<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 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) EXCHANGE ACT For the
transition period from to
Commission file number 0-17975
REDHEADS, INC,
(Exact name of business issuer as specified in its charter)
Delaware 95-4169432
(State or other jurisdiction of incorporation or organization (IRS
Employer Identification No.)
Fifty South Buckhout Street, Irvington, New York 10533
(Address of principal executive offices)
(914) 591-4444
(Issuer's telephone number)
(Former name, former address and formal fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
APPLICATION ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,386,439 as of December 28, 1997.
Page 1 of 16
<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 30, 1997 (unaudited) and December 29, 1996
(audited)....................................................................... 3
Consolidated Statement of Operations
For the Thirteen Weeks
Ended March 30, 1997 and March 31, 1996
(Unaudited)..................................................................... 4
Consolidated Statement of Cash Flows
For the Thirteen Weeks Ended March 30, 1997
and March 31, 1996
(Unaudited)..................................................................... 5
Consolidated Statement of Accumulated Deficit
For the Thirteen Weeks Ended March 30, 1997
(Unaudited)..................................................................... 6
Notes to Consolidated Financial Statements
(Unaudited)..................................................................... 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................................... 10-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 13
Item 2. Changes in Securities............................................................. 14
Item 3. Defaults Upon Senior Securities................................................... 14
Item 4. Other Information................................................................. 14
Item 5. Exhibits and Reports on Form 8-K.................................................. 14-15
Signature Page .................................................................................. 16
</TABLE>
Page 2 of 16
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDHEADS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1997 DECEMBER 29, 1996
<S> <C> <C>
CURRENT ASSETS
Cash 79,905 58,332
Accounts Receivable - Credit Cards 39,431
Inventories 73,535 80,840
Other Current Assets 133,738 293,057
----------- -----------
TOTAL CURRENT ASSETS 326,609 432,229
Fixed Assets 1,863,066 1,942,966
Other Assets 321,336 296,669
Long Term Note Receivable 161,096 0
----------- -----------
TOTAL LONG TERM ASSETS 2,345,499 2,239,634
TOTAL ASSETS 2,672,108 2,671,863
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Liabilities Subject to compromise 15,415,682 15,415,682
Trade accounts 1,473,757 3,739,586
Notes payable 629,587
Sales and payroll taxes payable 64,631 99,496
Postpetition senior secured notes 3,792,910 2,979,530
Loans Payable -- Taxes 0 0
Accrued Expenses 1,435,390 (A)
----------- -----------
TOTAL CURRENT LIABILITIES 22,811,957 22,234,295
COMMITMENTS & CONTINGENCIES
REDEEMABLE 5% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
$10,000 par and redeemable value;
authorized, issued and
and outstanding -- 198 1,980,000 1,980,000
STOCKHOLDERS' DEFICIT
Preferred stock $.001 par value;
authorized -- 1,000,000 shares;
issued and outstanding -- 107,000 107 107
Common stock -- $.001 par value;
authorized -- 15,000,000 shares;
issued and outstanding -- 7,244,000 7,244 7,244
Additional paid-in capital 13,887,520 13,887,520
Accumulated deficit (36,014,720) (35,437,302)
----------- -----------
(22,119,849) (21,542,431)
----------- -----------
Plus: subscriptions receivable 0 0
TOTAL STOCKHOLDERS' EQUITY (20,139,849) (19,562,432)
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 2,672,108 2,671,863
=========== ===========
</TABLE>
Page 3 of 16
<PAGE> 4
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS ENDING 13 WEEKS ENDING
MARCH 30, 1997 MARCH 31, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES 2,320,122 100.00% 6,066,403 100.00%
