<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 March 29, 1998
[ ] 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 X No
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
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 May 15, 1998.
<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 March 29, 1998 (unaudited)
and March 30, 1997 (unaudited) 3
Consolidated Statement of Operations for the thirteen weeks ending
March 30, 1998 and thirteen ended March 30, 1997
(unaudited) 4
Consolidated Statement of Cash Flows as of March 29, 1998
(unaudited) 5
Consolidated Statement of Accumulated Deficit
For the thirteen weeks ended March 29, 1998
(unaudited) 6
Notes to Consolidated Financial Statements
(unaudited) 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18-19
Item 5. Other Information 19
Item 6. Subsequent Events 20
Item 7 Exhibits and Reports on Form 8-K 20
Signature Page 21
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDHEADS, INC, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 170,168 79,905
Accounts Receivable - Credit Cards 1 39,431
Inventories 81,312 73,535
Other Current Assets 595,483 133,738
--------- -----------
TOTAL CURRENT ASSETS 846,963 326,609
Fixed Assets 2,573,544 1,863,066
Other Assets 692,250 321,336
Long Term Note Receivable 673,017 161,096
--------- -----------
TOTAL LONG TERM ASSETS 3,938,811 2,345,499
TOTAL ASSETS 4,785,774 2,672,108
========= ===========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Liabilities Subject to compromise 0 15,415,682
Trade accounts 1,021,881 1,473,757
Notes Payable 468,974 629,587
Sales and payroll taxes payable 88,875 64,631
Postpetition senior secured notes 150 3,792,910
Loans Payable - Taxes 402,568 0
Accrued Expenses 185,072 1,435,390
--------- -----------
TOTAL CURRENT LIABILITIES 2,167,519 22,811,957
REDEEMABLE 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
$10,000 par and redeemable value; authorized, issued
and outstanding - 198 1,980,000
---------- -----------
TOTAL LIABILITIES 2,167,519 24,791,956
STOCKHOLDERS' EQUITY (DEFICIT)
8% Preferred stock - $.001 par value; authorized
- 1,006,000 shares; issued and outstanding - 5,333
shares as of March 29, 1998 40,000
8% Preferred stock LEV - $.001 par value; authorized
- 15,000 shares; issued and outstanding - 11,333
shares as of March 29, 1998 85,000
10% Preferred stock - $.001 par value; authorized
- 5,000,000 shares; issued and outstanding - 44,775
shares as of March 29, 1998 335,815
Preferred stock - $.001 par value; authorized
- 1,000,000 shares; issued and outstanding - 107,000
shares as of March 30, 1997 0 107
Common stock - $.001 par value; authorized - 23,024,000
shares; issued and outstanding - 2,836 shares as of
March 29, 1998 2,386
Old Common stock - $.001 par value; authorized
- 15,000,000 shares; issued and outstanding - 7,244,000
shares as of March 30, 1997 0 7,244
Additional paid-in capital 3,066,662 13,887,520
Accumulated deficit (1,153,332) (36,014,720)
---------- -----------
2,376,532 (22,119,849)
---------- -----------
Plus: subscriptions receivable 200,000 0
TOTAL STOCKHOLDERS' EQUITY 2,576,532 (20,139,849)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 4,785,774 2,672,108
========== ===========
</TABLE>
3
<PAGE> 4
REDHEADS, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 Weeks Ending 13 Weeks Ending
March 29, 1998 March 30, 1997
(unaudited) (unaudited)
<S> <C> <C>
SALES 2,389,652 100.00% 2,320,122 100.00%
COST OF SALES 730,166 30.56% 673,674 29.04%
---------- ----------
GROSS PROFIT 1,659,486 69.44% 1,646,447 70.96%
---------- ----------
OPERATING EXPENSES
Labor costs 729,151 30.51% 737,153 31.77%
Occupancy costs 307,751 12.88% 300,003 12.93%
Other Operating Expense 573,141 23.98% 526,036 22.67%
Depreciation 151,530 6.34% 81,664 3.52%
---------- ----------
TOTAL OPERATING EXPENSES 1,761,573 73.72% 1,644,856 70.90%
---------- ----------
INCOME (LOSS) FROM RESTAURANT
OPERATIONS (102,088) -4.27% 1,591 0.07%
---------- ----------
General and administrative
expenses 204,618 8.57% 168,465 7.26%
---------- ----------
