<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 June 29, 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 (IRS Employer Identification No.)
incorporation or organization)
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), June
29, 1997 (unaudited) and December 29, 1996
(audited)...................................................................... 3
Consolidated Statement of Operations for the eight weeks ending
May 25, 1997, five weeks ended June 29, 1997 and thirteen
Ended June 30, 1996
(Unaudited).................................................................... 4
Consolidated Statement of Operations for the twenty one weeks ending
May 25, 1997, five weeks ended June 29, 1997 and twenty six
Ended June 30, 1996
(Unaudited).................................................................... 5
Consolidated Statement of Cash Flows as of May 25, 1997 (unaudited),
June 29, 1997 (unaudited) and December 29, 1996
(audited)...................................................................... 6
Consolidated Statement of Accumulated Deficit
For the twenty six weeks ended June 29, 1997
(Unaudited).................................................................... 7
Notes to Consolidated Financial Statements
(Unaudited).................................................................... 8-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................................. 11-19
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................................................................ 22
Item 5. Exhibits and Reports on Form 8-K................................................. 22
Signature Page ................................................................................. 23
</TABLE>
PART I FINANCIAL INFORMATION
Page 2 of 23
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
REDHEADS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
May June December
ASSETS 25, 1997 29, 1997 29, 1996
- ------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash ................................................ 144,554 102,377 58,332
Accounts Receivable - Credit Cards .................. 39,194 102,484 0
Inventories ......................................... 72,324 89,780 80,840
Other Current Assets 2,052,242 1,575,181 293,057
---------- ---------- -----------
TOTAL CURRENT ASSETS ................................... 2,308,314 1,869,821 432,229
Fixed Assets ........................................ 1,943,396 2,095,719 1,942,966
Other Assets ........................................ 186,617 392,556 296,668
Long Term Note Receivable ........................... 684,777 680,862 0
---------- ---------- -----------
TOTAL LONG TERM ASSETS ................................. 2,814,790 3,169,137 2,239,634
TOTAL ASSETS ........................................... 5,123,104 5,038,958 2,671,863
========== ========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Liabilities Subject to compromise ................... 0 0 15,415,682
Trade accounts ...................................... 388,048 329,406 3,739,586
Notes Payable ....................................... 201,581 234,090 (A)
Sales and payroll taxes payable ..................... 53,549 69,020 99,496
Current portion of long-term debt ................... 34,973 (27) 2,979,530
Loans Payable - Taxes ............................... 381,605 381,605 0
Reserves for Liabilities ............................ 176,539 170,957
Accrued Expenses .................................... 641,946 643,484 (A)
---------- ---------- ----------
TOTAL CURRENT LIABILITIES .............................. 1,878,241 1,828,534 22,234,295
LONG-TERM DEBT ...................................... 0 0 0
COMMITMENTS & 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
June 29, 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 June 29, 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 28,755 June 29,
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 (34,440) (35,437,302)
----------- ---------- -----------
1,444,863 1,810,424 (21,542,431)
----------- ---------- -----------
Plus: subscriptions receivable ...................... 1,800,000 1,400,000 0
TOTAL STOCKHOLDERS' EQUITY ............................. 3,244,863 3,210,424 (19,562,431)
----------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. 5,123,104 5,038,958 2,671,863
=========== ========== ===========
</TABLE>
Page 3 of 23
<PAGE> 4