COST OF SALES 673,674 29.04% 1,828,903 30.15%
---------- ----------
GROSS PROFIT 1,646,447 70.96% 4,237,499 69.85%
---------- ----------
OPERATING EXPENSES
Labor costs 737,153 31.77% 1,942,937 32.03%
Occupancy costs 300,003 12.93% 803,783 13.25%
Other Operating Expense 526,036 22.67% 1,569,351 25.87%
Depreciation 81,664 3.52% 309,309 5.10%
---------- ----------
TOTAL OPERATING EXPENSES 1,644,856 70.90% 4,625,380 76.25%
---------- ----------
INCOME (LOSS) FROM
RESTAURANT OPERATIONS 1,591 0.07% (387,881) -6.39%
---------- ----------
General and administrative
expenses 168,465 7.26% 267,354 4.41%
---------- ----------
INCOME (LOSS) FROM
OPERATIONS (166,874) -7.19% (655,235) -10.80%
---------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) (197,840) -8.53% (108,721) -1.79%
Other income (expense) net (118,455) -5.11% 114,045 1.88%
---------- ----------
TOTAL OTHER INCOME
(EXPENSE) (316,295) -13.63% 5,324 0.09%
---------- ----------
REORGANIZATION EXPENSE
Professional fees (102,264) -4.41% (416,482) -6.87%
Loss on abandonment or
disposal or restaurants 8,014 0.35% 0 0.00%
Forgiveness of Debt 0 0.00% 0 0.00%
Closing of American Cafe
restaurants 0 0.00% 0 0.00%
---------- ----------
TOTAL REORGANIZATION
EXPENSE (94,250) -4.06% (416,482) -6.87%
---------- ----------
NET INCOME (LOSS) (577,418) -24.89% (1,066,392) -17.58%
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,244,000 7,244,000
========== ==========
INCOME (LOSS) PER
COMMON SHARE (0.08) (0.15)
========== ==========
</TABLE>
Page 4 of 16
<PAGE> 5
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DEC 96-MAR 97
<S> <C>
CASH FLOW FROM OPERATING ACTIVITY
Net Income (Loss) (577,418)
Depreciation Amortization 81,664
Decrease (Increase) In Inventory 7,305
Decrease (Increase) In Other Current
Assets And Accounts Receivable 119,888
Decresae (Increase) In Other Assets (185,764)
Loss On Sale Of Asset
Restructuring Expense
Forgiveness Of Debt
Increase (Decrease) In Trade Accounts
And Notes Payable And Accrued Expenses (200,852)
Increase (Decrease) In Sales And
Payroll Taxes Payable (34,865)
--------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (790,043)
--------
CASH FLOW FROM INVESTING ACTIVITY
(Increase) Decrease In C.I.P. And Fixed Assets (1,765)
Increase (Decrease) In Cash Due To/From
Affiliated Co'S 0
--------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,765)
--------
CASH FLOW FROM FINANCING ACTIVITY
Increase (Decrease) In Long Term Debt 813,380
Increase (Decrease) In Loans Payable
Increase (Decrease) In Reserve For Taxes
Change To Pain In Capital
Change To Preferred Cumulative Preferred
Change To Preferred Cumulative Preferred
Change To Preferred Cumulative Preferred
Change To Common Stock
Change To Preferred Stock Subscribed
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 813,380
--------
Increase (Decrease) In Cash 21,573
Cash Beginning 58,332
--------
Cash Ending 79,905
========
</TABLE>
Page 5 of 16
<PAGE> 6
REDHEADS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIT
FOR THE PERIOD ENDING MARCH 30, 1997
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
---------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 29, 1996 107 7,244 13,887,520 (35,437,302)
Net loss for thirteen weeks ended March 30, 1997 (577,418)
---------------------------------------------------
BALANCE AT MARCH 30, 1997 107 7,244 13,887,520 (36,014,720)
===================================================
</TABLE>
Page 6 of 16
<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 30,
1997 and December 29, 1996, the results of operations for the thirteen weeks
March 30, 1997 and March 31, 1996 and the cash flows for the thirteen weeks
ended March 30, 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 Yonkers, New
York and are leased on a month to month basis. Rent expense for the operations
existing at March 30, 1997 for the thirteen week period ending March 30, 1997
and March 31, 1996 was 230,326 and 227,991 respectively. Total rent expense for
the thirteen week period ending March 30, 1997 and March 31, 1996 was $230,326
and $516,293 respectively.