INCOME (LOSS) FROM OPERATIONS (306,706)-12.84% (166,874) -7.19%
---------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) (6,820) -0.29% (197,840) -8.53%
Other income (expense) net (35,447) -1.48% (118,455) -5.11%
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (42,267) -1.77% (316,295)-13.63%
---------- ----------
REORGANIZATION EXPENSE
Professional fees (88,116) -3.69% (102,264) -4.41%
Loss on abandonment or disposal
of restaurants (405) -0.02% 8,014 0.35%
Closing of American Cafe
restaurants 0 0.00% 0 0.00%
---------- ----------
TOTAL REORGANIZATION EXPENSE (88,522) -3.70% (94,250) -4.06%
---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (437,495)-18.31% (577,418)-24.89%
EXTRAORDINARY ITEM
Forgiveness of Debt 0 0.00% 0 0.00%
NET INCOME (LOSS) (437,495)-18.31% (577,418)-24.89%
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,386,439 7,244,000
==================================
INCOME (LOSS) PER COMMON SHARE (0.18) (0.08)
==================================
</TABLE>
4
<PAGE> 5
REDHEADS, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Mar 98-Dec 97
-------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITY
Net Income (Loss) (437,495)
Depreciation Amortization 151,530
Decrease (Increase) in Inventory 2,064
Decrease (Increase) in Other Current Assets and Accts. Rec. 80,183
Decrease (Increase) in Other Assets (76,488)
Loss on conversion of asset 405
Restructuring Expense 88,116
Forgiveness of Debt 0
Increase (Decrease) in Trade Accounts and Notes Payable
and Accrued Expenses 576,133
Increase (Decrease) in Loans Payable 6,820
Increase (Decrease) in Sales and Payroll Taxes Payable 17,652
--------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 408,921
--------
CASH FLOW FROM INVESTING ACTIVITY
(Increase) Decrease in C.I.P. and Fixed Assets (403,985)
Increase (Decrease) in Cash Due to/from Affiliated Co's 150
--------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (403,835)
--------
CASH FLOW FROM FINANCING ACTIVITY
Change to Paid In Capital 165,000
Change to Preferred Cumulative Preferred 20,000
Change to Preferred Stock Subscribed (200,000)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (15,000)
--------
Increase (Decrease) in Cash (9,914)
Cash Beginning 180,082
--------
Cash Ending 170,168
========
</TABLE>
5
<PAGE> 6
REDHEADS, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
REDHEADS, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
-------------------------------------------------------
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 DECEMBER 28,
1997 3,039,026 40,000 85,000 315,815 2,401,813 2,386 499,849 400,000 (715,836)
EQUITY PLACEMENT FEES (15,000) (15,000)
RECORD PREFERRED STOCK
TO TELEFERSCOT 0 20,000 180,000 (200,000)
NET INCOME JAN. TO
MARCH 1998 (437,495) (437,495)
-------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 29,
1998 2,576,531 40,000 85,000 335,815 2,581,813 2,386 484,849 200,000 (1,153,331)
=======================================================================================================
SHARES OUTSTANDING AT
MARCH 29, 1998 5,333 11,333 44,775
</TABLE>
6
<PAGE> 7
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 March 29,
1998 and December 28, 1997, the results of operations for the thirteen weeks
March 29, 1998 and March 30, 1997, and the cash flows for the thirteen weeks
ended March 29, 1998. 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 28,
1997.
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 28, 1997.
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 March 29, 1998 for the thirteen week period ending March 29, 1998
and March 30, 1997 was $324,250 and $310,656 respectively.
Future minimum rent payments
<TABLE>
<CAPTION>
Fifty-Two/ Fifty-Three Weeks
Ending December
---------------
<S> <C>
1998 $ 999,273
1999 1,023,488
2000 1,049,663
2001 1,056,699
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Fifty-Two/ Fifty-Three Weeks
Ending December
---------------
<S> <C>
2002 1,046,695
Thereafter 8,819,518
---------
</TABLE>
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.
