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 28, 1997 that are currently owned and/or operated by the Company through its wholly-owned corporate subsidiaries, as listed below:
(1) Assumes that the Company exercises all of its extension options.
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.
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 latter part of fiscal year 1998. The Company believes that an adverse decision to the Company in each of these matters will not materially affect the Company's operations, and further that it will have sufficient cash available to pay any judgments that may be entered with finality against the Company.
In July, 1997, Mr. Gallagher, one of the former owners of the Redheads concept, tendered his resignation to the Company and embarked upon design and construction of another concept restaurant named "Jersey Girls." Upon review of the completed facility and discussions with Mr. Gallagher and others, the Company believes that Mr. Gallagher, his partners, his affiliates and the designer, Mr. Greg Sheridan may have infringed upon the trade dress of the Redheads concept. The Company, in exchange for certain design features, has released Mr. Sheridan from any further legal action. The Company is reviewing the possibility of bringing legal action against the parties believed to be infringing. The Company is unable at this time to determine the likely outcome of this dispute. Failure to obtain injunctive relief against these infringing parties could have a materially adverse effect upon the Company's rights in its proprietary trade dress.
The Company is required by an order of the Bankruptcy Court, entered into in connection with the Plan, to remove all Red Robin trade dress from its restaurant locations in Secaucus, New Jersey, Yonkers, New York, and Kings Plaza, Brooklyn, on or before December 31, 1997. Failure to remove the trade dress as required by the Bankruptcy Court order could result in litigation and the grant of injunctive relief against the Company, and the imposition of unspecified monetary damages against the Company. The Company has proceeded with the conversions as directed by the court. As of November 1997 and March 1998 the Yonkers and Secaucus locations (respectively) had been successfully converted and only the Kings Plaza location was in violation of this order. The Company has notified Red Robin of its violation and intent to convert the unit during the third quarter of 1998. The Company continues to pay royalty fees to Red Robin.
In January 1998 The Company came to agreement with Mr. Michael Ezzo of Carmella Cafes with regard to a note held by The Company for the March 6, 1995 sale of the Carmella Cafes. The agreement forgives all unpaid interest through Dec. 31, 1997 ($173,821) and reduces the interest rate from 11% to 7% contingent on receipt of all payments due on a timely basis. The note was restructured to 7% with a 20 year term and quarterly payments of $12,990.89 commencing April 30, 1998.
Other than as discussed in this Item 3, there are no other legal proceedings to which the Company is a party that are material to the Company's business.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock issued pursuant to the Plan has not been publicly traded since the Plan Effective Date. Prior to the Plan Effective Date, the Company's then issued Common Stock was quoted for trading on the NASDAQ (symbol "MGIK"), until it was de-listed on April 10, 1995. Pursuant to its obligations under the Plan, the Company will use reasonable efforts to have the Common Stock quoted for trading on the automated quotation system maintained by the National Quotation Bureau, Inc (symbol "REDH").
The following table sets forth the quarterly high and low sales prices for the then issued Common Stock of the Company for the two years preceding year end December 28, 1997. The source of these quotations is the National Quotations Bureau. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.
HOLDERS
As of December 28, 1997, there were approximately ??? 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 tweleve 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 28, 1997, a total of 42,108 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 7. 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 28, 1997 the Company has $123,000 of dividends in arrears for Series 12% Cumulative Convertible Preferred Stock.
R.B.B. of Secaucus and R.B.B. of Yonkers Preferred Stock. Pursuant to the Plan, R.B.B. of Secaucus, Inc. and R.B.B. of Yonkers, Inc. issued 8% Cumulative Exchangeable Preferred Stock (the "Subsidiary Preferred Stock") in exchange for a release of prepetition liability of approximately $400,000. Each issuing subsidiary owns and operates the restaurant unit located in the city designated in the corporate name of the particular issuing subsidiary.
Dividends are payable on the Subsidiary Preferred Stock at a rate of 8% per annum based on the liquidation preference of $75 per share. The dividends are payable semi-annually, to the extent funds are legally available therefor. At the election of the issuing subsidiary such dividends may be paid by issuance of shares of Common Stock of the Company, valued for this purpose at the closing price as of the 10th business day preceding declaration of the dividend. Further, to the extent funds are legally available therefor, on May 30, 2000, May 30, 2001, and May 30, 2002, each issuing subsidiary will offer to purchase, at a cash price equal to $75 per share, plus accrued and unpaid dividends, one-sixth, one-third, and one-half, respectively of the Subsidiary Preferred Stock issued under the Plan; provided, however, that if at any time the closing bid price of the Common Stock exceeds $5 per share for 40 consecutive trading days, any such mandatory repurchase obligation shall expire.
Levittown Preferred Stock. R.B.B. of Levittown, Inc. has also issued its own 8% Cumulative Exchangeable Preferred Stock (the "Levittown Preferred Stock"). On May 25,1997 the company issued 13,111 shares of 8% Levittown Preferred Stock. Dividends are payable on the Levittown Preferred Stock in cash at a rate of 8% per annum based on the liquidation preference of $75 per
share. The dividends are payable semi-annually, to the extent funds are legally available therefor. Further, to the extent funds are legally available therefor, beginning on May 30, 1998, and monthly thereafter, the Levittown subsidiary will offer to purchase one forty-eighth (1/48) of the shares of the Levittown Preferred Stock issued under the Plan to the holder. The purchase price for such repurchase is equal to the liquidation preference of $75 per share, plus accrued and unpaid dividends. For the first three years after issuance, at the election of the holders and with the consent of the Company, Levittown Preferred Stock and the Subsidiary Preferred Stock is exchangeable for shares of common stock. After this time, the stock is not exchangeable at the holders option.
As of December 28, 1997 the Company has $58,000 of dividends in arrears for Series A 8% Cumulative Excahngeable Preferred Stock.
For further discussion of certain material terms of the Subsidiary Preferred Stock and the Levittown Preferred Stock, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation--The Reorganization Proceedings; Confirmation and Effectiveness of the Company's Reorganization Plan."
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the Company's consolidated financial statements. The consolidated financial data set forth below as of December 28, 1997, June 30, 1996 and July 2, 1995, and for the twenty-six week transition period ended December 29, 1996 are derived from the Company's audited financial statements, which have been audited by Cogen Sklar, LLP, the Company's independent certified public accountants. The consolidated financial data for the twenty-six week period ending December 31, 1995 set forth below are derived from the Company's unaudited financial statements.
