UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from December 27, 1998 to December 26, 1999
Commission File Number 0-17975
------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Redheads, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4169432
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
50 South Buckhout Street
Irvington, New York 10533
(Address of principal executive offices) Zip Code
(914) 591-4444
(Registrant's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of Class
Common Stock, par value $0.001 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x].
Registrant's revenues for the most recent calendar year: $ 7,799,756.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 26, 1999 was $543,404 (based on 869,447 shares
held by non-affiliates and the closing price of the stock at December 26,
1999.)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [x] No [ ]
As of March 17, 2000, the Registrant had 2,457,759 shares of its $0.001 par
value common stock issued and outstanding.
Transitional small business format check one [ ] yes [x] no
Documents Incorporated by Reference: None.
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I 3
Item 1. Description of the Business 3
Item 2. Description of Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II 13
Item 5. Market for Common Equity and Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7. Financial Statements 26
Item 8. Changes in And Disagreements With Accountants on
Accounting And Financial Disclosure 26
PART III 27
Item 9. Directors and Executive Officers of the Registrant 27
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and
Management 31
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 33
SIGNATURES 35
</TABLE>
PART I
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This document contains certain forward looking information about the
Company, its business and its anticipated future performance. When used in
this document, the words "anticipate," "believe," "expect," "estimate,"
"project," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties, and
assumptions by the management of the Company and may not prove to be
correct. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, expected, estimated, or
projected. These assumptions include: (i) the receipt of adequate additional
capital on a timely basis to enable the Company to implement its business
plans; (ii) the availability of suitable restaurant leaseholds and the
Company's ability to successfully negotiate and enter into binding lease
agreements; (iii) the successful conversion and integration of existing Red
Robins and other restaurants into the Company's current business operations;
and (iv) the continuation of favorable economic conditions.
All of these assumptions are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company. Accordingly, there can be no assurance that actual results will
meet expectations or will not be materially lower than the results
contemplated in this document.
Item 1. Description of the Business
Introduction
The Company owns and operates four casual dining, table service
restaurants in New York and New Jersey under the name "Redheads Bistro/Bar."
The Redheads Bistro/Bar concept is based upon the uniqueness, flair
and style associated with being a redheaded person. Redheads are honored as
a "breed apart" from the ordinary; a group of people with a flair for life
and unpredictable nature. These elements are presented in homage to famous
Redheads from celebrities to animated characters depicted in hundreds of
posters, photographs and sculptures which reflect the redheads state of
mind. Guest are encouraged to "expect the unexpected" and to absorb some of
the fun, irreverence and unpredictable nature of being a redhead.
General Business Developments During The Last Fiscal Year
The Company and all of its subsidiaries filed petitions for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") on April 6, 1995 (the "Petition Date"), and all operated as debtors
and debtors-in-possession through the entirety of their Chapter 11 cases.
On May 30, 1997 (the "Plan Effective Date"), the Second Amended Plan
of Reorganization for the Company and its subsidiaries (the "Plan"), which
was confirmed by court order dated December 30, 1996, became effective. In
connection with its reorganization, the Company caused its name to be
changed to "Redheads, Inc." and its Certificate of Incorporation and By-Laws
to be amended and restated. In addition, the Plan caused all equity
securities issued prior to the Plan Effective Date to be canceled and
extinguished. Under the Plan, the Company issued on the Plan Effective Date
a total of 2,235,743 shares of Common Stock and 28,775 shares of Series A
12% Cumulative Convertible Preferred Stock to certain claimants entitled to
distributions under the Plan. Pursuant to the Plan certain subsidiaries also
issued preferred stock to certain claimants. See "Item 5-Market for Common
Equity and Related Stockholder Matters."
Subsequently, in June, 1997, the Company purchased the "Redheads
Bistro/Bar" concept and one operating Redheads Bistro/Bar restaurant located
in Middletown, New Jersey. For additional discussion of the terms of the
purchase of the Redheads concept and the Plan, see "Item 1. Business-The
Redheads Purchase" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
As of the time of the filing of its Chapter 11 petition for relief,
the Company operated and managed 15 restaurants in the New York and
Washington, D.C. metropolitan areas. In the New York metropolitan area, as
of the Petition Date, the Company operated six "Red Robin Burger and Spirits
Emporium" restaurants pursuant to franchise agreements under which Red Robin
International, Inc. licensed to the Company certain proprietary operating
systems, trade dress, and other specialized property. In the Washington,
D.C. metropolitan area the Company operated nine "The American Cafe"
restaurants, which had been purchased in March, 1994 from Monolith
Enterprises, Inc., a subsidiary of W.R. Grace & Co.
While operating under Chapter 11 the Company ceased operations at all
of its restaurants in the Washington, D.C. metropolitan area and two of its
restaurants in the New York metropolitan area. At the end of 1998 the
Company owned and operated five restaurants under the name "Redheads
Bistro/Bar." On January 10, 1999, the Company halted operations of the
Redheads Bistro/Bar restaurant located in Levittown, New York. The company
currently owns and operates four "Redheads Bistro/Bar" locations.
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.
The company acquired rights to the Redheads Bistro/Bar concept in June,
1997. See "The Redheads Purchase." Pursuant to an agreement with Red Robin
International entered into in connection with consummation of the Plan, the
Company was required to cease operating its three restaurants in Yonkers,
New York, Secaucus, New Jersey, and Brooklyn, New York as Red Robin
restaurants by no later than December 31, 1997. As of December 27, 1998 the
Company had completed conversion of all Red Robin restaurants to Redheads
Bistro/Bar. See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation-The Reorganization Proceedings;
Confirmation and Effectiveness of the Company's Reorganization Plan."
The Redheads Restaurant Concept and Menu
The Company believes that the trend in eating out is toward casual,
moderately priced, full-menu table service restaurants serving well-
prepared, high quality foods. The Company's restaurants offer large portions
of high quality, fresh food at moderate prices. The per person check average
at the Company's "Redheads" restaurants is approximately $9.75 for lunch
and $12.75 for dinner, with an average per restaurant seating capacity of
approximately 250.
The Company believes that its restaurants are distinguishable from
many other casual, moderately priced full-menu table service restaurants by
its theme, decor and its menu. The theme, decor and menu are intended to
appeal to a varied clientele, including families, business patrons, casual
diners, and shoppers.
The restaurants are sophisticated yet comfortable and casual, with
lively colors, natural woods, plants, and brass fixtures. The bar area has
several large and small video screens, electronic and non-electronic games,
various entertainment features, caters to singles, couples, informal groups,
and late night dinner and drink crowds in an entertainment driven atmosphere
that often features live musical entertainment. Bars are well stocked with
selections from microbrewerys and boutique wineries along with a full liquor
offering. The restaurants also have a satellite dish and multiple
television screens throughout the bar and dining facilities.
Casually dressed redheaded mannequins are playfully placed throughout
the restaurant, and the walls are extensively adorned with photos and prints
featuring all varieties of redheaded people, models, and personalities, of
all ages. Local patrons are encouraged to post photos of their own favorite
redhead friend, relative, or personality along the thin strip boards that
traverse much of the seating area.
The international menu is diverse in its offering, catering to a
variety of tastes and budgets. In addition to the daily featured specials,
the menu offers unique dishes in every category. Coffees, including
espressos, and desserts are also offered. The menu's breadth, coupled with
specials, caters to lunch, early-bird, evening dinner, and late night
appetites. The portions are generous, and menu items range from $4.95 for
appetizers to $16.95 for certain steak and seafood entree selections.
Three of the restaurants offer a prominently displayed sushi bar,
staffed by sushi chefs. The Company believes the trend in casual restaurant
dining is moving to eclectic menus accented by ethnicity of taste. The
Company addresses this trend through the addition of certain new design
elements known as modular dining. Menus are adjusted to reflect the needs
and dining preferences of the individual restaurant market trade areas.
The service staff dresses casually, wearing Redheads-styled red polo
shirts and dark or khaki slacks or shorts, depending on the season.
The Company believes that the success of the Redheads Bistro/Bar
concept depends on a number of factors including location, management,
operating practices, and employees.
The Company attempts to capture a significant portion of the market
share for food and beverage services in the immediate business area where
its restaurants are located. To this end, each restaurant provides take-out
service and has fax machines through which it accepts orders. The Company
also caters special events in its restaurants, and offers catering sales and
event planning managers to develop additional business in this area.
The Company's restaurants make extensive use of computerization,
providing management with precise information on hourly sales and labor
costs. In addition to the tight labor controls this minimizes the need to
carry large quantities of food inventory and generally results in a higher
quality of food inventory. Each of the Company's restaurants uses a
computerized point-of-sale system that tracks all food and drink orders and
expeditiously fulfills them. This enables the servers and managers to remain
on the restaurant floor and be available to serve patrons.
Suppliers
The Company purchases food and other supplies for its restaurants from
various wholesalers on a daily basis. The Company's ability to maintain a
consistent quality of its products depends upon acquiring quality food
products and related items from reliable sources. While the Company believes
that there are multiple sources for most food products in the greater New
York metropolitan area, the Company is still subject to the common risks
associated with restaurant supply relationships, such as those relating to
freshness, quality, selection, price and availability.
The cost of the Company's supplies depends upon the extent to which
the Company is able to negotiate satisfactory arrangements with suppliers
and the availability of and demand for various items. The combined unit
volume of purchases by each of its restaurants has enabled the Company to
obtain volume discounts and negotiating leverage in certain instances.
The Company may be materially adversely affected by external events,
such as local weather conditions affecting the price and supply of various
items, as well as strikes within the food or transportation industries,
which may limit the ability of suppliers to furnish food to the Company on a
timely and cost-effective basis. Generally, however, all essential food and
beverage products are available, or upon short notice can be made available,
from alternative qualified suppliers.
Because of the relatively rapid turnover of perishable food products,
inventories in the restaurants, consisting primarily of food, beverages, and
supplies, have a modest aggregate dollar value relative to revenues.
Marketing
The Company primarily targets the 18 to 49 year old age group, which
constitutes slightly less than half of the United States population. Members
of this population segment generally grew up frequenting fast food
restaurants but the Company believes that, with increasing maturity, they
prefer a broader, more adult, casual dining and bar experience. To attract
this target group, the Company has used various types of advertising and
promotions. Marketing programs are regionalized to address the specific
requirements of each trade area. Marketing programs consist primarily of
public relations campaigns, advertisements in local newspapers, radio
commercials, distributing flyers, and sponsoring local activities. The
Company expects to rely primarily on targeted marketing efforts and positive
word-of-mouth endorsements from existing customers.
Seasonality
The Company's business is seasonal in nature, with revenues and, to a
greater degree, operating incomes lower in the winter and fall (excluding
the year-end holiday shopping period) than in the spring and summer. This
seasonal effect is largely caused by colder and more inclement weather that
keeps people at home, and by reduced overall consumer spending in the fall
in advance of the year-end holiday season. Free-standing restaurant sales
are higher in the late spring and early summer months; sales at mall-based
restaurants generally reach their highest level during the year-end holiday
season.