Series A 12% Cumulative Convertible Preferred Stock ("Series A
Preferred Stock"). In accordance with the Plan of Reorganization, Teleferscott
International Ltd. ("Teleferscott"), the holder of $1,700,000 in postpetition
series B notes (see accompanying discussion of the Reorganization Plan) and
$1,600,000 subsequently funded and issued Series A Preferred Stock subscription,
currently holds 44,775 series A Preferred Stock. The Company is obligated to pay
dividends to the holders of the
8
<PAGE> 9
Series A 12% Cumulative Convertible Preferred Stock ("Series A Preferred Stock")
issued under the Plan at a rate equal to twelve percent (12%) per annum on
the $75 stated value. The dividends are payable annually through the issuance
of shares of Common Stock of the Company at a price equal to 80% of the average
bid price for the Common Stock during the preceding 12 months. To the extent
these funds are legally available, beginning May 30, 2000, the Company has the
option to purchase, at a cash price equal to $75, per share, plus accrued and
unpaid dividends, portions of Series A Preferred Stock, so that the stock would
be retired within seven years. For the first three years after the issuance, at
the election of the holders and with the consent of the Company, the Series A
Preferred Stock is exchangeable for shares of common stock. After this time the
stock is not exchangeable at the holders option. As of March 29, 1998, a total
of 44,775 shares of the Series A Preferred Stock were outstanding, and all of
such shares were held by Teleferscot. Any newly issued Series A Preferred Stock
will be entitled to dividends on the same terms as the currently outstanding
shares of Series A Preferred Stock.
R.B.B. of Secaucus and R.B.B. of Yonkers Preferred Stock. Pursuant to
the Plan, R.B.B. of Secaucus, Inc. and R.B.B. of Yonkers, Inc. issued 8%
Cumulative Exchangeable Preferred Stock (the "Subsidiary Preferred Stock") in
exchange for a release of prepetition liability of approximately $400,000. Each
issuing subsidiary owns and operates the restaurant unit located in the city
designated in the corporate name of the particular issuing subsidiary.
Dividends are payable on the Subsidiary Preferred Stock at a rate of 8%
per annum based on the liquidation preference of $75 per share. The dividends
are payable semi-annually, to the extent funds are legally available therefor.
At the election of the issuing subsidiary such dividends may be paid by issuance
of shares of Common Stock of the Company, valued for this purpose at the closing
price as of the 10th business day preceding declaration of the dividend.
Further, to the extent funds are legally available therefor, on May 30, 2000,
May 30, 2001, and May 30, 2002, each issuing subsidiary will offer to purchase,
at a cash price equal to $75 per share, plus accrued and unpaid dividends,
one-sixth, one-third, and one-half, respectively of the Subsidiary Preferred
Stock issued under the Plan; provided, however, that if at any time the closing
bid price of the Common Stock exceeds $5 per share for 40 consecutive trading
days, any such mandatory repurchase obligation shall expire.
Levittown Preferred Stock. R.B.B. of Levittown, Inc. has also issued
its own 8% Cumulative Exchangeable Preferred Stock (the "Levittown Preferred
Stock"). On May 25,1997 the company issued 13,111 shares of 8% Levittown
Preferred Stock. Dividends are payable on the Levittown Preferred Stock in cash
at a rate of 8% per annum based on the liquidation preference of $75 per share.
The dividends are payable semi-annually, to the extent funds are legally
available therefor. Further, to the extent funds are legally available therefor,
beginning on May 30, 1998, and monthly thereafter, the Levittown subsidiary will
offer to purchase one forty-eighth (1/48) of the
9
<PAGE> 10
shares of the Levittown Preferred Stock issued under the Plan to the holder. The
purchase price for such repurchase is equal to the liquidation preference of $75
per share, plus accrued and unpaid dividends. For the first three years after
issuance, at the election of the holders and with the consent of the Company,
Levittown Preferred Stock and the Subsidiary Preferred Stock is exchangeable for
shares of common stock. After this time, the stock is not exchangeable at the
holders option.
