UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-11331
PERFORMANCE INDUSTRIES, INC.
----------------------------
(Exact name of Registrant as Specified in its Charter)
Ohio 34-1334199
- ---------------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2425 E. Camelback Road, Suite 620
Phoenix, Arizona 85016
(Address of principal executive offices and zip code)
(602) 912-0100
(Registrant's telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each class Name of Each Exchange 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 subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
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.
The aggregate market value of Registrant's voting stock held by nonaffiliates as
of March 29, 1996 (based upon closing price) was $769,000.
At March 31, 1996, 9,958,115 shares of Registrant's Common Stock were
outstanding.
PART I
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. Five of the restaurants operate under the trade name Bobby McGee's
and are full service restaurants/nightclubs. The sixth was converted to a sports
bar concept operating under the trade name McGee's Grill. In 1995, a seventh
restaurant was acquired in Scottsdale, Arizona. It is a full service restaurant
and bar operating under the trade name Buster's Restaurant Bar & Grill.
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.
The nightclub offers a dance floor with a disc jockey playing recorded music. It
appeals to younger patrons who are out for a night of dancing and socializing.
Buster's Restaurant Bar & Grill is a more upscale dining experience offering
choice meats, seafood, and specialty dishes. The beverage offerings include a
full line of liquors and wine, as well as ten micro brews and a wide assortment
of domestic and imported beers. Buster's Restaurant Bar & Grill's business is
more cyclical than the other restaurants with greater sales between November and
April coinciding with the winter visitor season in Arizona and slower sales
during the summer months.
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.
Restaurants has developed a franchising package for its concept domestically 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 receivables 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 of 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 receivables 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 receivables 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.
2
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., 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.
The remaining space in the retail phase is under lease with tenant improvements
having commenced in late 1995 with expected completion in the second quarter
1996. The lessee is a full service restaurant.
Fabricaciones Metalicas Mexicanas, S.A.(FMMSA)
- ----------------------------------------------
This is the Mexican subsidiary of the Company that previously operated as a
Maquiladora plant in Mexicali, Mexico. Since the Company discontinued
manufacturing, it has been the holder of the real property owned by the Company
and has been the lessor of the property to other manufacturing concerns. At the
present time, the enclosed property is 100% leased with lease terms of two to
five years in duration. The Company has a real estate broker seeking a buyer for
the property.
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. Implementation of Reorganization
--------------------------------
On April 21, 1991, Mr. Gasket Company (excluding subsidiaries), (now known as
Performance Industries, Inc., the "Company" herein) filed a petition for relief
under Chapter 11 of the United Bankruptcy Code with the United States Bankruptcy
Court for the Central District of California, Chapter 11 Case No.
LA-91-72714-AA. The bankruptcy was prompted, in part, by the following events:
1) the March 21, 1991 entry of a judgment against Mr. Gasket Company in favor of
Rally Manufacturing Company ("Rally"); 2) the inability of Mr. Gasket Company to
make a principal reduction payment on certain Subordinated Notes owed by Mr.
Gasket Company; 3) the refusal by Mr. Gasket Company's primary lender to extend
further credit to Mr. Gasket Company as a result of the threat of execution on
the Rally judgment; and 4) a decrease in sales of Mr. Gasket Company's products
of 30% or $17 million in the first six months of 1991.
On May 4, 1993, Mr. Gasket Company emerged from Chapter 11 proceedings and filed
a Certificate of Reorganization with the Ohio Secretary of State's Office, along
with Amended and Restated Articles of Incorporation which, among other things,
changed the name of the Company from Mr. Gasket Company to Performance
Industries, Inc. The Company now operates its business without Bankruptcy Court
supervision.
Under the Joint Plan, a cash reserve of approximately One Million Five Hundred
Thousand Dollars was established for the purpose of satisfying disputed and
unliquidated general unsecured claims which were expected to be liquidated
subsequent to the Implementation Date. If the reserve is insufficient to satisfy
all subsequently liquidated claims, the Company is required to deposit up to One
Million Dollars per year into the Option A Cash Reserve until such time as all
claims are paid pursuant to the Joint Plan. It is not anticipated that this
requirement will have any effect on the Company's ability to meet its
obligations.