Competition
The retail food and beverage service industry is intensely
competitive, especially within the New York-Northern New Jersey metropolitan
area. The Company competes with other full menu table service restaurants
and fast food restaurants for location, service, personnel, perceived
quality, variety, and value of the food and ambiance offered. The Company
competes with food service operations, with locally-owned operations, and
with national and regional chains, like T.G.I.Friday's, Applebee's,
Bennigan's, Chili's, Houlihan's, and Lone Star Steakhouse, among others,
several of whom have greater financial and other resources, longer operating
histories, substantially more facilities, and greater name recognition than
Redheads. Barriers to entry are not substantial in the restaurant industry.
Generally, however, locations and restaurants comparable to the Company's
restaurants require substantial capital to open and operate.
The Company has no control over the number of competitive restaurants
that may open in the proximity of the Company's restaurants. Many of these
restaurants may enjoy much broader consumer recognition. Increasing
competitive pressure may require additional advertising and promotional
expenditures, the amount and timing of which may be determined in part by
the need to respond to the advertising of competitors.
Government Regulation
The Company's restaurants are subject to licensing and regulation by
various government agencies, including those dealing with alcohol control,
health, sanitation, fire, building, planning, on-site dancing and live
entertainment, and local traffic patterns. Delays in obtaining, or denials
of, necessary licenses or approvals could have a material adverse impact
upon the Company's development of new restaurants and, consequently, the
Company's prospects. The Company is also subject to Federal and state laws
pertaining to fair labor standards, which govern such matters as working
conditions and minimum wages.
The Company has obtained liquor licenses for all of its present
locations, and does not anticipate any difficulty in obtaining liquor
licenses in the future. In New Jersey, the number of liquor licenses which
may be granted in any one municipality is limited and subject to local
regulation. For this reason, the acquisition of a liquor license may be
time-consuming, difficult and expensive, and the loss of a liquor license
could have a materially adverse impact upon the Company's prospects. In
connection with the maintenance of its liquor licenses, the Company is
required to notify a local regulatory authority in the event of certain
changes in stock ownership of the licensed corporation and changes in
management of its New Jersey restaurants.
Sales of alcoholic beverages represent approximately 20% of the
Company's food and beverage revenues. The temporary suspension or permanent
loss of any liquor license, or the inability to obtain a liquor license,
could have a materially adverse effect on the Company's sales and results of
operations.
Management and Other Employees
As of December 26, 1999, the Company employed 224 persons, of whom 7
were executive and administrative personnel, 16 were managerial employees
involved in restaurant operations, 63 were kitchen personnel, and 138 were
restaurant service personnel. All of the restaurant service personnel are
part-time employees. All non-managerial restaurant employees are paid on an
hourly basis. The Company believes that it enjoys generally good
relationships with its employees. None of the Company's employees are
covered by a collective bargaining agreement.
The Company seeks to attract and retain high caliber restaurant
managers by providing them with an appropriate balance of autonomy,
direction and attractive financial incentives. To those incentives, the
Company has developed a management incentive program under which new general
managers will work with senior management to prepare quarterly budgets and
performance plans for their restaurants. More experienced general managers,
who have demonstrated the ability to achieve planned objectives, may be
promoted to the district manager level. The Company believes that by
providing its general managers and district managers with short and long-
term financial incentives, it will continue to attract and retain high
caliber personnel. Company policy strongly favors promoting existing non-
management employees into management positions. Management trainees must
demonstrate their ability in every area of restaurant operations before
being considered for promotion.
Trademarks
The Company is endeavoring to secure federal trademark and service
mark rights to the name and mark of "Redheads." A third party has an
existing federal service mark registration for "The Redhead" for "nightclub
and cocktail lounge services," which could preclude a registration by the
Company. It appears, however that the Company made "prior use," and may
have a basis to bring a cancellation proceeding with respect to the
registered mark. The Company is advised that its prior use of the name and
mark protects its use of the name for those restaurants which made such
prior use. The Company may be precluded, however, from use of the name and
mark in the Chicago, Illinois market for as long as the registrant conducts
business there under "The Redhead" name. The Company's current plan is to
concentrate growth on the East Coast, and in the Middle Atlantic states in
particular, where the first use of the trademark and service mark have been
established.
In November 1997, after having closed the last American Cafe
operations at the end of 1996, agreement was reached by which Ruby Tuesday,
Inc., a Georgia corporation, purchased the American Cafe trademarks and all
rights and interest therein for $100,000.
Environmental Compliance
Compliance with federal, state, and local laws and regulations which
have been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, is
not expected to have a material affect upon the capital expenditures,
earnings, or competitive position of the Company.
Item 2. Description of Properties
All of the Company's restaurant locations are held under long term
leases. The Company's leases generally provide for a fixed base rent plus
additional rent based on the level of sales generated by the restaurant.
Most of the Company's leases require the Company to pay all or a portion of
the costs of owning and operating the premises, including the cost of
insurance, taxes and maintenance.
Restaurant Locations
The following chart sets forth the restaurants as of December 26, 1999
that are currently owned and/or operated by the Company through its wholly-
owned corporate subsidiaries, as listed below:
<TABLE>
<CAPTION>
Location Present Concept Est. Seating Sq. Footage Term (1)
-------- --------------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Brooklyn, NY Redheads 250 6,500 May 1986 - Jan. 2005
Yonkers, NY Redheads 260 8,400 July 1988 - June 2012
Middletown, NJ Redheads 210 6,000 Apr. 1991 - Mar. 2006
Secaucus, NJ Redheads 220 8,250 Oct. 1989 - Sept. 2009
<FN>
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<F1> Assumes that the Company exercises all of its extension options.
</FN>
</TABLE>
The Company's administrative headquarters are located at Fifty South
Buckhout Street, Irvington, New York 10533, where the Company leases
approximately 4,000 square feet of office space under a five year lease. The
monthly lease payment is approximately $2,000, net of taxes, insurance, and
maintenance. The Company has been operating from this space since 1997.
The Company believes that its current facilities are adequate for
their present and future intended uses and that its properties are in good
condition, well maintained, and adequately insured.
Item 3. Legal Proceedings
General
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 early part of fiscal year 2000. 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. As of year end 1999, this case has moved to
the United States Supreme Court.
On October 7, 1998, Keybro Enterprises, the holders of 8% Cumulative
Preferred Stock of R.B.B. of Levittown, Inc.(see Dividends) brought on a
motion before the United States Bankruptcy Court for the conversion of the
instant cases to Chapter 7 of the Bankruptcy Code; and the Company, and its
affiliated entities and subsidiaries, the reorganized debtors interposed
opposition to the motion.
On November 12, 1998, Keybro and the Company agreed to immediately put
up the restaurant located on Hempstead Turnpike, Levittown, NY up for sale.
The debtors would operate the Levittown restaurant until the date of sale.
The proceeds of the sale of the Levittown restaurant, net of the actual
costs of the sale including brokers fees would be applied as follows: First,
$50,000 will be applied to reimburse the Company for operational losses
incurred; second, up to $250,000 to be paid to Keybro; the balance of the
proceeds would be paid to the Company.
The Company agreed to continue to operate the Levittown restaurant
under the terms of the Stipulation through and including Sunday, January 10,
1999. In the event that a sale had not closed by that date, then: The
Company's agreement to operate the restaurant would expire; the Company
would deliver to Keybro the common stock of RBB of Levittown, Inc.; the
Company would deliver to Keybro peaceful possession of the restaurant;
Keybro would reimburse the Company for any actual operational losses
incurred during the period following the Stipulation up to the amount of
$37,500.
On January 10, 1999, without the sale of the restaurant occurring and
in accordance with the Stipulation, The Company delivered peaceful
possession of the restaurant to representatives of Keybro at the restaurant.
Additionally, the Company delivered the common stock of RBB of Levittown,
Inc.(which Keybro rejected), and discontinued the operations of the
restaurant known as Redheads.
In August 1999, Keybro commenced an action against the Company, Inc.
and R.B.B. of Levittown, Inc, seeking damages in excess of $850,000,
together with punitive damages in excess of $2,000,000, alleging, inter
alia, breach of the stipulation between Keybro and the Company entered into
during the Magic Restaurants reorganization, fraud, and corporate waste. The
Company and R.B.B. answered, albeit belatedly, asserting defenses based upon
the reorganization plan, the stipulation, defendants attempt to deliver the
common stock of R.B.B. to Keybro and defendants' attempts to sell the
Levittown restaurant. Keybro moved for a default judgment, and the Company
and R.B.B. opposed the motion. That motion has been pending since the end of
October 1999. The Company maintains it has meritorious defenses to the
action that was brought.
Other than as discussed in this Item 3, there are no other legal
proceedings to which the Company is a party that are material to the
Company's business.
Potential Dram Shop Liability
All restaurants in New Jersey and New York are subject to dram shop
legislation which imposes liability on licensed alcoholic beverage servers
for injuries or damages caused by their negligent service of alcoholic
beverages to a visibly intoxicated person or to a minor, if such service is
the proximate cause of the injury or damage and such injury or damage is
reasonably foreseeable. Additional restaurants established or acquired by
the Company in the future are likely to be subject to similar potential
liability in New Jersey and New York or elsewhere. While the Company
maintains insurance which it believes is adequate to protect against such
liability, there can be no assurance that it will not be subject to a
judgment in excess of its insurance coverage or that it will be able to
continue to obtain insurance coverage at reasonable costs or at all. The
imposition of a judgment substantially in excess of the Company's insurance
coverage would have a material adverse effect on the Company. The failure or
inability of the Company to maintain insurance coverage could materially and
adversely affect the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock issued pursuant to the Plan began trading on the
NASDAQ Bulletin Board in the third quarter of 1998 under the 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 quarters ended
December 26, 1999. 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
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<S> <C> <C>
1998
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Third quarter $ 0.75 $ 2.25
Fourth quarter $ 0.25 $ 2.25
1999
----
First quarter $ 0.25 $ 2.25
Second quarter $ 0.31 $ 3.00
Third quarter $ 0.25 $ 3.25
Fourth quarter $ 0.31 $ 1.75
</TABLE>
Holders
As of December 26, 1999, there were approximately 85 holders of record
of the Company's Common Stock.
Dividends
Common Stock. No dividends have been declared in respect of the
Company's Common Stock since the April 6, 1995 Petition Date. The Company is
not prohibited or restricted from paying dividends on the Common Stock, but
the Company does not anticipate paying any dividends to holders of the
Company's Common Stock in the foreseeable future.