The information should be read in conjunction with and is qualified by reference to "Item 8. Financial Statements and Supplementary Data" and "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company owns and operates five casual dining, table service restaurants in New York and New Jersey under the name "Redheads Bistro/Bar" and "Red Robin Burgers & Spirits Emporium." 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 restaurants is operated through a separate wholly-owned subsidiary of the Company. Those subsidiaries are R.B.B. of Levittown, Inc.; R.B.B. of Brooklyn, Inc.; R.B.B. of Yonkers, 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"). While under the protection of Chapter 11, actions to collect on all claims against the Company that were in existence prior to the filing of the petitions for relief, whether secured or unsecured, were stayed while the Company and its subsidiaries reorganized their businesses as debtors and debtors-in-possession. These claims are reflected in the Company's December 29, 1996 audited balance sheet as "liabilities subject to compromise." Additional claims may arise subsequent to the petition date from rejection of executory contracts and unexpired leases and from determination by the Bankruptcy Court (or otherwise agreed by the claimant) of allowed claims for contingencies and other disputed amounts. The Company received Bankruptcy Court approval to pay or otherwise honor certain of its prepetition obligations, including employee wages, which the Company did primarily in the last quarter of the fiscal year ended July 2, 1995.
The lack of liquidity that precipitated the Company's Chapter 11 filing stemmed from under-capitalization, the collapse of its stock price, the concomitant inability to obtain equity or debt financing through the public capital markets, rising interest costs of nearly $1 million annually, mounting amortization and accelerations of nearly $4 million in notes payable, high level of general and administrative expenses, and delays in closing several unprofitable restaurant locations.
POSTPETITION FINANCING. Pursuant to several orders of the Bankruptcy Court following commencement of the Reorganization Cases, the Company was authorized to continue to use "cash collateral" in the ordinary course of its business. Pursuant to these Orders, and as protection of certain secured creditors' interests in such cash collateral, these secured creditors were granted replacement liens on the postpetition accounts and inventory of the Company and its subsidiaries to the extent of their use of the cash collateral.
On the Petition Date, the Company filed a motion for an order authorizing it to obtain up to $1.5 million in credit through the issuance of certain debt securities (the "Postpetition Senior Secured Notes"). The Bankruptcy Court entered an order authorizing such debt. The order was subsequently amended to authorize the issuance of up to $2.5 million in Postpetition Senior Secured Notes. A total of $2.5 million was advanced during the Company's reorganization through the issuance of these Postpetition Senior Secured Notes.
The Postpetition Senior Notes, among other things, (a) carried an interest rate of 12 percent (12%) per annum; (b) allowed for the payment of up to a ten percent commission on borrowings to "finders" or broker representatives of noteholders; (c) constituted administrative superpriority claims; and (d) liens on all the Company's assets, junior only to valid preexisting liens existing as of the Petition Date.
OPERATIONAL RESTRUCTURING OF THE BUSINESS. The operational problems encountered by the Company prior to filing Chapter 11 increased in the first several months following the filing. Once the Company filed for Chapter 11 relief, sales dropped significantly. In addition, some of the Company's employees left the Company and were hired by the Company's direct competition. Finding replacements for these employees took substantial time, and generally required training and promotion of in-house talent. As a result of these problems, same store sales for the Red Robin restaurants were nearly 17% lower in 1995 than the prior year's sales levels. Similarly, same store sales for The American Cafe restaurants were down in 1995 approximately 8% from the prior year's sales levels.
To turn around the Company's operating business, the new management team implemented hundreds of corrective changes at both the corporate and unit levels, including: food cost factors, training and personnel factors, service improvements, staff and overhead reductions, outsourcing of certain service needs, point-of-sale equipment upgrades, and new marketing efforts. As a result, same store sales at several of the Red Robin locations by the end of fiscal year ended June 30, 1996 were even with, or ahead of, the previous year's sales.
SELECTION AND PURCHASE OF THE REDHEADS CONCEPT. In September of 1996 the Company began redirecting its strategic focus towards development, ownership, and operation of a multi-unit, mid-scale, casual dining concept operating under the name Redheads Bistro/Bar. In furtherance of this strategic redirection, during the twenty-six week transition period ended December 29, 1996, the Company ceased all restaurant operations under The American Cafe concept, closed down two marginal Red Robin restaurants in Smithhaven and Staten Island New York, and caused the restaurant in Levittown, New York, formerly operating as a Red Robin restaurant, to be converted to a Redheads Bistro/Bar. Pursuant to an agreement with Red Robin International, entered into in connection with consummation of the Plan, the Company is required to cease operating its three restaurants in Yonkers, New York, Secaucus, New Jersey, and Kings Plaza Brooklyn, New York as Red Robin restaurants by no later than December 31, 1997. The Company intends to cause each of these three restaurants to be converted to a Redheads Bistro/Bar in accordance with that agreement. Failure to remove the trade dress as required by the Bankruptcy Court order could result in litigation and the grant of injunctive relief against the Company, and the imposition of unspecified monetary damages against the Company. The Company is proceeding with the conversions as directed by the court. As of January 1998 the Yonkers location had been successfully converted, the Secaucus unit was closed for conversion and only the Kings Plaza location was in violation of this order.
On June 11, 1997 the Bankruptcy Court overseeing the Chapter 11 cases of Red One, Inc., Mr. Gallagher entered an order authorizing the sale of the Redheads Bistro/Bar concept and the Middletown Redheads Bistro/Bar facility to the Company. The Company purchased the trade name, trade dress elements, and all related intellectual property rights in the Redheads Bistro/Bar concept for $100,000, and purchased the Middletown Redheads Bistro/Bar for $175,000 cash, plus assumption of the underlying lease. The closing of this sale occurred on June 23, 1997, and ownership of the Redheads concept and the Middletown Redheads Bistro/Bar transferred to the
Company. No appeals of the order authorizing the sale were filed, and the property was transferred, by the Bankruptcy Court order, free and clear of all liens, claims, and encumbrances.
THE REORGANIZATION PLAN. By order of the Bankruptcy Court entered on December 30, 1997, the Bankruptcy Court confirmed the Company's Second Amended Plan of Reorganization. The Plan became effective by its terms on May 30, 1997. Prior to such date the Company's name was changed to Redheads, Inc. The Plan addressed the treatment of all claims against and equity interests in the Company through the Plan Effective Date in the following manner:
Postpetition Series A Notes. The holders of $2,520,000 of the Postpetition Series A Notes received 1,896,983 shares of the Company's Common Stock in exchange for their notes and interest due of approximately $325,000.
