ITEM 1. BUSINESS --------
The Company currently operates in three primary business segments for which it has formed the following subsidiaries; restaurants, factoring, and real estate development.
Performance Restaurants Group, Inc. (Restaurants)
Restaurants was formed in 1993 to acquire six operating restaurants in California. Four of the restaurants operate under the trade name Bobby McGee's and are full service restaurants/nightclubs. The fifth was converted to a sports bar/nightclub concept operating under the trade name McGee's Grill. In 1995, a sixth restaurant was acquired in Scottsdale, Arizona. It is a full service restaurant and bar operating under the trade name Buster's Restaurant Bar & Grill. In 1996, the Company acquired two Carlos Murphy's restaurants in San Diego, California, with rights to open other Carlos Murphy's Restaurants in the San Diego and Los Angeles, Metropolitan areas and Maricopa County, Arizona. In 1996, the Company sold one of the original Bobby McGee's locations.
The Bobby McGee's concept is a full service restaurant using costumed servers and a lounge offering music and dancing at the same location. The restaurant appeals to a wide range of diners as a special event restaurant. Diners come to the restaurant to celebrate birthdays, anniversaries, graduations, and other special occasions.
McGee's Grill was opened in 1994. It features pool tables and television screens for the viewing of sports events and a limited menu for dinner and lunch in the sports bar. The sports bar is combined with the more traditional nightclub offered at other Bobby McGee's restaurants.
During 1996, the company bought two Carlos Murphy's Mexican Restaurants in the San Diego, California area. Carlos Murphy's is in the casual dining restaurant segment and features an extensive menu of Mexican Food choices. Limited renovations to these locations is expected. Part of the renovations will be to upgrade the lounge by adding a dance floor and a D.J. playing recorded music. This will help increase sales in the later hours when their are fewer diners.
Restaurants has developed a franchising package for its concept domesticaly and internationally. The franchisees will pay a fee for each restaurant they develop, plus a royalty based upon gross sales of each location. Area Development Agreements will cover multi unit franchises in a specific geographic area. Restaurants will offer assistance to the franchisee in training employees, advertising, site selection, and operation of a franchised location. Restaurants has not actively marketed any franchises.
Performance Funding Corp. (Funding)
This subsidiary was formed in Arizona and is engaged in the factoring business. Factoring is the purchase of accounts receivable at a discount from face value. All purchases are full recourse against the seller. This means that, after a predetermined period, the seller must either repurchase the invoice at full face value or substitute an invoice for the face value, plus accrued fees.
At the time of purchase of the invoice, Funding purchases the invoice at a discount from the face value of the invoice. The discount is set at the maximum fees possible, plus a reserve for bad debt. Upon collection of the invoice, the seller is paid the difference between the fee holdback and earned fees to the date of payment. Funding receives a security interest in other receivable, of the seller to further secure payment of fees and to secure performance of the recourse provision of the contract.
Funding looks for sellers with annual sales between $250,000 and $15,000,000. The decision to purchase any receivable is based upon the financial condition of the client, the profitability of the seller, payment terms of the receivable, and the credit worthiness of the account debtors.
Performance Development Corp. (Development)
Camelback Plaza Development, L.C.
Development was formed in Arizona in 1993 to act as managing member of Camelback Plaza Development, L.C. with a 71.6% ownership, which was developing and leasing Camelback Plaza, a retail/restaurant development in Phoenix, Arizona. The retail phase of the project opened in late 1994 with Just for Feet and Blockbuster Music as its first tenants.
The restaurant phase, consisting of a free standing building for the Hard Rock Cafe, was constructed in 1995. The Hard Rock Cafe opened for business in October 1995.
In 1996, one of the tenants in the retail area, a full service restaurant opened and closed, vacating the premises. The company is taking action against the tenant for breach of the lease, while actively seeking a new tenant for the space.
In January 1997, Blockbuster Music closed its store and is seeking a subtenant for the space. They continue to meet all of their financial obligations under the terms of the lease.
Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)
The company sold the subsidiary in July, 1996 for $1,000,000 and a note payable to the company for $2,000,000. The note is to be paid, inclusive of interest in 18 payments of $120,000 each.
Ixtapa
The Company purchased land for development as a condominium complex. At the time of purchase, the seller had committed to construction financing for the project. As discussed further below, the Company has indefinitely delayed the project due to the continuing financial situation in Mexico. Currently, the Company has the property listed for sale with a broker.
A. Competition
The factoring business is a niche market for financing. Funding competes with several companies that have greater financial resources than Funding. Funding competes on the basis of rates, service and market concentration.
The restaurant business is highly competitive. Restaurants competes in the restaurant business with a number of chains and restaurants owned by substantially larger companies with greater financial resources than Restaurants. Restaurants competes on the basis of name recognition, concept of restaurants, location, quality of product and other intangible elements. Restaurants believes that the costume concept, along with the adjoining nightclub, offers a unique experience for the consumer that has a broad appeal. Restaurants further believes its present locations offer a competitive advantage over other areas.
The real estate development business is highly competitive. Development competes with several other development companies in the Phoenix market that are more experienced and have greater financial resources. However, Development feels the location of the development is highly desirable to the high volume tenants who have signed leases.
B. Trademarks and Patents
The Company's registered trademark for restaurants is an important factor in marketing for this group due to the high degree of name recognition in its geographical area and general market. The name Bobby McGee's is federally trademarked.
C. Environmental Matters
An investigation of environmental matters related to facilities and property owned and leased by the Company was performed to determine contingencies that may have affected the Company's emergence from Chapter 11. Certain reports received by the Company have identified areas of environmental contamination and potential environmental contamination. Management believes that certain predecessors-in-interest may bear either full or partial liability for remediation of affected areas. Certain predecessors-in-interest and governmental agencies have been notified by the Company of the related possible liabilities. In addition, the Company notified its insurance carriers of potential claims under its general liability and property insurance coverage from prior years.
a. Reyes Ave Compton, CA
This facility housed the manufacturing plant of the former Wheel business which was sold in 1992.
In 1991 possible contamination at the site was discovered. The Richter Family Trust, the owner of this facility, filed an action against the Company and others in the U.S. District Court for the Central District of California and served it on the Company in April 1995. The Company responded to the complaint on its behalf and on behalf of Joe Hrudka as an officer of the Company. The complaint seeks damages of an unspecified amount for environmental contamination at the site under several theories. Currently, the action is stayed by stipulation of the parties, so that further testing to determine the extent of the contamination can be completed.
The Company tendered defense of the action to several insurance carriers under policies in force for the periods when it owned and operated its wheel division at the site. Two insurers have agreed to pay some legal costs of defending the action under their policies, although they have reserved the right to ultimately deny coverage.
b. Warehousing and Office Facility in Ohio
In 1990, potential contamination was discovered at this location. Environmental studies performed to date have determined that the contamination is confined to the site with no evidence of migration to groundwater or surrounding properties. At the present time, analysis of the potential remediation alternatives has not been completed, nor has a plan been submitted for approval by the Ohio EPA.
As part of the sale of the Performance Division to Echlin, Inc., the Company entered into an indemnity agreement with a predecessor-in-interest at the site. The predecessor-in-interest and the buyer of the Performance division have agreed to pay for the remediation of the major known environmental contamination at the site. However, the Company was required to guarantee the obligations of the purchaser.