Future minimum rent payments
<TABLE>
<CAPTION>
Fifty-Two/ Fifty-Three Weeks
Ending December
---------------
<S> <C>
1997 $ 1,008,313
1998 1,020,423
1999 1,050,893
2000 1,075,642
2001 1,024,824
Thereafter 10,448,147
-----------
</TABLE>
Page 7 of 16
<PAGE> 8
3. CAPITALIZATION
Preferred Stock, Convertible 5%
On September 4, 1994, the Company authorized and issued 220 shares,
with a stated value of $10,000, and realized $1,870,000, net of commissions of
$330,000. The preferred stock is redeemable by the Company in 1996, at $10,000,
per share, and each share of preferred stock is convertible into 1.25 to 4
shares of common stock, depending on market value, subject to restrictions. On
February 2, 1995, 22 shares of the preferred stock were converted to 222,222
shares of common stock at a conversion price of $.45 per share, in accordance
with the agreement.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of $.001 par value
preferred stock in one or more series and to fix the rights, preferences,
privileges, and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of preferred stock with the voting and non-
conversion rights may adversely affect the voting power of holders of common
stock, including the loss of voting control of others. The Company has 107,000
shares of Series A 15% preferred stock issued and outstanding as of March 30,
1997 and March 31,1996. The shares are redeemable by the Company's management at
any time for $10. per share plus any unpaid dividends. Dividends are cumulative.
Liquidating distributions are $10. per share plus any unpaid dividends.
Common Stock
During the thirteen weeks ended March 30, 1997, the Company did not
issue any shares of common stock:
4. ACQUISITION AND DIVESTITURES OF RESTAURANTS
1) 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.
2) 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 8 of 16
<PAGE> 9
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>
3) 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.
4) In August 1996 The Company caused the conversion of its Levittown
Long Island Red Robin to a Redheads Bistro/Bar.
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 30, 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 carryforwards expiring through 2011, available to face future
federal income taxes.
Page 9 of 16
<PAGE> 10
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
carryforwards. These limitations, described in Section 382 of the Internal
Revenue Code, limit the amount of future taxable income which may be offset by
pre- change net operating loss and capital loss carryforwards. This limitation
is calculated by reference to the value 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.
(B) RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THE THIRTEEN WEEKS ENDED MARCH 30, 1997 AS COMPARED WITH
THE THIRTEEN WEEKS ENDED MARCH 31, 1996
Total revenues decreased $3,746,281, or 62% to $2,320,122 for the
thirteen weeks ended March 30, 1997, from $6,066,403 for the thirteen weeks
ended March 31, 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
$6,661 or .26% from the same period a year ago. Alcoholic beverage revenues, as
Page 10 of 16
<PAGE> 11
a percentage of food and beverage revenues increased to 20.2% for the current
year as compared to 17% a year ago.
Food and beverage expense decreased $1,155,229 or 63% to $673,674 for
the thirteen weeks ended March 30, 1997 from $1,828,903 for the thirteen weeks
ended March 31, 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% to 29.2% and 30.2% for the thirteen weeks ended March
30, 1997, and March 31, 1996, respectively.
Restaurant labor and related expenses decreased $1,205,784 or 62% to
$737,153 for the thirteen weeks ended March 30, 1997, from $1,942,937 for the
thirteen weeks ended March 31, 1996. This was attributable to the closure of
eleven restaurants whose numbers were in the March 31, 1996 period and not in
March 30, 1997. Restaurant labor expenses as a percentage of food and beverage
revenues decreased to 31.7% from 32.0%, in the respective periods.