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 latter part of fiscal year 1998. 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.
COMMITMENTS AND CONTINGENCIES
(a) The Company operates its restaurants under various operating leases expiring through August 2013. The executive offices are located in Irvington, New York and are leased on a month to month basis. Rent expense for the fifty two weeks ending December 28, 1997, June 30, 1996 and the twenty six weeks ended December 29, 1996 was $968,545 $2,548,805 and $695,453 respectively. Total rent expense for the thirteen week period ending September 28, 1997 and September 30, 1996 was $262,841 and $621,170 respectively.
Future minimum rent payments
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:
- --------
(1) The Company did not break out general and administrative expenses from other operating expenses at December 31, 1995 so G & A was estimated at 6% of gross sales.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 28, 1997 TO THE FISCAL YEAR ENDED DECEMBER 29, 1996(2)
Total revenues decreased $16,776,404 or 63% to $9,679,825 in fiscal year ended December 28, 1997 ("Fiscal Year 1997") from $26,456,229 in the fiscal year ended June 30, 1996 ("Fiscal Year 1996"). Total Operating expense decreased $13,741,664 or 66% to $7,041,909 in Fiscal Year 1997 from $20,783,573 in the Fiscal Year 1996. Loss from operations decreased $1,506,847 or 57% to $1,151,242 in Fiscal Year 1997 from $2,658,089 in the Fiscal Year 1996. The decreases were attributable primarily to the closure in the third and fourth quarters of 1996 of nine The American Cafe units and two Red Robin units, the discontinuance of promotional sales such as Transmedia and IGT in addition to cost control measures put in place by new management.
Food and beverage expense decreased $4,995,300 or 64% to $2,827,958 for Fiscal Year 1997 from $7,823,258 for Fiscal Year 1996, principally as a result of the decreased sales volumes caused by the closure of 11 restaurants by December 29, 1996. Food and beverage expenses as a percentage of food and beverage revenues were 29.2% in Fiscal Year 1997 compared with 29.6% in Fiscal Year 1996, reflecting the increased weighted average of sales in The American Cafe units (which maintained higher food costs percentages) than with Red Robin restaurant units.
Restaurant labor and related expenses decreased $6,218,742 or 66% to $3,108,513 in Fiscal Year 1997 from $9,327,255 in Fiscal Year 1996, primarily because of the many unit closures that had been effected by the end of December 29, 1996, but also because of improved productivity, scheduling, and training. Restaurant labor expenses as a percentage of revenues decreased to 32.1% in Fiscal Year 1997 from 35.3% in Fiscal Year 1996.
Restaurant occupancy expenses decreased $2,234,704 or 64.1% to $1,251,869 in Fiscal Year 1997 from $3,486,573 in Fiscal Year 1996, primarily because of the many unit closures that had been effected by December 29, 1996. In the 1997 period, restaurant occupancy charges as a percentage of revenues decreased to 12.9% from 13.2% in the 1996 Period.
Other Operating expenses decreased $4,568,874 or 67% to $2,301,863 in Fiscal Year 1997 from $6,870,738 in Fiscal Year 1996. This decrease is primarily due to unit closures, the discontinuance of promotional incentives such as Transmedia and IGT and the continually improving cost cutting measures employed by management. General and administrative expenses as a percentage of revenues decreased to 23.8% in Fiscal Year 1997 from 26.0% in Fiscal Year 1996.
- -------- (2)These two periods do not run consecutively due to the change in accounting periods from fiscal year ending June to fiscal year ending December.
Depreciation and amortization expense decreased $719,344 or 65% to $379,663 in Fiscal Year 1997 from $1,099,007 in Fiscal Year 1996, primarily as a result of the Company's divestiture of a number of units by December 1996.
General and administrative expenses increased $453,713 or 89% to $961,200 in Fiscal Year 1997 from $507,487 in Fiscal Year 1996. This increase is partially due to a one time $228,136 stock compensation paid May 1997. General and administrative expenses consist of, among other things, executive salaries, other administrative compensation corporate office expense and corporate overhead expenses. General and administrative expenses as a percentage of revenues increased to 9.9% in Fiscal Year 1997 from 1.9% in Fiscal Year 1996.
Interest expense-net decreased $189,636 or 36.8% to $393,892 in Fiscal Year 1997 from $514,725 in Fiscal Year 1996, principally as a result of the pay down of certain secured loans and the reduction in DIP financing as a result of the emergence from Chapter 11 proceedings. Interest expense-net as a percentage of revenues increased to 3.3% in Fiscal Year 1997 from 2.0% in Fiscal Year 1996.
Other income (expense) decreased $308,702 or 129% to $(68,802) in Fiscal Year 1997 from $239,900 in Fiscal Year 1996, primarily because of the loss of banquet and video revenue from the closure of American Cafes units effected by December 1996. Other income (expenses) as a percentage of revenues increased to .7% in the 1997 Period from -.9% in the 1996 Period.
Professional Fees decreased $337,074 or 39% to $522,081 in Fiscal Year 1997 from $859,155 in Fiscal Year 1996, primarily due to a reduction in legal and GMB management fees associated with the Chapter 11 cases. Professional Fees as a percentage of revenues increased to 5.3% in the 1997 Period from 3.3% in the 1996, this is reflective of lower sales volumes.
The Company recognized a loss on the closing of The American Cafe Restaurants of $2,391,159 in Fiscal Year 1996, this represented 9% of revenue.
The Company recognized an extraordinary gain of $15,988,136 from the forgivness of debt upon the emergence from its Chapter 11 cases. In Fiscal Year 1997, this represents 144% of revenue.
The Company's net Gain in Fiscal Year 1997 was $13,928,936 as compared to a net loss of $6,183,228 in Fiscal Year 1996. This represents a decrease of $20,112,164 or 325% in net loss.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1996 TO THE FISCAL YEAR ENDED JULY 2, 1995
Total revenues decreased $10,728,706 or 29% to $26,456,229 in fiscal year ended June 30, 1996 ("Fiscal Year 1996") from $37,184,935 in the fiscal year ended July 2, 1995 ("Fiscal Year 1995"). Total Operating expense decreased $14,428,162 or 40% to $21,291,060 in Fiscal Year 1996 from $35,719,222 in the Fiscal Year 1995. Loss from operations decreased $6,611,902 or 71% to $2,658,089 in Fiscal Year 1996 from $9,269,991 in the Fiscal Year 1995.