The Company had to agree to remove two above ground storage tanks, an underground storage tank, and to submit a closure plan to the State for a drum storage area. In March, 1995, the State of Ohio EPA accepted the company's closure of the drum storage area as being in compliance with the previously filed closure plan. This was the last requirement for the release of the escrow funds held by Echlin, Inc., from the sale proceeds of the Brookpark Road facility. The Company had also completed the removal of an underground storage tank at the Brookpark Road facility in 1994. With this closure, the Company believes it has no further expense for environmental contamination related to the Brookpark Road facility.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company and its subsidiaries owned and leased a total of approximately 104,402 square feet of restaurant, office, and other space for its principal facilities. Management believes that the Company's and its subsidiaries' facilities and equipment are modern and well maintained.
The locations and general description of the principal properties owned and leased by the Company and its subsidiaries are as follows:
((1)) The real property of five (5) acres is subject to a long term land lease. The subsidiary has the option to purchase the real property after the year 2015 at its fair market value without consideration of value added for any improvements on the property.
((2)) This property is currently subleased to an unrelated third party. The Company is a guarantor of the lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A. On January 6th, 1994, the Company filed an action in the Superior Court of Arizona for the County of Maricopa to determine the fair cash value of its shares held by shareholders who dissented from the sale of the Exhaust business. The dissenting shareholders are as follows: Ecco Sales, Inc., Defined Benefit Plan and Mr. David E. Miller, its trustee; Murray & Murray Co., L.P.A. Profit-Sharing Plan and Trust and Dennis E. Murray., its trustee; and Murray and Murray Co., L.P.A. - Dennis Murray Voluntary Account and Dennis E. Murray, Sr., its trustee; Monumental Life Insurance Company, a Maryland Corporation; Ince & Co., a foreign Corporation; The Travelers Corporation, a foreign corporation; The Travelers Insurance Company, a Connecticut Corporation; Provident Mutual Life Insurance Company, a foreign corporation; New England Mutual Life Insurance Company, a Massachusetts Corporation; Angelo M. Alesci, an individual; William R. Bagger, an individual:
All of the dissenting shareholders, except Ecco Sales and Murray & Murray, LPA, agreed to accept and were paid $.75 per share, as the fair market value, for their stock.
Two of the dissenting shareholders made a special appearance by Motion to Dismiss for lack of personal jurisdiction, Murray & Murray Co., L.P.A. Profit Sharing Plan, and Murray & Murray Co., L.P.A. After the remand from the Arizona Court of Appeals, the Maricopa County Superior Court held it had jurisdiction over the defendants in February, 1995. The defendants appealed the trial court decision to the Arizona Court of Appeals. The court again upheld the trial court decision. The defendants then appealed to the Arizona Supreme Court, which upheld the Court of Appeals' decision.
The defendants sought review by the U.S. Supreme Court under a Writ of Certiorari. The Writ was denied in February 1996. The matter will now proceed to establish the fair market value of the defendants' shares as of the date of their dissent. The matter was remanded to the Superior Court County of Maricopa, State of Arizona for further proceedings in the Fall, 1996. The Company requested a hearing pursuant to statute to determine if the shareholders are entitled to receive the fair cash value of their shares and to appoint an appraiser(s) to determine the fair cash value.
The Court held a status conference with all parties in January, 1997. The Court requested that each side submit the lists of appraisers from whom the Court could appoint two appraisers. All other matters before the Court were taken under advisement.
B. On January 26, 1994, an action filed by Murray & Murray in the Court of Common Please, County of Cuyahoga, State of Ohio, was served on the Company and three former or present officers and/or directors of the Company; Joe Hrudka, Tom Hrudka and Howard B. Gardner. The action against the Company seeks declaratory judgment holding that the fair cash value determination be heard in the State of Ohio. The action against the directors and officers alleges a breach of fiduciary duty involving the negotiation of consulting and non-competition agreements in connection with the Company's sale of its former businesses. The Company has filed a motion to dismiss the action which motion has not yet been decided.
C. In April 1995, the Company was served with an action filed by the Richter Family Trust in the U.S. District Court for the Central District of California against the Company and others for unspecified damages for the remediation of the site of the Company's former wheel manufacturing plant. The Company responded to the suit on its own behalf and on behalf of Joe Hrudka, an officer and director of the Company, who was sued personally. Currently, the case has been stayed by stipulation of the parties, so that further testing can be conducted on site to determine the extent of the contamination.
The Company is involved in various other claims and legal actions arising in the ordinary course of business, including product liability claims. In the opinions of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low closing bid prices for the Company's common stock as reported by the NASDAQ National Market System for the past two calendar years: (1)
BID ASK Quarter ended March 31, 1996 5/8 1 3/8 Quarter ended June 30, 1996 5/8 1 3/8 Quarter ended September 30, 1996 5/8 1 3/8 Quarter ended December 31, 1996 3/4 1 3/8
1995 ((2)) Quarter ended March 31, 1995 2 1/2 3 Quarter ended June 30, 1995 2 2 1/4 Quarter ended September 30, 1995 1 1/2 2 Quarter ended December 31, 1995 3/4 1 1/4
((1)) All quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual trades.
((2)) Restated to reflect 4 for 1 reverse stock split effective June, 1996.
As of March 31, 1997, there were 790 holders of record of the Company's common stock. No dividends have been declared since December 1984, nor does the Company anticipate that any dividends will be declared in the foreseeable future.
The Company's shares are traded over the counter.
During 1994, the Company purchased approximately 558,500 shares of stock from dissenters due to the sale of the Company's Exhaust division to Walker Manufacturing. In addition, the Company purchased approximately 50,500 shares on the open market in 1994.
During 1996, the Company effected a 4 for 1 reverse stock split and an odd lot tender offer. Approximately 8200 shares were tendered to the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATE (in thousands, except per share data).
The Company's selected consolidated financial data has been prepared in accordance with generally accepted accounting principles applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business.
The following table sets forth selected consolidated financial data of the Company for the five years ended December 31, 1992 through 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere herein. The selected consolidated financial data for the years ended December 31, 1992 through 1996 are derived from the audited financial statements of the Company.
Year Ended December 31
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated
For the year ended December 31, 1996, the Company had a consolidated loss from continuing operations of ($3,723,000) compared to a loss of ($144,000) for the same period in 1995.
During 1995 the Company had income from discontinued operations of approximately $438,000, as a result of "changes in accounting estimates," and adjustments to reserve accounts for claims and bad debt expense that offset the loss from continuing operations yielding net income of $294,000. There were no such adjustments in 1996.
The Company's general, and administrative expenses were $3,465,000, an increase of $624,000 from 1995. The increase is a result of nonrecurring charges for the closure of two restaurants, Las Vegas and San Ramon (See note #17 to Consolidated Financial Statements), and an increase in bad debt expense of $139,000.
Interest expense was $754,000 in 1996 compared to $533,000 in 1995. This increase is attributable to the use of the factoring line of credit for a full year and an increase in borrowing by the parent to meet the cash needs while the Development subsidiary negotiated a long term third party financing for its project and interest expense of the Development subsidiary that had been capitalized during construction of the project.
