE> 15
administrative expenses as a percentage of revenues increased to 6.1% from 4.6%,
in the respective periods. This reflects the squeeze on G&A from reduced sales
levels in 1997.
Interest income (expense) decreased $150,387 or 100% to $0 for the
thirteen weeks ended September 28, 1997 from $(150,387) for the thirteen weeks
ended September 30, 1996, principally as a result of interest incurred in
connection with DIP financing converted to equity in May 1997. Interest income
(expense) as a percentage of revenues improved to 0% from 2.8%, in the
respective periods.
Other income (expense) decreased $133,065 or 69.1% to $59,476 for the
thirteen weeks ended September 28, 1997 from $192,541 for the thirteen weeks
ended September 30, 1996, due to reductions in temporary service, 40,000; travel
& trans. 30,000; accounting 50,000. Other income (expense) as a percentage of
revenues decreased 1.3% to 2.3% from 3.6%, in the respective periods.
Professional Fees decreased $329,534 or 91.1% to $32,268 for the thirteen
weeks ended September 28, 1997 from $361,802 for ended September 30, 1996
principally as a result of a decrease in attorneys fees and GMB management fees
related to the bankruptcy. Reorganization expense as a percentage of revenues
decreased 5.4% to 1.3% from 6.7%, in the respective periods.
The Company's net loss decreased $1,399,208 or 78% to ($392,245) for the
thirteen weeks ended September 28, 1997, from ($1,791,453) for the thirteen
weeks ended September 30, 1996. Net loss as a percentage of revenues decreased
17.7% to 15.4% from 33.1%, in the respective periods.
RESULTS OF OPERATIONS -THE THIRTY NINE WEEK ENDED SEPTEMBER 28, 1997 AS COMPARED
WITH THE THIRTY NINE WEEKS ENDED SEPTEMBER 30, 1996
Total revenues decreased $10,881,888, or 60% to $7,228,740 for the thirty
nine weeks ended September 28, 1997, from $18,110,627 for the thirty nine weeks
ended September 30, 1996. The decrease was attributable to the closure of eleven
locations, all of the remaining the American Cafes (nine locations) and Two Red
Robins (Smithhaven and Staten Island). Alcoholic beverage revenues, as a
percentage of food and beverage revenues increased to 20.1% for the current year
as compared to 16.7% a year ago.
Food and beverage expense decreased $3,566,030 or 63% to $2,105,930 for
the thirty nine weeks ended September 28, 1997 from $5,671,960 for the thirty
nine weeks ended September 30, 1996, principally due to the decrease in volume
attributable to restaurant closings. Food and beverage expenses as a percentage
of food and beverage revenues fell 2.1% to 2.1% from 31.3% for the thirty nine
weeks ended September 28, 1997, and September 30, 1996, respectively.
Restaurant labor and related expenses decreased $3,679,852 or 61% to
$2,341,681 for the thirty nine weeks ended September 28, 1997, from $6,021,534
for the thirty nine weeks ended September 30, 1996. This was attributable to the
closure of eleven restaurants whose numbers were in the September 30, 1996
period and not in September 28, 1997. Restaurant labor expenses as a percentage
of food and beverage revenues decreased to 32.4% from 33.3%, in the respective
periods.
Page 15 of 23
<PAGE> 16
Restaurant occupancy expenses decreased $1,519,716 or 62% to $942,940 for
the thirty nine weeks ended September 28, 1997, from $2,462,656 for the thirty
nine weeks ended September 30, 1996. This was attributable to the closure of
eleven restaurants whose numbers were in the September 30, 1996 period and not
in September 28, 1997. Restaurant occupancy expenses as a percentage of food and
beverage revenues decreased to 13.0% from 13.6%, in the respective periods.
Other operating expenses decreased $3,176,241 or 65.3% to $1,687,266
for the thirty nine weeks ended September 28, 1997, from $4,863,506 for the
thirty nine weeks ended September 30, 1996. This was also attributable to the
closure of eleven restaurants in the current period as compared to the same
period a year ago. Other operating expenses consist mainly of utilities,
supplies, royalties, insurance, maintenance and other overhead items. Other
operating expenses as a percentage of food and beverage revenues decreased 3.5%
to 23.3% from 26.9%, in the respective periods.
Depreciation decreased $447,831 or 63.9% to $253,189 for the thirty nine
weeks ended September 28, 1997, from $701,020 for the year ended September 30,
1996. This decrease is attributable to the depreciation of fixed asset additions
in connection with the eleven restaurants in the prior period, which were not in
operation in the current period.