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
8 WEEKS ENDING 5 WEEKS ENDING 13 WEEKS ENDING
MAY 25, 1997 JUNE 29, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SALES 1,415,733 100.00% 939,309 100.00% 6,629,912 100.00%
COST OF SALES 403,433 28.50% 262,457 27.94% 1,985,737 29.95%
---------- --------- ----------
GROSS PROFIT 1,012,300 71.50% 676,852 72.06% 4,644,175 70.05%
---------- --------- ----------
OPERATING EXPENSES
Labor costs 437,023 30.87% 293,477 31.24% 2,139,147 32.27%
Occupancy costs 206,276 14.57% 101,269 10.78% 823,396 12.42%
Other Operating Expense 314,245 22.20% 211,319 22.50% 1,899,754 28.65%
Depreciation 57,363 4.05% 27,933 2.97% 167,889 2.53%
0 0.00% 0.00% 0.00%
---------- --------- ----------
TOTAL OPERATING EXPENSES 1,014,907 71.69% 633,998 67.50% 5,030,156 75.87%
---------- --------- ----------
INCOME (LOSS) FROM RESTAURANT OPERATION (2,607) -0.18% 42,854 4.56% (385,981) -5.82%
---------- --------- ----------
General and administrative expenses 442,025 31.22% 57,672 6.14% 344,690 5.20%
---------- --------- ----------
INCOME (LOSS) FROM OPERATIONS (444,631) -31.41% (14,818) -1.58% (730,671) -11.02%
---------- --------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) (126,024) -8.90% 11,789 1.26% (193,318) -2.92%
Other income (expense) net 96,297 6.80% (6,514) -0.69% 35,300 0.53%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE) (29,727) -2.10% 5,275 0.56% (158,018) -2.38%
REORGANIZATION EXPENSE
Professional fees (375,852) -26.55% (11,697) -1.25% (254,647) -3.84%
Loss on abandonment or disp. of rest.s 0 0.00% 0 0.00% 0 0.00%
Forgiveness of Debt 16,072,400 1135.27% (13,200) -1.41% 0 0.00%
Closing of American Cafe restaurants 0.00% 0 0.00% (2,391,159) -36.07%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE) 15,696,548 1108.72% (24,897) -2.65% (2,645,806) -39.91%
---------- --------- ----------
---------- --------- ----------
NET INCOME (LOSS) 15,222,189 1075.22% (34,440) -3.67% (3,534,495) -53.31%
========== ========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,154,549 2,234,744 7,244,000
INCOME (LOSS) PER COMMON SHARE 2.13 (0.02) (0.49)
</TABLE>
Page 4 of 23
<PAGE> 5
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
21 WEEKS ENDING 5 WEEKS ENDING 26 WEEKS ENDING
MAY 25, 1997 JUN 29, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SALES....................................... 3,735,855 100.00% 939,309 100.00% 12,696,314 100.00%
COST OF SALES............................... 1,077,107 28.83% 262,457 27.94% 3,814,640 30.05%
---------- --------- ----------
GROSS PROFIT................................ 2,658,747 71.17% 676,852 72.06% 8,881,674 69.95%
---------- --------- ----------
OPERATING EXPENSES
Labor costs............................. 1,174,177 31.43% 293,477 31.24% 4,082,084 32.15%
Occupancy rates......................... 506,279 13.55% 101,269 10.78% 1,627,179 12.82%
Other Operating Expense................. 840,281 22.49% 211,319 22.50% 3,469,105 27.32%
Depreciation............................ 139,027 3.72% 27,933 2.97% 477,168 3.76%
---------- --------- ----------
TOTAL OPERATING EXPENSES................ 2,659,763 71.20% 633,998 67.50% 9,655,536 76.05%
---------- --------- ----------
INCOME (LOSS) FROM RESTAURANT OPERATION..... (1,015) -0.03% 42,854 4.56% (773,861) -6.10%
---------- --------- ----------
General and administrative expenses..... 610,489 16.34% 57,672 6.14% 612,044 4.82%
---------- --------- ----------
INCOME (LOSS) FROM OPERATIONS............... (611,505) -16.37% (14,818) -1.58% (1,385,906) -10.92%
---------- --------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense)............... (323,864) -8.67% 11,789 1.26% (302,039) -2.38%
Other income (expense) net.............. (22,158) -0.59% (6,514) -0.69% 149,345 1.18%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE)............ (346,022) -9.26% 5,275 0.56% (152,694) -1.20%
REORGANIZATION EXPENSE
Professional fees....................... (478,116) -12.80% (11,697) -1.25% (671,129) -5.29%
Loss on abandonment or disposal of rest. 8,014 0.21% 0 0.00% 0 0.00%
Forgiveness of Debt..................... 16,072,400 430,22% (13,200) -1.41% 0 0.00%
Closing of American Cafe restaurants.... 0 0.00% 0 0.00% (2,391,159) -18.83%
---------- --------- ----------
TOTAL OTHER INCOME (EXPENSE)............ 15,602,298 417.64% (24,897) -2.65% (3,062,288) -24.12%
---------- --------- ----------