Series A 12% Cumulative Convertible Preferred Stock. The Company is
obligated to pay dividends to the holders of the Series A 12% Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") that was issued
under the Plan at a rate equal to 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 December 26, 1999, a total of 44,775 shares of the Series A
Preferred Stock was outstanding, and all of such shares were held by
Teleferscot International, Ltd., ("Teleferscot"). Any newly issued Series A
Preferred Stock will be entitled to dividends on the same terms as the
currently outstanding shares of Series A Preferred Stock. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-The Reorganization Proceedings; Confirmation and Effectiveness of
the Company's Reorganization Plan" for further discussion of the nature and
terms of the Series A Preferred Stock.
As of December 26, 1999 and December 27, 1998, the Company has
$1,031,000 and $558,000 of dividends in arrears for Series 12% Cumulative
Convertible Preferred Stock. Based upon the common stock dividend formula
the cumulative dividend would total approximately 638,000 and 468,000 shares
of common 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 therefore. Further, to the extent funds are legally
available therefore, beginning on May 30, 1998, and monthly thereafter, the
Levittown subsidiary will offer to purchase one forty-eighth (1/48) of the
shares of the Levittown Preferred Stock issued under the Plan to the holder.
The purchase price for such repurchase is equal to the liquidation
preference of $75 per share, plus accrued and unpaid dividends. For the
first three years after issuance, at the election of the holders and with
the consent of the Company, Levittown Preferred Stock and the Subsidiary
Preferred Stock is exchangeable for shares of common stock. After this time,
the stock is not exchangeable at the holders option.
As of December 26, 1999 and December 27, 1998 the Company has $258,000
and $158,000 of dividends in arrears for 8% Cumulative Exchangeable
Preferred Stock.
For further discussion of certain material terms of the Subsidiary
Preferred Stock and the Levittown Preferred Stock, see "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operation-The
Reorganization Proceedings; Confirmation and Effectiveness of the Company's
Reorganization Plan and Item 3. Legal Proceedings."
Certain Rights of Preferred Shareholders
The Company's charter provisions forbid mergers or consolidations in
which the Company is not the survivor, and certain asset sales, without the
consent of holders of a majority of the shares of the Series A Preferred
Stock, voting as a single class.
The Subsidiary Preferred Stock and the Levittown Preferred Stock each
provide that if the issuing subsidiary of the preferred stock fails to pay
three consecutive semiannual dividends or fails to make one mandatory
repurchase, then the holders of such stock in such subsidiary, voting as a
single class, shall be entitled to elect one director to the Board of
Directors of the issuing subsidiary. Such director will serve until all
accrued dividend and mandatory repurchase payments are brought current.
The certificates of incorporation of the subsidiaries issuing the
Subsidiary Preferred Stock each provide that the subsidiary may not create,
incur, assume, or otherwise become or be liable for any indebtedness for
borrowed money or for the deferred purchase price of property (except to the
Company or another subsidiary of the Company).
The certificate of incorporation of R.B.B. of Levittown provides that
it may not create, incur, assume, or otherwise become or be liable for any
indebtedness for borrowed money or for the deferred purchase price of
property. Further, the charter provides that the issuing subsidiary will not
sell, transfer, or dispose of the assets of the subsidiary, except for cash
in the ordinary course of business at then fair market value.
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.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
The Company owns and operates four casual dining, table service
restaurants in New York and New Jersey under the name "Redheads Bistro/Bar."
The Company was originally organized as a Delaware corporation on July 14,
1988 under the name Wetherly Ventures Associates, Inc., which name was
subsequently changed to Magic Restaurants, Inc. on October 28, 1988.
Each of the Company's five (the Levittown location was closed on
January 10, 1999) restaurants is operated through a separate wholly-owned
subsidiary of the Company. Those subsidiaries are R.B.B. of Brooklyn, Inc.;
R.B.B. of Yonkers, Inc.;R.B.B. of Levittown Inc.; R.B.B. of Secaucus, Inc.;
and R.B.B. of Middletown, Inc.
The Reorganization Proceedings; Confirmation and Effectiveness
of the Company's Reorganization Plan
Generally. On April 6, 1995, the Company (then Magic Restaurants,
Inc.) and its 17 wholly-owned subsidiaries filed petitions for relief under
Chapter 11 of Title 11 of the United States Code in the Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"), thereby commencing their
Chapter 11 cases (the "Reorganization Cases"). On May 30, 1997 the 2nd
amended plan of reorganization was confirmed and became effective.
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 $2.520 million in
Postpetition Senior Secured Notes. A total of $2.520 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. These notes
remain outstanding
The Reorganization Plan. By order of the Bankruptcy Court entered on
December 30, 1996, the Bankruptcy Court confirmed the Company's Second
Amended Plan of Reorganization. The Plan became effective by its terms on
May 25, 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 senior secured 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 12% Series A Preferred Stock (MRI) in exchange for the notes and
interest due of approximately $58,150. The holder of the Series A Preferred
Stock is authorized under the terms thereof to exchange one share of Series
A Preferred Stock for (a) 5 shares of Common Stock through May 30, 1998, (b)
3.75 shares of Common Stock from May 31, 1998 through May 30, 1999, and (c)
3 shares of Common Stock from May 31, 1999 through May 30, 2000. The Series
A Preferred Stock carries a $75 liquidation preference per share (plus
accrued and unpaid dividends) and is callable by the Company at any time at
the liquidation preference price. The 12% Series A Preferred Stock also
grants the Company an option to repurchase a percentage of the Series A
Preferred Stock, each year, at $75 per share commencing on May 30, 2000. If
the Company exercised all such options it would retire the Series A
Preferred Stock by May 30, 2004.
Postpetition Liabilities. Approximately $1,882,000 of postpetition
liabilities were exchanged for 5,333 shares of newly issued 8% Subsidiary
Preferred Stock and 213,760 shares of newly issued Common Stock. The holders
of the Subsidiary Preferred Stock are authorized under the terms thereof
(with the Company's consent), to exchange one share of Preferred Stock for
(a) 5 shares of Common Stock through May 30, 1998, (b) 3.75 shares of Common
Stock through May 30, 1999, and (c) 3 shares of Common Stock through May 30,
2000. The Subsidiary Preferred Stock carries a $75 liquidation preference
per share (plus accrued and unpaid dividends) and is callable by the Company
at any time at the liquidation preference price. The present holder of all
Subsidiary Preferred Stock is Red Robin International, which holds 1,778
shares of Subsidiary Preferred Stock of R.B.B. of Secaucus, Inc., 1,777
shares of R.B.B. of Yonkers, Inc. and 1,777 shares of R.B.B. of Levittown,
Inc.
Secured Claims. Secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for payables of $209,000
in cash, and 11,333 shares of Levittown Preferred Stock. The present holder
of this 8% Levittown Preferred Stock is Keybro Enterprises, Inc., with
11,333 shares.
Trade and Other Miscellaneous Claims. The holders of approximately
$13,456,000 of trade and miscellaneous claims received 125,000 shares of
Common Stock of the Company, to be shared pro rata among certain of the
claimants. Approximately $26,000 of these liabilities remained intact.
Pre-Plan Effective Date Equity Interests. All equity interests
outstanding prior to the Plan Effective Date were canceled and extinguished
without compensation.
The Company is presently appealing an order of the Bankruptcy Court
requiring the Company to pay approximately $100,000 to Bowie Produce, Inc.,
a prepetition produce vendor, pursuant to the Perishable Agricultural
Commodities Act ("PACA"). The resolution of these matters is not expected to
become final until the early part of fiscal year 2000. The Company believes
that an adverse decision to the Company in this matter will not materially
affect the Company's operations, and further that it will have sufficient
cash available to pay any judgments that may be entered with finality
against the Company. As of year end 1999, this case has moved to the United
States Supreme Court.
Commitments and Contingencies
(a) The Company operates its restaurants under various operating
leases expiring through July 2012. The executive offices are located in
Irvington, New York. Rent expense for the fifty two weeks ending December
26, 1999, December 27,1998 was $871,684 and $1,047,760 respectively.
Future minimum rent payments
<TABLE>
<CAPTION>
Fifty-Two/ Fifty-Three Weeks
Ending December
----------------------------
<S> <C>
2000 $ 813,267
2001 820,303
2002 810,537
2003 785,285
2004 795,597
Thereafter 3,494,711
----------
$7,519,700
==========
</TABLE>
The Redheads Purchase
Central to the Company's restructuring strategy was acquisition of the
Redheads Bistro/Bar concept from its owners, Red One, Inc., a New Jersey
corporation and J. Michael Gallagher. Red One, Inc. and Mr. Gallagher were
operating under Chapter 11. On June 11, the Bankruptcy Court overseeing the
Chapter 11 cases of Red One, Inc., and Mr. Gallagher entered an order
authorizing the sale of the Redheads concept and the Middletown Redheads
Bistro/Bar in Middletown, New Jersey, to the Company. The Company purchased
the trade name, trade dress elements, and all related intellectual property
rights in the Redheads concept for $100,000, and purchased the Middletown
Redheads Bistro/Bar for $175,000 cash, plus assumption of the underlying
lease. The sale closed on June 23, 1997, and ownership of the Redheads
Bistro/Bar concept and the Middletown Redheads Bistro/Bar were transferred
to the Company. No appeals of the order authorizing the sale were filed, and
the property was transferred, by Court order, free and clear of all liens,
claims, and encumbrances.