As of December 28, 1997 the Company has $58,000 of dividends in arrears
for Series A 8% Cumulative Exchangeable Preferred Stock.
The Company's charter provisions forbid mergers or consolidations in which the
Company is not the survivor, and certain asset sales, without the consent of
holders of a majority of the shares of the Series A Preferred Stock, voting as a
single class.
The Subsidiary Preferred Stock and the Levittown Preferred Stock each
provide that if the issuing subsidiary of the preferred stock fails to pay three
consecutive semiannual dividends or fails to make one mandatory repurchase, then
the holders of such stock in such subsidiary, voting as a single class, shall be
entitled to elect one director to the Board of Directors of the issuing
subsidiary. Such director will serve until all accrued dividend and mandatory
repurchase payments are brought current.
The certificates of incorporation of the subsidiaries issuing the
Subsidiary Preferred Stock each provide that the subsidiary may not create,
incur, assume, or otherwise become or be liable for any indebtedness for
borrowed money or for the deferred purchase price of property (except to the
Company or another subsidiary of the Company).
The certificate of incorporation of R.B.B. of Levittown provides that
it may not create, incur, assume, or otherwise become or be liable for any
indebtedness for borrowed money or for the deferred purchase price of property.
Further, the charter provides that the issuing subsidiary will not sell,
transfer, or dispose of the assets of the subsidiary, except for cash in the
ordinary course of business at then fair market value.
The certificate of incorporation of R.B.B. of Levittown also provides
it may not enter into mergers or consolidations in which R.B.B. of Levittown is
not the survivor, or into certain asset sales, without the consent of holders of
a majority of the shares of the Levittown Preferred Stock, voting as a single
class.
Holders of the Levittown Preferred Stock also have the right, if a
default in payment of dividends or mandatory repurchase is uncured for 60 days
or if the covenant on incurrence of indebtedness or ownership of the subsidiary
assets is breached, to require the Company to deliver to the holder all
outstanding shares of common stock of R.B.B. of Levittown, Inc. in exchange for
the Levittown Preferred Stock.
10
<PAGE> 11
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.
The Common Stock issued pursuant to the Plan has not been publicly
traded since the Plan Effective Date. Prior to the Plan Effective Date, the
Company's then issued Common Stock was quoted for trading on the NASDAQ (symbol
"MGIK"), until it was de-listed on April 10, 1995. Pursuant to its obligations
under the Plan, the Company will use reasonable efforts to have the Common Stock
quoted for trading on the automated quotation system maintained by the National
Quotation Bureau, Inc (symbol "RDHD").
The following table sets forth the quarterly high and low sales prices
for the then issued Common Stock of the Company for the two years preceding year
end December 28, 1997. The source of these quotations is the National Quotations
Bureau. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Low High
--- ----
1995
<S> <C> <C>
Second quarter................................................ $ 0.01 $ 0.06
Third quarter................................................. $ 0.01 $ 0.06
Fourth quarter................................................ $ 0.01 $ 0.06
1996..........................................................
First quarter................................................. $ 0.01 $ 0.12
Second quarter................................................ $ 0.01 $ 0.12
Third quarter................................................. $ 0.01 $ 0.12
Fourth quarter................................................ $ 0.01 $ 0.12
1997
First quarter................................................. $ 0.01 $ 0.12
</TABLE>
HOLDERS
As of December 28, 1997, there were approximately 62 holders of record
of the Company's Common Stock.
4. ACQUISITION AND DIVESTITURES OF RESTAURANTS
11
<PAGE> 12
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 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 March 29, 1998. The Company's federal state and
city tax returns have not yet been filed for the fifty two week period ending
December 28, 1997, the twenty six weeks ended December 29, 1996, the fifty two
weeks ended June, 30 1996 and July 2, 1995.
As of December 28, 1997 the Company had approximately $15,300,000 of
net operating loss carry forwards expiring through 2011, available to face
future federal income taxes.
12
<PAGE> 13
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.
RESTAURANT LOCATIONS
13
<PAGE> 14
<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.