3
B. Prior Business
--------------
Wheel and Tire Division
- -----------------------
On December 31, 1992, during the Chapter 11 proceeding, the wheel and tire
business was sold. Under the terms of the sale agreement, Cragar Industries,
Inc. purchased all inventory, intangible property, certain accounts receivable,
and other assets of the wheel and tire business.
The net sales price of the wheel and tire business was $11,348,000 consisting of
$4,000,000 paid in January 1993, $4,000,000 paid by March 31, 1993 pursuant to
the terms of a secured promissory note, and the balance to be paid by December
31, 1993 pursuant to the terms of a non-interest bearing cognovit promissory
note. This note was renegotiated during the summer of 1993 and in December 1994.
(See note to financial statements 5 for further details). In connection with
this sale, the Company entered into a three year non-competition agreement.
Performance Division
- --------------------
On May 4, 1993, the Company sold the assets and certain liabilities of the
Performance Division to an affiliate of Echlin, Inc. The buyer operates as Mr.
Gasket, Inc. The assets sold included most of the assets of the Performance
business and related activities in Cleveland, Ohio, excluding land and building.
The sales price for the Performance business was $33,880,000 before adjustment
in working capital, as defined in the Purchase Agreement. Cash and other
consideration of $31,880,000 were paid at closing on May 4, 1993 and $175,000
was paid upon agreement on the working capital adjustment. An additional
$2,000,000 was maintained in escrow for twelve months to provide for the payment
of claims for indemnification under the initial Purchase Agreement. (See note 5
to financial statements for further information). The escrow was closed and all
proceeds paid to the Company on May 4, 1994.
In conjunction with the sale of Performance Division, the land and building used
for the Performance Division was leased by an affiliate of Echlin, Inc. with an
option to purchase. This option was exercised and the land and building sale
closed on April 14, 1994. The net proceeds were approximately $2,180,000 after
payment of the existing mortgage on the property.
Exhaust Division
- ----------------
The Company sold its Exhaust business to Walker Manufacturing, a division of
Tennessee Gas Pipeline Company on December 3, 1993 after approval of the sale by
shareholders on November 28, 1993. The sale included all machinery and equipment
used by the Company to manufacture exhaust products, the exhaust finished goods
inventory, selected raw material and work in process, patents and trademarks and
account receivables related to the exhaust business.
The sale price was $7,503,090, subject to later adjustment if the accounts
receivable collections did not exceed the sum of approximately $2,500,000.
$6,503,090 was paid on closing, $1,000,000 was paid upon the delivery of
machinery and equipment from Mexico to the Buyer's factory in Mississippi. In
connection with the sale, the Company and certain of its current and former
officers and directors entered into a five year non-competition agreements with
respect to the Exhaust business.
In addition, the Company entered into a transition agreement with Walker whereby
the Company agreed to provide warehousing for finished goods in Phoenix to
Walker through March 31, 1994 at a cost basis. The transition agreement ended on
March 31, 1994 when Walker closed its warehouse in Phoenix.
C. 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.
4
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.
D. 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.
E. 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. Manufacturing Facility in California
------------------------------------
This facility housed the manufacturing plant of the Wheel business. All
assets at this facility have been sold and the buyer has vacated the
premises (See Notes 5 & 18 to the Consolidated Financial Statements). The
Company filed a closure plan with the State of California for this facility.
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 believes 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 cost.
At this time, all appropriate county, state and federal agencies have been
notified regarding contamination at this site. To management's knowledge, no
response has yet been made by any notified governmental agency nor has the
facility been 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.
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
5
for any contamination or the costs of remediation.