The Company has an investment in shares of a publicly traded stock, Western Pacific Airlines. These securities are subject to a restriction on sale limiting the number of shares that can be sold by the Company during any quarter. As a result of a change in the securities rules covering restricted stock, this restriction should be lifted as of April 29, 1997 and the shares become free trading (see Note 3 to Consolidated Notes to the Financial Statements). The company realized a net gain of $387,000 on sale of a portion of this stock in 1995.
Performance Restaurants Group, Inc.
Revenues
Total revenues increased 5 % to $20,344,000 for 1996 compared to $19,357,000 for 1995. The increase in revenue is a result of the addition of two restaurants during part of the year. Same store sales for stores open at least one year did not increase or decrease significantly.
Stores closed during the year accounted for revenues of $1,734,000 and $2,115,000 during 1996 and 1995 respectively.
Cost and Expenses
Cost of sales, consisting of food and beverage cost, increased in 1996 to 28.5% of sales compared to 27.6% in 1995. This increase is partially attributable to a higher percentage of sales being food which has a higher cost than beverages.
The restaurant division recorded a loss from operations of $2,774,000 for 1996 as compared to a loss from operations of $166,000 for 1995. The loss is attributed to higher depreciation charges, increased advertising and for closure of the Las Vegas and San Ramon restaurants. In addition $360,000 is attributed to operating losses at the Las Vegas store (see Note #17 to Consolidated Financial Statements).
Carlos Murphy's
The Company purchased two Carlos Murphy's restaurants in August and December, 1996. These are a mid-priced family oriented Mexican Food restaurant. Both restaurants are located in San Diego, California.
The restaurants have not been part of the Company's operations long enough to contribute significantly to income. Some limited renovations have been made to the restaurants to add late night lounge business to the regular restaurant business.
Restaurant Outlook
The Company has made some changes to the menu at the Bobby McGee's restaurants which are aimed at increasing the per check average of sales. Initial results at test restaurants have been promising and the Company will expand the new menu throughout its operations over the next six months.
The Company plans on expansion throughout 1996 by acquiring operating restaurants that could be converted to one of its concepts; Bobby McGee's, McGee's Grill, or Carlos Murphy's; at minimal expense. The Company has the rights to Bobby McGee's and McGee's Grill nationwide except the state of Arizona, and to Carlos Murphy's for San Diego and Los Angeles, California and Maricopa County (Phoenix) Arizona.
The Company hopes that the new menu and additional stores will significantly add to revenues for 1997 and expects to be profitable by year end, however, there can be no assurance that the Company's strategy will be successful.
Performance Funding Corp. (Funding)
Gross Revenues for the year ended December 31, 1996 were $623,000 including an intercompany charge for interest to the Company which is eliminated in consolidation, as compared to $896,000 in 1995, a decrease of approximately 30%. The decrease was a result of increased competition from banks for customers resulting in a lowering of rates for factored accounts and directly from a reduction from in gross fees of non-performing customers. Funding has added new clients during the year, but none with the volume for years past.
Funding had a loss from continuing operations of $30,000 in 1996 as compared to net earnings before taxes of $676,000 in 1995. This has resulted from lower volume of business in 1996, increase of bad debt, and interest increase associated with the use of the line of credit for a full year in 1996 as compared to 5 months in 1995.
At December 31, 1996, funding had $1,270,000 invested in assets and approximately $1,556,000 earning fees compared to $1,697,000 and $2,070,000, respectively in 1995. The decline is based mainly on increased competition for quality customers.
Most major banks, in the past year or two, have established divisions which are allowed to finance somewhat higher risk companies. These are the companies Funding seeks as clients. These are companies that almost qualify for conventional financing but may not have enough history or are experiencing fast paced growth. Funding cannot or will not compete with these divisions on interest rates. But Funding can and does compete by offering a close personal interest and understanding of the client's business. The ability to quickly respond to the client's changing financing needs has also been a good selling tool.
In July 1995, Funding obtained a line of credit from a financial institution in the amount of $2,000,000. This has allowed the Company to lessen its cash investment in Funding while providing capital for future growth. Under the agreement, the Company must maintain an equity position of $1,000,000. The line of credit expires in July 1997, and Funding is negotiating a reduced line of credit for the future. Management believes, but there can be no assurance, that the line of credit will be renewed in 1997.
Performance Development Corp. (Development)
Gross rent received for the year ending December 31, 1996, was approximately $1,142,000 compared to approximately $770,000 for 1995. Development recorded a net loss of approximately $153,000 for the year ended December 31, 1996, as compared to a loss of $30,000 for 1995. This loss includes a charge for intercompany interest that is eliminated in consolidation. The increase in the loss is attributable to certain expenses including interest that had been capitalized in prior years during construction of the project which are now operating expenses. The rental increase is primarily a result of the opening of the Hard Rock Cafe in 1995.
In November 1996, Development refinanced the property. The loan from a mortgage company was for $7,250,000 amortized over 25 years with a balloon payment due at the end of 7 years. Funds from the loan were used to payoff the mini-permanent loan, repay loans from the Company to Development and to meet certain expenses for the operation of the Plaza which were due.
One of the tenants has defaulted on its leases for restaurant space. A replacement tenant has signed a lease which will commence on or before January 1, 1998, at a lower base rent, but with percentage rent clauses.
The Company does not currently have the property listed with a broker for sale.
Ixtapa, Mexico
At the present time the Company has placed the property in Ixtapa, Mexico with a broker for sale. There are no future plans to develop this property.
Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)
FMMSA had gross rental income of $384,000 for the year ended December 31, 1996 as compared to $524,000 for the year ending December 31, 1995. The decrease is a result of the sale of the subsidiary in July, 1996. Income from operations before income taxes for FMMSA was $219,000 in 1996 compared to $195,000 in 1995. The increase was a result of lower expenses due to completion of renovations at the property in 1995 (see Note #6 to Consolidated Financial Statements).
During 1996, the Company sold the stock it held in FMMSA for $1,000,000 plus a promissory note to the Company for $2 million dollars. The Company's net gain on sale was $1.2 million dollars (see Notes #4 and 6 to Consolidated Financial Statements).
Liquidity and Capital Resources
Short Term
The Company's cash and cash equivalents increased to $1,136,000 at December 31, 1996 from $411,000 in 1995. This increase is attributed mainly to the cash realized from the sale of the Mexican subsidiary and the release of cash from restricted accounts. Working Capital decreased significantly from $2,400,000 as of December 31, 1995 to $1,329,000 at December 1996. This decrease is primarily a result of a decrease in the value of securities available for sale during 1996.
The Funding line of credit expires in July 1997. The Company is negotiating for an extension of the line of credit at a reduced amount in keeping with its current outlook for the Funding division. Management believes but there can be no assurance that the line of credit will be extended.
The Company has securities available for sale in the market value of $727,000 as of December 31, 1996. Due to a change in the Rule 144 regarding Sale of Securities, a restriction on the sale of these securities on the open market will end on April 29, 1997.
Management believes that its short term cash requirements can be met with available cash and cash equivalents.
