UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 of 15(d) of
The Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-11331
PERFORMANCE INDUSTRIES, INC.
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(Exact name of Registrant as Specified in its Charter)
OHIO 34-1334199
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2701 E. CAMELBACK ROAD, SUITE 210
PHOENIX, ARIZONA 85016
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(Address or principal executive offices and zip code)
(602) 912-0100
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(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports and (2) has been subjected to such
filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES [ ] NO [X]
THE AGGREGATE MARKET VALUE OF REGISTRANT'S VOTING STOCK HELD BY NONAFFILIATES AS
OF NOVEMBER 30, 2000 (BASED UPON CLOSING PRICE) WAS $493,292.
AT NOVEMBER 30, 2000, 2,182,533 OF REGISTRANT'S COMMON STOCK WERE OUTSTANDING.
PART I
ITEM 1. BUSINESS
In 1997, the Company restructured its operations divesting itself of two
businesses, Factoring and Development. This will allow the company to
concentrate on its core business, Restaurants. Management believes this will
enable analysts to better understand the Company which may result in greater
stock activity.
PERFORMANCE RESTAURANTS GROUP, INC. (RESTAURANTS)
Restaurants was formed in 1993 to acquire six operating restaurants in
California. One of the restaurants operates under the trade name Bobby McGee's
and is a full service restaurant/nightclub. One was converted to a sports
bar/restaurant/nightclub concept operating under the trade name McGee's Grill. A
third one was converted to a Steamers Restaurant with the nightclub still
operating under the Bobby McGee's name.
In 1995 the company sold one of the Bobby McGee's locations. Another was sold in
1999 and the third one sold in March 2000.
In 1995, a restaurant was acquired in Scottsdale, Arizona. It is a full service
restaurant and bar operating under the trade Buster's Restaurant Bar & Grill.
In 1996, the Company acquired two Carlos Murphy's restaurants in San Diego,
California. In 1998, the Company entered into an operating lease for the two
Carlos Murphy's restaurants with an unrelated third party. Subsequently, one was
closed in 1998, and the other was sold in January 1999.
In October 1998, the company purchased Steamers Genuine Seafood. It is an
upscale seafood restaurant located in the Biltmore Fashion Park in Phoenix, AZ.
In November 1999, the company signed a lease to open Latitudes Restaurant & Bar
in Scottsdale, AZ. This casual restaurant will open in January 2000.
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 restaurants to celebrate birthdays, anniversaries, graduations, and other
special occasions.
McGee's Grill 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.
Buster's is a full service restaurant offering a variety of dishes including
seafood, steak and pasta dishes. Buster's is on the higher end of the casual
dining market.
Steamers is a full service restaurant offering a variety of dishes, but
featuring seafood. Steamers is on the higher end of the casual dining market.
The Phoenix restaurants experience a slow down in sales and profits in the
summer months. This is partially offset by an increase in sales in the
California restaurants in the summer months.
Total employees for Performance Restaurants as of 12/31/99were 326 Full-Time and
120 Part-Time.
PERFORMANCE FUNDING CORP. (FUNDING)
The Company sold the Factoring business to a third party related through common
management in August 1997. The Company believes the sale to have been on terms
at least as favorable as it would have received in an arm's length transaction.
The sale allowed the Company to make available cash for use in the expansion of
its restaurant division when needed.
2
PERFORMANCE DEVELOPMENT CORP. (DEVELOPMENT)
CAMELBACK PLAZA DEVELOPMENT, L.C.
In December of 1997, the Company sold its interest in Camelback Plaza
Development, Inc. to Imprimis Partners II, the minority partner in the
Development. The Company received approximately $700,000 for its interest.
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.
A. COMPETITION
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 advance
over other areas.
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 clams
under its general liability and property insurance coverage from prior years.
a) REYES AVENUE, COMPTON CA
This facility housed the manufacturing plan 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.
3
ITEM 2. PROPERTIES
As of December 31, 1999, the Company ands it subsidiaries leased a total of
approximately 68,598 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:
APPROXIMATE AREA IN
LOCATION PRIMARY FUNCTIONS SQUARE FEET LEASE EXPIRATION
- -------- ----------------- ----------- ----------------
Phoenix, Arizona Office 2,115 07/31/2000
Scottsdale, Arizona Buster's Restaurant Bar & Grill 9,123 04/30/2010
Phoenix, Arizona Steamers Genuine Seafood 7,827 04/30/2007
Brea, California Restaurant/Nightclub 11,000 06/30/2005
Burbank, California Restaurant/Nightclub (1) 11,000 06/30/2010
Burlingame, California Restaurant/Nightclub 9,000 12/02/2006
Citrus Heights, California Restaurant/Nightclub 10,600 09/14/2005
Scottsdale, Arizona Warehouse 3,320 06/30/2001
Scottsdale, Arizona Latitudes Restaurant & Bar 4,613 11/30/2009
Ixtapa Raw Land 8,748 sq. meters Purchasing
- ----------
(1) The FF&E was sold on 03/30/2000. And the building re-leased.
ITEM 3. LEGAL PROCEEDINGS
A. 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
1995 for $.75 a share. The remaining dissenting shareholders, who held
461,500 shares, were entitled to payment of "fair cash value" of the shares
within 30 days of the determination of the value by the court. The Company
acquired the stock of the remaining dissenting shareholders in 1998 for
$458,000.
B. 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 approximately $1,600,000 in
benefits to settle the claim in January 1996. Management believes the action
to be without merit and intends to vigorously defend the suit.
C. The Company is involved in various other claims and legal actions arising in
the ordinary course of business including claims from periods prior to its
reorganization under Chapter 11 of the bankruptcy code. These claims include
product liability claims, environmental matters and employment disputes.