Summary of Historical Results of Operations
The table that follows sets forth for the periods indicated the
Company's statements of operations, with operating expenses, loss, and other
income or expense items listed as a percentage of total revenues for such
periods:
<TABLE>
<CAPTION>
(audited) (audited)
52 weeks 52 weeks
12/26/99 Dec. 27, 1998
--------- -------------
<S> <C> <C> <C> <C>
SALES 7,799,756 100.00% 9,137,825 100.00%
COST OF SALES 2,402,540 30.80% 2,697,661 29.52%
---------- ----------
GROSS PROFIT 5,397,216 69.20% 6,440,164 70.48%
---------- ----------
OPERATING EXPENSES
Labor costs 3,527,638 45.23% 3,617,833 39.59%
Occupancy costs 1,163,622 14.92% 1,398,164 15.30%
Other Operating Expense 2,154,283 27.62% 2,915,966 31.91%
Loss on Impairment 0 0.00% 1,111,931 12.17%
Depreciation and Amortization 333,024 4.27% 647,366 7.08%
---------- ----------
TOTAL OPERATING EXPENSES 7,178,567 92.04% 9,691,260 106.06%
---------- ----------
LOSS FROM RESTAURANT OPERATIONS (1,781,351) -22.84% (3,251,096) -35.58%
---------- ----------
General and administrative expenses 869,602 11.15% 632,192 6.92%
LOSS FROM OPERATIONS (2,650,953) -33.99% (3,883,288) -42.50%
---------- ----------
Interest expense (363,585) -4.66% (172,093) -1.88%
Other income (expense) net 0 0.00% 7,323 0.08%
---------- ----------
TOTAL OTHER EXPENSE (363,585) -4.66% (164,770) -1.80%
---------- ----------
REORGANIZATION EXPENSE
Professional fees 0 0.00% 0 0.00%
Gain on disposal of asset 0 0.00% 0 0.00%
---------- ----------
TOTAL REORGANIZATION EXPENSE 0 0.00% 0 0.00%
---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (3,014,538) -125.47% (4,048,058) -150.06%
EXRTAORDINARY ITEM
Forgiveness of Debt 0 0.00% 0 0.00%
---------- ----------
NET INCOME (LOSS) (3,014,538) -38.65% (4,048,058) -44.30%
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 2,457,759 2,426,292
========== ==========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Loss from operations (1.75) (1.94)
========== ==========
RESTAURANTS OPEN AT BEGINNING OF PERIOD 5 5
RESTAURANTS OPENED IN PERIOD 0 0
RESTAURANTS CLOSED IN PERIOD 1 0
RESTAURANTS OPEN AT END OF PERIOD 4 5
</TABLE>
Comparison of the Fiscal Year Ended December 26, 1999
to the Fiscal Year Ended December 27,1998
Total revenues decreased $1,338,069 or 15% to $7,799,756 in fiscal
year ended December 26, 1999 ("Fiscal Year 1999") from $9,137,825 in the
fiscal year ended December 27, 1998 ("Fiscal Year 1998"). Total Operating
expense decreased $2,512,693 or 26% to $7,178,567 in Fiscal Year 1999 from
$9,691,260 in the Fiscal Year 1998. Loss from operations decreased
$1,232,335 or 32% to $2,650,953 in Fiscal Year 1999 from $3,883,288 in the
Fiscal Year 1998. The decrease in sales and operating expenses were
primarily attributed to the closure of the Levittown restaurant.
Food and beverage expense decreased $295,121 or 11% to $2,402,540 for
Fiscal Year 1999 from $2,697,661 for Fiscal Year 1998, principally as a
result of the decreased sales volumes and the closure of the Levittown
restaurant. Food and beverage expenses as a percentage of food and beverage
revenues were 30.8% in Fiscal Year 1999 compared with 29.5% in Fiscal Year
1998.
Restaurant labor and related expenses decreased $90,194 or 2.5% to
$3,527,638 in Fiscal Year 1999 from $3,617,833 in Fiscal Year 1998 primarily
due to the closing of the Levittown location. Other Restaurant labor and
related expenses as a percentage of revenues increased to 45.2% in Fiscal
Year 1999 from 39.5% in Fiscal Year 1998 primarily due to a change in
management's allocation of general and administrative payroll.
Restaurant occupancy expenses decreased $234,542 or 17% to $1,163,622
in Fiscal Year 1999 from $1,398,164 in Fiscal Year 1998. Restaurant
occupancy expenses as a percentage of revenues decreased to 14.9% in Fiscal
Year 1999 from 15.3% in Fiscal Year 1998 primarily due to the closure of the
Levittown restaurant.
Other Operating expenses decreased $761,683 or 26% to $2,154,283 in
Fiscal Year 1999 from $2,915,966 in Fiscal Year 1998, primarily due to the
write off of certain note receivables. Other Operating expenses as a
percentage of revenues decreased to 27.6% in Fiscal Year 1999 from 31.9% in
Fiscal Year 1998.
Loss on Impairment expense decreased $1,111,931 or 100% to $0 in
Fiscal Year 1999 from $1,111,931 in Fiscal Year 1998. This came as a result
of the Company's planned divestiture of the Levittown location.
Depreciation and amortization expense decreased $314,342 or 49% to
$333,024 in Fiscal Year 1999 from $647,366 in Fiscal Year 1998, primarily
due to the closure of the Levittown restaurant.
General and administrative expenses increased $237,410 or 38% to
$869,602 in Fiscal Year 1999 from $$632,192 in Fiscal Year 1998. General and
administrative expenses as a percentage of revenues increased to 11% in
Fiscal Year 1999 from 7% in Fiscal Year 1998. The increase is due to an
increase tax late payment charges.
Interest expense-net increased $191,492 or 111% to $363,585 in Fiscal
Year 1999 from $172,093 in Fiscal Year 1998, principally as a result of an
increase in interest charges for late payroll and sales tax payments.
Interest expense-net as a percentage of revenues increased to 4.7% in Fiscal
Year 1999 from 1.9% in Fiscal Year 1998.
Other income (expense) decreased $7,323 or 100% to $0 in Fiscal Year
1999 from $7,323 in Fiscal Year 1998. Other income (expenses) as a
percentage of revenues decreased to 0% in the 1999 Period from 1.8% in the
1998 Period.
The Company's net loss in Fiscal Year 1999 was $3,014,538 as compared
to a net loss of $4,048,058 in Fiscal Year 1998. This represents an increase
of $1,033,520 or 26% in net income over Fiscal Year 1998 net loss. This is
primarily due to the closure of the Levittown restaurant.
Financial Condition and Capital Resources
Operating Activities. Since inception, the Company has incurred
losses from operations. As of December 26, 1999 and December 27,1998, the
Company had an accumulated deficit of $7,778,432 and $4,763,894
respectively. During the Fifty-Two weeks ended December 26, 1999, net cash
flow used in operations totaled $267,325. During the Fifty-Two Weeks ended
December 27,1998, net cash flow used in operations totaled $842,797.
As of December 26, 1999, the Company had negative working capital of
$4,282,589 as compared to negative working capital of $1,958,245 as of
December 27, 1998.
The Company has, upon the effectiveness of its confirmed Plan,
accounted for the reorganization using "fresh-start" reporting. Accordingly,
all assets and liabilities are restated to reflect their reorganization
value, which approximates fair value at the date of reorganization.
Application of the principles of "fresh-start" reporting resulted in
elimination of the stockholders' deficit and caused $22,435,338 of total
liabilities to be extinguished, as provided specifically in the Plan itself.
See"- The Reorganization Proceedings; Confirmation and Effectiveness of the
Company's Reorganization Plan" for further discussion of the consequences of
the Plan's confirmation and effectiveness.
The Company does not have trade accounts receivable, since sales are
for cash or by credit card receipts, which are usually paid within one week.
The Company does not maintain substantial inventories due to the relatively
brief shelf life and frequent turnover of food products and liquor. The
restaurants receive deliveries of food and liquor no less frequently than
every other day. Additionally, the Company has been able to obtain modest
amounts of trade credit for purchasing food, liquor, and restaurant
supplies.
Increases in food and labor costs and interest rates can have a direct
affect on the Company's operations. The Company believes it has responded
appropriately to such increases, some of which are passed through to the
consumer. The federal minimum wage required to be paid to employees has
increased, however many of the Company's employees are paid hourly rates
higher than the federal minimum wage.
The Company's current leases require, and future leases may require,
the Company to pay taxes, maintenance, insurance, repairs and utility costs
which are also subject to inflation, and in addition, some leases contain,
and future leases may contain, escalations of annual rentals based upon
limited increases in specific cost-of-living indices, none of which are
controllable by the Company.
Increases in interest rates will adversely affect the Company's
ability to obtain financing necessary for the establishment of additional
restaurants and additional working capital needs.
Investing Activities. None
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 $3.3 million. Through December 26, 1999 the
Company received the entire $3,300,000 of the committed funding. As of
March, 1998 the Company had drawn down on the remaining amount available
under commitment in order to fund the Secaucus unit conversion to the
Redheads Bistro/Bar concept. In exchange for each $75 drawn down under the
funding commitment, Teleferscot will receive 1 additional share of the
Company's Series A Preferred Stock.
During fiscal year 99 and fiscal year 98 the Company received
financing in the form of 12% Debt instruments. The amount of loans from
these instruments for the year totaled $622,020 and $793,641 respectively.
It is management's belief that profitability will be achieved by
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
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.
As of December 26, 1999, the company's working capital deficit was
$4,282,589. The company anticipates that it will require additional working
capital to fund operations. The Company believes that it will have
sufficient capital to meet these obligations through the improvement of
current operations and financing in the form of debt from a major
shareholder of the company. However, there can be no assurance that the
Company will have sufficient capital to support operations and implement its
business plans. If the company does not obtain additional capital it will
not be able to maintain current operations.
Item 7. Financial Statements
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1999
AND
DECEMBER 27, 1998
REDHEADS, INC. AND SUBSIDIARIES
C O N T E N T S
---------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5 to F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-16
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Redheads, Inc.