The decreases were attributable primarily to the sale by the Company in March, 1995 of its five Carmella's Cafe units, the prepetition closure of six The American Cafe units the closure of two Red Robin units and cost control measures put in place by new management.
Food and beverage expense decreased $2,912,446 or 27% to $7,823,258 for Fiscal Year 1996 from $10,735,704 for Fiscal Year 1995, principally as a result of the decreased sales volumes caused by the closure of 13 restaurants by the end of Fiscal Year 1995. Food and beverage expenses as a percentage of food and beverage revenues were 29.6% in Fiscal Year 1996 compared with 28.9% in Fiscal Year 1995, reflecting the increased weighted average of sales in The American Cafe units (which maintained higher food costs percentages) following the closure of two Red Robin and five Carmella's Cafe restaurant units.
Restaurant labor and related expenses decreased $4,419,212 or 32% to $9,327,255 in Fiscal Year 1996 from $13,746,467 in Fiscal Year 1995, primarily because of the many unit closures that had been effected by the end of Fiscal Year 1995, but also because of improved productivity, scheduling, and training. Restaurant labor expenses as a percentage of revenues decreased to 35.3% in Fiscal Year 1996 from 37.0% in Fiscal Year 1995.
Restaurant occupancy expenses decreased $1,552,567 or 32.2% to $3,486,573 in Fiscal Year 1996 from $5,039,140 in Fiscal Year 1995, primarily because of the many unit closures that had been effected in Fiscal Year 1995. In the 1996 period, restaurant occupancy charges as a percentage of revenues decreased to 13.2% from 13.6% in the 1995 Period.
General and administrative expenses decreased $8,007,512 or 52% to $7,378,225 in Fiscal Year 1996 from $15,385,737 in Fiscal Year 1995. This decrease reflects the immediate impact management had on eliminating wasteful general and administrative expenses upon their succeeding prior management in April, 1995 at the commencement of the Company's Chapter 11 cases. General and administrative expenses as a percentage of revenues decreased to 27.9% in Fiscal Year 1996 from 41.4% in Fiscal Year 1995.
Depreciation and amortization expense decreased $448,871 or 29% to $1,099,007 in Fiscal Year 1996 from $1,547,878 in Fiscal Year 1995, primarily as a result of the Company's divestiture of a number of units in Fiscal Year 1995.
Interest expense-net decreased $318,004 or 38.2% to $514,725 in Fiscal Year 1996 from $832,729 in Fiscal Year 1995, principally as a result of the paydown of certain secured loans prepetition and the cessation of certain interest payable obligations upon the commencement of the Company's Chapter 11 case. Interest expense-net as a percentage of revenues decreased to 2.0% in Fiscal Year 1996 from 2.3% in Fiscal Year 1995.
Other income (expense) decreased $388,991 or 61.9% to $239,900 in Fiscal Year 1996 from $628,891 in Fiscal Year 1995, primarily because of the unit closures effected by the end of Fiscal Year 1995. Other operating expenses as a percentage of revenues decreased to .9% in the 1996 Period from 1.7% in the 1995 Period. A significant portion of this decrease is attributable to the loss of banquet related income lost with the closure of The American Cafes.
Restructuring expenses, primarily representing the fees and expenses of professionals and restaurant management consultants employed in the Company's Chapter 11 case, were $859,155 in Fiscal Year 1996. The Company has not employed any restaurant consultants since February, 1996.
The Company recognized a loss on disposal of restaurants $1,589,417 in Fiscal Year 1995 from the sale, closure, or liquidation of the Carmella restaurant units and certain other assets of the Company. This represented 4.3% of revenue.
The Company recognized a loss on the closing of The American Cafe Restaurants of $2,391,159 in Fiscal Year 1996, this represented 9% of revenue.
The Company recognized a loss on the write off of goodwill of $3,171,060 relating to the sale, closure, or liquidation of restaurants and other assets of the Company in Fiscal Year 1995. This represented 8.5% of revenue.
The Company's net loss in Fiscal Year 1996 was $6,183,228 as compared to a net loss of $14,234,306 in Fiscal Year 1995. This represents an $8,051,078, or 56.6% decrease in net loss which reflects the substantial benefit brought to bear by the new management team appointed at the outset of the Company's Chapter 11 case.
COMPARISON OF THE TWENTY-SIX WEEK PERIODS ENDED DECEMBER 29, 1996 AND DECEMBER 31, 1995
Total revenues decreased $6,058,995 or 44% to $7,700,920 for the twenty-six week transition period ended December 29, 1996 (the "1996 Period") from $13,759,915 for the twenty-six weeks ended December 31, 1995 (the "1995 Period"). The decrease was attributable primarily to the closure of the Company's nine The American Cafe restaurants in the 1996 period. Alcoholic beverage revenues, as a percentage of food and beverage revenues, were 18% for the 1996 period compared to 16% for the comparable 1995 period. This reflects the effects of the closure of The American Cafe, which averaged lesser liquor sales volume than did the Red Robin restaurants.
Food and beverage expense decreased $1,729,352 or 43% to $2,279,267 for the 1996 Period from $4,008,618 for the comparable 1995 Period, principally as a result of the closure of The American Cafe units. Food and beverage expenses as a percentage of food and beverage revenues were 29.6% and 29.1% for the 1996 Period and the 1995 Period, respectively.
Labor costs and related expenses decreased $2,113,650 or 43.5% to $2,741,441 for the 1996 Period from $4,855,091 for the comparable 1995 Period, primarily because of the closure of The American Cafe, but also because of improved productivity, scheduling, and training. Restaurant labor expenses as a percentage of revenues increased slightly to 35.6% in the 1996 Period from 35.3% in the 1995 Period primarily due to the high labor cost associated with the opening of the Levittown, New York Redhead Bistro/Bar concept.
Restaurant occupancy expenses decreased $845,486 or 46.1% to $990,332 for the 1996 Period from $1,835,818 for the 1995 Period, primarily because of the closure of The American Cafe units. The higher occupancy charges relative to sales at The American Cafe also contributed to the lower restaurant occupancy expenses as a percentage of revenues once these units were closed. In the 1996 period, restaurant occupancy charges as a percentage of revenues decreased to 12.8% from 13.3% in the 1995 Period.