Management intends to vigorously defend these claims and believes them to be
without merit.
D. Accrued liabilities at December 31, 1999, include approximately $120,000 for
potential litigation settlements on various claims. 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.
4
PART II
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 OTC Bulletin Board for the
past two calendar years(1)
BID ASK
--- ---
1999
Quarter ended March 31, 1999 .90 1.00
Quarter ended June 30, 1999 .90 1.00
Quarter ended September 30, 1999 .90 1.00
Quarter ended December 31, 1999 .90 1.00
1998
Quarter ended March 31, 1998 .90 1.00
Quarter ended June 30, 1998 .90 1.00
Quarter ended September 30, 1998 .90 1.00
Quarter ended December 31, 1998 .90 1.00
(1) All quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual trades.
As of March 26, 1999, there were 766 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 trade over the counter under the symbol PRFI.
During 1996, the Company effected a 4 for 1 reverse stock split and an odd lot
tender offer. Approximately 8,200 shares were tendered to the company.
5
ITEM 6. SELECTED FINANCIAL DATA (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, 1995 through 1999. 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, 1995 through 1999
are derived from the audited financial statements of the Company.
YEAR ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
OPERATING RESULTS:
Net revenues $ 19,326 $ 19,456 $ 22,029 $ 22,407 $21,598
Net income (loss) from continuing operations $ (749) $ (483) $ (1,076) $ (3,723) $ 294
Basic and diluted income (loss) per common
share from continuing operations $ (.34) $ (.21) $ (.44) $ (1.50) $ .12
Weighted average number of common stock
outstanding 2,198 2,309 2,473 2,486 2,489
AS OF DECEMBER 31 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
FINANCIAL POSITION:
Working capital (deficiency) $ (240) $ (791) $ 1,194 $ 1,118 $ 2,424
Total assets $ 8,297 $ 9,397 $ 10,405 $ 21,971 $24,878
Long term debt, excluding current installments
and amount subject to compromise $ 451 $ 766 $ 255 $ 8,950 $ 7,345
Shareholders' equity $ 4,268 $ 5,214 $ 6,212 $ 8,530 $13,061
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATION
PERFORMANCE RESTAURANTS GROUP, INC.
Restaurant's Gross Revenues for 1999 were down slightly from 1998 as a result of
the closing of two restaurants. Gross revenues were $19,326,000 compared to
$19,456,000 in 1998. The closing of the two restaurants was offset by sales at a
restaurant acquired in 1998, Steamers in Phoenix. For restaurants open for at
least one year, customer count is down by 9% in 1999 from 1998. Same store sales
for stores open at least one year were also down by 9% for the period. In
addition revenues from admissions at the Bobby McGee's restaurants is down by
$216,000 from 1998 or 17%. This is attributed to the closing of the two
restaurants in 1998, which had lounges where admissions are charged for entry at
night.
Income from continuing operations before income taxes were $136,000 in 1999 vs.
a loss of $494,000 in 1998.
For the first six months of 2000, the Restaurants group is showing a profit.
Management believes the profit to be a result of the closure of non-profitable
locations and the opening of new locations. Management also believes, but there
can be no assurance, that Restaurants will continue to be profitable for the
balance of the fiscal year.
Performance Industries, Inc. realized income and expense from several
non-recurring events including the collection of a $491,000 debt from settlement
of the bankrupt estate of a former customer, and a $236,000 gain realized on the
sale of securities held as available for sale. The Company also recognized a
$378,000 adjustment to the deferred tax valuation allowance. As a result of
these items, the Company had a loss of $749,000 for 1999 as compared to a loss
of $483,000 for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Management believes, but there can be no assurance, that current cash reserves
are sufficient to meet the needs of the Company for the current fiscal year. The
Restaurant group is expected to meet all of its cash need for the current year
from operations. This is because of greater cost controls and the closure of
non-profitable stores in the past year.
During January 2000, the Company opened a new restaurant in Scottsdale, AZ. This
was financed by a bank loan in the sum of $500,000. If the Company acquires or
opens any more restaurants, it will need to borrow further sums to cover
acquisition or opening cost. Management believes, but there can be no assurance,
that the Company would be able to borrow any monies needed.
The Company is remodeling two restaurants in California in the upcoming fiscal
year, 2000. Management believes, but there can be no assurance, that such cost
will be met through operating income.
ITEM 8. FINANCIAL STATEMENTS
The independent auditors' report on the Consolidated Financial Statements listed
in the accompanying index are filed as part of this report. See Index to Audited
Consolidated Financial Statements on page 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company as of December 31, 1999 were
as follows:
NAME AGE POSITION
---- --- --------
Joe Hrudka 62 President
Edmund L. Fochtman, Jr. (1) 63 Vice President/CFO
Allen L. Haire (1) 58 Director
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
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 1997, he
assumed the additional position of President. 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 a Vice President of the Company from June
1997. Prior to this, he was President of the Company from 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, he 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.
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.
8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following tables sets forth the number and percentage of the outstanding
shares of common stock beneficially owned as of March 29,2000, 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 1,689,241 76%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December of 1997, the Company sold its interest in the Camelback Plaza
Development, L.C., to the other members of the limited liability company. The
Company had tried to sell the development for over a year and was unsuccessful
in finding a bona fide purchaser for the entire project. Management believes the
sale to be on terms at least as favorable as would have been realized in a sale
to unrelated third parties.
In August 1997, the Company sold its Factoring division to a new company
including two present directors and officers of the Company, Joe Hrudka and Ed
Fochtman, Jr. The sale was on terms at least as favorable as would have been
realized in a sale to unrelated third parties.