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,
14
<PAGE> 15
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 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
15
<PAGE> 16
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 MARCH 29, 1998 AS COMPARED WITH
THE THIRTEEN WEEKS ENDED MARCH 30, 1997
Total revenues increased $69,530, or 3.0% to $2,389,652 for the thirteen
weeks ended March 29, 1998, from $2,320,122 for the thirteen weeks ended March
30, 1997. The increase was attributable to the net effect of the closure the
Secaucus, New Jersey, Red Robin location during renovation to a Redheads
Bistro/Bar and the addition of the Middletown, New Jersey, Redheads Bistro/Bar
location.
Same stores sales decreased approximately $274,866 or 15.5% for the
thirteen weeks ended March 29, 1998 from the same period a year ago. The
decrease in same store sales can be substantially attributed to the Company's
Levittown, Long Island Redheads Bistro/Bar location. The decrease in same store
sales at the Levittown unit totaled approximately $249,128 or 38.9%.
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<PAGE> 17
Food and beverage expense increased $56,492 or 8.39% to $730,166 for the
thirteen weeks ended March 29, 1998 from $673,674 for the thirteen weeks ended
March 30, 1997, principally due to the difference in food cost inherent in the
Redheads Bistro/Bar concept as compared to the food cost inherent in the Red
Robin concept and partially attributable to the net loss in sales referred to
above. The company re-engineered the menu lowering food cost at the Redheads
Bistro/Bar Levittown location.
Restaurant labor and related expenses decreased $8,002 or 1.09% to
$729,151 for the thirteen weeks ended March 29, 1998, from $737,153 for the
thirteen weeks ended March 30, 1997. This was attributable to the efficiencies
realized by the re-engineering of the menu at the Redheads Bistro/Bar location
in Levittown. Restaurant labor expenses as a percentage of food and beverage
revenues decreased 1.26% to 30.51% from 31.77%, in the respective periods.
Restaurant occupancy expenses increased $7,748 or 2.58% to $307,751 for
the thirteen weeks ended March 29, 1998, from $300,003 for the thirteen weeks
ended March 30, 1997. This was attributable to the combined effect of (1) the
acquisition of the Middletown Redheads Bistro/Bar location, (2) the increase in
base rent at the Yonkers location and (3) the capitalization of the Secaucus
rent during the renovation period. Restaurant occupancy expenses as a percentage
of food and beverage revenues decreased .05% to 12.88% from 12.93%, in the
respective periods.
Other operating expenses increased $47,105 or 8.95% to $573,141 for the
thirteen weeks ended March 29, 1998, from $526,036 for the thirteen weeks ended
March 30, 1997. This was attributable to the acquisition of the Middletown
Redheads Bistro/Bar location. 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 increased
1.31% to 23.98% from 22.67%, in the respective periods.
Depreciation increased $69,866 or 85.55% to $151,530 for the thirteen
weeks ended March 29, 1998, from $81,664 for the year ended March 30, 1997. This
increase is attributable to the depreciation of fixed asset additions in
connection with the conversion of Redheads Yonkers, New York, and acquisition of
the Middletown, New Jersey restaurants.
General and administrative expenses increased $36,154 or 21.5% to
$204,618 for the thirteen weeks ended March 29, 1998, from $168,465 for the
thirteen weeks ended March 30, 1997. 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 8.6% from 7.3%,
in the respective periods.
Interest expense decreased $191,020 or 96.55% to $6,820 for the thirteen
weeks
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<PAGE> 18
ended March 29, 1998 from $197,8400 for the thirteen weeks ended March 30,
1997, principally as a result of interest incurred in connection with DIP
financing converted to equity in May 1997. Interest income as a percentage of
revenues improved to 0.29% from 8.53%, in the respective periods.
Other expense decreased $71,758 or 60.58% to $46,697 for the thirteen
weeks ended March 29, 1998 from $118,455 for the thirteen weeks ended March 30,
1997, due to income realized from sushi concessions in the Yonkers, Levittown
and Secaucus locations. Other expense as a percentage of revenues decreased
3.16% to 1.95% from 5.11%, in the respective periods.