Irvington, New York
We have audited the accompanying consolidated balance sheets of Redheads,
Inc. and Subsidiaries as of December 26, 1999 and December 27, 1998 and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the fifty-two weeks then ended. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Redheads, Inc. and Subsidiaries as of December 26, 1999 and
December 27, 1998 and the results of their operations and cash flows for the
fifty-two weeks then ended., in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1, the Company has incurred recurring losses from operations and at
December 26, 1999 has a working capital deficit of $4,282,589, a
stockholders' deficit of $4,051,733 and is delinquent on a substantial
portion of the $981,676 sales tax liability and $1,391,702 payroll tax
liabilities. Also as discussed in Note 12, an action was commenced against
the Company related to the Levittown restaurant, the outcome of which is
uncertain. Continuation of the Company as a going concern is dependent upon
future successful operations and the ability to generate sufficient cash
flows from operations and capital/financing sources to meet its obligations.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
June 15, 2000
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Inventory $ 92,012 $ 84,812
Other current assets 61,290 86,719
---------------------------
TOTAL CURRENT ASSETS 153,302 171,531
PROPERTY AND EQUIPMENT - NET 1,189,667 1,349,017
LOAN RECEIVABLE - OFFICER 99,293 -
OTHER ASSETS 357,557 365,674
---------------------------
TOTAL ASSETS $ 1,799,819 $ 1,886,222
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ 53,753 $ 210,955
Accounts payable and accrued expenses 1,498,959 912,781
Sales tax payable 981,676 495,414
Prepetition taxes payable 509,723 443,238
Payroll tax liabilities 1,391,780 67,388
---------------------------
TOTAL CURRENT LIABILITIES 4,435,891 2,129,776
LONG-TERM DEBT 1,415,661 793,641
---------------------------
TOTAL LIABILITIES 5,851,552 2,923,417
---------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
Series A 12% Cumulative Convertible - $0.001
par value; 5,000,000 shares authorized;
44,775 shares issued and outstanding in 1999
and 1998 335,815 335,815
Series A 8% Cumulative Exchangeable - $0.001
par value; 1,017,000 shares authorized;
16,666 shares issued and outstanding in 1999
and 1998 125,000 125,000
ADDITIONAL PAID-IN CAPITAL 2,581,812 2,581,812
COMMON STOCK - $0.001 par value; 23,024,000
shares authorized; 2,457,759 shares issued
and outstanding in 1999 and 1998 2,458 2,458
ADDITIONAL PAID-IN CAPITAL 681,614 681,614
ACCUMULATED DEFICIT (7,778,432) (4,763,894)
---------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (4,051,733) (1,037,195)
---------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 1,799,819 $ 1,886,222
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEKS ENDED
DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SALES $ 7,799,756 $ 9,137,825
COST OF SALES 2,402,540 2,697,661
---------------------------
GROSS PROFIT 5,397,216 6,440,164
---------------------------
OPERATING EXPENSES
Labor costs 3,527,638 3,617,833
Occupancy costs 1,163,622 1,398,164
Other operating expenses 2,154,283 2,149,880
Depreciation and amortization 333,024 647,366
Write off of uncollectible receivables - 86,224
Write off of notes receivable - 679,862
Loss on impairment of assets of Levittown restaurant - 1,111,931
---------------------------
7,178,567 9,691,260
LOSS FROM RESTAURANT OPERATIONS (1,781,351) (3,251,096)
GENERAL AND ADMINISTRATIVE
EXPENSES 869,602 632,192
---------------------------
LOSS FROM OPERATIONS (2,650,953) (3,883,288)
---------------------------
OTHER INCOME (EXPENSE)
Interest income 5,620 -
Interest expense (369,205) (172,093)
Other income, net - 7,323
---------------------------
(363,585) (164,770)
---------------------------
NET LOSS $(3,014,538) $(4,048,058)
===========================
BASIC AND DILUTED LOSS PER SHARE
OF COMMON STOCK $ (1.75) $ (1.94)
===========================
WEIGHTED AVERAGE SHARES
OUTSTANDING OF COMMON STOCK 2,457,759 2,426,292
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FIFTY-TWO WEEKS ENDED
DECEMBER 28, 1997 TO DECEMBER 26, 1999
<TABLE>
<CAPTION>
12%
Series A Preferred Stock Preferred
------------------------ Paid-In Common Paid-In Stock Accumulated
12% 8% Capital Stock Capital Subscribed Deficit
--- -- ------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 28, 1997 $315,815 $125,000 $2,401,812 $2,386 $499,849 $ 400,000 $ (715,836)
Issuance of 2,666 shares of 12%
Preferred Stock for partial
receipt of subscription receivable 20,000 - 180,000 - - (200,000) -
Proceeds of subscription receivable
converted to debt - - - - - (200,000) -
Issuance of 67,819 shares of Common
Stock for settlements of unpaid
legal fees - - - 68 176,519 - -
Issuance of 3,500 shares of Common
Stock for settlement of unpaid
expenses - - - 4 5,246 - -
Net loss for the fifty-two weeks ended
December 27, 1998 - - - - - - (4,048,058)
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 27, 1998 335,815 125,000 2,581,812 2,458 681,614 - (4,763,894)
Net loss for the fifty-two weeks ended
December 26, 1999 - - - - - - (3,014,538)
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 26, 1999 $335,815 $125,000 $2,581,812 $2,458 $681,614 $ - $(7,778,432)
====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REDHEADS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIFTY-TWO WEEKS ENDED
DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING EXPENSES
Net loss $(3,014,538) $(4,048,058)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation 257,550 398,539
Amortization 75,474 248,829
Loss on write off of uncollectible receivables - 86,224
Loss on write off of notes receivable - 679,862
Loss on disposal of property and equipment - 4,847
Loss on impairment of assets of Levittown restaurant - 1,111,931
Issuance of stock for settlement of expenses - 5,251
(Increase) decrease in assets
Inventories (7,200) (1,436)
Other current assets (36,647) (66,852)
Other assets (5,281) 77,575
Increase in liabilities
Accounts payable and accrued expenses 586,178 121,423
Sales taxes payable 486,262 424,190
Prepetition taxes payable 66,485 47,490
Payroll taxes payable 1,324,392 67,388
----------------------------
Net cash used in operating activities (267,325) (842,797)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (98,200) (541,881)
Loan receivable - officer (99,293) -
----------------------------
Net cash used in investing activities (197,493) (541,881)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on long-term debt (56,600) (82,500)
Proceeds from long-term debt 678,620 876,141
Proceeds from subscription receivable - 200,000
Cash overdraft (157,202) 210,955
----------------------------
Net cash provided by financing activities 464,818 1,204,596
----------------------------
DECREASE IN CASH - (180,082)
CASH - BEGINNING OF PERIOD - 180,082
----------------------------
CASH - END OF PERIOD $ - $ -
============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Preferred Stock for Preferred Stock subscribed $ - $ 200,000
============================
Conversion of Subscription receivable $ - $ 200,000
============================
Conversion of accounts payable and accrued expenses
to Preferred and Common Stock $ - $ 176,586
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REDHEADS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of the Business
----------------------------------
Redheads, Inc. and Subsidiaries (the "Company") are engaged in the
development, ownership and operation of restaurants that offer an upscale
alternative to fast food restaurants by providing high quality, moderately
priced food, and quick convenient full-menu table service. The Company
operated nine American Cafe restaurants located in the Washington, D.C.,
Maryland and Virginia areas. The Company also operated six Red Robin Burger
and Spirits Emporiums ("Red Robin"), in the New York metropolitan area
pursuant to a franchise granted by Red Robin International, Inc., serving
American style food with international specialties. Additionally, the
Company operated five Carmella Cafe restaurants and two Spiga Italian-style
family restaurants. In March 1995, the Company divested itself of ownership
of the Carmella Cafe and Spiga restaurants. On April 6, 1995 the Company
filed a voluntary petition for relief under Chapter 11 of Title II of the
Federal Bankruptcy Code. During the twenty-six week period ended December
29, 1996 the Company ceased operations of all American Cafe restaurants and
two Red Robin restaurants, located in Smithhaven, New York and Staten
Island, New York. On May 30, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization, effective May 25, 1997 for accounting
purposes. Upon confirmation, the Company's name was changed to Redheads,
Inc. Upon emergence, the Company had four restaurants in operation, located
in Kings Plaza, New York; Levittown, New York; Yonkers, New York and
Secaucus, New Jersey. On June 23, 1997, the Company purchased a Redheads
Bistro/Bar located in Middletown, New Jersey together with the related
intellectual property rights in the Redheads concept, trade name and trade
dress. Effective January 10, 1999, the Levittown Restaurant was closed. The
Company has converted the remaining restaurants into the Redheads Bistro/Bar
concept as of December 26, 1999.
Management's Future Plans
-------------------------
The Company's consolidated financial statements have been prepared on the
basis that it is a going concern which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
As reflected in the financial statements, the Company has incurred net
losses of $3,014,538 and $4,048,058 for the fifty-two weeks ended December
26, 1999 and December 27, 1998 and at December 26, 1999 had a working
capital deficit of $4,282,589. The Company financed its operating losses in
the current year primarily through non-payment of its payroll and sales tax
liabilities as well as increases in accounts payable. As of December 26,
1999, a substantial portion of the $981,676 sales tax liability and
$1,391,702 payroll tax liabilities are delinquent.
The Company anticipates that it will require additional working capital to
fund operations and repay its delinquent to obligations. The Company
believes that it will have sufficient capital to meet these obligations
through the improvements of current operations and financing from a major
stockholder of the Company. However, there can be no assurance that the
Company will have sufficient capital to support operations and implement its
business plans.
Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include the accounts of
Redheads, Inc. and its Subsidiaries at December 26, 1999 and December 27,
1998 and the fifty-two weeks then ended. All material intercompany
transactions have been eliminated in consolidation.
Effective July 1, 1993, the Company adopted a fiscal year of fifty-two or
fifty-three weeks. Effective July 1, 1996, the Company changed its fiscal
year end to the last Sunday of December.
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
130, "Reporting Comprehensive Income," beginning December 28, 1997.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically
has not been recognized in the calculation of net income. Since the company
has no items of other comprehensive income, no separate statement of
comprehensive income has been presented.
Fair Value of Financial Statements
----------------------------------
The Company's financial instruments consist of cash, payables, and accrued
expenses. The carrying values of cash, payables and accrued expenses
approximate fair value because of their short maturities.
The carrying value of the loan receivable - officer and the long-term debt
approximates fair value since the interest rate associated with the debt
approximates the current market interest rate.
Concentration of Credit Risk Involving Cash
-------------------------------------------
The Company maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. During the year, the Company may have cash
balances in these financial institutions in excess of these limits. At
December 26, 1999 there were no balances in excess of insurable amounts.
Depreciation
------------
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the
estimated useful lives of the assets. Depreciation is computed using the
straight line method.
Inventory
---------
Inventory consists of food, liquor, bar and other supplies and is stated at
the lower of cost (determined by the first-in, first-out method) or market.
License Fees and Deferred Leasing Expenses
------------------------------------------
License fees and deferred leasing expenses are amortized on a straight-line
method over the related license or lease.
Preoperating Cost
-----------------
The Company has adopted Statement of Position 98-5, "Reporting on the Cost
of Start-up Activities," for its fifty-two weeks ended December 26, 1999.
This statement requires start-up costs, such as pre-operating costs, to be
expensed as incurred.
Income Taxes
------------
The Company accounts for income taxes on an asset and liability approach to
financial accounting. Deferred income tax assets and liabilities are
computed annually for temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates based on
management's knowledge and experience. Accordingly, actual results could
differ from those estimates.
Recoverability of Long Lived Assets
-----------------------------------
The Company follows SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The Company
is not aware of any events or circumstances which indicate the existence of
an impairment which would be material to the Company's annual financial
statements.
Accounting for Stock-Based Compensation
---------------------------------------
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of the grant over the amount the employee is required to
pay to acquire the stock (the intrinsic value method under Accounting
Principles Board Opinion 25). Such amount, if any, is accrued over the
related vesting period, as appropriate.
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation."
The Statement encourages employers to account for stock compensation awards
based on their fair value on their date of grant. Entities may choose not to
apply the new accounting method but instead, disclose in the notes to the
financial statements the pro forma effects on net income and earnings per
share as if the new method had been applied. The Company has adopted the
disclosure-only approach of the Standard.
Earnings (Loss) Per Share
-------------------------
The Company follows SFAS No. 128, "Earnings Per Share" (EPS). This
statement establishes standards for computing and presenting EPS. For
entities with complex capital structures, the statement requires the dual
presentation of both Basic EPS and Diluted EPS on the face of the statement
of operations. Under this standard, Basic EPS is computed based on weighted
average shares outstanding and excludes any potential dilution; Diluted EPS
reflects potential dilution from the exercise or conversion of securities
into common stock or from other contracts to issue common stock.
Basic earnings (loss) per share include the weighted average number of
shares outstanding during the year. Diluted earnings (loss) per share
include the weighted average number of shares outstanding and dilutive
potential common shares, such as warrants and convertible securities.