In December of 1997, the Company sold its interest in the Camelback Plaza
Development, L.C., to the other members of the limited liability company. The
Company had tried to sell the development for over a year and was unsuccessful
in finding a bona fide purchaser for the entire project. Management believes the
sale to be on terms at least as favorable as would have been realized in a sale
to unrelated third parties.
In 1997, the Company made two short term loans totaling $55,000 to Joe Hrudka.
Mr. Hrudka has repaid the loans. In December 1997, the Company purchased shares
of stock in the Company from Jonathan Tratt, a former director, for $126,425.
During 1999, the Company loaned Performance Funding, L.L.C. $500,000. The
balance of this note at December 31, 1999 was $250,000 with interest being paid
monthly at 12%. The note is due in full in July 2000. The Company leases a
warehouse that houses antique autos owned by the Company as well as other
vehicles owned by the majority shareholder. Total rent expense on the warehouse
was $35,000 for the year ended Dec. 31, 1999.
In December 1997, the Company purchased shares of stock in the Company from
Jonathan Tratt, a former director, for $126,425.
9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Reports 13-14
Consolidated Balance Sheets - December 31, 1999 and 1998 15
Consolidated Statements of Operations - Years ended
December 31, 1998 and 1997 16
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1998, 1998 and 1997 17
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997 18-19
Notes to Consolidated Financial Statements - Years ended
December 31, 1999, 1998 and 1997 20
(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.
- -----------
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.
10.53 Lease dated January 17, 1995 by and between Restaurants of America, Inc.
(Lessee) and Camelback Plaza Development, L.C. (Lessor), as filed with
the Company's Report on Form 10-K for the year ended December 31, 1994,
and incorporated 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, 1994 as filed with
the Company's Report on Form 10-K for the year ended December 31, 1994
and incorporated 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.
10
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. as filed with the Company's Report on Form 10-K for the
year ending December 31, 1995 and incorporated herein by reference.
10.58 Lease dated September 1, 1995, between Performance Restaurants of
Nevada, Inc. and 1030 East Flamingo, L.L.C. as filed with the Company's
Report on Form 10-K for the period ending December 31, 1995 and
incorporated 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 as filed with the Company's Report on Form 10-K for the
year ending December 31, 1995 and incorporated 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 as filed with the Company's Report on Form 10-K for the
year ending December 31, 1995 and incorporated herein by reference.
10.61 Cash Collateral Agreement by and between Performance Industries, Inc.,
and Norwest Bank dated October 31, 1995 as filed with the Company's
Report on Form 10-K for the year ending December 31, 1995 and
incorporated 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 2624 E. Camelback Rd., Phoenix, AZ as
filed with the Company's Report on Form 10-K for the year ending
December 31, 1995 and incorporated herein by reference.
10.63 Stock Purchase Agreement, dated February 28, 1996, Letter Amendment
thereto dated March 20, 1996, Letter Amendment thereto 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. as filed with the Company's
Report on Form 10-K for the year ending December 31, 1995 and
incorporated herein by reference.
22. Performance Industries, Inc. (the Company) is the parent company of its
wholly owned subsidiaries Performance Restaurant Group, Inc. (restaurant
company), Performance Funding Corp. (formerly a factoring company) and
RD's Pischkes Grill, LLC dba Latitudes.
11
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: November 30, 2000 PERFORMANCE INDUSTRIES, INC.
By: /s/ Joe Hrudka
------------------------------------
Joe Hrudka
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 14th day of April 1999, by the following persons on
behalf of the Registrant in the capacities indicated:
By: /s/ Joe Hrudka Chairman of the Board, President and
------------------------------ Director
Joe Hrudka
By: /s/ Edmund L. Fochtman, Jr. Vice President, CFO and Director
------------------------------
Edmund L. Fochtman, Jr.
By: /s/ Allen L. Haire Director
------------------------------
Allen L. Haire
12
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Performance Industries, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Performance
Industries, Inc. as of December 31, 1999, and the related consolidated
statements of operations and comprehensive income, shareholders' equity and cash
flows for the year then ended. 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 audit.
Except as discussed in the following paragraph, we conducted our audit 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 consolidated 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
audit provides a reasonable basis for our opinion.
As discussed in Notes 3 and 6, the Company has real estate in Mexico valued at
$785,000 held for sale and a related $708,000 note payable with $77,000 of
accrued interest secured by the land in Mexico. Principal and interest payments
on the debt have been discontinued and no offers have been obtained for sale of
the real estate. The Company is not willing to obtain a legal opinion relative
to ownership issues resulting from default on debt payments or a current
valuation of the real estate. It was impracticable to extend our auditing
procedures sufficiently to satisfy ourselves as to the ownership and valuation
of the real estate and the related debt and accrued interest.
In our opinion, except for the effects of such adjustments and/or disclosures,
if any, as might have been determined to be necessary had we been able to obtain
sufficient evidence regarding the Company's real estate held for sale and
related note payable, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Performance
Industries, Inc. as of December 31, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Phoenix, Arizona
March 22, 2000
13
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Performance Industries, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Performance
Industries, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1998. 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 consolidated 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, 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ TOBACK CPAs, P.C.
TOBACK CPAs, P.C.