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
proposed 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 agreed 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. PROPERTIES
----------
As of December 31, 1995, the Company and its subsidiaries owned and leased a
total of approximately 363,308 square feet of manufacturing, warehousing,
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 Lease
Location Primary Functions Square Feet Expiration
- -------- ----------------- ----------- ----------
Phoenix, Office 6,314 Lease
Arizona 07/31/97
Scottsdale, Buster's Restaurant Bar & Grill 9,123 04/31/2000
Arizona
Brea, Restaurant/Nightclub 11,000 06/30/2005
California
Burbank, Restaurant/Nightclub 11,000 06/30/2010
California
Burlingame, Restaurant/Nightclub 9,000 12/31/1996
California
Citrus Heights, Restaurant/Nightclub 10,600 09/14/2005
California
San Bernardino, Restaurant/Nightclub 10,500 11/13/2002
California
6
Approximate
Area in Lease
Location Primary Functions Square Feet Expiration
- -------- ----------------- ----------- ----------
San Ramon, Restaurant/Nightclub 9,980 06/30/2002
California
Mexicali, Office, manufacturing, 277,000(1) Owned
Mexico and warehousing
Ixtapa Raw Land 8,748 sq. meters Owned
Phoenix, Development Project 5 Acres(2) Land Lease
Arizona 02/28/2052
Las Vegas, Restaurant/Nightclub 9,185 12/31/2005
Nevada
- --------------------------------------------------------------------------------
(1) Due to a change in the Mexican laws, this
property has been transferred in fee to
Fabricaciones Metalicas Mexicanas, SA, a wholly
owned subsidiary of the Company. The Mexicali
facility is currently being leased by several
tenants. The lease commitments expire on various
dates between 1996 and 1998. The Company's
minimum annual rent for 1996 is approximately
$700,000 from the property.
(2) The real property of five (5) acres which is
under development by the subsidiary 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.
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, Sr., 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 of Philadelphia, a Pennsylvania
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
7
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 Company expects the proceedings to take at least
90 days to be resolved.
B. On January 26, 1994 an action filed by Murray & Murray in the
Court of Common Pleas, 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 opinion of management, the ultimate
disposition of these matters will not have a material adverse
effect on the Company's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
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 National Market System for
the past two calendar years:
BID ASK
--- ---
1995
- ----
Quarter ended March 31, 1995 9/16 3/ 4
Quarter ended June 30, 1995 1/ 2 9/16
Quarter ended September 30, 1995 3/ 8 1/ 2
Quarter ended December 31, 1995 3/16 5/16
1994
- ----
Quarter ended March 31, 1994 $ 1/2 $ 11/16
Quarter ended June 30, 1994 $ 1/2 $ 11/16
Quarter ended September 30, 1994 $ 5/8 $ 11/16
Quarter ended December 31, 1994 $ 9/16 $ 3/4
(1) All quotations represent inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent
actual trades.
As of March 26, 1996, there were 810 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.
8
The Company's shares are traded over the counter.
During 1994, the Company purchased approximately 2,234,000 shares of stock from
dissenters due to the sale of the Company's Exhaust division to Walker
Manufacturing. In addition, the Company purchased approximately 202,000 shares
on the open market in 1994.
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, 1991 through 1995. 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, 1991 through 1995
are derived from the audited financial statements of the Company.
Year Ended December 31
----------------------
OPERATING RESULTS: 1991 1992 1993 1994 1995
- ----------------- -------- -------- -------- -------- --------
Net revenues $ 71,200 $ 78,478 $ 360 $ 18,415 $ 20,253
Net income (loss) ($23,034) ($ 5,711) $ 27,623 $ 435 $ 294
Net income (loss) per
common share ($ 2.19) ($ .54) $ 2.34 $.04 $ 0.03
Weighted average
number of shares
of common stock
outstanding 10,525 10,525 11,789 10,407 9,958
Year Ended December 31
----------------------
FINANCIAL POSITION: 1991 1992 1993 1994 1995
- ------------------ -------- -------- -------- -------- --------
Working capital
(deficiency) ($37,743) ($35,609) $ 2,636 $ 574 $ 2,424
Total assets $ 85,214 $ 68,320 $ 23,126 $ 24,108 $ 24,878
Long-term debt,
excluding current
installments and
amount subject to
compromise $ 1,456 $ 955 $ 515 $ 5,962 $ 7,345
Shareholders' equity
(deficiency) $(10,397) $(16,108) $ 12,824 $ 11,494 $ 13,061
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
9
RESULTS OF OPERATIONS
- ---------------------
Consolidated
- ------------
For the year ended December 31, 1995 the Company had a consolidated after tax
loss from continuing operations of ($144,000), compared to a loss of ($289,000)
for the same period in 1994.