Professional Fees decreased $14,147 or 13.83% to $88,116 for the thirteen
weeks ended March 29, 1998 from $102,264 for ended March 30, 1997 principally as
a result of a decrease in attorneys fees related to the bankruptcy.
Reorganization expense as a percentage of revenues decreased 0.36% to 3.70% from
4.06%, in the respective periods.
The Company's net loss decreased $139,923 or 24.22% to ($437,495) for the
thirteen weeks ended March 29, 1998, from ($577,418) for the thirteen weeks
ended March 30, 1997. Net loss as a percentage of revenues decreased 6.58% to
18.31% from 24.89%, 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 March 29, 1998 operations
resulted in a loss of $448,801 and the net decrease in cash totaled $9,914. This
was primarily the result the net cash provided from operations of $408,921; net
cash used in investing activities of $403,835, mostly increases in construction
in the Secaucus unit conversion and net cash used in financing activities of
$15,000 from the receipt of $200,000 of Preferred Stock Subscribed and payment
of private placement financing fees. As of March 29, 1998, the Company had a net
cash balance of $170,178.
As of March 29, 1998, the Company had negative working capital of
$1,320,556, as compared to negative working capital of $976,736 as of December
28, 1997.
The Company has, upon the effectiveness of its confirmed Plan, accounted
for the reorganization using "fresh-start" reporting. Accordingly, all assets
and liabilities are restated to reflect their reorganization value, which
approximates fair value at the date of reorganization. Application of the
principles of "fresh-start" reporting resulted in elimination of the
stockholders' deficit and caused $22,435,338 of total liabilities to be
extinguished, as provided specifically in the Plan itself. See"-- The
Reorganization
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<PAGE> 19
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.
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. Additionally, the Company believes the anticipated private
placement will provide the necessary capital to acquire additional locations to
achieve profitability. However, the Company believes, although there can be no
assurance, that these programs will achieve profitability and/or anticipated
financing occur thereby and enhancing the Company's profitability and 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 location in Secaucus, New Jersey, Yonkers,
New York, and Kings Plaza, Brooklyn, on or before December 31, 1997. Failure to
remove the trade dress as required by the Bankruptcy Court order could result in
litigation and the grant of injunctive relief against the Company, and the
imposition of unspecified monetary damages against the Company. The Company has
proceeded with the conversions as directed by the court. As of November 1997 and
March 1998 the Yonkers and Secaucus locations (respectively) had been
successfully converted and only the Kings Plaza location was in violation of
this order. The Company has notified Red Robin of its violation and intent to
convert the unit during the third quarter of 1998.
FINANCING ACTIVITIES. To fund these units' conversion to the Redheads
Bistro/Bar concept and costs associated with the emergence from bankruptcy, as
well as other costs, the Company obtained a funding commitment from Teleferscot
to provide up to $3.5 million. Through March 29, 1998 the Company received
approximately $3,300,000 of the committed funding. 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
19
<PAGE> 20
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.
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.
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.
20
<PAGE> 21
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 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 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
21
<PAGE> 22
infringed upon the trade dress of the Redheads concept. The Company has resolved
this matter whereby Jersey Girls has agreed to remove the items bringing rise to
the Company's possible legal actions.
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company was operating pursuant to the orders of the Bankruptcy Court
during the first quarter of 1997 and did not submit any matters to a vote of the
security holders during that period.
22
<PAGE> 23
ITEM 5. 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.
On February 18, 1998 the Company entered into an exclusive agreement for
the private placement of securities with a broker-dealer for the private
placement of up $2,000,000 of the Company's securities. The offering will be on
a "best efforts all or none basis" as to $1,750,000 of Securities and on a "best
efforts basis" as to an additional $250,000 of Securities. The anticipated terms
of the Offering are subject to further review and negotiation and the completion
of due diligence. There can be no assurance that the Company will receive the
contemplated financing.
23
<PAGE> 24
ITEM 7. 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 March 29, 1998:
None.
24
<PAGE> 25
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: May 18, 1998 By: s/ Charles O. Olson, Jr.
------------- ------------------------
Charles O. Olson, Jr.
Chief Executive Officer
25
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