NET INCOME (LOSS)....................... 14,644,771 392.01% (34,440) -3.67% (4,600,888) -36.24%
========== ========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING............................. 7,209,923 2,234,744 7,244,000
INCOME (LOSS) PER COMMON SHARE.............. 2.03 (0.02) (0.64)
</TABLE>
Page 5 of 23
<PAGE> 6
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DEC 96-MAY 97 MAY 97-JUN 97 JUN 96-DEC 96
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITY
Net Income (Loss) 14,644,771 (34,440) (3,126,413)
Depreciation Amortization 139,027 27,933 333,814
Decrease (Increase) In Inventory 8,516 (17,456) 151,699
Decrease (increase) In Other Current Assets
And Accounts Receivable (1,798,380) 413,772 210,422
Decrease (Increase) In Other Assets (574,725) (202,024) 220,111
Loss On Sale Of Asset (8,014) 0 1,377,001
Restructuring Expense 478.116 11.697 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) (24,595) (242,231)
Increase (Decrease) In Sales And
Payroll Taxes Payable (45,947) 15,470 (75,124)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (21,152,730) 203,558 (1,190,717)
CASH FLOW FROM INVESTING ACTIVITY
(Increase) Decrease In C.I.P. And Fixed Assets (139,457) (180,256) (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) (180,256) (676,518)
CASH FLOW FROM FINANCING ACTIVITY
Increase (Decrease) In Long Term Debt (2,944,557) (35,000) 1,655,000
Increase (Decrease) In Loans Payable 381,605 0 0
Increase (Decrease) In Reserve For Taxes 176,539 (5,582) 0
Change To Paid In Capital 23,649,121 335,103 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 (65,479) 1,654,999
Increase (Decrease) In Cash 86,222 (42,177) (212,235)
Cash Beginning 58,332 144,554 270,567
Cash Ending 144,554 102,377 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 MAY 25, 1997 0 0 0 0 0 0 0 0 0
Exch 400,000 of
Prepetition Liabilities
for 5,333 Sub Preferred 400,000 400,000
Exch 1,758,150 Series B
Senior Notes for 23,442
MRI Preferred 1,758,150 1,758,150
Exch 850,000 of Prepetition
Secured Keybro claims
for 11,333 subpreferred 850,000 850,000
Exch 2,250,000 of Series A
Senior Notes Interest of
$325,000 for 1,896,983
of Common Stock @ 1.50 PS 2,845,745 1,897 2,844,326 (749)
Exch 830,000 of prepetition
Trade & Misclaims for
125,000 shares of
Common Stock @ 1.50 PS 187,500 125 187,375
Exch 1,882,000 of Post
Petition Liabilities for
213,260 Shares of Common
Stock @ 1.50 PS 319,890 213 319,677
Record 5005 HRS Consulting 0 1 1,650 (1,650)
Revalue preferred to exchange
value (1 to 58 hrs) 0 (360,000) (765,000) (1,582,335) 2,707,335
Reclass Apic to Preferred 0 1,446,826 (1,446,826)
Accrue additional liability 0
Eliminate against
accumulated deficit (4,611,138) (4,611,138)
Stocks subscribed - 23,225
shares of MRI
Preferred Stock 1,800,000 1,800,000
---------------------------------------------------------------------------------------------------
BALANCE AT MAY 25, 1997 3,549,877 40,000 85,000 175,815 1,446,826 2,236 2,399 1,800,000 (2,399)
===================================================================================================
Paras recorded 3,549,876 5.33 11.33 28.78 125 2,149,705 1,400,000
Preferred stock subscribed 0 (400,000) 400,000
Increase preferred to EMV
of conversion 0 399,995 849,989 1,758,121 (3,008,105)
Reclass PIC common to
common @ PAR 0 213 (213)
Reclass PIC common to
common @ PAR 0 1 (1)
Reclass PIC common to
common @ PAR 0 1,897 (1,897)
Reclass PIC common to
PIC Preferred 0 2,397 (2,397)
Reclass PIC common to
PIC Preferred 0 1,446,826 (1,446,826)
Revalue preferred to
exchange value
(1 to 10 shares) 0 (320,000) (680,000) (1,406,520) 2,406,520
ADJ Exchange Value
(from 10 to 5 shrs) 0 (40,000) (85,000) (175,815) 300,815
Record Legal Expense/
Liability (305,012) (305,012)
Eliminate negative
over caused by
liability accrual 0 (307,411) 307,411
---------------------------------------------------------------------------------------------------
BALANCE AT MAY 25, 1997 3,244,863 40,000 85,000 175,815 1,141,812 2,236 0 1,800,000 0
===================================================================================================
<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 MAY 25, 1997 3,244,863 40,000 85,000 175,815 1,141,812 2,236 0 1,800,000 0
Receipt of Preferred
Stock Subs 0 400,000 (400,000)
Record preferred 5,333
shares at PAR 0 5 (5)
Revalue preferred stock
to Exchange Value
(1 to 5 at $1.50) 0 39,995 (39,995)
Net Income June 1997 (34,440) (34,440)
0
0