Net after tax income for 1995 was $294,000 compared to income of $435,000 for
the year ending December 31, 1994. In 1995 the Company had income of $438,000
from discontinued operations primarily as a result of "changes in accounting
estimates". Throughout the year the Company was able to settle claims for less
than expected and to collect, or now expects to collect, more receivables than
anticipated at December 31, 1994.
The Company's selling, general, and administrative expenses were $659,000 less
than in 1994. This is a 19% decrease.
Interest expense was $533,000 in 1995 compared to $18,000 in 1994. This rise in
interest is a result of the mini- permanent loan on the retail center and the
Funding line of credit.
In December 1995 the Company was able to sell a portion of securities it
obtained in a private offering. The net proceeds from the sale was $387,000. The
original investment made in 1994 was $250,000. The remaining shares, which are
subject to restrictions on sale under Rule 144, have been written up to market
value as of December 31, 1995 (see Note 6 to the Notes to Consolidated Financial
Statements).
During the year ended December 31, 1994, the Company purchased 2,436,455 of
treasury stock at an average price of $.7244 per share. Most of these purchases
were a result of dissenting shareholders rights exercised in 1993. The Company's
book value per common share outstanding increased from $1.10 at December 31,
1994 to $1.31 at December 31, 1995.
At December 31, 1995 the Company had only eight employees, two of which are
devoted exclusively to management of the Funding subsidiary. Management has no
plans to increase employment from this level.
Performance Restaurants Group, Inc. (Restaurants)
- -------------------------------------------------
Revenues
- --------
Total revenues increased 11.6% to $19,357,000 for 1995 compared to $17,350,000
for 1994. The increase in revenue is a result of the acquisition of a new
restaurant operating under the trade name Buster's Restaurant Bar & Grill.
The year ended 1995 was a 53 week year as compared to 52 weeks in the year ended
1994. Excluding the extra week in 1995, same store sales were down approximately
2.3% as compared with 1994.
Cost and Expenses
- -----------------
Cost of sales, consisting of food and beverage cost, increased during 1995 to
27.6% of sales, as compared with 26.4% in 1994. The percentage increase is
primarily attributable to the food items offered at Buster's Restaurant Bar &
Grill. The restaurant sells primarily certified Black Angus beef and fresh
seafood of the highest quality available. The menu yields a higher food cost
percentage than a Bobby McGee's restaurant.
Restaurant operating expenses include all other unit-level operating costs, the
major components of which are labor cost, supplies, advertising and promotions,
utilities, outside services, repairs and maintenance, depreciation, and
occupancy cost. These costs as a percentage of sales increased slightly by .6%
to 66.6% during 1995 as compared with 66.0% in 1994. The percentage increase is
a result of increased advertising and an increase in depreciation expense. Same
store depreciation increased $245,000 to $423,000 in 1995 from $178,000 in 1994.
The increase is due to the extensive remodeling of the restaurants which was
completed in April of 1995. Advertising expenditures have increased due to
several aggressive advertising campaigns aimed at exposing customers to the
newly remodeled "Bobby McGee's".
10
Administrative expenses as a percentage of sales declined by .4% in 1995 to
6.6%, compared with 7.0% in 1994. Substantially all of the decline is attributed
to higher sales volume.
Net Income
- ----------
The restaurant division recorded a net loss of $165,534 for 1995 as compared to
net income of $105,198 for 1994. The loss is attributable to higher depreciation
charges, increased advertising and the seasonality of Buster's Restaurant Bar &
Grill.
Earnings Outlook
- ----------------
In 1995, Restaurants signed a lease for a new Bobby McGee's restaurant in Las
Vegas, Nevada. Renovations of the premises is proceeding and a grand opening is
planned for May 1996. The new restaurant will operate under the familiar Bobby
McGee's concept with an updated decor and will serve as a model for future
expansion.
Restaurants is looking at several locations throughout the south-west for
expansion of all three of its restaurant concepts. Restaurants will concentrate
on Arizona, California, and Nevada for company operated stores and offer
franchises nationally.
Bobby McGee's Franchises
- ------------------------
Restaurants has developed a franchise package for domestic and international use
because of interest in a possible franchise by a foreign investor. The domestic
package was developed to meet certain regulatory policies before offering the
franchises internationally. Restaurants has not actively sought franchisees and
has no estimate of how many if any will be sold in the upcoming fiscal year.