Other Operating expenses decreased $834,486 or 46.1% to $990,332 for the 1996 Period from $1,835,818 for the 1995 Period. This decrease reflects the effects of the consolidation and streamlining of the Company's operations. Other Operating expenses as a percentage of revenues decreased to 12.8% in the 1996 period from 13.3% in the 1995 period.
Depreciation and amortization expense decreased $276,687 or 44.5% to $345,152 for the 1996 Period from $621,839 for the 1995 Period, primarily as a result of the Company's divestiture of The American Cafe, Red Robin and Carmella Cafe units.
The General and administrative expenses(3) decreased $44,832 or 5.4% to $780,763 for the 1996 Period from $825,595 for the 1995 Period. General and administrative expenses consist of, among other things, executive salaries, other administrative compensation, corporate office rent, and corporate overhead expenses. General and administrative expenses as a percentage of revenues increased to 5.3% in the 1996 Period from 6.0% in the 1995 Period, due to the estimate and because of the increased costs associated with the closure of The American Cafe units, the start-up of the Redheads concept, and the work associated with preparing for conversion of the Company's remaining restaurant units.
Other Operating expenses decreased $834,486 or 46.1% to $990,332 for the 1996 Period from $1,835,818 for the 1995 Period. This decrease reflects the effects of the consolidation and streamlining of the Company's operations. Other Operating expenses as a percentage of revenues decreased to 12.8% in the 1996 period from 13.3% in the 1995 period.
Interest expense-net increased $121,013 or 57% to $333,699 for the 1996 Period from $212,686 for the 1995 Period, principally as a result of the interest expense accrued in connection with loan advances made to the Company during the Company's Chapter 11 case by certain postpetition lenders, the principal amount of which exceeded $2.9 million as of the end of the 1996 Period. Interest expense-net as a percentage of revenues increased to 4.3% in the 1996 Period from 1.6% in the 1995 Period.
Other income (expense) increased $241,701 or 266.9% to $(151,146) for the 1996 Period from $90,555 for the 1995 Period, primarily resulting from the closure of The American Cafe units. The benefits of the closure were offset in part by the increased expenses associated with their closure, as well as to increased operating costs in the 1996 Period associated with the
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(3)The Company did not break out general and administrative expenses from other operating expenses at this time so a 6% of gross sales estimate was used.
training, systems development, and start-up of the Redheads Bistro/Bar concept during that period and the conversion of the Levittown, New York location to the Redheads Bistro/Bar concept. Other expenses as a percentage of revenues increased to 2.0% (expense) in the 1996 Period from .6% (income) in the 1995 Period.
Restructuring expenses, primarily professionals in the Company's Chapter 11 case, decreased $385,984 or 79.1% to $102,966 in the 1996 Period from $488,279 in the 1995 Period. The high costs of administering the Company's Chapter 11 case during the 1996 Period occurred when the Company was engaged in a number of highly contested proceedings as it moved towards confirmation in the 1996 Period of its Plan kept restructuring expenses at an elevated level in the 1996 Period. The higher legal costs were offset by the termination of a consulting contract for restaurant management services during 1996 resulting in lower overall restructuring expenses. Restructuring expenses as a percentage of revenues increased to (1.3%) in the 1996 Period from 3.6% in the 1995 Period.
The Company recognized a loss on disposal of restaurants in the 1996 Period of $1,353,050, primarily from the closure of The American Cafe units and the Staten Island and Smithhaven Red Robin locations.
The Company's net loss for the 1996 Period was $3,126,413, as compared to a net loss of $1,582,341 for the 1995 Period. The increase, 97.6%, was primarily attributable increased expenses associated with the closure of The American Cafe units, the increased expense associated with the start-up of the Redheads concept and the conversion of the Levittown location to a Redheads Bistro/Bar. The loss as a percentage of revenue increased to 40.6% in the 1996 Period from 11.5% in the 1995 Period.
FINANCIAL CONDITION AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Since inception, the Company has incurred losses from operations. As of December 28, 1997 and December 29, 1996, the Company had an accumulated deficit of $715,836 and $35,437,302 respectively. During the Fifty-Two weeks ended December 29, 1996, net cash flow used in operations totaled $1,820,628. During the Thirty-one weeks ended December 29, 1997, net cash flow used in operations totaled $742,221.
As of December 29, 1996, the Company had negative working capital of $21,802,066, as compared to negative working capital of $157,158 as of December 28, 1997.
The Company has, upon the effectiveness of its confirmed Plan, accounted for the reorganization using "fresh-start" reporting. Accordingly, all assets and liabilities are restated to reflect their reorganization value, which approximates fair value at the date of reorganization. Application of the principles of "fresh-start" reporting resulted in elimination of the stockholders' deficit and caused $22,435,338 of total liabilities to be extinguished, as provided specifically in the Plan itself. See "--The Reorganization 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 believe 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. In November, 1997, the Company caused its Red Robin restaurant unit in Yonkers, New York to be converted to a Redheads Bistro/Bar. This first unit conversion by the Company to the Redheads Bistro/Bar concept cost the Company approximately $65 per square foot or approximately $546,000.
The Company is required by an order of the Bankruptcy Court, entered into in connection with the Plan, to remove all Red Robin trade dress from its restaurant locations. As of November 28, 1997 the Yonkers, New York unit had been converted. As of March 1998 the Secaucus, New Jersey had been converted and only Kings Plaza, Brooklyn remained unconverted, in violation of the order. Failure to remove the trade dress as required by the Bankruptcy Court order could result in litigation and the grant of injunctive relief against the Company, and the imposition of unspecified monetary damages against the Company. The Company has notified Red Robin of its violation and intent to convert the unit during the third quarter of 1998. The Company continues to pay royalty fees to Red Robin.
FINANCING ACTIVITIES. To fund these units' conversion to the Redheads Bistro/Bar concept and costs associated with the emergence from bankruptcy, as well as other costs, the Company obtained a funding commitment from Teleferscot to provide up to $3.5 million. Through December 28, 1997 the Company received approximately $3,100,000 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.
Before the filing of the Chapter 11 case, the Company funded its growth, operating losses, and expansion costs primarily through a combination of public and private offerings of debt and equity, through bank loans, and operating cash flows, including the continued modest extensions of trade credit to the Company. To fund the Company's losses during the Chapter 11 case, the Company relied primarily upon the issuance of Bankruptcy Court approved debtor-in-possession secured loans, of which a total of nearly $2.5 million was advanced between the April 6, 1995 Petition Date and the close of the Transition Period ended December 29, 1996.