Phoenix, Arizona
March 23, 1999
14
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS
1999 1998
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 517 $ 1,486
Investment in trading securities 816 7
Investment in available-for-sale securities (Note 2) 143 --
Accounts and other receivables, less allowance for
doubtful accounts of $9 and $27, respectively 452 333
Receivables from sale of businesses, net of allowance -- 125
Factored accounts receivable -- 150
Current portion of note receivable (Note 12) 40 --
Note receivable from related party (Note 15) 250 --
Inventories 205 289
Prepaid expenses and other current assets 119 212
Deferred income taxes (Note 9) 11 24
Real estate held for sale (Notes 3 and 6) 785 --
-------- --------
Total current assets 3,338 2,626
Real estate held for sale (Notes 3 and 6) -- 785
Note receivable, less current portion (Note 12) 276 --
Deferred income taxes (Note 9) 410 1,278
Property and equipment (Notes 4 and 6) 3,460 3,770
Other assets (Note 5) 813 938
-------- --------
Total assets $ 8,297 $ 9,397
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 6) $ 807 $ 497
Accounts payable 539 579
Excess of outstanding checks over bank balance 150 --
Accrued employment costs 373 530
Accrued expenses and other current liabilities
(Notes 3, 7 and 9) 1,459 1,561
Foreign tax liability (Note 9) 250 250
-------- --------
Total current liabilities 3,578 3,417
Long-term debt, less current portion (Note 6) 451 766
-------- --------
Commitments and contingencies (Notes 8, 13 and 14)
Shareholders' equity
Preferred stock, par value $1.00 per share;
authorized 100,000 shares; none issued -- --
Common stock, no par value; authorized 5,000,000
shares; issued 3,157,332 shares; outstanding
2,188,162 and 2,211,183, respectively (Note 11) 31,202 31,202
Accumulated deficit (22,977) (22,228)
Accumulated other comprehensive income (Note 2) (174) --
-------- --------
8,051 8,974
Treasury stock at cost (3,783) (3,760)
-------- --------
Total shareholders' equity 4,268 5,214
-------- --------
Total liabilities and shareholders' equity $ 8,297 $ 9,397
======== ========
See Notes to Consolidated Financial Statements.
15
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues $ 19,326 $ 19,456 $ 22,029
Cost of revenues (18,177) (18,111) (20,733)
Selling, general and administrative expenses (1,597) (1,926) (2,051)
Interest expense (36) (19) (134)
Interest income 85 -- --
Gain (loss) on securities 236 -- (207)
Bad debt recovery, net 504 -- --
Loss on disposal of restaurants (262) -- --
Other income, net (Notes 2, 8 and 12) 57 106 338
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 136 (494) (758)
Income tax (expense) benefit (Note 9) (885) 11 (318)
----------- ----------- -----------
Loss from continuing operations (749) (483) (1,076)
Loss from discontinued operations (Note 10) -- -- (530)
----------- ----------- -----------
Net loss $ (749) $ (483) $ (1,606)
=========== =========== ===========
Other comprehensive income:
Unrealized loss on investment securities, net of tax (174) -- (443)
----------- ----------- -----------
Comprehensive loss $ (923) $ (483) $ (2,049)
=========== =========== ===========
Basic and diluted (loss) per common share:
Continuing operations $ (.34) $ (.21) $ (.44)
Discontinued operations -- -- (.21)
----------- ----------- -----------
Basic and diluted (loss) per common share $ (.34) $ (.21) $ (.65)
=========== =========== ===========
Basic and diluted weighted-average shares outstanding 2,198,256 2,309,451 2,472,649
=========== =========== ===========
See Notes to Consolidated Financial Statements.
16
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Common Stock Treasury Stock Accumulated
------------------ ------------------ other
Number Number Accumulated comprehensive
Amount of shares Amount of shares deficit income (loss) Total
------ --------- ------ --------- ------- ------------- -----
Balance, December 31, 1996 $31,202 3,157,332 $(2,976) 676,068 $(20,139) $ 443 $ 8,530
Net loss -- -- -- -- (1,606) -- (1,606)
Treasury stock purchased -- -- (269) 103,375 -- -- (269)
Holding loss on securities
available for sale, net of
income taxes of $72 -- -- -- -- -- (443) (443)
------- --------- ------- -------- -------- ----- -------
Balance, December 31, 1997 31,202 3,157,332 (3,245) 779,443 (21,745) -- 6,212
Net loss -- -- -- -- (483) -- (483)
Treasury stock purchased
(Note 15) -- -- (515) 166,706 -- -- (515)
------- --------- ------- -------- -------- ----- -------
Balance, December 31, 1998 31,202 3,157,332 (3,760) 946,149 (22,228) -- 5,214
Net loss -- -- -- -- (749) -- (749)
Treasury stock purchased -- -- (23) 23,021 -- -- (23)
Unrealized loss on
securities, net of
income taxes of $4 -- -- -- -- -- (174) (174)
------- --------- ------- -------- -------- ----- -------
Balance, December 31, 1999 $31,202 3,157,332 $(3,783) 969,170 $(22,977) $(174) $ 4,268
======= ========= ======= ======== ======== ===== =======
See Notes to Consolidated Financial Statements.
17
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
Cash flows from operating activities
Net loss $ (749) $ (483) $(1,606)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 766 823 699
Loss on settlement of receivables from sale of business -- -- 88
Increase in trading securities (789) -- --
Unrealized gains on trading securities (20) -- --
Principal payments received on installment notes receivable 9 -- --
Impairment loss on real estate held for sale -- -- 375
Loss on sale of subsidiaries -- -- 913
Loss on investment in preferred stock -- -- 120
Loss on securities available for sale -- -- 207
Minority interest in loss from subsidiary -- -- (82)
(Gain) loss on sale of property and equipment (15) 94 92
(Recovery) bad debt expense (12) 131 88
Deferred income taxes 885 (11) 231
Changes in assets and liabilities (net of changes
related to discontinued operations):
Accounts receivable (107) 64 (152)
Factored accounts receivable 150 82 (7)
Inventories 84 24 15
Prepaid expenses and other current assets 93 15 (405)
Other assets 40 (8) 477
Accounts payable (40) (58) (359)
Accrued employment costs (157) 54 (15)
Other current liabilities, net (102) 98 (630)
------- ------- -------
Net cash provided by operating activities 36 825 49
------- ------- -------
See Notes to Consolidated Financial Statements.