Performance Funding Corp. (Funding)
- -----------------------------------
A customer representing approximately $360,000 of the 1994 fee revenue obtained
other financing and paid off the Company in February of 1995. Funding was able
to obtain additional business to offset some of this lost revenue. As a result,
gross revenues for the year ended December 31, 1995 was $896,000 compared to
$1,065,000 in 1994, a decrease of approximately 13%.
Net earnings before taxes decreased from $895,000 in 1994 to $676,000 in 1995.
Coupled with the gross revenue decrease, third party interest and financing
costs associated with obtaining the new line of credit are responsible for most
of the decrease in net earnings.
At December 31, 1995, Funding had approximately $1,550,000 invested in assets of
approximately $2,070,000 earning fees, compared to $3,500,000 and $4,400,000 at
December 31, 1994. This is a 53% reduction in assets earning fees from 1994 to
1995. Increased competition for quality customers is the primary cause for most
of the decline. As stated above, one of Funding's largest customers,
representing $1,400,000 of the assets earning fees at December 31, 1994, was
able to obtain alternative financing offering significantly lower interest
rates. Quality clients of this size are difficult to replace.
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 clients' business. The ability to quickly
respond to the clients' 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 in Funding of
$1,000,000. The line of credit expires in
11
July 1997. Management believes, but there can be no assurance, that the line of
credit will be renewed in 1997, if needed.
Performance Development Corp. (Development)
- -------------------------------------------
Gross rent received for the year ended December 31, 1995 was approximately
$770,000 compared to approximately $50,000 for 1994. The development recorded a
net loss of approximately $30,000 for the year ended December 31, 1995 compared
to break even for 1994. This loss is attributed to unabsorbed common area
maintenance expenses related to unoccupied space. Based upon signed leases, all
space is to be occupied by the second quarter of 1996 and the minimum rents are
expected to be over $1,000,000 in 1996.
Development converted its construction loan of $4.9 million to a mini-permanent
loan on January 1, 1996. The loan is amortized over a twenty year period with a
balloon of the outstanding balance due in 40 months.
The Company has contracted with a broker to obtain a buyer of the project.
Ixtapa, Mexico
- --------------
Development purchased land in Marina Ixtapa Mexico for development as a sixty
unit condominium. Preliminary architectural work has been completed, including
cost estimates.
At the time of purchase, Development received a commitment for construction
financing from the seller of the property. The commitment was not honored as a
result of the financial crisis in Mexico.
The Company planned to begin development of the project in the first quarter of
1995. These plans have been indefinitely put on hold by the financial crisis in
Mexico.
Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)
- -----------------------------------------------
FMMSA is a wholly owned foreign subsidiary of the Company. Its remaining assets,
after the December, 1993 sale of the Exhaust Division, consists of land and
buildings located in Mexicali, Mexico.
Gross rent revenue was approximately $535,000 for the year ended December 31,
1995 compared to approximately $488,000 in 1994. Net after tax income was
approximately $195,000 and $20,000 for these same years respectively. The 1994
net earnings were impacted by environmental cleanup expenses related to closing
the exhaust division of the Company. While 1995 net earnings improved, the
Company incurred some expenses related to making the property into an industrial
park, as well as repairs to make the facility more suitable for additional
tenants.
Liquidity and Capital Resources
- -------------------------------
Short Term
- ----------
The Company's short term liquidity and capital resources have improved
considerably during the year ended December 31, 1995. While cash and equivalents
have decreased, $731,000, working capital has increased by $1,850,000. In
addition, the Company, through its Funding subsidiary, obtained a two year,
$2,000,000 line of credit. At December 31, 1995, the Company had used
approximately $360,000 of the line of credit.
The Company has negotiated a six month line of credit for $1,000,000, which is
to be in effect by April 1, 1996. The line is secured by certain securities
available for sale. The contract provides for one six month option to extend.
12
With the financing the Company has in place, and with most all of the business
segments generating positive cash flows, management believes, but there can be
no assurance, its short term cash requirements will be met.