It is management's belief that profitability will be achieved by opening or acquiring additional restaurants to provide an expanding revenue base to absorb fixed corporate overhead charges. The Company anticipates that revenues will exceed the increased expenditures associated with the construction and acquisition of additional restaurants.
The poor performance of any one restaurant could have a materially adverse effect upon the financial condition of the Company. However, the Company believes, although there can be no assurance, that the adverse effect of the results of any one restaurant will diminish as the number of restaurants operated by the Company increases. While the Company believes that management efficiencies and marketing strategies will limit declines in existing store revenues, there can be no assurance that future declines in existing restaurant revenues will not occur and adversely affect the Company.
Since May 30, 1997, the effective date of the plan of reorganization, the Company lost $715,836. As of December 28, 1997, its working capital was ($157,158). The company anticipates that it will require additional working capital to fund operations and complete the conversion of its existing store to the Redheads concept. The Company also will need additional capital to acquire new restaurant operations and integrate these restaurants into current operations. The Company believes that it will have sufficient capital to meet these obligations through the improvement of current operations, additional revenues generated from new restaurants and the completion of a private placement of equity in the amount of approximately $2,000,000 anticipated in the second quarter of calendar 1998. The Company has signed a letter of intent with an investment banker for a private financing of $2,000,000. However, there can be no assurance that the offering or any restaurant acquisition will be completed, or that the Company will have sufficient capital to support operations and implement its business plans.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s) -------
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......................................
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
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.
DAVID C. SEDERHOLT. Mr. Sederholt joined the Company as Executive Vice President and Chief Operating Officer in July, 1997. From 1991 until joining the Company, Mr. Sederholt served as President and Chief Operating Officer of Rattlesnake Holding Co., Inc. and its subsidiary Rattlesnake Grill Restaurants. Mr. Sederholt co-founded and developed the Rattlesnake concept in 1991. Mr. Sederholt was responsible for the reduction of labor and food cost through creation and continual modification of the menu, while furthering the market identity of the concept. Mr. Sederholt additionally served as Chief Financial Officer at Rattlesnake from 1992 to 1996. From 1986 through 1991, Mr. Sederholt served as Managing Partner of Atlantic Professional Resources, Inc., a management and marketing consulting firm serving the foodservice and hospitality industries. From 1983 through 1986, he served as Corporate Director of Food and Beverage for Huckleberry's restaurants, a multi-unit company with restaurants in New York, Connecticut, and Florida. Mr. Sederholt received a B.S. (Biology and Chemistry) from Pace University.
A. KEITH HEBERT. Mr. Hebert has served as Vice President - Director of Operations since joining the Company in July, 1995. From 1982 to 1986 Mr. Hebert operated his own restaurant, Checkers Pizza, which he sold in 1986. From 1986 to 1989 Mr. Hebert acted as Regional Director for Nachos (now known as Two Pesos) restaurant in Houston, Texas. Mr. Hebert joined the Casa
Ole/Crazy Jose's chain of restaurants in 1990 and, until joining the Company, served in various positions of increasing responsibility eventually being appointed vice president.
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. Mr. McConnaughy became a director of the Company in 1997. Until 1994, Mr. McConnaughy was Chairman of the Board and Chief Executive Officer of GEO International Corporation, a New York Stock Exchange company specializing in graphic systems, quality laboratories, and oil field equipment and services. He remains a director of GEO International Corporation. From 1969 until 1985, Mr. McConnaughy served as Chairman of the Board and Chief Executive Officer of Peabody International Corporation. During his tenure at Peabody, the company's sales grew from approximately $23 million to $850 million. He was named outstanding Chief Executive Officer for his industry group (Environmental Control) by Financial World Magazine in 1975, 1976, and 1978. He is currently on the Board of Directors of Mego Corporation, Transact International, Inc., Pets Choice, Ltd., Cryptologics International, Inc., Pantopec International, Inc., Oxi-Gene, Inc., and Riddell, Inc. He also serves on the Board of Trustees of Strang Cancer Prevention Center and the Harlem School for the Arts. Mr. McConnaughy has been a director of the Company since the Plan Effective Date.
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., Pierpaolo Matteuzzi and John McConnaughy, Jr. 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 and John McConnaughy, Jr. are members 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 July 1, 1995 to December 31, 1995 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 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information, concerning the annual and long-term compensa tion 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
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EMPLOYMENT CONTRACTS
The Company has no employment contract with any of its executive officers other than Mr. Sederholt. It is anticipated that the Company will enter into an employment agreement with Mr. Olson prior to the end of fiscal year 1997, the terms of which are under discussion and review by the Company's board of directors.
The employment contract with Mr. Sederholt, entered into in July, 1997, has a one year term and automatically renews for successive one year periods unless terminated upon at least sixty days prior written notice. The contract provides for a base salary of $100,000 annually. In addition, the Company granted to Mr. Sederholt the right to purchase a number of shares equal to 1.75% of the Company's issued and outstanding shares of Common Stock at an exercise price of $1.50 per share (subject to customary anti-dilution provisions and adjustment for certain other events such as stock splits and recapitalizations). These options will vest 25% on each anniversary date of the employment contract.
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 Messrs. Pasini and McConnaughy. 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 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of August 31, 1997, 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.
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(1) 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)
(2) 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.
(3) 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.
ITEM 13.
ITEM 13. 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 14.
ITEM 14. 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 on the pages indicated:
(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. Copies of individual exhibits will be furnished to stockholders upon written request to Treasurer, Redheads, Inc., One Executive Boulevard, Yonkers, New York 10701 and payment of a reasonable fee.
(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 April 14, 1998.
Redheads, Inc.
By: /s/ CHARLES O. OLSON, JR. ------------------------- CHARLES O. OLSON, JR. PRESIDENT AND CHIEF EXECUTIVE 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.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997 REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.)