Long Term
The Development subsidiary obtained a long term loan on the property from a mortgage broker in 1996. The Company was repaid a portion of its loan to the subsidiary but is still owed approximately $1.0 Million dollars for loans to the subsidiary. The Company expects that the project will provide sufficient cash flow in 1998 to reduce this indebtedness.
The Restaurant division is expected to add several locations over the next several years. Expansion will be by purchasing operating restaurants that can be converted into one of the Company's concepts with minimal renovation and costs. The Company will only consider restaurants which will generate immediate revenues and where costs associated with conversion can be controlled. The Restaurant division is not looking to expand by opening new restaurants. The Restaurants division does not expect to incur material costs in purchasing new restaurants.
Restaurant expansion will be completed through cash on hand or by cash provided by operations. The Company will seek Seller financing where appropriate and available. It is not anticipated that the Company will need to borrow funds for expansion of the Restaurant subsidiary.
The Restaurant and Factoring divisions are poised to realize income during 1997. Management believes that, but there can be no assurance, that both will show significantly improved results from operations during the year.
The development subsidiary should meet all of its obligations without a material increase in the investment by the Company, although some costs associated with Lessee Improvements for a new restaurant tenant may be advanced. The Development is not expected to have positive cash flow until the restaurant tenant commences operation in 1998.
Inflation
Management does not believe that inflation will have a material effect on the results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditors' report on the Consolidated Financial Statements and Schedules listed in the accompanying index are filed as part of this report. See Index to Audited Consolidated Financial Statements and Schedules on page ___.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company as of December 31, 1996 were as follows:
Name Age Position
Joe Hrudka 58 Chief Executive Officer
Edmund L. Fochtman, Jr. ((1)) 59 President/Director
Allen L. Haire ((1)) 54 Director
Jonathan Tratt ((1)) 38 Director
James W. Brown ((2)) 48 Chief Financial Officer/Director
Robert A. Cassalia 44 Secretary
All Directors are elected annually by the Company's shareholders and hold office until their successors are duly elected and qualified.
((1)) Member of the Audit Committee
((2)) Mr. Brown tendered his resignation as an officer and director of the company effective April 4, 1997.
Joe Hrudka is the founder and principal shareholder of the Company. Since 1981 he has served as the Chairman of the Board and a Director. Mr. Hrudka has served as Chief Executive Officer of the Company since November 1993. In 1964, Mr. Hrudka founded the original Mr. Gasket Company and served as Chairman of the Board and President until the Company was purchased by W.R. Grace in 1971. He was then employed as a Vice President of the Automotive Division of W.R. Grace from 1972 to 1974 and as a consultant to W.R. Grace during 1975 and 1976. From 1977 until the formation of the Company in 1981, Mr. Hrudka was a private investor. Mr. Hrudka had served as a director of Action Products, Inc., from 1987, and served as Secretary of Action Products, Inc., from October 1990 to May 1992. In November 1991, a receiver was appointed by the Maricopa County Superior Court, State of Arizona, to manage the assets of Action Products, Inc., at the request of a secured party. Action's assets were sold in May 1992 by the receiver. Mr. Hrudka has served as a Director of each of the subsidiaries since they have been formed.
Edmund L. Fochtman, Jr., has been President of the Company since May, 1993. He was an executive Vice President of the Company since January, 1992. He was Chairman of the Board of Directors and Chief Executive Officer of Action Products, Inc., a company engaged in manufacture and sale of fiberglass bodied mini-cars and sales of other promotional products from October 1986 until January 1992. From 1984 to 1986, Mr. Fochtman was a private investor. From 1976 to 1984, her served as Vice President of F.W. & Associates, Inc. In November 1991, a receiver was appointed by the Maricopa County Superior Court, State of Arizona, to manage the assets of Action Products, Inc., at the request of a secured party. Action's assets were sold in May 1992 by the receiver. Mr. Fochtman was elected a Director of the Company in June 1988 and as a director of each of the subsidiaries since 1993.
Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical Products, a manufacturer of gas-fired infra-red heating equipment, since July 1984. He was a manufacturer's representative from 1977 to 1984. Mr. Haire was elected a Director in June 1988.
Jonathan Tratt has been President and Director of Industrial Brokerage, Inc., an investment and commercial real estate brokerage company since 1992. Prior to 1992, Jonathan Tratt was a general investor and real estate agent in Phoenix, Arizona. Mr. Tratt was elected a director of the Company in May, 1993.
James W. Brown, a certified public accountant, has been Chief Financial Officer and Director since December 1993. From 1989 until joining the Company in May, 1993, Mr. Brown was CFO of RACAM Amusements Group. From 1985 to 1988 he was the Chief Operating Officer of American Educational Computers, Inc., a publicly traded software and video publisher. Prior to 1985 he was Vice President of
Finance of National Zinc Company, a primary metals manufacturer. Mr. Brown has served as a Director of the subsidiaries since 1993. Mr. Brown resigned as an officer and director effective April 4, 1997.
Robert A. Cassalia was hired by the Company as Assistant Secretary, in January of 1991. On May 4, 1993, he was elected Secretary. Before joining the Company Mr. Cassalia was General Counsel of Action Products, Inc., a manufacturer of fiberglass bodied mini-cars since October, 1986, he was in private practice in Phoenix, Arizona and Syracuse, New York.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein from the Company's proxy statement to be filed pursuant to Regulation 14(a) under the Securities Exchange Act of 1934, within 120 days from December 31, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following tables sets forth the number and percentage of the outstanding shares of common stock beneficially owned as of March 29, 1996, by the only persons known to the Company to own beneficially more than 5% of the outstanding shares of common stock.
Name and Address Number of Shares Percent of Beneficial Owner Beneficially Owned of Class - ------------------- ------------------ --------
Joe Hrudka 9716 N. 71st Street Paradise Valley, AZ 85253 1,689,241 69%
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained in Note 19 to the Consolidated Financial Statements herein, which Information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES...AND REPORTS ON FORM 10-K
(1) Index to Consolidated Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - Years
ended December 31, 1996, 1995 and 1994
(2) Index to Consolidated Financial Statement Schedules:
All schedules have been omitted because the material is not applicable or is not required as permitted by the rules and regulations of the Commission, or the required information is included in Notes to the Consolidated Financial Statements.
(3) Exhibits:
Exhibit No. - -----------
2.1 Disclosure Statement and Plan of Reorganization filed on July 21, 1992 by the Official Creditors' Committee. Incorporated by reference to the Company's Report on Form 10- Q filed on August 12, 1992.
2.2 Amended Plan of Reorganization filed by the Company on August 3, 1992. Incorporated by reference to the Company's Report on Form 10-Q filed on august 12, 1992.
2.3 Amended Disclosure Statement including a Joint Plan of Reorganization approved by the Court to be distributed to interested parties on October 27, 1992. Incorporated by reference to the Company's Report on Form 10-Q filed on November 10, 1992.
2.4 The Confirmed Joint Plan of Reorganization, approved by the United States Bankruptcy Court, Central District of California on April 21, 1993, as filed with the Company's report on Form 10-Q for the period ended March 31, 1993.
2.5 Notice of satisfaction to all conditions precedent to implementation of Option "A" of the Joint Plan of Reorganization dated September 30, 1992, as filed with the Company's report on Form 10-Q for the period ended March 31, 1993.