---------------------------------------------------------------------------------------------------
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)
===================================================================================================
SHARES OUTSTANDING
AT JUNE 29, 1997 5,333 11,333 28,775 2,335,743
</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 June 29, 1997
and December 29, 1996, the results of operations for the thirteen weeks June 29,
1997 and March 31, 1996 and the cash flows for the thirteen weeks ended June 29,
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
operations existing at June 29, 1997 for the thirteen week period ending June
29, 1997 and June 30, 1996 was 222,080 and 193,143 respectively. Total rent
expense for the thirteen week period ending June 29, 1997 and June 30, 1996 was
$233,009 and $592,281 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. A loss on the
sale was recorded as follows:
Page 9 of 23
<PAGE> 10
American Cafe
Loss on Sale of Tysons Corner
December 15, 1996
<TABLE>
<S> <C>
Assets sold
Leasehold (net) 91,736
Furniture and Fixtures (net) 7,276
Restaurant Equipment (net) 204,935
Plants 4,039
--------
Total 307,987
Sales Proceeds 200,000
--------
Gain (Loss) (107,987)
========
Sale proceed were distributed as follows
Prepetition payment to landlord 53,777
Other prepetition payable 5,000
Escrow (pending cures) 40,000
Note receivable 50,000
Funds to Magic at closing 51,223
--------
Total 200,000
========
</TABLE>
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 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 June 29, 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.
Page 10 of 23
<PAGE> 11
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, 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.
<TABLE>
<CAPTION>
RESTAURANT LOCATIONS
<S> <C> <C> <C> <C>
LOCATION PRESENT CONCEPT EST. SEATING SQ. FOOTAGE TERM(1)
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
Page 11 of 23
<PAGE> 12
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.
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.
Page 12 of 23
<PAGE> 13
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 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.
Page 13 of 23
<PAGE> 14
Secured Claims. Secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for $209,000 in cash, and
11,333 shares of Levittown Preferred Stock. The present holder of this Levittown
Preferred Stock is Keybro Enterprises, Inc., with 11,333 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.
Approximately $26,000 of these liabilities remain intact.
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 JUNE 29, 1997 AS COMPARED WITH
THE THIRTEEN WEEKS ENDED JUNE 30, 1996
Total revenues decreased $4,274,870, or 64% to $2,355,042 for the
thirteen weeks ended June 29, 1997, from $6,629,912 for the thirteen weeks ended
June 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). Same stores sales decreased approximately
$26,661 or 1% from the same period a year ago. Alcoholic beverage revenues, as a
percentage of food and beverage revenues increased to 20.0% for the current year
as compared to 16.5% a year ago.
Food and beverage expense decreased $1,319,847 or 66.5% to $665,890 for
the thirteen weeks ended June 29, 1997 from $1,985,737 for the thirteen weeks
ended June 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 1.7% to 28.3% for the thirteen weeks ended June 29, 1997,
from 30% thirteen weeks ended June 30, 1996, respectively.
Restaurant labor and related expenses decreased $1,408,647 or 65.9% to
$730,500 for the thirteen weeks ended June 29, 1997, from $2,139,147 for the
thirteen weeks ended June 30, 1996. This was attributable to the closure of
eleven restaurants whose numbers were in the June 30, 1996 period and not in
June 29, 1997. Restaurant labor expenses as a percentage of food and beverage
revenues decreased 1.3% to 31.0% from 32.3%, in the respective periods.
Restaurant occupancy expenses decreased $515,851 or 63% to $307,545 for
the thirteen weeks ended June 29, 1997, from $823,396 for the thirteen weeks
ended June 30, 1996. This was attributable to the closure of eleven restaurants
whose numbers were in the June 30, 1996 period and not in June 29, 1997.
Restaurant occupancy expenses as a percentage of food and beverage revenues
increased .6% to 13% from 12.4%, in the respective periods.