C O N T E N T S
PAGE ----
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF CASH FLOWS to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors Redheads, Inc. (Formerly Magic Restaurants, Inc.) Irvington, New York
We have audited the accompanying consolidated balance sheet of Redheads, Inc. and Subsidiaries (formerly Magic Restaurants, Inc.) as of December 28, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the period May 26, 1997 (emergence date) to December 28, 1997 and the consolidated balance sheet of Magic Restaurants, Inc. and Subsidiaries as Debtor-in-Possession (Predecessor) as of December 29, 1996 and the related consolidated statements of operations, stockholders' deficit and cash flows for the period December 30, 1996 to May 25, 1997, the twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended June 30, 1996. 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 in the first paragraph present fairly, in all material respects, the consolidated financial position of Redheads, Inc. and Subsidiaries (formerly Magic Restaurants, Inc.) as of December 28, 1997 and the results of their operations and cash flows for the period May 26, 1997 (emergence date) to December 28, 1997 and the consolidated financial position of Magic Restaurants, Inc. and Subsidiaries as Debtor-in-Possession (Predecessor) as of December 29, 1996 and the results of their operations and cash flows for the period December 30, 1996 to May 25, 1997, the twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended June 30, 1996, 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 emerged from Chapter 11 of the U.S. Bankruptcy Code pursuant to a confirmed plan of reorganization, effective May 25, 1997 (emergence date). Since May 25, 1997, the Company incurred a net loss of $715,836 and at December 28, 1997 had a working capital deficit of $157,158. 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 April 8, 1998
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) CONSOLIDATED BALANCE SHEETS DECEMBER 28, 1997 AND DECEMBER 29, 1996
The accompanying notes are an integral part of these consolidated financial statements.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD JUNE 30, 1996 TO DECEMBER 28, 1997
The accompanying notes are an integral part of these consolidated financial statements.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The accompanying notes are an integral part of these consolidated financial statements.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company has converted these restaurants, with the exception of Kings Plaza and Secaucus, into the Redheads Bistro/Bar concept as of December 28, 1997.
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, since May 25, 1997, the Company incurred a net loss of $715,836 and at December 28, 1997 had a working capital deficit of $157,158.
The Company anticipates that it will require additional working capital to fund operations and complete the conversion of its existing restaurant to the Redheads concept. The Company also will need additional capital to acquire new restaurant operations and integrate these restaurants into current operations. The Company believes that it will have sufficient capital to meet these obligations through the improvement of current operations, additional revenues generated from new restaurants and the completion of a private placement of equity in the amount of approximately $2,000,000, anticipated in the second quarter of calendar 1998. The Company has signed a letter of intent with an investment banker for this private financing. However, there can be no assurance that the offering or any restaurant acquisition will be completed, or 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 28, 1997 and for the period May 26, 1997 (emergence date under the confirmed plan of reorganization) to December 28, 1997. The accompanying consolidated financial statements include the accounts of Magic Restaurants, Inc. and Subsidiaries as Debtor-in-Possession (Predecessor) as of December 29, 1996 and for the twenty-one weeks ended May 25, 1997, the twenty-six weeks ended December 29, 1996 and the fifty-two weeks ended June 30, 1996. 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.
Fair Value of Financial Statements
The Company's financial instruments consist of cash, short-term receivables, payables and accrued expenses. The carrying values of cash, short-term receivables, payables and accrued expenses approximate fair value because of their short maturities.
The carrying value of the fixed rate noncurrent notes receivable and current portion of long-term debt approximate fair value since the interest rate associated with the debt approximates the current market interest rate.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 28, 1997 balances were in excess of insurable amounts by approximately $236,000.
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
Preoperating costs, consisting primarily of training personnel, are amortized on a straight-line method over one year.
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
Effective July 1, 1996 the Company adopted 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.
Effective July 1, 1996 the Company implemented 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.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
Effective year ended December 28, 1997, the Company adopted SFAS No. 128, "Earnings Per Share" (EPS). This statement establishes standards for computing and presenting EPS, replacing the presentation of currently required primary EPS with a presentation of Basic 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 new 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 and is similar to the currently required fully diluted EPS. SFAS 128 was effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of the prior years' earnings per share.
Earnings (Loss) Per Share (continued)
Prior year amounts for net loss per common share were recomputed in accordance with SFAS No. 128; however such recomputed amounts were unchanged from those previously reported.
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 antidilutive, therefore, basic and diluted earnings (loss) per share are the same.
Net loss applicable to common stockholders for the thirty-one weeks ended December 28, 1997 has been increased by $181,000 of preferred dividends in arrears.
Recently Issued Accounting Pronouncements
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components. The reporting and display requirements of SFAS No. 130 are effective for fiscal years beginning after December 15, 1997. The Company presently intends to comply with this statement for its year ended December 27, 1998.
During June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and related disclosures about products and services, geographic areas and major customers. The reporting and disclosure requirements of SFAS No. 131 are effective for periods beginning after December 15, 1997. The Company presently intends to comply with this statement for its year ended December 27, 1998.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to conform to 1997 presentations.
NOTE 2 - PLAN OF REORGANIZATION
The Company's confirmed plan of reorganization provided for the following:
Priority Tax Claims - Federal and state payroll, withholding and other taxes of approximately $382,000 are payable in equal periodic installments over a period ending six years after the date of assessment in an aggregate amount equal to the amount of such allowed claim plus interest from the effective date on the unpaid portion.
Secured Claims - The secured claims of approximately $1,207,000 (including interest of approximately $197,000) were exchanged for payables of $209,000 and 11,333 shares of 8% preferred stock of the Levittown subsidiary.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PLAN OF REORGANIZATION (Continued)
Trade and Other Miscellaneous Claims - The holders of approximately $13,456,000 of trade and miscellaneous claims received 125,000 shares of the new common stock of the Company. $26,000 of claim liabilities remained intact.
Postpetition Series A Senior Secured Notes - The holders of $2,520,000 of Series A Senior Secured Notes received 1,896,983 shares of the new 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 Senior Secured Notes - The holders of $1,700,000 of Series B Senior Secured Notes received 23,442 shares of new 12% preferred stock of parent corporation in exchange for their notes and interest due of approximately $58,000.
Postpetition Liabilities - Approximately $1,882,000 of postpetition liabilities were exchanged for 5,333 shares of new 8% subsidiary preferred stock and 213,760 shares of new common stock. Approximately $1,227,000 of postpetition liabilities remained intact. Included in this amount was approximately $500,000 due to certain professionals retained in the bankruptcy case, which was exchanged for 150,696 shares of common stock of the Company by December 28, 1997. No interest will accrue on the outstanding unpaid balances due these professionals.