General and administrative expenses decreased $38,023 or 4.4% to $824,557
for the thirty nine weeks ended September 28, 1997, from $862,580 for the thirty
nine weeks ended September 30, 1996. This small decrease can be mainly
attributed to a one time $228,136 stock compensation paid, in May 1997, to
officers and employees for services. 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 11.4% from
4.8%, in the respective periods.
Interest expense decreased $140,351 or 31.0% to $(312,075) for the thirty
nine weeks ended September 28, 1997 from $(452,426) for the thirty nine weeks
ended September 30, 1996, principally as a result of interest incurred in
connection with DIP financing which converted to equity May 25, 1997. Interest
income (expense) as a percentage of revenues increased to 4.3% from 2.5%, in the
respective periods.
Other income decreased $44,952 or 105% to ($88,148) for the thirty nine
weeks ended September 28, 1997 from ($43,196) or the thirty nine weeks ended
September 30, 1996, primarily due to lost banquet and video revenue from the
closed American Cafes in addition to one time adjustments to income, from
receivable accounts and accrual reversals, for $285,280 in the period ending
September 30, 1996. Other income as a percentage of revenues decreased to 1.2%
from .24%, in the respective periods.
Professional Fees decreased $510,850 or 49% to $522,081 for the thirteen
weeks ended September 28, 1997 from $1,032,931 for ended September 30, 1996
principally as a result of GMB management fees and decrease in attorneys fees
related to the bankruptcy. Professional Fees as a percentage of revenues
increased 1.5% to 7.2% from 5.7%, in the respective periods.
The company recognized a one time gain for the thirty nine weeks ended
September 28, 1997, from the forgiveness of debt of $16,059,200. This resulted
primarily from the writeoff of prepetition
Page 16 of 23
<PAGE> 17
trade claims (see Accountants discussion and analysis for further information).
In addition the thirty nine weeks ended September 30, 1996 there was a loss on
the closing of American Cafes of $2,391,159.
The Company's net income increased $20,610,427 or 322% to $14,218,086 for
the thirty nine weeks ended September 28, 1997, from a loss of ($6,392,341) for
the thirty nine weeks ended September 30, 1996. Net income as a percentage of
revenues increased to 197% from -35.3%, in the respective periods.
(C) LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Since inception, the Company has incurred losses
from operations. As of May 25, 1997, the Company had an accumulated deficit of
$36,864,531. This was all eliminated through the use of "fresh-start"
accounting. During the period May 25, 1997 through September 28, 1997 operations
resulted in a loss of $426,285 and the net increase in cash totaled $46,436.
This was primarily the result the net cash used in operations of $16,190; net
cash used in investing activities of $196,819 mostly increases in construction
in progress in the Yonkers unit conversion and net cash provided by financing
activities of $259,445 from $200,000 of debt offset by $35,000 debt repayment
and the addition of $94,418 in taxes payable. As of September 28, 1997, the
Company had a net cash balance of $190,990.
As of September 28, 1997, the Company had working capital of -$306,128,
as compared to negative working capital of -$21,802,067 as of December 29, 1996.
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 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 not less frequently than every other day and
deliveries of liquor several times each week. Additionally, since the
bankruptcy, the Company has unable to obtain trade credit for purchasing food,
liquor, and restaurant supplies. As a result, the Company has been making
payments on a COD basis. Upon emergence from bankruptcy the Company will seek to
reestablish terms with its trade vendors.
Page 17 of 23
<PAGE> 18
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.
The Company anticipates that it may continue to incur losses in the near
term as it continues to integrate operating margin improvement programs into its
existing restaurants. However, the Company believes, although there can be no
assurance, that these programs will achieve profitability and enhance its
working capital position.
INVESTING ACTIVITIES. 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 is proceeding with the conversions of these three units to the
Redheads Bistro/Bar concept, and presently believes the conversions will be
completed in accordance with the agreement. As of November, 1997 The company
caused its Red Robin restaurant unit in Yonkers, New York to converted to a
Redheads Bistro/Bar. The conversion cost for the Yonkers unit was approximately
$60. per square foot.
FINANCING ACTIVITIES. To fund these units' conversion to the Redheads
Bistro/Bar concept, as well as other costs, the Company obtained a funding
commitment from Teleferscot to provide up to $3.5 million. Through confirmation
and effectiveness of the Plan, the Company received approximately $2,100,000 of
the committed funding. The Company presently intends to draw down on the
remaining amount available under commitment in order to fund the remaining unit
conversions to the Redheads Bistro/Bar concept. The Company believes that the
remaining committed funds will be sufficient to enable the Company to convert
all three restaurant units to the Redheads Bistro/Bar concept and, additionally,
to supply the Company with sufficient cash (along with cash from operations) to
meet its normal obligations in the ordinary course of business, including the
obligations owing to taxing authorities under the Plan. 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.