Assumed conversion of the warrants and convertible securities would be
either immaterial or antidilutive, therefore, basic and diluted earnings
(loss) per share are the same.
Net loss applicable to common stockholders for the fifty-two weeks ended
December 26, 1999 and December 27, 1998 has been increased by $1,289,000 and
$653,000 for preferred dividends in arrears.
NOTE 2 - LOSS ON IMPAIRMENT OF ASSETS OF LEVITTOWN RESTAURANT
As a result of the closing of the Levittown restaurant, effective January
10, 1999, the Company wrote-off the net carrying value of the fixed assets
and intangible assets of the Levittown restaurant as of December 27, 1998
and recorded an impairment loss of $1,111,931.
NOTE 3 - OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Preoperation costs - net of accumulated amortization
of $303,850 in 1999 and $241,776 in 1998 $ - $62,074
Prepaid expenses 12,268 -
Credit card receivables 26,497 20,613
Other receivables 22,525 4,032
-------------------
$61,290 $86,719
===================
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold improvements $1,051,478 $1,027,983
Restaurant fixtures and equipment 57,468 21,092
Computer software 294,966 261,025
Furniture and fixtures 561,262 556,874
-------------------------
1,965,174 1,866,974
Less: Accumulated depreciation 775,507 517,957
-------------------------
$1,189,667 $1,349,017
=========================
</TABLE>
NOTE 5 - LOAN RECEIVABLE - OFFICER
Loan receivable, officer, represents advances to an officer of the Company,
with an interest rate of 12% and no stated repayment terms.
NOTE 6 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Liquor license - net $233,489 $233,470
License fees - net 74,167 84,167
Deposits 21,239 15,958
Deferred leasing expenses - net 6,163 6,677
Deferred legal expenses - net 3,957 4,360
Acquisition costs - net 18,542 21,042
---------------------
$357,557 $365,674
=====================
</TABLE>
Liquor license, license fees, deferred leasing expenses, deferred legal
expenses and acquisition costs are net of accumulated amortization of
$80,926 and $67,526 as of December 26, 1999 and December 27, 1998.
NOTE 7 - LONG-TERM DEBT
The long-term debt consists of notes payable to investors, with principal
and accrued interest, at 12%, due on June 30, 2003. The notes are
collateralized by all of the assets of the Middleton and Kings Plaza
subsidiaries.
NOTE 8 - COMMITMENTS
The Company leases its executive office and remaining restaurant premises
under various operating leases expiring through July 2012. Rent expense for
the fifty-two weeks ended December 26, 1999 and December 27, 1998 was
$871,684 and $1,047,760.
Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
Fifty-two/Fifty-three Weeks
Ending December, Amount
--------------------------- ------
<S> <C>
2000 $ 813,267
2001 820,303
2002 810,537
2003 785,285
2004 795,597
Thereafter 3,494,711
----------
$7,519,700
==========
</TABLE>
NOTE 9 - CAPITAL STOCK
Series A 12% Cumulative Preferred Stock
---------------------------------------
The Company's management is authorized to issue 5,000,000 shares of $0.001
par value preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control of others. During 1997, the Company accepted the subscription for
the purchase of 46,667 shares of Series A 12% Cumulative Convertible
Preferred Stock ("Series A Preferred Stock") at approximately $75 per share,
for a total of $3,500,000. As of December 28, 1997, $3,100,000 had been
received and 42,109 shares of Series A Preferred Stock had been issued. The
stock was valued at the maximum exchange rate of five shares of Common Stock
for every one share of series A Preferred Stock. The Common Stock was
valued at $1.50 per share. The balance of the proceeds of $400,000 was
received by April 8, 1998.
During April 1998, $200,000 of the proceeds from the $400,000 subscription
receivable was converted to a debt instrument, resulting in a reduction of
the total subscription to $3,300,000, for which 44,775 shares of Series A
Preferred Stock was issued.
The Company is obligated to pay dividends to the holders of the Series A
Preferred Stock that was issued at a rate equal to 12% per annum on the $75
stated value. The dividends are payable annually through the issuance of
shares of Common Stock of the Company at a price equal to 80% of the average
bid price for the Common Stock during the preceding 12 months. To the
extent funds are legally available, beginning on May 30, 2000, the Company
has the option to purchase, at a cash price equal to $75 per share, plus
accrued and unpaid dividends, portions of the Series A Preferred Stock, so
that the stock would be retired within seven years. For the first three
years after issuance, at the election of the holders and with the consent of
the Company, the Series A Preferred Stock is exchangeable for shares of
Common Stock. After this time the stock is not exchangeable at the holders'
option. As of May 30, 2000 the funds were not legally available.
As of December 26, 1999 and December 27, 1998, the Company has $1,031,000
and $558,000 of dividends in arrears for Series A 12% Cumulative Convertible
Preferred Stock, which would equate to a stock dividend of approximately
638,000 and 468,000 shares of Common Stock.
Series A 8% Cumulative Exchangeable Preferred Stock
---------------------------------------------------
On May 25, 1997, the Company issued 1,778 shares of Series A 8% Cumulative
Exchangeable Preferred Stock of both Secaucus and Levittown subsidiaries and
1,777 shares of Series A 8% Cumulative Exchangeable Preferred Stock of
Yonkers subsidiary ("Subsidiary Preferred Stock") in exchange for a release
of a prepetition liability of approximately $400,000. The stock was valued
at the maximum exchange rate of five shares of Common Stock for every one
share of Subsidiary Preferred Stock. The Common Stock was valued at $1.50
per share.
Dividends are payable on the Subsidiary Preferred Stock at a rate of 8% per
annum based on the liquidation preference of $75 per share. The dividends
are payable semi-annually, to the extent funds are legally available. At
the election of the issuing subsidiary such dividends may be paid by
issuance of shares of Common Stock of the Company, valued for this purpose
at the closing price as of the 10th business day preceding declaration of
the dividend. Further, to the extent funds are legally available, on May
30, 2000, May 30, 2001, and May 30, 2002, each issuing subsidiary will offer
to purchase, at a cash price equal to $75 per share, plus accrued and unpaid
dividends, one-sixth, one-third, and one-half, respectively of the
Subsidiary Preferred Stock issued under the Plan; provided, however, that if
at any time the closing bid price of the Common Stock exceeds $5 per share
for 40 consecutive trading days, any such mandatory repurchase obligation
shall expire. As of May 30, 2000 the funds were not legally available.
On May 25, 1997, the Company issued 13,111 shares of 8% Cumulative
Exchangeable Preferred Stock of Levittown subsidiary ("Levittown Preferred
Stock") in exchange for a release of a secured claim liability of
approximately $850,000. The stock was valued at the maximum exchange rate
of five shares of Common Stock for every one share of Levittown Preferred
Stock. The Common Stock was valued at $1.50 per share.
Dividends are payable on the Levittown Preferred Stock in cash at a rate of
8% per annum based on the liquidation preference of $75 per share. The
dividends are payable semi-annually, to the extent funds are legally
available. Further, to the extent funds are legally available, beginning on
May 30, 1998, and monthly thereafter, the Levittown subsidiary will offer to
purchase one forty-eighth of the shares of the Levittown Preferred Stock
issued under the Plan to the holder. The purchase price is equal to the
liquidation preference of $75 per share, plus accrued and unpaid dividends.
For the first three years after issuance, at the election of the holders
and with the consent of the Company, the Subsidiary Preferred Stock and the
Levittown Preferred Stock is exchangeable for shares of Common Stock. After
this time, the stock is not exchangeable at the holders' option. As of May
30, 2000 the funds were not legally available.
The Company's authorized and issued outstanding shares of Series A 8%
Cumulative Exchangeable Preferred Stock is as follows:
<TABLE>
<CAPTION>
Shares Shares Issued
Subsidiary Authorized and Outstanding
---------- ---------- ---------------
<S> <C> <C>
Yonkers 1,000,000 1,777
Levittown 15,000 13,111
Secaucus 2,000 1,778
--------- ------
1,017,000 16,666
========= ======
</TABLE>
As of December 26, 1999 and December 27, 1998, the Company has $258,000 and
$158,000 of dividends in arrears for Series A 8% Cumulative Exchangeable
Preferred Stock.
Common Stock
------------
On May 20, 1998, the Company issued 67,819 shares of Common Stock for
settlement of unpaid legal fees. In December 1998, the Company issued 3,500
shares of Common Stock for settlement of unpaid expenses.
Warrants
--------
From time to time, the Company may issue warrants to purchase its Common
Stock to parties other than employees and directors. Warrants may be issued
as an incentive to help the Company achieve its goals, or in consideration
for cash or services rendered to the Company, or a combination of the above.
Prior to May 25, 1997, as part of the subscription for 46,667 shares of
Series A Preferred Stock, the Company issued three year warrants to purchase
1,500,000 shares of its Common Stock at a price of $2.00 per share and five
year warrants to purchase 1,500,000 shares of its Common Stock at a price of
$5.00 per share.
NOTE 10 - INCOME TAXES
There is no income tax benefit for operating losses for the fifty-two weeks
ended December 26, 1999 and December 27, 1998 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the tax benefit of the net operating losses
described above were offset by a 100% valuation allowance. Management
believes that a valuation allowance is considered necessary since it
is more likely than not that the deferred net asset will not be
realized through future taxable income.
The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Statutory tax (benefit) provision $1,036,000 $1,417,000
Utilization of net operating loss carryforwards - -
Increase in valuation allowance 1,036,000 1,417,000
-------------------------
$ - $ -
=========================
</TABLE>
Under SFAS No. 109, Accounting for Income Taxes, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates.
The tax effect of temporary differences that give rise to deferred income
taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Accruals and reserves $ (389,000) $ 389,000
Net operating loss carryforwards 7,840,000 $ 6,401,000
Valuation allowance on deferred tax asset 7,451,000 (6,790,000)
---------------------------
$ - $ -
===========================
</TABLE>
As a result of the change in control described in Note 1, the Company is
subject to limitations on the future utilization of its federal net
operating loss carryforwards. These limitations, described in Section 382
of the Internal Revenue Code, limit the amount of future taxable income
which may be offset by pre-change net operating loss and capital loss
carryforwards. This limitation is calculated by reference to the value of
the Company immediately before the change date, multiplied by a discount
factor, known as the "long term tax-exempt rate".
The Company files a consolidated federal income tax return and certain
combined state and city returns.
The Company's federal, state and local tax returns have not been filed for
the fifty-two weeks ended December 26, 1999 and December 27, 1998, the
thirty-one weeks ended December 28, 1997, twenty-one weeks ended May 25,
1997, twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended
June 30, 1996.
As of December 26, 1999, the Company had approximately $22,400,000 of net
operating loss carryforwards expiring through 2014, available to offset
future federal income taxes.