Other Disputed Postpetition Claims - The Company is a party to certain litigation pending before the Bankruptcy Court. The first, Magic Restaurants, Inc., et al. v. Nicolo and Joseph Ottomanelli, objects to the $75,000 administrative claim filed by the Ottomanellis and seeks damages of $250,000 by way of counterclaim. The Company is also presently appealing an order of the Bankruptcy Court requiring the Company to pay approximately $100,000 to Bowie Produce, Inc., a prepetition produce vendor, pursuant to the Perishable Agricultural Commodities Act ("PACA"). The resolution of these matters is not expected to become final until the latter part of the fiscal year 1998. The Company believes that an adverse decision to the Company in each of these matters will not materially affect the Company's operations, and further that it will have sufficient cash available to pay any judgements that may be entered with finality against the Company.
The Company accounted for the reorganization using fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the plan received less than 50% of the voting shares of the emerging entity and its reorganization value is less than its postpetition liabilities and allowed claims, as shown below:
It was determined that the Company's reorganization value approximated the net book value of the assets immediately before May 25, 1997, the date of the plan confirmation.
The following table ("Plan of Reorganization Recovery Analysis") summarizes the adjustments required to record the reorganization and the issuance of the various securities in connection with the implementation of the plan.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PLAN OF REORGANIZATION RECOVERY ANALYSIS
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITION
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 for $302,000 cash and the assumption of the underlying lease. The acquisition has been accounted for by the purchase method of accounting and the purchase price approximated the fair value of the net assets required.
Unaudited proforma consolidated results of operations were not presented since there was no historical financial information available that corresponded to the periods presented.
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following:
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
NOTE 6 - NOTES RECEIVABLE - LONG-TERM
Notes receivable consist of three notes, with interest rates ranging from 5.0% to 9.75%, maturing through January 2018, collateralized by property. The current portion of notes receivable has been included in other current assets.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
License fees, deferred leasing expenses, deferred legal expenses, deferred brokerage fees and acquisition costs are net of accumulated amortization of $140,669, and $158,873 as of December 28, 1997 and December 29, 1996.
NOTE 8 - COMMITMENTS
The Company leases its executive office and remaining restaurant premises under various operating leases expiring through August 2013. Rent expense for 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 was $582,563, $385,982 $695,453 and $2,548,805.
Future minimum annual rentals are as follows:
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - POSTPETITION SENIOR SECURED NOTES
Postpetition senior secured notes consist of the following:
NOTE 10 - 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 ten 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.
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 December 28, 1997, the Company has $123,000 of dividends in arrears for Series A 12% Cumulative Convertible Preferred Stock.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
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.
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.
The Company's authorized and issued outstanding shares of Series A 8% Cumulative Exchangeable Preferred Stock is as follows:
As of December 28, 1997, the Company has $58,000 of dividends in arrears for Series A 8% Cumulative Exchangeable Preferred Stock.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
Common Stock
On May 25, 1997, the Company issued shares of Common Stock as follows:
The Company issued 1,896,983 shares of Common Stock in exchange for the release of $2,520,000 of series A Senior Secured Notes and interest due of approximately $325,000.
The Company issued 125,000 shares of Common Stock valued at $187,500 for the settlement of approximately $13,456,000 of trade and other miscellaneous claims.
The Company issued 213,260 shares of Common Stock valued at $319,890 for the settlement of approximately $1,111,000 of postpetition liabilities.
On May 30, 1997, the Company issued 500 shares of Common Stock in exchange for consulting services.
On December 28, 1997, the Company issued 150,696 shares of Common Stock for the settlement of $500,000 of unpaid legal fees.
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.
Effective July 1, 1996, the Company adopted FASB Statement 123, "Accounting for Stock-Based Compensation," which requires compensation cost associated with warrants issued to other than employees to be valued based on the fair value of the warrants.
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. The Black-Scholes model valued these warrants at zero based on the following assumptions: no dividend yield, expected volatility of 0%, and a risk-free interest rate of 5.5%.
Predecessor
Redeemable 5% Cumulative Convertible Preferred Stock
On September 4, 1994, the Company's management authorized and issued 220 shares of redeemable 5% cumulative preferred stock for $1,870,000, net of commissions of $330,000. The value assigned to these securities was $10,000 per share. The holder of the preferred stock had the option to redeem the stock for $10,000 per share. Additionally, each share was convertible into 1.25 to 4 shares of common stock, depending on the market value and subject to certain restrictions.
On February 2, 1995, 22 shares of the preferred stock were converted to 222,222 shares of common stock at a conversion price of $0.45 per share, in accordance with the agreement.
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STOCK (Continued)
Preferred Stock
The Company's management was authorized to issue 1,000,000 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. The Company had 107,000 shares of Series A 15% preferred stock issued and outstanding as of December 29, 1996. The shares were redeemable by the Company's management at any time for $10 per share plus any unpaid dividends. Dividends were cumulative. Liquidating distributions were $10 per share plus any unpaid dividends.
NOTE 11 - REORGANIZATION EXPENSES
Loss on Abandonment or Disposal of Restaurants
For the twenty-six weeks ended December 29, 1996, the loss on disposal of equipment is mainly due to the abandonment of equipment due to the closing of the American Cafe restaurant located in Tyson's Corner, Virginia and the two Red Robin restaurants located in Smithhaven, New York and Staten Island, New York.
Closing of American Cafe Restaurants
Prior to the June 30, 1996 year end, the management of the Company adopted a formal plan to close all of its American Cafe restaurants, except the restaurant located in Tyson's Corner, Virginia.
As of June 30, 1996 the Company recognized a $467,855 net loss from winding down operations of these restaurants from July 1996 through October 1996. Additionally, the Company recognized a loss of abandonment of the net book value of the property and equipment at these restaurants in the amount of $1,923,305.
NOTE 12 - INCOME TAXES
The Company files a consolidated federal income tax return and certain combined state and city returns.
There are no significant temporary differences for the 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.
The Company's federal, state and local tax returns have not been filed for 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 28, 1997, the Company had approximately $15,300,000 of net operating loss carryforwards expiring through 2011, available to offset future federal income taxes.
As a result of the change in control described in Note 2, 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".
REDHEADS, INC. AND SUBSIDIARIES (Formerly Magic Restaurants, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (Continued)
There is no income tax benefit for operating losses for 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 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.
NOTE 13 - 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 own shares of Redheads, Inc. Common Stock.