3.3 Amended and Restated Articles of Incorporation of the Company. Incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K, dated March 29, 1988.
3.4 Revised Code of Regulations, as amended, of the Company. Incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K, dated March 29, 1988.
10.45 Asset purchase agreements relating to the sale of the Wheel and Tire business dated December 31, 1992 by and between Cragar Industries, Inc., and the Company. Incorporated by reference to the Company's report on Form 8-K filed on January 12, 1993.
10.46 The following exhibits relate to the sale of the Performance business on May 4, 1993 as filed with the Company's report on Form 10-Q for the period ended March 31, 1995 and incorporated herein by reference:
10.47 The following documents related to the sale of the Company's Exhaust Division to Walker Manufacturing Company as filed with Notice of Annual Meeting of shareholders dated November 8, 1994 and incorporated herein by reference.
10.48 1993 Stock Option Plan of Performance Industries, Inc. filed with the Company's Notice of Annual Meeting of shareholders dated November 8, 1993 and incorporated herein by reference.
10.49 Documents relating to its purchase of operating assets from Bobby McGee's USA, Inc., effective December 20, 1993, which were filed with the Company's report on Form 10-K for the period ended December 31, 1993, and are incorporated herein by reference.
10.50 The following documents relating to the purchase of the ground lease for 2671 E. Camelback Road, Phoenix, Arizona, effective December 30, 1993, as filed with the Company's report on Form 10-K for the year ended December 31, 1993, and are incorporated herein by reference:
10.51 Lease dated May 9, 1994, by and between Just for Feet, Inc. (Lessee) and Camelback Development L.C. (Lessor) dated May 9, 1994. Which were filed with the Company's report on form 10-K for the year ended December 31, 1994, and are incorprated herein by reference.
10.52 Lease dated June 30, 1994, by and between Blockbuster Music Retail, Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor). Which were filed with the Company's report on form 10-K for the year ended December 31, 1994, and are incorprated herein by reference.
10.53 Lease dated January 17, 1995 by and between Restaurants of America, Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor). Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.54 Design Build Lease Agreement dated December 18, 1992, by and between Hard Rock Cafe Investors, Ltd., XIV (Lessee) and Imprimis Partners II (Lessor) and amendment thereto dated September 26, 1995. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.55 Offer to purchase Buster's Restaurant, Bar and Grill dated February 25, 1995, including a first assignment and Assumption of Lease and landlord's consent dated March 15, 1995, by and between Mercado Del Lago, L.L.C., Buster's & Company, Inc. and Performance Restaurants Group, Inc., and lease dated the 20th of November 1989 by and between Mercado Project Group, Inc., and lease dated the 20th of November 1989 by and between Mercado Project Limited (Lessor) and Buster's & Company, Inc. (Lessee), and Bill of Sales dated March 15, 1995. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.56 Documents from the Caliber Bank loan dated June 24, 1994, as amended September 21, 1994. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
- Restaurant Phase Construction Agreement, dated June 24, 1994.
- Restaurant Phase Promissory Note.
- Irrevocable Letter of Credit - $1,900,000.
- Environmental Indemnification Agreement.
- Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust, dated September 21, 1994.
- Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixtures Filing.
- Assignment of Hard Rock Cafe Lease.
- Retail Phase Construction Loan Agreement, dated June 24, 1994.
- Retail Phase Promissory Note.
- Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory note, and Retail Phase Deed of Trust, dated September 21, 1994.
- Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixtures Filing.
- Assignment of Retail Leases.
10.57 Line of Credit Agreement dated July 19, 1995, by and between Performance Funding Corp. and Capital Factors, Inc., and Guarantee of Performance Industries, Inc. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.58 Lease dated September 1, 1995, between Performance Restaurants of Nevada, Inc. and 1030 East Flamingo, L.L.C. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.59 Second Amendment to Retail Phase Construction Loan Agreement dated October 31, 1995 by and between Camelback Plaza Development, L.C. and Norwest Bank. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.60 Tenth Amendment to Restaurant Phase Construction Loan Agreement dated October 31, 1995, by and between Camelback Plaza Development, L.C. and Norwest Bank. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.61 Cash Collateral Agreement by and between Performance Industries, Inc., and Norwest Bank dated October 31, 1995. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
10.62 Promissory Note, Deed of Trusts, Assignment of Lease and Rents by and between the Camelback Plaza Development L.C. and Boston Capital Mortgage dated as of November 1, 1996 for the sum of $7,250,000 on the property of the subsidiary at 2621 E. Camelback Rd., Phoenix, AZ.
10.63 Stock Purchase Agreement, dated February 28, 1996, Letter Amendment there to dated March 20, 1996, Letter Amendment there to dated July 15, 1996, and Deposit Escrow Agreement between Markwood L.L.C. as Buyer and the Company as seller of stock in its wholly owned subsidiary Fabricaciones Metalicas Mexicanas - S.A.
22. Subsidiaries of the Registrant. Which were filed with the Company's report on form 10-K for the year ended December 31, 1995, and are incorprated herein by reference.
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.
Dated: April 14, 1997 Performance Industries, Inc.
By: /s/ Edmund L. Fochtman, Jr. Edmund L. Fochtman, Jr. President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 29th day of March, 1996, by the following persons on behalf of the Registrant in the capacities indicated:
/s/ Joe Hrudka Chairman of the Board and Director Joe Hrudka (Chief Executive Officer)
/s/ Edmund L. Fochtman, Jr. President and Director Edmund L. Fochtman, Jr.
/s/ Allen L. Haire Director Allen L. Haire
/s/ Jonathan Tratt Director Jonathan Tratt
/s/ James W. Brown Chief Financial Officer and Director James W. Brown (principal Accounting Officer)
/s/ Robert A. Cassalia Secretary Robert A. Cassalia
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
CONTENTS
Page
Independent auditor's report 21
Consolidated financial statements:
Balance sheets 22
Statements of operations 23
Statements of shareholders' equity 24
Statements of cash flow 25 - 26
Notes to financial statements 27 - 48
Board of Directors and Shareholders Performance Industries, Inc. Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT ----------------------------
We have audited the accompanying consolidated balance sheets of Performance Industries, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Performance Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
TOBACK CPAs, P.C. Phoenix, Arizona March 26, 1997
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
The accompanying notes are an integral part of these consolidated financial statements. 22
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated financial statements. 23
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See Note 16 regarding a one-for-four reverse stock split which occurred in 1996. The accompanying notes are an integral part of these consolidated financial statements. 24
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated financial statements. 25
PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Supplemental Disclosure of Noncash Investing and Financing Activities
See notes to financial statements for noncash investing and financing activities.
The accompanying notes are an integral part of these consolidated financial statements. 26
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies:
Business:
Performance Industries, Inc. has three primary subsidiaries:
o Performance Restaurants Group, Inc. (restaurant operations) o Performance Funding Corp. (receivable factoring) o Performance Camelback Development Corp. (real estate operations)
These subsidiaries conduct business primarily in Arizona and California.
Prior to 1994, Performance Industries, Inc. operated in the general and specialty automotive parts and accessory businesses as Mr. Gasket Company. During 1993, the Company completed the disposition of those operations. Any gains, losses or activity related to these operations have been accounted for as income from discontinued operations.