NOTE 11 - RELATED PARTY TRANSACTIONS
In 1995, the Bankruptcy Court overseeing the Company's Chapter 11 case, in
connection with the employment of Mr. Charles Olson, Jr. as President and
Chief Executive Officer, approved a consulting agreement between the Company
and Rye Management, Inc. ("Rye"), that was extensively negotiated between
the Company and the Creditors' Committee. Rye is a corporation owned and
controlled by Mr. Olson. The consulting agreement called for a
reorganization bonus to be paid to Rye upon the confirmation of the Plan.
The consulting agreement assigns various "Success Factors" that are based on
the actual recovery (as a percentage of Allowed Claims) realized by general
unsecured creditors in the Chapter 11 cases.
This reorganization bonus will be paid through the issuance of the Company
Common Stock. Under the confirmed Plan, the number of shares issued will be
based on the sustained trading prices achieved for the Common Stock over the
three year period following the Plan Effective Date. The reorganization
bonus will be calculated based upon the highest average trading price
achieved by the Common Stock over the course of ten consecutive trading days
during the three years following the Effective Date (with average share
volumes traded per day in excess of 10,000 shares). The Company estimates
that, on average, a total of 18,000 shares would be issuable for each $1.00
of sustained price realized up to $53 per share during the three year
period.
Mr. Olson also has a controlling interest in two companies and a partnership
that owns shares of Redheads, Inc. Common Stock. At December 26, 1999 and
December 27, 1998, $900 and $57,500 of the total long-term debt is due to
the partnership controlled by Mr. Olson.
NOTE 12 - CONTINGENCY
On October 7, 1998, Keybro Enterprises filed a motion before the United
States Bankruptcy Court for the conversion of the instant cases to Chapter 7
of the Bankruptcy Code; and Redheads, Inc. and its affiliated entities and
subsidiaries, the reorganized debtors, interposed opposition to the motion.
On November 12, 1998, Keybro and Redheads agreed to immediately put up for
sale the restaurant located on Hempstead Turnpike, Levittown, NY. The
debtors would operate the Levittown restaurant until the date of sale. The
proceeds of the sale of the Levittown restaurant, net of the actual costs of
the sale including brokers fees would be applied as follows:
1) $50,000 will be applied to reimburse Redheads for operational
losses incurred;
2) up to $250,000 to be paid to Keybro;
3) the balance of the proceeds would be paid to Redheads.
Redheads agreed to continue to operate the Levittown restaurant under the
terms of the Stipulation through and including Sunday, January 10, 1999. In
the event that a sale had not closed by that date, then Redheads' agreement
to operate the restaurant would expire. Redheads would deliver to Keybro
the common stock of R.B.B. of Levittown, Inc. and Redheads would deliver to
Keybro possession of the restaurant; Keybro should reimburse Redheads for
any actual operational losses incurred during the period following the
Stipulation up to the amount of $37,500.
On January 10, 1999, without the sale of the restaurant occurring and in
accordance with the Stipulation, Redheads delivered possession of the
restaurant to representatives of Keybro at the restaurant. Additionally,
Redheads delivered the common stock of R.B.B. of Levittown, Inc. which
Keybro rejected, and discontinued the operations of the restaurant known as
Redheads.
In August 1999, Keybro commenced an action against Redheads, Inc. and R.B.B.
of Levittown, Inc. seeking damages in excess of $850,000, together with
punitive damages in excess of $2,000,000, alleging, inter alia, breach of
the stipulation between Keybro and Redheads entered into during the Magic
Restaurants reorganization, fraud, and corporate waste. Redheads and R.B.B.
answered, albeit belatedly, asserting defenses based upon the reorganization
plan, the stipulation, defendants attempt to deliver the common stock of
R.B.B. to Keybro and defendants' attempts to sell the Levittown restaurant.
Keybro moved for a default judgment, and Redheads and R.B.B. opposed the
motion. That motion has been pending since the end of October 1999. The
Company maintains it has meritorious defenses to this action.
Item 8. Changes in And Disagreements With Accountants on Accounting
And Financial Disclosure
None.
PART III
--------
Item 9. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles O. Olson, Jr.(2) 42 President, Chief Executive
Officer, Chief Financial
Officer & Director
Pierpaolo Matteuzzi (2) 47 Director
Julio Pasini (1) 45 Director
<FN>
--------------------
<F1> Member of the Compensation Committee
<F2> Member of the Audit Committee
</FN>
</TABLE>
Charles O. Olson, Jr. Mr. Olson was elected a director of the Company
at its annual meeting held on July 21, 1994 and has served as its President
since April 6, 1995, the Petition Date. He has been, since January 1994, a
principal of RehCam Investments, a private Houston, Texas investment firm.
He has also been, since 1987, the sole principal of Rye Management, Inc., a
financial consulting firm. Until October 1993, Mr. Olson served for more
than five years as President of Capital Holdings, Inc., a private financial
management firm in Houston. Mr. Olson received a B.A. (Accounting) from the
University of Houston in 1981. He is currently on the Board of Directors of
SLB Snacks Corporation.
Pierpaolo Matteuzzi. Mr. Matteuzzi became a director of the Company
in 1997. Mr. Matteuzzi has served since 1987 as managing director of
Sogevalor, S.A., a Swiss portfolio managing company. In the 12 years prior
to joining Sogevalor, Matteuzzi ascended to senior management of an
international finance department in a major Swiss bank.
John E. McConnaughy, Jr. Retired effective January 19,1999.
Julio M.V. Pasini. Mr. Pasini became a director of the Company in
1997. Mr. Pasini has been Chief Executive Officer of Dumont Investments,
Inc. since its inception in January 1996. Dumont Investments, Inc. is a
money management company with investments in the USA. Prior to joining
Dumont Mr. Pasini was at Swiss Bank Corporation holding a variety of
positions in Financial Institutions and Capital Markets, culminating with
the global responsibility of developing and servicing relationships with
Italian banks and investment funds.
Executive officers are appointed by the Board of Directors and serve
at the pleasure of the Board of Directors. All directors hold office until
the next annual meeting of stockholders or until their successors are
elected and qualified.
Board Committees
Audit Committee. The Audit Committee of the Board of Directors (i)
review the results and scope of the annual audit and other services provided
by the Company's independent auditors, (ii) reviews and evaluates the
Company's internal audit and control functions and (iii) monitors
transactions between the Company and its employees, officers and directors.
Charles Olson, Jr. and Pierpaolo Matteuzzi are members of the Audit
Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors administers the Company's stock option and stock purchase plans
and designates compensation levels for the Company's executive officers and
directors. Julio Pasini is a member of the Compensation Committee.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than ten percent of the Company's Common
Stock or the Company's Preferred Stock, to file reports of ownership and
changes in ownership with the Commission. During the entire Transition
Period the Company was operating under Chapter 11 and none of the persons
serving as officers and directors filed any reports under Section 16(a) of
the Exchange Act.
Compensation of Directors
Until otherwise authorized, the directors of the Company are not paid
or reimbursed for out-of-pocket expenses for each Board meeting attended by
such director. During the period from December 27, 1998 to December 26, 1999
none of the directors were compensated for any service provided as a
director.
Limitation of Directors' Liability; Indemnification of Directors and
Officers
The Restated Certificate of Incorporation of the Company, as amended,
provides that no director of the Company shall be liable to the Company for
monetary damages for breach of fiduciary duty or care as a director except
for liability for breach of the director's duty of loyalty, for acts not in
good faith, intentional misconduct or knowing violations of law, for
unlawful payment of dividends or stock purchases or redemptions or for
transactions in which the directors derived an improper personal benefit.
The By-Laws of the Company provide for the indemnification of officers and
directors to the fullest extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) in connection with the securities
being registered, the Company will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 10. Executive Compensation
Compensation of Executive Officers
The following table sets forth information, concerning the annual and
long-term compensation of the Company's chief executive officer and other
individuals acting in a similar capacity for the past three fiscal years. No
information is included regarding compensation paid to other executive
officers during such three year period because no such executive officer
earned annual or long-term compensation in excess of $100,000. Except as set
forth in the tables below, no bonus, other annual compensation, long-term
compensation (in the form of restricted stock awards, options, stock
appreciation rights, long-term incentive plans, or otherwise), or other
forms of compensation were paid to the Company's chief executive officer,
any other individuals acting in a similar capacity, or any other executive
officer of the Company at any time during such periods as are reflected in
the tables set forth below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Fiscal Year ----------------------- Stock All Other
Name and Principal Position or Period Salary ($) Bonus ($) Award Compensation
--------------------------- ----------- ---------- -------- ----- ------------
<S> <C> <C> <C> <C>
Charles Olson, Jr. 1999 $67,000 $0 $ 0
President/CEO 1998 $67,000 $0 $ 0
1997 $66,000 $0 $ 0
1996-T $33,500 $0 $27,000
1996 $99,500 $0 $54,000
David Sederholt 1998-T $78,846 $0
EVP/COO 1997 $50,000 $0 $33,000
Steven R. Jakubowski 1996-T $ 0 $0 $60,000
Chief Operating Officer 1996 $80,000 $0 $40,000
1996 $30,000 $0 $ 0
</TABLE>
Employment Contracts
The Company has no employment contract with any of its executive
officers.
During 1998 Mr. Sederholt left employment of the Company. The Company
retained Mr. Sederholt as consultant for two months following his
termination of employment.
The Company has no compensatory plan or arrangement with any of its
executive officers in the event of (i) that officer's resignation,
retirement, or termination in any other manner, (ii) a change-in-control of
the Company, or (iii) a change in such officer's responsibilities following
a change-in-control of the Company
The Fiscal Year 1997 Stock Option Plan
On the Plan Effective Date, as approved in the Confirmation Order of
the Bankruptcy Court, the Company adopted a long-term incentive plan (the
"Incentive Plan") providing for the issuance of stock options (the
"Options") to purchase shares of Common Stock, thereby entitling the holder
thereof, upon exercise, to receive the value or the increase in value of the
shares of Common Stock subject thereto.
The Options shall constitute either "incentive stock options" within
the meaning of Section 422A of the Internal Revenue Code ("ISO's") or
"nonqualified stock options" ("NQSO's"). All Options granted to non-employee
directors and consultants will constitute NQSO's. The Company believes that
the Incentive Plan will provide the Company with significant advantages in
attracting, retaining, and motivating key employees, officers, and directors
of the Company by providing such persons with incentives that are linked
directly to increases in stockholder value.
The Incentive Plan is administered by a committee (the "Compensation
Committee") of the Company's Board of Directors, consisting of no fewer than
two directors, none of whom may be employees of the Company and each of whom
serves at the pleasure of the Board of Directors. Currently the Compensation
Committee is composed of Mr. Pasini. This Board Committee has full power to
administer and to make all determinations as it deems necessary or advisable
for the proper administration of the Incentive Plan, including, without
limitation, the power to select from among the employees, consultants, and
directors eligible for awards, those individuals to whom awards will be
granted and the number of awards to be granted to such persons. The
Compensation Committee is authorized to interpret the Incentive Plan and may
at any time adopt such rules and regulations as it deems advisable.