Long Term
- ---------
During 1995, the Company invested approximately $3,250,000 to complete its real
estate development projects. The Company has made some progress in the marketing
for sale of these real estate assets. The Company has signed a six month
exclusive contract with Cushman & Wakefield to be the broker for a sale of the
Camelback Plaza retail center.
The Company has a purchase and sale agreement with one of its tenants in
Mexicali, Mexico to sell the Company's foreign subsidiary, FMMSA. The sale, if
completed, should take place in the 2nd or 3rd quarter of 1996.
Additionally in 1995, the Company invested $1,410,000 into its restaurant
subsidiary. The funds were used to add two new restaurants and finish remodeling
existing restaurant stores. One of the restaurants purchased was in operation
and its results for the approximate 9 1/2 months of the Company's ownership are
included in the results of operations. The other restaurant, which is in Las
Vegas, will not open until the 2nd quarter of 1996. With the opening of this
restaurant, the Company will have eight restaurants total. Management believes
it needs 10 - 12 restaurants to maximize absorption of its fixed operating
expenses.
The Company intends to use the proceeds from the sale of its real estate
holdings to expand its restaurant operations.
Inflation
- ---------
Management does not believe that inflation will have a material effect on the
results of operations.
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. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON
--------------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Directors and Executive Officers of the Company as of December 31, 1995 were
as follows:
Name Age Position
- ---- --- --------
Joe Hrudka 57 Chief Executive Officer
Edmund L. Fochtman, 58 President/Director
Jr. (1)
Allen L. Haire (1) 53 Director
Jonathan Tratt 37 Director
James W. Brown 47 Chief Financial Officer/Director
13
Robert A. Cassalia 43 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.
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 has 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 the 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.
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. Jonathan Tratt is also a director of Gulp Investments, Inc., a real
estate and general investment company, and 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 Amusement 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.
Robert A. Cassalia was hired by the Company as Assistant Secretary, In-House
Counsel 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. Prior to 1986,
he was in private practice in Phoenix, Arizona and Syracuse, New York.
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, 1994.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
The following table sets forth the number and percentage of the outstanding
shares of common stock beneficially owned as of March 29, 1995 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 6,756,966(1) 69%
- --------------------------------------------------------------------------------
(1) Certificates representing 795,973 shares are in the possession of a
bank which claims a security interest in the same in connection
with loan arrangements. The net result of future actions taken in
connection therewith cannot be predicted by the Company at this
time.
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. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,...AND REPORTS ON FORM 10-K
-----------------------------------------------------------------------
(1) Index to Consolidated Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1995
and 1994
Consolidated Statements of Operations - Years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements - Years ended
December 31, 1995, 1994 and 1993
(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:
15
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 1O-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.
10.39 Month-To-Month Lease by and between F. W. Investments, an
Ohio General Partnership, and the company for the premises
known as 2401 W. First Street, Tempe, Arizona.
Incorporated by reference to the Company's Form 10-K filed
April 14, 1991.
10.44 Sale Escrow Instructions Promissory Note and Security
Agreement between Calico Light Weapon Systems and the
Company concerning the sale of the Company's gun division
dated December 10, 1990. Incorporated by reference to the
Company's Form 8 filed September 27, 1991.
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
16
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.
10.52 Lease dated June 30, 1994 by and between Blockbuster Music
Retail, Inc. (Lessee) and Camelback Plaza Development L.C.
(Lessor).
10.53 Lease dated January 17, 1995 by and between Restaurants of
America, Inc. (Lessee) and Camelback Plaza Development,
L.C. (Lessor).
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.
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 Limited (Lessor) and Buster's & Company,
Inc. (Lessee), and Bill of Sale dated March 15, 1995.
10.56 Documents from the Caliber Bank loan dated June 24, 1994
as amended September 21, 1994.
- 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 Fixture 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 Fixture 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.
10.58 Lease dated September 1, 1995 between Performance
Restaurants of Nevada, Inc. and 1030 East Flamingo, L.L.C.
17
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.
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.
10.61. Cash Collateral Agreement by and between Performance
Industries, Inc. and Norwest Bank dated October 31, 1995.