18
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Changes in restricted cash $ -- $ -- $ 409
Payments received on receivables from sale of businesses 125 50 1,118
Principal payments received on notes receivable from related party 250 -- --
Disbursements on notes receivable from related party (500) -- --
Purchase of property and equipment (1,032) (213) (466)
Net proceeds from sale of:
Real estate operations -- -- 560
Factoring operations -- -- 513
Property and equipment 351 23 --
Purchase of available for sale securities (321) -- --
Payment for purchase of restaurant assets -- (1,100) --
Loan to officer -- -- (55)
Repayment of officer loan -- -- 55
Other, net -- (56) 166
------- ------- -------
Net cash (used in) provided by investing activities (1,127) (1,296) 2,300
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 492 -- --
Repayments of borrowings (497) (343) (401)
Treasury stock purchased (23) (515) (269)
Change in excess of outstanding checks over bank balance 150 -- --
------- ------- -------
Net cash (used in) provided by financing activities 122 (858) (670)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (969) (1,329) 1,679
Cash and cash equivalents, beginning of year 1,486 2,815 1,136
------- ------- -------
Cash and cash equivalents, end of year $ 517 $ 1,486 $ 2,815
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid $ 57 $ 35 $ 102
======= ======= =======
Income taxes paid $ 1 $ 1 $ 1
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Note receivable from sale of restaurant location $ 325 $ -- $ --
======= ======= =======
See Notes to Consolidated Financial Statements.
19
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS:
Performance Industries, Inc. (the Company) is the parent company of its
wholly-owned subsidiaries Performance Restaurant Group, Inc. (restaurant
company), Performance Funding Corp. (formerly a factoring company) and RD's
Pischkes Grill, LLC dba Latitudes.
During 1997, Performance Funding Corp., (a factoring company) discontinued its
operations. The Company sold the majority of its factored receivables to a
related corporation (see Note 15). The Company accounted for the disposition of
these assets as discontinued operations in 1997 (see Note 10).
Also during November 1997, Performance Camelback Development Corp. sold its 72%
interest in Camelback Plaza Development Corp., L.L.C. Camelback Plaza
Development Corp., L.L.C. owns and operates a retail and restaurant property in
Phoenix, AZ. The Company accounted for this disposition as discontinued
operations in 1997 (see Note 10).
In December 1999, the Company's restaurant subsidiary formed RD's Pischkes
Grill, LLC dba Latitudes which opened its restaurant operation in Scottsdale,
Arizona in January 2000. The fiscal year end is the same as the restaurant
company.
The Company's continuing operations consist of restaurant locations in Arizona
and California.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Performance
Industries, Inc. and its wholly-owned subsidiaries. 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.
20
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of other financial instruments including cash and cash
equivalents, accounts receivable, receivables from sale of business, factored
receivables, investment in securities 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 (excluding the $708,000 note payable,
Mexican corporation) approximates fair value because the interest rates on debt
are comparable to current market rates on debt with similar terms.
FISCAL YEAR:
The Company's year ends on December 31, but the sole operating entity is the
restaurant subsidiaries, which has a different year end. The restaurant
company's fiscal year ends on the last Sunday on or before December 31st. The
years ended December 26, 1999, December 27, 1998 and December 28, 1997 contained
52 weeks.
ADVERTISING:
Advertising costs are charged to operations as incurred. The Company incurred
advertising expense of approximately $206,000, $229,000, and $334,000 during
1999, 1998 and 1997, respectively.
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 not discussed elsewhere in the notes to the
financial statements relate to the realizability of certain receivables,
valuation of net deferred tax assets, estimates of liabilities subject to
compromise investments in marketable equity securities, and certain litigation
contingencies.
21
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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; machinery and
equipment, furniture and fixtures and vehicles, 3 to 10 years. Leasehold
improvements are depreciated over the shorter of the life of the asset or the
remaining term of the related lease.
INVESTMENT IN MARKETABLE EQUITY SECURITIES:
Trading securities are held for resale in anticipation of short-term
fluctuations in market prices. Trading securities, consisting primarily of
actively traded equity securities, are stated at fair value. Realized and
unrealized gains and losses are included in income.
Available-for-sale securities consist of marketable equity securities not
classified as trading. Available-for-sale securities are stated at fair value,
and unrealized holding gains and losses, net of the related deferred tax effect,
are reported as a separate component of shareholders' equity.
Gains and losses on the sale of securities are determined using the specific
identification method.
The Company invests in common shares of publicly-traded companies. Such
investments are exposed to various risks such as interest rate, market and
credit. Due to the level of risk associated with such investments and the level
of uncertainty related to changes in the value of such investments, it is at
least reasonably possible that changes in risks in the near term would
materially affect investment balances and the amounts reported in the financial
statements.
22
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INVESTMENT IN REAL ESTATE:
Investment in real estate and real estate held for sale represents the cost of
certain real estate held for future sale.
LOSS PER COMMON SHARE:
Basic loss per common share is computed by dividing the loss attributable to the
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share is computed using the weighted average
number of shares of common stock outstanding plus the dilutive effect of any
stock options. The effect of the options have not been included in the
computation of diluted loss per common share because their inclusion would have
had an anti-dilutive effect.
CONCENTRATIONS OF CREDIT RISK:
The Company periodically holds cash deposits in excess of federally insured
limits.
RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements for 1997
and 1998 to conform to the financial statement classifications for 1999 with no
effect on net income.
23
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in all fiscal quarters of all fiscal years beginning after June
15, 2000. The Statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company will adopt the new Statement effective
January 1, 2001. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivative
will either be offset against the change in fair value of the hedges assets,
liabilities or firm commitment through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on the Company's earnings or financial position.
NOTE 2. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
A summary of investment earnings recognized in income during the year ended
December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
----- ----- -----
Trading securities:
Realized gains (losses), net $ 215 $ -- $ --
Change in unrealized gains (losses), net 21 -- --
----- ----- -----
$ 236 $ -- $ --
----- ----- -----
Available-for-sale securities:
Realized gains -- -- --
Realized (losses) -- -- (207)
----- ----- -----
-- -- (207)
----- ----- -----
$ 236 $ -- $(207)
===== ===== =====
24
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2. INVESTMENTS IN MARKETABLE EQUITY SECURITIES (CONTINUED)
The following is a summary of the Company's investment in available-for-sale
securities as of December 31, 1999 (in thousands):
Cost $ 321
Gross unrealized losses (178)
-----
Fair value $ 143
=====
DERIVATIVE FINANCIAL INSTRUMENTS:
The Company sold two call options during December, 1999 for the purchase of
common stock of two publicly traded companies. The proceeds received for the
options totaled $106,000 and were recorded as deferred revenue. The buyer of the
options can acquire 5,000 shares of common stock at a strike price of $55 per
share and 10,000 shares of common stock at a strike price of $50 per share. At
December 31, 1999, the Company owned the number of common shares necessary to
meet its obligation should the options be exercised prior to their expiration in
January, 2000.
The market value of the options at December 31, 1999 was $96,000 and is included
in other current liabilities in the accompanying balance sheet. The $10,000 gain
related to the change in fair value of the options is included in other income
in the accompanying statement of operations in accordance with the accounting
treatment prescribed by FASB 115 for trading securities.
The options are subject to volatility that coincides with the risk of valuation
changes that is inherent in publicly traded securities.
NOTE 3. INVESTMENT IN REAL ESTATE
Real estate held for sale of $785,000 as of December 31, 1999 represents land in
Ixtapa, Mexico. The Company plans to sell the land and has discontinued making
payments on a note payable secured by the land (see Note 6). An impairment loss
of $375,000 is included in other income (expense) in the accompanying December
31, 1997 consolidated statement of operations.
NOTE 4. PROPERTY AND EQUIPMENT
The components of property and equipment consist of the following (in
thousands):
1999 1998
-------- --------
Restaurant equipment $ 1,736 $ 2,068
Furniture and fixtures 828 765
Transportation equipment 438 438
Leasehold improvements 2,496 2,829
Equipment held under capital leases 219 219
Construction in progress 525 25
-------- --------
6,242 6,344
Less accumulated depreciation (2,782) (2,574)
-------- --------
$ 3,460 $ 3,770
======== ========
25
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT (CONTINUED)
The Company financed $475,000 of the construction in progress at December 31,
1999 using proceeds from the line of credit (see Note 6).
NOTE 5. OTHER ASSETS
Other assets consist of the following (in thousands):
1999 1998
---- ----
Classic automobiles $206 $206
Deposits and other 117 115
Liquor licenses 146 176
Restaurant small wares 344 441
---- ----
$813 $938
==== ====
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in
thousands):
1999 1998
------- -------
Note payable, Mexican corporation, with interest
at prime plus 3-7/8%, with monthly principal
payments of $6,000 plus interest through December
2006, secured by real estate held for sale (see
Note 3). The company has discontinued making the
required payments on this note due to the Mexican
corporation's breach of contract. In addition, no
accrual has been made for the interest on the note
payable $ 708 $ 708
Line of credit, bank, allowing for borrowings up
to $492,000, with monthly interest payments at
8.25%, collateralized by assets and personally
guaranteed by the majority shareholder, due
January 29, 2000. Subsequent to year-end, the line
was converted to a term note with the principal
balance increased to $517,000, with monthly
principal payments of $8,200 plus interest at
8.25% to increase to prime plus .25% after three
years, due January 2007, collateralized by assets
and personally guaranteed by the majority
shareholder 492 --
Notes repaid in full during 1999 -- 450
Other debt 58 105
------- -------
1,258 1,263
Less current portion (807) (497)
------- -------
$ 451 $ 766
======= =======
26
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
During 1999 approximately $12,000 of interest was capitalized.
Approximate future maturities of long-term debt, excluding capital lease
obligations, for the next five years as of December 31, 1999 are as follows (in
thousands):
2000 $ 807
2001 71
2002 67
2003 72
2004 79
Thereafter 162
------
$1,258
======
NOTE 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 1999 and 1998, the components of accrued expenses and other
current liabilities consist of the following (in thousands):
1999 1998
------ ------
Gift certificates and advance customer deposits $ 179 $ 112
Litigation settlements and estimated claims (Note 13) 120 200
Product liability costs 10 69
Sales taxes payable 111 146
Other accruals 242 237
Environmental liability 499 499
Sales tax accrual 298 298
------ ------
$1,459 $1,561
====== ======
NOTE 8. LEASES
The Company's restaurant subsidiary leases seven restaurant locations and office
and warehouse facilities under operating leases including one restaurant
location which was closed during 1999 and one restaurant which opened in 2000.
One of these leases is personally guaranteed by the majority shareholder through
June 2002. These leases expire at various dates through 2010 and require
aggregate annual payments of approximately $1,180,000. The leases also contain
provisions for contingent rental payments ranging from 3% to 9% of sales. During
1999, 1998 and 1997 the restaurants incurred contingent rentals of approximately
$339,000, and $349,000 and $331,000, respectively.