Performance Camelback Development Corp. has a 72% ownership interest in Camelback Plaza Development Corp., L.L.C., an Arizona limited liability company.
Principles of consolidation:
The consolidated financial statements include the accounts of Performance Industries, Inc., its wholly-owned subsidiaries and its majority owned real estate limited liability company. All significant intercompany balances and transactions are eliminated in consolidation.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents.
Fair value of financial instruments:
The carrying amount of cash values and cash equivalents approximates fair value because of the short maturity of those instruments.
The carrying amount of other financial instruments including accounts receivable, receivables from sale of business, factored receivables and current liabilities approximate the fair value of these instruments because of the short-term nature of the instruments.
The carrying amount of long-term debt approximates fair value because the interest rates on debt are comparable to current market rates on debt with similar terms.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Advertising:
Advertising costs are charged to operations as incurred.
Accounting estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company's significant estimates relate to the realizability of certain receivables, valuation of net deferred tax assets, estimates of liabilities subject to compromise, and certain litigation contingencies.
Inventory:
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consists of food and beverages at restaurant locations.
Property and equipment:
Property and equipment are stated at cost and depreciated using the straight-line method over the following estimated useful lives; buildings, 35 years; machinery and equipment, furniture and fixtures and vehicles, 5 to 10 years; land improvements, 10 years. Leasehold improvements are depreciated over the term of the related lease.
Restaurant equipment available for sale:
Restaurant equipment available for sale represents assets removed from closed restaurants and is reported at the lower of carrying amount or fair value less costs of disposal.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Securities available for sale:
Securities available for sale are reported at fair value. Unrealized holding gains, net of income tax, on securities available for sale are reported as a net amount in a separate component of shareholders' equity until realized.
Gains and losses on the sale of securities available for sale are determined using the specific identification method.
Fair values for securities available for sale are determined using quoted market prices.
Income taxes:
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax 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 benefit (expense) is the tax receivable (payable) for the period and the change during the period in deferred tax assets and liabilities excluding the tax effect on unrealized holding gains on securities available for sale.
Factoring operations:
The Company recognizes fees based upon a percentage of the gross factored receivables. The Company makes advances of up to 80% of the face amount of factored receivables. The remaining balance is held as a reserve for fees and charge-backs for uncollected receivables. Management's policy is to obtain a security interest in all borrowers' receivables and obtain personal guarantees, when deemed necessary.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Investment in real estate:
Rental real estate:
Rental real estate is stated at cost, which principally represents land lease costs, capitalized carrying costs, offsite improvements and building construction costs. Rental real estate is being depreciated using the straight-line method over the estimated useful life of the properties of approximately 35 years.
Rental income is recognized on the straight-line basis over the life of the related leases. Lease incentives are recognized as reductions of rental income over the terms of the related leases.
Undeveloped real estate:
Undeveloped real estate represents the cost of certain real estate held for future development or sale.
Income (loss) per common share:
Income (loss) per common share is based upon the weighted average number of shares outstanding. The assumed exercise of employee stock options does not result in material dilution.
Reclassifications:
Certain reclassifications have been made to the financial statements for 1995 and 1994 to conform to the financial statement classifications for 1996.
2. Restricted cash:
In November 1996, the Company entered into an agreement with the minority shareholders in the Camelback Plaza Development, L.C. (see Note 19). The agreement contains a provision that restricts the use of a portion of the proceeds from the refinancing of the real estate project. The cash is to be used to fund operating expenses and shortfalls of the project, if necessary.
The restrictions are partially released on February 1, 1997 and entirely released on April 1, 1997.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Securities available for sale:
During 1995, the Company implemented SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, related to the Company's investment in certain equity securities.
In 1995, a portion of the securities became marketable as a result of a public stock offering, and were sold for a gain of approximately $343,000. The remaining securities became available for sale in May, 1996 subject to certain SEC limitations. As a result, the Company considers its investments in marketable equity securities to be available for sale as of December 31, 1996.
At December 31, 1996, the aggregate fair value of securities available for sale was approximately $727,000, with unrealized holding gains of $516,000 and a cost basis of $211,000.
Unrealized holding gains decreased in 1996 by $783,000, net of income taxes of approximately $274,000.
4. Receivables from sale of businesses:
Receivables from sale of businesses consist of the following (in thousands):
1996 1995 ------ ------
Note receivable, interest at 10%, principal and interest payments due in monthly installments of approximately $120,000 through January, 1998, secured by stock of former Mexican subsidiary (See Note 6) 1,475 -
Note receivable, former employee, interest at 12.5%, principal and interest payments due in monthly installments of approximately $6,600 through July, 1998, unsecured. During 1996 the former employee stopped making payments on the note. The note is fully allowed for in the allowance for doubtful accounts as of December 31, 1996. 123 126
Notes settled during 1996 - 1,154 ------ ------ 1,598 1,280 Less allowance for doubtful accounts (123) (280) ------ ------ $1,475 $1,000 ====== ======
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Receivables from sale of businesses:
Approximate future maturities of receivables from sale of businesses at December 31, 1996 are as follows (in thousands):
1997 $ 1,433 1998 165
5. Allowances for doubtful accounts:
The changes in allowances for doubtful accounts are as follows (in thousands):
The allowances for doubtful accounts include allowances for accounts and other receivables, receivables from sale of business, and factored accounts receivable.
6. Investment in real estate:
Investment in real estate included in the 1996 and 1995 balance sheets is as follows: 1996 1995 ----------------- ---------------- Rental real estate $ 8,742 $ 10,980 Less accumulated depreciation (430) (1,076) ----------------- ---------------- 8,312 9,904
Undeveloped real estate 1,169 1,169 ----------------- ----------------
$ 9,481 $ 11,073 ================= ================
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate, continued:
Summaries of real estate transactions and related accumulated depreciation are as follows (in thousands):
Real estate:
The Company's real estate subsidiary owns a retail and restaurant project in Phoenix, Arizona. The subsidiary completed the project in 1995. The subsidiary has entered into lease agreements with the various tenants of the project (see Note 12).
During 1996, the Company sold its stock in its Mexican subsidiary, Fabricaciones Metalicas Mexicanas, S. A. (FMMSA). The total sales price for the shares was $3,000,000, including $1,000,000 in cash and a note receivable of $2,000,000 (See Note 4). The significant assets disposed of by the Company for which the subsidiary held an ownership interest included rental real estate with a carrying value of approximately $1,500,000. The gain on the sale, net of selling costs, was approximately $1,200,000 for 1996.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate, continued:
FMMSA had gross rental revenues of approximately $524,000 and $544,000 and net income of approximately $195,000 and $20,000 for the years ending December 31, 1995 and 1994, respectively. For the seven months prior to the sale in 1996, FMMSA had gross rental revenue of approximately $384,000 and income from operations before income taxes of approximately $219,000.
7. Property and equipment:
The components of property and equipment consist of the following (in thousands):
8. Other assets: Other assets consist of the following (in thousands):
During 1996, the Company invested $120,000 in the preferred stock of a closely held regional airline. There currently is no public market for the preferred stock. The investment is recorded at cost.