22 Subsidiaries of the Registrant.
18
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: March 29, 1996 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
- -------------------------- (Chief Executive Officer)
Joe Hrudka
/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
- -------------------------- (principal Accounting Officer)
James W. Brown
/s/ Robert A. Cassalia Secretary
- --------------------------
Robert A. Cassalia
19
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
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 flows 25
Notes to financial statements 27
20
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, 1995 and 1994
and the related consolidated statements of operations, shareholders' equity and
cash flows for the three years in the period ended December 31, 1995. 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, 1995 and 1994,
and the results of their operations and their cash flows for the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
TOBACK CPAs, P.C.
Phoenix, Arizona
March 20, 1996
21
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
-------------- ------------
Current assets:
Cash and cash equivalents $ 411 $ 1,142
Restricted cash (Note 11) 1,267 2,900
Securities available for sale (Note 6) 1,783 -
Accounts and other receivables, less allowance for
doubtful accounts of $25 and $143, respectively (Note 21) 416 584
Current portion of receivables from sale of businesses,
net of allowance (Notes 5, 7 and 21) 480 1,024
Factored accounts receivable, net of allowance for
doubtful accounts of $201 and $113, respectively (Note 21) 1,868 4,311
Inventories 293 276
Prepaid expenses and other current assets 322 201
Other assets held for sale 212 231
Deferred income taxes (Note 14) - 254
-------------- -------------
Total current assets 7,052 10,923
Receivables from sale of businesses, less current portion,
net of allowance (Notes 5, 7 and 21) 520 -
Investment in real estate (Note 8) 11,073 7,573
Deferred income taxes (Note 14) 1,734 1,829
Property and equipment, net (Note 9) 3,578 2,706
Other assets (Note 10) 921 1,077
-------------- -------------
Total assets $ 24,878 $ 24,108
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations (Note 11) $ 594 $ 4,394
Accounts payable 1,260 1,208
Accrued employment costs 288 401
Accrued product liability costs (Note 16) 350 902
Accrued expenses and other current liabilities (Note 12) 1,016 982
Factored receivables reserve 390 889
Liabilities subject to compromise (Note 3) 754 1,573
-------------- -------------
Total current liabilities 4,652 10,349
Long-term debt and capital lease obligations, less current portion (Note 11) 6,751 1,849
Commitments and contingencies (Notes 13, 16, 17 and 18)
Minority interest (Notes 8 and 13) 414 416
Shareholders' equity:
Preferred stock, par value $1.00 per share; authorized
100,000 shares; none issued - -
Common stock, no par value; authorized 20,000,000
shares; issued 12,629,326 shares 31,202 31,202
Accumulated deficit (16,416) (16,710)
Unrealized appreciation on securities available for sale,
net of income taxes (Note 6) 1,226 -
-------------- -------------
16,012 14,492
Treasury stock at cost (2,671,211 shares) (2,951) (2,998)
-------------- -------------
Total shareholders' equity 13,061 11,494
-------------- -------------
Total liabilities and shareholders' equity $ 24,878 $ 24,108
============== =============
The accompanying notes are an integral
part of these consolidated financial statements.
21
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
------------ ------------ -----------
Revenues from continuing operations $ 20,253 $ 18,415 $ 360
Cost of revenues (18,279) (16,058) (82)
Selling, general and administrative expenses (2,841) (3,500) (3,029)
Interest expense (533) (18) (87)
Other income, net 1,233 711 480
------------ ------------ -----------
Loss from continuing operations
before reorganization items (167) (450) (2,358)
Reorganization items (Note 4) -- -- (1,878)
------------ ------------ -----------
Loss from continuing operations
before income taxes (167) (450) (4,236)
Income tax benefit (Note 14) 21 161 2,400
------------ ------------ -----------
Loss from continuing operations before minority interest (146) (289) (1,836)
Minority interest in loss from subsidiary 2 -- --
------------ ------------ -----------
Loss from continuing operations (144) (289) (1,836)
Income from discontinued operations (Notes 3 and 5) 438 724 13,443
------------ ------------ -----------
Income before extraordinary gain 294 435 11,607
Extraordinary gain on forgiveness of debt (Note 3) -- -- 16,016
------------ ------------ -----------
Net income $ 294 $ 435 $ 27,623
============ ============ ============
Income (loss) per common share:
Continuing operations $ (.02) $(.03) $ (.16)
Discontinued operations .05 .07 1.14
------------ ------------ -----------
Income before extraordinary gain .03 .04 .98
Gain on forgiveness of debt -- -- 1.36
------------ ------------ -----------
Net income per common share $ .03 $ .04 $ 2.34
============ ============ ===========
Average number of shares outstanding 9,958,115 10,406,958 11,789,453
============ ============ ===========
The accompanying notes are an integral
part of these consolidated financial statements.