27
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8. LEASES (CONTINUED)
Future minimum lease payments for noncancelable operating leases as of December
31, 1999 are as follows (in thousands):
OPERATING
LEASES
---------
2000 $ 1,221
2001 1,142
2002 1,089
2003 1,095
2004 1,104
Thereafter 2,615
---------
$ 8,266
=========
Rent expense for operating leases was approximately $1,568,000, $1,582,000 and
$1,862,000 for 1999, 1998 and 1997, respectively.
NOTE 9. INCOME TAXES
The provision for income tax (expense) benefit consists of the following (in
thousands):
1999 1998 1997
----- ----- -----
Federal:
Current $ -- $ -- $ --
Deferred (885) 10 (231)
State and local -- 1 --
----- ----- -----
Total income tax (expense) benefit $(885) $ 11 $(231)
===== ===== =====
Allocated to:
Continuing operations $(885) $ 11 $(318)
Discontinued operations -- -- 87
----- ----- -----
$(885) $ 11 $(231)
===== ===== =====
The foreign tax liability represents an estimate of the Mexican income tax
related to the sale of the Company's Mexican subsidiary in 1996.
28
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
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 for continuing operations (in thousands):
1999 1998 1997
----- ----- -----
Income tax (expense) benefit at statutory rate $ (48) $ 168 $ 247
State income taxes (11) 20 --
Tax effect of valuation allowance on deferred tax assets, net of the valuation
allowance on unrealized losses on available for sale securities of $72 (378) (162) (212)
Expiration and loss of net operating loss carryforwards (509) -- (353)
Permanent differences and other 61 (15) --
----- ----- -----
Income tax (expense) benefit from continuing operations $(885) $ 11 $(318)
===== ===== =====
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):
1999 1998
------- -------
Current deferred tax assets:
Unrealized losses on securities $ 76 $ --
Reserves not currently deductible 166 168
------- -------
242 168
Valuation allowance (231) (144)
------- -------
Net current deferred tax asset $ 11 $ 24
======= =======
Non-current deferred tax assets:
Difference between book and tax bases of assets $ 581 $ 967
Contribution carryforwards 25 27
Capital loss carryforwards 82 82
Net operating loss carryforwards 7,872 7,989
General business credit carryforwards 66 66
------- -------
8,626 9,131
Valuation allowance (8,216) (7,853)
------- -------
Net non-current deferred tax asset $ 410 $ 1,278
======= =======
29
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
During the year ended December 31, 1999, the Company increased its valuation
allowance for the deferred tax asset as management believes that the net
operating losses will not be fully utilized in future years. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. During 1999, 1998 and 1997, the
Company lost the benefit of a portion of its federal and state net operating
loss carryforwards due to reaching the expiration date of the carryforwards.
The Company has available at December 31, 1999, federal net operating loss
carryforwards and unused general business credits, which may provide future tax
benefits as follows (in thousands):
UNUSED
FEDERAL NET UNUSED
YEAR OF OPERATING LOSS FEDERAL GENERAL
EXPIRATION CARRYFORWARDS BUSINESS CREDITS
---------- ------------- ----------------
2003 $ -- $ 37
2005 1,128 --
2006 3,866 --
2007 7,015 --
2008 2,967 --
2009 3,257 29
2010 1,231 --
2011 489 --
2012 549
2013 436 --
2019 984 --
------- -------
$21,922 $ 66
======= =======
The Company has net operating carryforwards for state income tax purposes of
approximately $2,490,000 which expire from 2000 through 2004.
NOTE 10. DISCONTINUED OPERATIONS
During 1997, the Company sold its real estate operations and its factoring
business. As a result, net sales, costs of sales, income and expenses related to
those segments have been recorded as discontinued operations in the accompanying
consolidated statements of operations. The sales of the businesses are described
below.
30
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 10. DISCONTINUED OPERATIONS (CONTINUED)
REAL ESTATE OPERATIONS:
In November 1997, the Company sold its 72% interest in Camelback Plaza
Development Corp., L.L.C., to the minority shareholders. The net cash sales
price for its 72% interest was $709,000. The significant assets disposed of by
the Company for which the subsidiary held an ownership interest included real
estate with a carrying value of approximately $8,000,000. Along with the real
estate acquired, the associated note payable of approximately $7,200,000 was
assumed by the buyer. For the eleven months prior to the sale in 1997, Camelback
Plaza Development had gross rental revenues of $934,000. Percentage rental
income earned was approximately $84,000 for 1997. Any income or loss from
operations is included in income (loss) from discontinued operations.
FACTORING:
In August 1997, the Company discontinued operating its factoring subsidiary and
sold substantially all of the net assets of its factoring business, including
factored accounts receivable, equipment and intangible assets, to a related
company, Performance Funding, L.L.C. (see Note 15). The buyer also assumed the
obligations of the factoring business upon sale. The net selling price was
approximately $513,000 in the form of cash. The remaining factored accounts
receivable of $150,000 were collected in 1999.
Revenues for the eight months prior to the sale in 1997 were approximately
$400,000. The loss from the operation of the factoring business is included in
loss from discontinued operations.
The caption "Loss from discontinued operations" in the accompanying consolidated
statements of operations for the year ended December 31, 1997 consists of the
following (in thousands):
1997
-----
Loss from operations of real estate subsidiaries, net of income tax $(118)
Loss on sales of real estate subsidiaries, net of income tax (670)
Income from operations of factoring subsidiaries, net of income tax 255
Gain on the sale of factoring operations 3
-----
$(530)
=====
31
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 11. 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.