Other operating expenses decreased $1,374,190 or 72.3% to $525,654 for
the thirteen weeks ended June 29, 1997, from $1,899,754 for the thirteen weeks
ended June 30, 1996. This was also attributable to the closure of eleven
restaurants in the current period as compared to the same period
Page 14 of 23
<PAGE> 15
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 6.3% to 22.3%
from 28.6%, in the respective periods.
Depreciation decreased $82,562 or 49.2% to $85,296 for the thirteen
weeks ended June 29, 1997, from $167,859 for the year ended June 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 increased $155,007 or 45% to $499,697
for the thirteen weeks ended June 29, 1997, from $344,690 for the thirteen weeks
ended June 30, 1996. This increase 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 21.2% from 5.2%, in the respective periods.
Interest income (expense) decreased $79,083 or 41% to $(114,235) for the
thirteen weeks ended June 29, 1997 from $(193,318) for the thirteen weeks ended
June 30, 1996, principally as a result of interest incurred in connection with
DIP financing converted to equity in May 1997 and revenue recognized on
receivables. Interest income (expense) as a percentage of revenues increased to
4.8% from 2.9%, in the respective periods.
Other income (expense) increased $54,483 or 154% to $89,783 for the
thirteen weeks ended June 29, 1997 from $35,300 for the thirteen weeks ended
June 30, 1996, due to the reversal of a $200,000 reserve for the non performing
loan for the 1995 sale of the Carmella Cafes. Other income (expense) as a
percentage of revenues increased to 3.3% from 0.5%, in the respective periods
Professional Fees increased $132,901 or 52.2% to $387,549 for the
thirteen weeks ended June 29, 1997 from $254,647 for ended June 30, 1996
principally as a result of a increase in attorneys fees related to the
bankruptcy. Reorganization expense as a percentage of revenues increased 13.6%
to 16.5% from 3.84%, in the respective periods
The company recognized a one time gain for the thirteen weeks ended June
29, 1997, from the forgiveness of debt of $16,059,200. This resulted primarily
from the writeoff of prepetition trade claims (see Accountants discussion and
analysis for further information). In addition the thirteen weeks ended June 30,
1996 there was a loss on the closing of American Cafes of $2,391,159.
The Company's net income increased $18,722,245 or 530.% to $15,187,749
for the thirteen weeks ended June 29, 1997, from ($3,534,495) for the thirteen
weeks ended June 30, 1996
RESULTS OF OPERATIONS -THE TWENTY SIX WEEK ENDED JUNE 29, 1997 AS COMPARED WITH
THE TWENTY SIX WEEKS ENDED JUNE 30, 1996
Total revenues decreased $8,021,150, or 62% to $4,675,164 for the twenty
six weeks ended June 29, 1997, from $12,696,314 for the twenty six weeks ended
June 30, 1996. The decrease was attributable to the closure of eleven locations,
all of the remaining he American Cafes (nine
Page 15 of 23
<PAGE> 16
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 $2,475,076 or 65% to $1,339,564 for
the twenty six weeks ended June 29, 1997 from $3,814,640 for the twenty six
weeks ended June 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 1.4% to 28.6% and 30.0% for the twenty six
weeks ended June 29, 1997, and June 30, 1996, respectively.
Restaurant labor and related expenses decreased $2,614,431 or 64% to
$1,467,653 for the twenty six weeks ended June 29, 1997, from $4,082,084 for the
twenty six weeks ended June 30, 1996. This was attributable to the closure of
eleven restaurants whose numbers were in the June 30, 1996 period and not in
June 29, 1997. Restaurant labor expenses as a percentage of food and beverage
revenues decreased to 31.4% from 32.2%, in the respective periods.
Restaurant occupancy expenses decreased $1,019,631 or 63% to $607,547 for
the twenty six weeks ended June 29, 1997, from $1,627,179 for the twenty six
weeks ended June 30, 1996. This was attributable to the closure of eleven
restaurants whose numbers were in the June 30, 1996 period and not in June 29,
1997. Restaurant occupancy expenses as a percentage of food and beverage
revenues increased to 13.0% from 12.8%, in the respective periods.
Other operating expenses decreased $2,417,506 or 69.7% to $1,051,599 for
the twenty six weeks ended June 29, 1997, from $3,469,105 for the twenty six
weeks ended June 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 4.8% to 22.5% from 27.3%, in
the respective periods.