Restaurant occupancy expenses decreased $503,780 or 63% to $300,003 for
the thirteen weeks ended March 30, 1997, from $803,783 for the thirteen weeks
ended March 31, 1996. This was attributable to the closure of eleven restaurants
whose numbers were in the March 31, 1996 period and not in March 30, 1997.
Restaurant occupancy expenses as a percentage of food and beverage revenues
decreased to 12.9% from 13.3%, in the respective periods.
Other operating expenses decreased $1,043,315 or 64.5% to $526,036 for
the thirteen weeks ended March 30, 1997, from $1,569,351 for the thirteen weeks
ended March 31, 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 to 22.7% from 25.9%, in the
respective periods.
Depreciation decreased $227,645 or 73.6% to $81,664 for the thirteen
weeks ended March 30, 1997, from $309,309 for the year ended March 31, 1996.
This decrease is attributable to the depreciation of fixed asset additions in
connection with the eleven restaurants in the prior period, which were not in
operation in the current period.
General and administrative expenses decreased $98,890 or 37% to $168,465
for the thirteen weeks ended March 30, 1997, from $267,354 for the thirteen
weeks ended March 31, 1996. This decrease can be mainly attributed to reduction
in management and supervisory personnel. 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 7.3% from 4.4%,
in the respective periods.
Interest income (expense) increased $89,119 or 82% to $(197,840) for the
thirteen weeks ended March 30, 1997 from $(108,721) for the thirteen weeks ended
March 31, 1996, principally as a result of interest incurred in connection with
DIP financing. Interest income (expense) as a percentage of revenues increased
to 8.5% from 1.8%, in the respective periods.
Other income (expense) increased $232,500 or 204% to $(118,455) for the
thirteen weeks ended March 30, 1997 from $114,045 for the thirteen weeks ended
March 31, 1996, primarily due
Page 11 of 16
<PAGE> 12
to lost banquet and video revenue from the closed American Cafes in addition to
one time miscellaneous income adjustment in the period ending March 31, 1996.
Other income (expense) as a percentage of revenues increased to 5.1% from 1.8%,
in the respective periods
Reorganization expense decreased $322,232 or 77.4% to $102,264 for the
thirteen weeks ended March 30, 1997 from $$416,482 for ended March 31, 1997
principally as a result of a decrease in professional fees from attorneys and
GMB management fees. Reorganization expense as a percentage of revenues
increased to 4.1% from 6.9%, in the respective periods.
The Company's net loss decreased $488,974 or 45.9% to $577,418 for the
thirteen weeks ended March 30, 1997, from $1,066,392 for the thirteen weeks
ended March 31, 1996.
(C) LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 1997, the Company had a net cash balance of $79,905.
While cash of $99,000 was used for acquisitions of new equipment, the cash
balance increased by $21,573 due to net decrease of $790,043 from operating and
a net increase of $813,380 financing activities.
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 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.
Page 12 of 16
<PAGE> 13
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) began
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.
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.
Page 13 of 16
<PAGE> 14
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.
Other than as discussed in this Item 1, there are no other legal
proceedings to which the Company is a party that are material to the Company's
business.
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.
ITEM 4. OTHER INFORMATION
On December 15, 1996, the Company ceased operations in its Smithhaven,
New York location. As of December 29, 1996, the Company ceased operations in its
Staten Island, New York location. As of December 15, 1996, the Company ceased
operations in its Tysons Corner, Virginia location. The long term assets of both
operation were written off as of year end 1996.
In March, 1997 the company, in an effort to improve earnings, ended
promotional programs with Transmedia and In Good Taste (IGT). After analysis it
was determined that promotional incentives could be created internally at less
cost than through Transmedia or IGT.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits Filed
None
Page 14 of 16
<PAGE> 15
(B) The Company filed the following currents reports of Form 8-K and
8-K/A during the quarter ended March 30, 1997:
None
Page 15 of 16
<PAGE> 16
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 Olson, Jr.
----------------------- -----------------------
Charles Olson, Jr.
Chief Executive Officer
Page 16 of 16
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