Loan acquisition costs are being amortized over the 84 month term of the debt and are shown net of accumulated amortization.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-term debt and capital lease obligations: Long-term debt and capital lease obligations consist of the following (in thousands):
Cash paid for interest was approximately $818,000, $700,000, and $70,000 during 1996, 1995 and 1994, respectively.
Approximately $273,000 of interest costs were capitalized as construction period interest on the real estate project during 1995.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-term debt and capital lease obligations:
Approximate future maturities of long-term debt, excluding capital lease obligations, for the next five years as of December 31, 1996 are as follows (in thousands): 1997 $505 1998 463 1999 321 2000 181 2001 191
10. Accrued expenses and other current liabilities:
At December 31, 1996 and 1995, the components of accrued expenses and other current liabilities consist of the following (in thousands):
11. Liabilities subject to compromise:
From April 21, 1991 through May 4, 1993, Performance Industries, Inc. (formerly Mr. Gasket Company) operated as debtor-in-possession under the supervision of the Bankruptcy Court. In Chapter 11, the shareholders' interests and substantially all liabilities as of the filing date were subject to compromise.
Additions or deletions to the claims (liabilities subject to compromise) may arise from the determination by the Bankruptcy Court or agreement by parties in interest of allowed claims for contingencies and disputed collateral and amounts. The Company is in the process of negotiating settlements of the final claims outstanding. Liabilities subject to compromise consist primarily of environmental remediation and tax liabilities.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases:
As lessee: ----------
The Company's restaurant subsidiary leases ten restaurant locations under operating leases including one restaurant location which closed prior to year end. These leases expire at various dates through 2010 and require aggregate annual payments of approximately $1,400,000. The leases also contain provisions for contingent rental payments ranging from 5% to 9% of sales. During 1996 and 1995, the restaurants incurred contingent rentals of approximately $358,000 and $332,000, respectively.
The Company's restaurant subsidiary also leases certain equipment under capital leases. The leases require aggregate monthly payments of approximately $4,600 through May, 2001.
The Company's real estate subsidiary leases land under an operating lease. The lease requires annual payments of approximately $200,000 through 2052.
The Company and its subsidiaries also lease their office space and two warehouse facilities under operating leases. These leases require aggregate monthly payments of approximately $15,000 and expire at various dates through 1997.
Future minimum lease payments for capital leases and noncancellable operating leases as of December 31, 1996 are as follows (in thousands):
Capital Operating leases leases ------------ ------------- 1997 $ 56 $ 1,704 1998 56 1,621 1999 56 1,506 2000 47 1,381 2001 9 1,359 Thereafter - 14,932 ------------ -------------
224 $ 22,503 ============= Less amount representing interest (37) ------------
Present value of future minimum lease payments on capital leases $ 187 ============
Rent expense for operating leases was approximately $1,818,000, $1,723,000 and $1,398,000 for 1996, 1995 and 1994, respectively.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases, continued:
As lessor: ----------
The Company's real estate subsidiary has entered into operating leases for its rental real estate with four primary tenants. The leases call for aggregate monthly rental payments of approximately $78,000. The leases are for periods of 5 to 25 years and include rent escalation clauses every 3 to 5 years tied to the consumer price index. Certain leases also include percentage rent charges based on gross revenues of the tenants.
Aggregate minimum future rentals under the lease agreements as of December 31, 1996 are as follows (in thousands):
1997 932 1998 932 1999 942 2000 1,036 2001 1,086 Thereafter 12,654 -------------- $ 17,582 ==============
Percentage rental income earned was approximately $173,000 and $80,000 for 1996 and 1995, respectively. There was no percentage rental income earned in 1994.
13. Income taxes:
The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes as of January 1, 1994. There was no cumulative effect on prior years from the change in accounting for income taxes.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
The provision for income taxes expense consists of the following (in thousands):
Foreign income taxes represent an estimate of the Mexican income tax on the sale of the Company's Mexican subsidiary.
The following is a reconciliation between the income tax (expense) benefit from continuing operations and income taxes calculated at the statutory federal income tax rate of 34% for continuing operations (in thousands):
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss and tax credit carry forwards. Significant components of the Company's net deferred tax assets consist of the following (in thousands):
The deferred income tax liability related to unrealized holding gains on securities available for sale decreased by $274,000 during 1996 as a result of a decrease in the unrealized holding gain during 1996.
The Company has recorded a net deferred tax asset as of December 31, 1996, of $1,460,000 primarily reflecting the benefit of net operating loss carryforwards. Realization is dependent upon generating sufficient taxable income prior to the expiration of the carryforwards. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
The Company has available at December 31, 1996, federal net operating loss carryforwards and unused general business credits, which may provide future tax benefits as follows (in thousands): Unused Unused federal federal net general Year of operating loss business expiration carryforwards credits -------------------- ----------------- ---------------- 1997 $ - $ 318 1998 - - 2003 - 37 2005 2,585 - 2006 3,866 - 2007 7,015 - 2008 2,997 - 2009 3,257 29 2010 1,862 30 2011 3,790 - ----------------- ----------------
$ 25,372 $ 414 ================= ================
The Company has net operating carryforwards for state income tax purposes of approximately $14,000,000 which expire through 2001.
14. Discontinued operations:
Income from discontinued operations consists of adjustments for estimated allowances and reserves on receivables and liabilities of previously discontinued business segments, net of income taxes.
15. Stock option plans:
The Company has a stock option plan which provides for a maximum of 500,000 shares of common stock that may be issued to employees, directors, or consultants of the Company and its subsidiaries.
The option price for options granted to eligible employees must be at least 100% of the fair market value of the stock at the time the options are granted. The option price for options granted to non-employees is determined by the Board of Directors. Options granted to employees are not exercisable after ten years. Restrictions on the time to exercise options given to non-employees are set forth in the options agreements.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Stock option plans:
At December 31, 1996, all outstanding options were exercisable and 192,500 shares were available for future grant. All outstanding options expire through 2005.
A summary of transactions with respect to the stock option plan follows:
16. Reverse stock split:
During the year, the Company approved a one-for-four reverse stock split of its issued and outstanding common stock. In conjunction with the reverse stock split, the Company also approved an offer to purchase shares of the Company's stock held by shareholders with holdings of less than 100 shares. The Company ultimately purchased 8,266 treasury shares as a result of the offer.
17. Restaurant closures:
During the year, the Company opened a new restaurant in Las Vegas, Nevada. The Company incurred total costs of approximately $1,500,000 related to the restaurant, including leasehold improvements, restaurant equipment and pre-opening costs. The Company also has a lease obligation for the restaurant building which requires annual payments totalling approximately $180,000 per year through December, 2005. Operations of the restaurant included sales of approximately $809,000 and losses of approximately $360,000 during 1996. In October, 1996, management determined that the location could not generate sufficient revenue to become a profitable operation and closed the restaurant. Accordingly, the Company recorded a loss resulting from the closure of the restaurant of approximately $1,255,000 in 1996. At December 31, 1996, management has estimated future costs of the disposal for additional rental liabilities to be $80,000. These costs are included in the recorded loss on closure of restaurants and in accrued expenses and other current liabilities on the accompanying balance sheet for 1996.