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.
Page 18 of 23
<PAGE> 19
The Company anticipates that it will require substantial additional debt
or equity capital to fund the Company's expansion plans, which contemplate the
opening of at least one new Redheads Bistro/Bar restaurant each quarter. The
inability of the Company to obtain such additional financing will result in the
curtailment by the Company of its expansion activities and further restructuring
or downsizing of the Company's operations.
Page 19 of 23
<PAGE> 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GENERAL
On December 30, 1996 the second amended plan of reorganization was
approved by the Bankruptcy Court. 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 a party to certain litigation pending before the
Bankruptcy Court. The first, Magic Restaurants, Inc., et al. v. Nicolo and
Joseph Ottomanelli, Adv. Pro. No. 97-54, the company 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 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 February, 1997 it was noted that Dining Ala Card (DAC) made
unauthorized withdrawals totaling approximately $66,224 from the Company's bank
accounts during the period April 18, 1996 until February 11,1997. Upon inquiry
of the deductions, the company was informed they were for funds received on
February 11, 1996 (post petition). Further inquiry by the company revealed the
bank account DAC alleged to wire the money to had been closed November, 1994
(this was confirmed with the bank). During later communication, a DAC
representative confirmed the Company did not receive any post petition funding.
The representative went on to say any reimbursement decision might best be
resolved in the bankruptcy court. The company has since sought relief from the
courts. The Company believes that an adverse decision to the Company in this
matter will not materially affect the Company's operations.
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 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.
Page 20 of 23
<PAGE> 21
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 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.
The Company's litigation pending before the Bankruptcy Court regarding
Magic Restaurants, Inc., et al. v. Nicolo and Joseph Ottomanelli, Adv. Pro. No.
97-54, was settled in December 1997. The settlement required The Company to
issue to the Ottomanellis 2,500 shares of common stock.
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.
ITEM 2. CHANGES IN SECURITIES.
All equity interests outstanding prior to the Plan Effective Date of May
30, 1997, were canceled and extinguished without compensation. See section
"Management Discussion and Analysis" for further discussion on securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On December 30, 1996 the second amended plan of reorganization was
approved by the Bankruptcy Court. All securities, except as expressly provided
in the plan, and other documents representing or giving rise to claims or equity
interests in Magic Restaurants, Inc. and the subsidiaries shall be deemed to be
canceled and holders of such documents/instruments shall have no rights arising
from the documents/instruments, except the rights as expressly provided in the
plan.
ITEM 4. OTHER INFORMATION
On December 15, 1996, the Company ceased operations in its Smithhaven,
New York location. As of December 29, 1996, the Company ceased operations in its
Staten Island, New York location. As of December 15, 1996, the Company ceased
operations in its Tysons Corner, Virginia location. The long term assets of both
operation were written off as of year end 1996.
In March, 1997 the company, in an effort to improve earnings, ended
promotional programs with Transmedia and In Good Taste (IGT). After analysis it
was determined that promotional incentives could be created internally at less
cost than through Transmedia or IGT.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits Filed
Page 21 of 23
<PAGE> 22
None
(B) The Company filed the following currents reports of Form 8-K and
8-K/A during the quarter ended September 28, 1997:
None.
Page 22 of 23
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Redheads, Inc,
Date: April 1 , 1998 By: /s/ Charles O. Olson, Jr.
----------------------- --------------------------
Charles O. Olson, Jr.
Chief Executive Officer
Page 23 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
<EXCHANGE-RATE> 1
<CASH> 190,990
<SECURITIES> 0
<RECEIVABLES> 1,578,297
<ALLOWANCES> 0
<INVENTORY> 80,192
<CURRENT-ASSETS> 1,849,478
<PP&E> 5,368,314
<DEPRECIATION> 3,494,115
<TOTAL-ASSETS> 4,973,784
<CURRENT-LIABILITIES> 2,155,606
<BONDS> 0
0
340,815
<COMMON> 2,236
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,973,784
<SALES> 2,553,576
<TOTAL-REVENUES> 2,553,576
<CGS> 766,366
<TOTAL-COSTS> 874,028
<OTHER-EXPENSES> 1,305,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (392,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (392,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (392,245)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
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