Under the Incentive Plan, the Compensation Committee is authorized to
issue, pursuant to Options granted pursuant to the Incentive Plan, shares of
Common Stock representing, in the aggregate, up to 250,000 shares of Common
Stock. The eligible persons to whom options are actually granted under the
Incentive Plan and the number of shares subject to each such option shall be
determined by the Compensation Committee in its sole discretion in
accordance with the terms and conditions of the Incentive Plan.
Options awarded pursuant to the Incentive Plan shall vest and become
exercisable (subject to the other provisions of the Incentive Plan) at any
time over a four year period commencing the date issued. The Compensation
Committee or the Board of Directors, as the case may be, in its sole
discretion, may determine that a different vesting period should apply. At
the time an Option is granted under the Incentive Plan, the Compensation
Committee may establish one or more terms or conditions which are applicable
to such Option and which are not inconsistent with any provision of the
Incentive Plan; provided that if such Option is an incentive stock option,
such terms and conditions shall not be inconsistent with Section 422 of the
Internal Revenue Code or any successor provision.
The exercise price per share to be purchased pursuant to any Option
shall be fixed by the Compensation Committee at the time the Option is
granted and may be less than, equal to, or greater than the fair market
value of one share on the date such Option is granted, depending, in part,
on the nature of the Option granted. The duration of any Option granted
under the Incentive Plan shall be for a period fixed by the Compensation
Committee, in its sole discretion, but generally not longer than between
five and ten years, depending on the nature of the Option granted.
The Incentive Plan may not be amended to effect the following changes
unless such amendment shall have been approved by the Board of Directors
and, within one year of such amendment, by the stockholders of the
Corporation: (i) increase the number of shares of stock which may be issued
under the Incentive Plan, except for changes in capitalization; (ii)
materially modify the requirements as to eligibility for participation;
(iii) extend the duration beyond that approved by the stockholders; or (iv)
materially increase the benefits accruing to participants under the
Incentive Plan.
The Board of Directors may terminate or suspend the Incentive Plan at
any time, but without the consent of the participant, such termination or
suspension shall not affect any Options then outstanding. The Board of
Directors may amend the Incentive Plan, but may not, without the prior
approval of its stockholders, make any amendment that would, in accordance
with the principles of Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, require the approval of the holders of the Common Stock issued
and outstanding.
The Incentive Plan has a term of ten (10) years through May 30, 2007.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 26,
1999, regarding beneficial ownership of the Company Stock of each executive
officer or director of the Company, and all executive officers and directors
as a group, and each stockholder who is known by Company to beneficially own
more than five percent of the Common Stock of the Company.
<TABLE>
<CAPTION>
Number of
Name and Address (if required) Shares of Percentage
of Beneficial Owner Common Stock (3) of Total
------------------------------ ---------------- ----------
<S> <C> <C>
Charles O. Olson, Jr. (1) 1,039,048 41.8%
Mohammedali Hassanali 151,886 6.1%
Bellaty N.V (1) 668,705 26.9%
RehCam Investments L.P (1) 153,698 6.1%
Chillington Corporation N.V (1) 190,246 7.6%
Ali Khin 156,550 6.3%
John E. McConnaughy, Jr. 363,251 14.6%
Teleferscot International Limited (2) 1,787,750 41.9%
A. Keith Hebert 9,324 0.4%
All Officers and Directors as a Group
(6 Persons) 1,411,623 56.9%
<FN>
--------------------
<F1> Charles Olson, Jr. is the president of Rye Management, Inc., (Rye)
the general partner of RehCam Investments Limited Partnership
(RehCam). Additionally Mr. Olson is a limited partner in RehCam.
RehCam owns 153,698 shares. Mr Olson is the attorney in fact for
Chillington Corporation N.V. which owns 190,246 shares. Mr. Olson
exercises voting and investment power over the shares held by this
entity, but disclaims beneficial ownership. Mr. Olson is the attorney
in fact for Bellaty N.V. which owns 668,705 shares. Mr. Olson
exercises voting and investment power over the shares held by this
entity, but disclaims beneficial ownership. Mr. Olson owns 26,399
shares personally. Does not include shares, if any, available to Rye
Management, Inc. under the terms of the consulting agreement to be
paid to Rye as a reorganization bonus. (see Certain Relationship and
Related Transactions)
<F2> Represents warrants, exercisable within 60 days, to purchase 750,000
shares at $4.00 per share and 750,000 shares at $10.00 per share. The
remaining 287,750 represents the right of Teleferscot (with the
Company's consent), as the owner of all outstanding Series A 12%
Cumulative Convertible Preferred Stock, to exchange one share of
Preferred Stock for (a) 5 shares of Common Stock through May 30, 1998,
(b) 3.75 shares of Common Stock through May 30, 1999, and (c) 3 shares
of Common Stock through May 30, 2000.
<F3> Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of May
25, 1997 are deemed outstanding.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions
In 1995, the Bankruptcy Court overseeing the Company's Chapter 11
case, in connection with the employment of Mr. Olson as President and Chief
Executive Officer, approved a consulting agreement between the Company and
Rye Management, Inc. ("Rye"), that was extensively negotiated between the
Company and the Creditors' Committee. Rye is a corporation owned and
controlled by Mr. Olson. The consulting agreement called for a
reorganization bonus to be paid to Rye upon the confirmation of the Plan.
The consulting agreement assigns various "Success Factors" that are based on
the actual recovery (as a percentage of Allowed Claims) realized by general
unsecured creditors in the Chapter 11 cases. The Success Factors range from
0, for a 0% recovery level, to 10.5, for a 50% recovery level, to 20 for a
100% recovery level. The total reorganization bonus due Rye will be equal to
the aggregate in each Chapter 11 case, of (x) the applicable Success Factor
(taken as a percentage) times (y) the total consideration paid to all
claimants in the case under the Plan.
This reorganization bonus will be paid through the issuance of the
Company's Common Stock. Under the confirmed Plan, the number of shares
issued will be based on the sustained trading prices achieved for the Common
Stock over the three year period following the Plan Effective Date. The
reorganization bonus will be calculated based upon the highest average
trading price achieved by the Common Stock over the course of ten
consecutive trading days during the three years following the Effective Date
(with average share volumes traded per day in excess of 10,000 shares). The
Company estimates that, on average, a total of 18,000 shares would be
issuable for each $1.00 of sustained price realized up to $53 per share
during the three year period.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements and the Report of Independent
Accountants are filed as a part of this report.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 26, 1999,
and December 27,1998
Consolidated Statements of Operations for the Fifty-Two
weeks ended December 26, 1999, and Fifty-Two Weeks
Ended December 27,1998.
Consolidated Statements of Stockholders' Equity for
Period December 28, 1997 to
December 26, 1999
Consolidated Statements of Cash Flows for the Fifty-Two
weeks ended December 26, 1999, and Fifty-Two weeks
ended December 27,1998.
Notes to Consolidated Financial Statements
(a)(2) Financial Statements Schedules
Not applicable.
(a)(3) Exhibits
The exhibits to this report have been included only with the copies of
this report filed with the Securities and Exchange Commission. All
previously filed documents are incorporated by reference. Copies of
individual exhibits will be furnished to stockholders upon written request
to Treasurer, Redheads, Inc., 50 S. Buckhout Suite #105 Irvington, NY 10533
and payment of a reasonable fee.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Second Amended Plan of Reorganization and Order Confirming
the Second Amended Plan of Reorganization (December 30, 1996)
2.2 Statement of Immaterial Modifications to the Plan and Order
Approving Immaterial Modifications to the Plan (January 28,
1997)
3.1 Amended and Restated Certificate of Incorporation (May 30,
1997)
3.2 Amended and Restated Bylaws (May 30, 1997)
4.1 Form of Certificate representing shares of Common Stock
4.2 Form of Certificate representing shares of Series A 12%
Cumulative Convertible Preferred Stock
10.1 Lease dated October, 1985 between Kings Plaza Shopping Center
of Flatbush Avenue, Inc. and Kings Plaza Shopping Center of
Avenue, U., Inc., as lessor, and Registrant, as lessee
10.2 Lease dated March 23, 1988 between Hartz Mountain Development
Corp., as lessor, and Registrant, as lessee
10.3 Lease dated September 19, 1986 between Robert Martin Company,
as lessor, and Registrant, as lessee
10.4 Lease dated December 23, 1992 between Crescent Land
Development Associates, as lessor, and Registrant, as lessee,
plus amendment thereto dated March 1, 1996
10.6 Commitment Letter dated as of May 30, 1997 between
Teleferscot International Limited and Registrant
10.7 Asset Purchase Agreement among Red One, Inc., J. Michael
Gallagher (collectively, the owners of the Redheads concept
and the Middletown Redheads Bistro/Bar restaurant facility)
and Registrant dated May, 1997 and Order of the Court
authorizing this acquisition
10.8 Employment Agreement dated July, 1997 between David C.
Sederholt, Executive Vice President and Chief Operating
Officer, and Registrant
11.1 Statement regarding computation of per share earnings
21.1 List of Subsidiaries
24.1 A power of attorney, pursuant to which amendments to this
Report may be filed, is included on the signature page
contained in Part IV of this Report
99.1 The Fiscal Year 1997 Stock Option Plan of Redheads, Inc., as
approved by the Bankruptcy Court in connection with
confirmation of the Registrant's plan of reorganization
</TABLE>
(a)(4) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Yonkers, State of New York on June 21, 2000.
Redheads, Inc.
By: /s/ CHARLES O. OLSON, JR.
-------------------------
Charles O. Olson, Jr.
President, Chief Executive Officer and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of Redheads, Inc. (the "Company") hereby constitutes and
appoints Charles O. Olson, Jr., his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and on
his behalf and in his name, place and stead, in any and all capacities, to
sign, execute and file this report under the Securities Exchange Act of
1934, as amended, and any or all amendments (including, without limitation,
post-effective amendments), with all exhibits and any and all documents
required to be filed with respect thereto, with the Securities and Exchange
Commission or any regulatory authority, granting unto such attorneys-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in order
to effectuate the same, as fully to all intents and purposes as he himself
might or could do if personally present, hereby ratifying and confirming all
that such attorney-in-fact and agent, or his substitute, may lawfully do or
cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ CHARLES O. OLSON, JR. President & CEO/CFO, Director June 21, 2000
-------------------------
Charles O. Olson, Jr.
/s/ PIERPAOLO MATTEUZZI Director June 21, 2000
-------------------------
Pierpaolo Matteuzzi
/s/ JULIO PASINI Director June 21, 2000
-------------------------
Julio Pasini