Depreciation decreased $310,207 or 65.0% to $166,961 for the twenty six
weeks ended June 29, 1997, from $477,168 for the year ended June 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 increased $56,117 or 9.1% to $668,162
for the twenty six weeks ended June 29, 1997, from $612,044 for the twenty six
weeks ended June 30, 1996. This increase 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 14.3% from 4.8%, in the respective periods.
Interest income (expense) increased $10,036 or 3.3% to $(312,075) for the
twenty six weeks ended June 29, 1997 from $(302,039) for the twenty six weeks
ended June 30, 1996, principally as a result of interest incurred in connection
with DIP financing. Interest income (expense) as a percentage of revenues
increased to 6.7% from 2.4%, in the respective periods.
Page 16 of 23
<PAGE> 17
Other income decreased $178,018 or 119% to $(28,672) for the twenty six
weeks ended June 29, 1997 from $149,345 (income) or the twenty six weeks ended
June 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 June 30, 1996.
Other income (expense) as a percentage of revenues decreased to (.6)% from 1.2%,
in the respective periods
Reorganization expense decreased $181,316 or 27.0% to ($489,813) for the
twenty six weeks ended June 29, 1997 from $(671,129) for ended June 30, 1997
principally as a result of a decrease in GMB management fees related to the
bankruptcy. Reorganization expense as a percentage of revenues increased 5.2%,
to 10.48% from 5.3%, in the respective periods
The company recognized a one time gain for the twenty six weeks ended
June 29, 1997, from the forgiveness of debt of $16,059,200. This resulted
primarily from the writeoff of prepetition trade claims (see Accountants
discussion and analysis for further information). In addition the twenty six
weeks ended June 30, 1996 there was a loss on the closing of American Cafes of
$2,391,159.
The Company's net income increased $19,211,219 or 418% to $14,610,331 for
the twenty six weeks ended June 29, 1997, from a loss of ($4,600,888) for the
twenty six weeks ended June 30, 1996
(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 June 29, 1997 operations
resulted in a loss of $34,440 and the net cash flow provided by operations
totaled $180,256.
As of June 29, 1997, the Company had working capital of $41,287, as
compared to negative working capital of $21,802,067 as of December 26, 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.
As of June 29, 1997, the Company had a net cash balance of $102,377. Cash
of $319,713 was used in investing activities for the acquisition of the
Middletown operation, $83,000; increase in construction in progress in Yonkers
for the conversion to Redheads concept, $69,000; and the acquisition of new POS
equipment at all locations $99,000. The cash balance increased by $44,045
primarily due to the above and due to a net decrease of $20,949,172 from
operating and a net increase of $21,312,929 financing activities. Operating
activities created net income of $14,610,331 from the following sources;
Forgiveness of debt, $16,059,200; net subscription receivable $1,400,000;
reversal of Carmella's
Page 17 of 23
<PAGE> 18
loan reserve $557,300; purchase of Redheads trade name $100,000; Purchase of
Middletown liquor license $100,000 and the reduction in prepetition liabilities
resulting from the emergence from bankruptcy $18,253,301. Sources for the above
from financing activities of $21,312,929 were; $2,979,557 from conversion of DIP
financing to equity; setup of a reserve for possible tax liabilities resulting
from prepetition liabilities $381,604; other liabilities and tax reserves (Bowie
$101,539) $170,957; the elimination of paid in capital $23,948,225; the
elimination of pre-emergence equity and issuance of fresh start equity
$1,644,300 and $1,400,000 in preferred stock subscribed.
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.
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.
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.
Page 18 of 23
<PAGE> 19
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 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.
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.
Page 20 of 23
<PAGE> 21
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.
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.
The Bankruptcy Court confirmed the Company's plan of reorganization
effective, May 30, 1997. On this date the name of the reorganized company was
changed to Redheads Bistro Bar, Inc.
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.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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.
Page 21 of 23
<PAGE> 22
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
these operations were written off as of year end 1996.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits Filed
None
(B) The Company filed the following currents reports of Form 8-K and
8-K/A during the quarter ended June 29, 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: March 31, 1998 By: /s/ Charles O. Olson, Jr.
------------------------------ ------------------------
Charles O. Olson, Jr.
Chief Executive Officer
Page 23 of 23
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