At December 31, 1999, all outstanding options were exercisable and 237,500
shares were available for future grant. The weighted average remaining
contractual life of the outstanding options is approximately six years.
A summary of transactions with respect to the stock option plan follows:
WEIGHTED
NUMBER RANGE OF AVERAGE
OF SHARES EXERCISE PRICES EXERCISE PRICE
--------- --------------- --------------
Outstanding at January 1, 1997 307,500 $.88 to $.96 $.90
Granted 167,500 $.88 to $.96 .89
Exercised --
Cancelled (37,500) $.88 $.88
---------
Outstanding at December 31,1997 437,500 $.88 to $.96 $.90
Granted --
Exercised --
Cancelled (137,500) $.88 $.88
---------
Balance at December 31, 1998 300,000 $.88 to $.96 $.91
Granted --
Exercised --
Cancelled (37,500) $.88 $.88
---------
262,500
Balance at December 31, 1999 300,000 $.88 to $.96 $.91
=========
32
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12. RESTAURANT CLOSURES
In January 1999, the Company closed a restaurant in La Mesa, California due to
the inability of the restaurant to generate adequate cash flow. Operations of
the restaurant included sales of approximately $140,000 and income of
approximately $4,000 during 1999. In January 1999, the Company sold its interest
in the La Mesa restaurant property for $348,000 and the buyer assumed the lease
commitment related to the property. The Company recorded a gain related to the
closure of the restaurant of approximately $126,000 in 1999, which is included
in other (expense) income, net in the consolidated statement of operations and
comprehensive income.
In March 1999, the Company closed a restaurant in San Bernadino, California due
to the inability of the restaurant to generate positive cash flow. Operations of
the restaurant included sales of approximately $259,000 and losses of
approximately $69,000 during 1999. The Company recorded a loss related to the
closure of the restaurant of approximately $151,000 in 1999 net of $50,000
received from the San Bernardino landlord to surrender the lease, which is
included in other (expense) income net, in the consolidated statement of
operations and comprehensive income.
During December 1999, the Company also closed a restaurant in Burbank,
California due to the inability of the restaurant to generate positive cash
flow. Operations of the restaurant included sales of approximately $1,864,000
and losses of approximately $575,000 during 1999. Subsequent to year-end, the
Company negotiated the sale of its Burbank restaurant property for $350,000,
with the buyer assuming the lease. The sale closed in March 2000. The total
value of the restaurant assets included in the consolidated balance sheet at
December 31, 1999 is approximately $410,000, consisting primarily of property
and equipment, restaurant small wares and liquor license. Included in other
income (expenses) on the consolidated statement of operations and comprehensive
income at December 31, 1999, is a loss of approximately $43,000 for the
impairment of assets relating to the closure of the Burbank restaurant and
$51,000 of accrued lease obligations.
33
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12. RESTAURANT CLOSURES (CONTINUED)
During 1996, 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 (See Note 8). Additional costs incurred during 1999,
1998 and 1997 were approximately $76,000, $189,000 and $100,000 related to the
Las Vegas restaurant and are included in other income (expense) in the
accompanying consolidated statement of operations and comprehensive income.
During 1999, the Company sold the remaining assets associated with the Nevada
location for $475,000 which approximates the remaining book value of the assets
disposed of. A promissory note of $325,000 was created with monthly payments due
from the buyer of approximately $5,000 per month, including interest at 8%,
through August 2006.
During 1999, the Company entered into a sublease agreement for the Nevada
location. Approximate minimum future rentals to be received on this sublease are
as follows:
2000 $ 180,000
2001 180,000
2002 180,000
2003 180,000
2004 180,000
Thereafter 180,000
-----------
Total minimum future rentals $ 1,080,000
===========
NOTE 13. 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 1995 for
$.75 a share. The remaining dissenting shareholders, who held 461,500 shares,
were entitled to payment of "fair cash value" of the shares within 30 days of
the determination of the value by the court. The Company acquired the stock of
the remaining dissenting shareholders in 1998 for $458,000.
34
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 13. LITIGATION (CONTINUED)
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 approximately $1,600,000 in benefits to settle the
claim in January 1996. 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 claims from periods prior to its
reorganization under Chapter 11 of the bankruptcy code. These claims include
product liability claims, environmental matters and employment disputes.
Management intends to vigorously defend these claims and believes them to be
without merit.
Accrued liabilities at December 31, 1999, include approximately $120,000 for
potential litigation settlements on various claims (see Note 7). 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.
NOTE 14. ENVIRONMENTAL MATTERS
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.
35
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 14. ENVIRONMENTAL MATTERS (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 in accrued expenses and other current liabilities 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.
NOTE 15. RELATED PARTY TRANSACTIONS
As discussed in Note 13 the Company sold the majority of its assets of
Performance Funding Corp to Performance Funding, L.L.C. Members of Performance
Funding L.L.C. include the Chairman and President of the Company, and the Vice
President of Operations and CFO. Additionally, Performance Funding, L.L.C. is
subleasing an office from the Company on a month-to-month basis for $1,600 a
month.
During 1999, the Company loaned Performance Funding, L.L.C. $500,000. The
balance of this note at December 31, 1999 was $250,000 with interest being paid
monthly at 12%. The note is due in full in July 2000.
The Company leases a warehouse that houses antique autos owned by the Company as
well as other vehicles owned by the majority shareholder. Total rent expense on
the warehouse was approximately $35,000 for the year-ended December 31, 1999.
During 1997, the Company purchased approximately 49,000 shares of the Company's
common stock from a Director of the Company for $2.60 per share.
36