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Restaurant closures:
During 1996, the Company also closed a restaurant in San Ramon, California due to the inability of the restaurant operation to generate positive cash flow. Operations of the restaurant included sales of approximately $925,000 and losses of approximately $144,000 during 1996. The Company recorded a loss related to the closure of the restaurant of approximately $540,000 in 1996. Sales from the San Ramon restaurant were approximately $2,116,000 and $2,257,000 during 1995 and 1994, respectively. Losses from operations of the restaurant were approximately $9,000 and $10,000 during 1995 and 1994, respectively. Subsequent to year end, the Company sold its interest in the restaurant property for $50,000 and the buyer assumed the lease commitment related to the property.
18. Litigation:
In November, 1993, certain shareholders dissented from the sale of one of the Company's automotive products business. As a result, the company filed an action to obtain a determination of the "fair cash value" of shares held by those shareholders as of November 28, 1993, as if the sale had not occurred. The Company settled with the majority of the dissenting shareholders during 1994 for $.75 a share. The remaining dissenting shareholders, who hold 461,500 shares, are entitled to payment of "fair cash value" of the shares within 30 days of the determination of the value by the court.
During 1993, two of the remaining dissenting shareholders filed an action against the Company and certain current and former directors, alleging that certain actions taken by the Company and management have lowered the value of the Company's stock. Management is aggressively defending this action and does not currently expect to incur any material liability at its conclusion.
In another matter, an insurance carrier has filed an action against the Company alleging that Company representatives failed to notify the insurance carrier of a product liability claim in a timely manner. The accident occurred in 1990 and the carrier voluntarily paid out approximately $1,700,000 in benefits to settle the claim in January 1995. Management believes the action to be without merit and intends to vigorously defend the suit.
The Company is involved in various other claims and legal actions arising in the ordinary course of business, including product liability claims and employment disputes.
Accrued liabilities at December 31, 1996, include approximately $600,000 for potential litigation settlements on various claims. (See Note 10). In the opinion of management, any additional liabilities related to legal actions will not have a material adverse effect on the Company's consolidated financial condition.
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19. Commitments:
During 1993, Performance Restaurant Group, Inc. (PRG) entered into a consulting agreement with the previous owner of six restaurants in California. The agreement provides for payments of $90,000 annually through 1999. The agreement also restricts disclosure of information and includes restrictive competition clauses.
During 1996, Camelback Plaza Development Corp., L.C. entered into an agreement with a property manager to direct the operations of the Company's Camelback rental real estate property. The agreement requires a monthly payment of the greater of $1,600 or 2% of gross revenue collected. The agreement is effective through July, 1997 with a one year renewal option.
The Company entered into a Purchase and Sale and Settlement Agreement with the minority members of Camelback Plaza Development, L.C. The agreement provides that the minority members can purchase the Company's interest in the L.C. for $1,150,000 which approximates the net carrying value of the assets of the L.C. The agreement also contains provisions to settle certain disputes between the parties. The agreement terminates if the sale of the Company's interest is not completed by April 1, 1997.
20. Contingencies:
An investigation of environmental matters related to facilities and property previously owned and leased by the Company was performed during 1992 to determine contingencies that would affect the Company's emergence from Chapter 11. Certain reports received by the Company identified areas of environmental contamination and potential environmental contamination. Management believes that certain predecessors-in-interest may bear either full or partial liability for remediation of affected areas. Certain predecessors-in-interest and governmental agencies were notified by the Company of the related possible liabilities. In addition, the Company notified its insurance carriers of potential claims under its general liability and property insurance coverage from prior years.
Locations reviewed for potential environmental liability included the following:
Manufacturing facility in California:
This facility housed the manufacturing plant of a wheel business formerly owned by the Company. All assets at this facility were sold and the buyer vacated the premises in a prior year.
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20. Contingencies, continued:
An environmental survey was conducted in the fall of 1991. Two areas for further investigation were identified. Further investigation in the spring of 1992 disclosed ground contamination and possible seepage into groundwater. Management believed the contamination to have existed prior to its purchase of the business in 1982 and has notified its predecessor-in-interest. The Company has accrued the estimated minimum remediation costs of approximately $500,000. These costs are included as liabilities subject to compromise in the accompanying consolidated balance sheets.
All appropriate county, state and federal agencies were notified regarding contamination at this site. To management's knowledge, no response was made by any notified governmental agency nor was the facility inspected by any such agency. However, the Company may, at a later date, be ordered to undertake further testing and/or remediation at the location.
Warehousing and office facility in Ohio:
In 1990, potential contamination was discovered at this location. Consultants were retained to perform testing and investigation of the site to determine the extent of the contamination. In compliance with bankruptcy statutes, rules and regulations regarding the dischargeability of claims, in January, 1993, the Company notified the Ohio Environmental Protection Agency (EPA) of contamination at the site.
Environmental studies performed determined that the contamination is confined to the site with no evidence of migration to groundwater or surrounding properties. Management estimated the costs of remediation to be as much as $5,600,000. The Company believed that a former owner/operator of the site, which is a Fortune 500 company, caused the contamination. The Company negotiated an agreement with the former owner/operator regarding indemnification for the costs of remediation. The agreement required that remediation costs be shared by the Company, the Fortune 500 company and the successor to the Company as owner of the property. The Company's responsibility with respect to the agreement was to pay remediation costs and to guarantee payment of costs by the successor related to clean-up areas pursuant to a "Final Closure Plan" approved by the Ohio EPA. The "Closure Plan" was approved by Ohio EPA in February, 1995. The Company incurred approximately $170,000 of costs related to this clean-up in 1994.
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21. Related party transactions:
The Company leased two buildings in Cleveland, Ohio, used predominately for manufacturing, from Joe Hrudka, the Company's principal shareholder and Chairman of the Board, as successor in interest to Hrudka Realty Company. The buildings were vacated as of May, 1992. Under the lease, the Company was required to return the building in essentially the same state of repair as the building was in upon the signing of the lease. The Company expended approximately $137,000 for repairs in 1994.
Howard Gardner Consultants received $30,000 in 1996 from the Company for consulting services on financial and general business matters. Howard B. Gardner is a former officer and director of the Company. The fees are included in selling, general and administrative expenses in the statement of operations.
A Director of the Company earned a 3% commission of $90,000 from the sale of the Company's stock in its Mexican subsidiary during 1996. The commission is included in selling, general and administrative expenses in the accompanying statement of operations. Of the commission earned, $45,000 was paid during 1996 and the remaining $45,000 is included in accounts payable on the accompanying balance sheet for 1996.
During 1996, the Company approved a short term loan of $150,000 to the principal shareholder. The loan was repaid to the Company prior to December 31, 1996.
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22. Principal business segments:
The Company has three primary business segments, its restaurant, factoring, and real estate operations.
Operating income by segment represents revenues less costs of revenues, selling, general and administrative expenses, interest expense, plus other income, net before allocation of corporate general and administrative expense, interest and other corporate income.
Revenues for factoring for 1996 include approximately $115,000 of interest revenue from other segments.
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22. Principal business segments, continued:
The Company's restaurant subsidiary incurred approximately $408,000, $425,000 and $334,000 of advertising expense in 1996, 1995 and 1994, respectively.