22
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Common Treasury Unrealized
Stock Stock appreciation
---------------------- -------------------------- of securities
Number Number Accumulated available for
Amount of shares Amount of shares Deficit sale
------ --------- ------ --------- ------------- ------------
Balance, January 1, 1993 $ 29,702 10,629,326 $ (1,042) 104,156 $ (44,768) $ -
Net income - - - - 27,623 -
Common stock issued 1,500 2,000,000 - - - -
Treasury stock purchased - - (191) 255,600 - -
---------- ------------ ---------- ----------- ------------- ------------
Balance, December 31, 1993 31,202 12,629,326 (1,233) 359,756 (17,145) -
Net income - - - - 435 -
Treasury stock purchased - - (1,765) 2,436,455 - -
---------- ------------ ---------- ----------- ------------ ------------
Balance, December 31, 1994 31,202 12,629,326 (2,998) 2,796,211 (16,710) -
Net income - - - - 294 -
Adjustment to treasury stock purchased
- - 47 (125,000) - -
Appreciation of securities available
for sale, net of income taxes
(Note 6) - - - - 1,226
---------- ------------ ---------- ----------- ------------ -----------
Balance, December 31, 1995 $ 31,202 12,629,326 $ (2,951) 2,671,211 $ (16,416) $ 1,226
========== ============ =========== =========== ============= ===========
The accompanying notes are an integral
part of these consolidated financial statements.
23
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------- ------------- ----------
Cash flows from operating activities:
Net income $ 294 $ 435 $ 27,623
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 788 348 1,510
Gain on sale of securities available for sale (343) - -
Minority interest in earnings (2) - -
Net gain on disposals of divisions - - (7,559)
Gain on litigation settlement - - (8,639)
Provisions for doubtful receivables related to
previously discontinued businesses - - 2,233
Gain on debt forgiveness - - (16,016)
Adjustments and changes in estimates related
to previously discontinued businesses (480) (1,225) -
Amortization of intangibles and other assets - - 116
(Gain) loss on sale of property and equipment - (93) 671
Provision for allowance for doubtful accounts 133 113 270
(Increase) decrease in accounts receivable (62) 258 626
Decrease in refundable income taxes - 100 6
Increase in inventories (17) (35) (466)
(Increase) decrease in prepaid
and other current assets (121) 114 304
(Increase) decrease in other assets (94) 57 (184)
Decrease (increase) in other assets held for sale 19 - (180)
(Decrease) increase in accounts payable (214) 366 (409)
Decrease in other current liabilities, net (1,450) (1,408) (327)
Decrease in other noncurrent liabilities - - (500)
Deferred income taxes 3 317 (2,648)
--------------- -------------- ---------------
Net cash used in operating activities (1,546) (653) (3,569)
--------------- -------------- ---------------
The accompanying notes are an integral
part of these consolidated financial statements.
24
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
--------------- -------------- ---------------
Cash flows from investing activities:
Decrease (increase) in restricted cash $ 1,633 $ (2,900) $ -
Payments received on other receivables and
receivables from sale of businesses 709 4,153 8,500
Proceeds from sale of securities available for sale 387 - -
Decrease (increase) in factored receivables, net 1,836 (3,310) (1,114)
Investment in real estate held for sale (3,250) (3,684) (1,050)
Purchase of property and equipment (960) (1,666) (1,379)
Proceeds from sale of:
Noncash assets of Exhaust division - - 6,503
Noncash assets of Performance division - - 31,880
Property and equipment, other - 2,206 223
Other assets held for sale - 34 250
Payment for purchase of restaurant assets (450) - (1,000)
Other, net (5) (250) -
--------------- -------------- ---------------
Net cash (used in) provided by
investing activities (100) (5,417) 42,813
--------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings 1,115 4,151 -
Repayments of debt (247) (185) (459)
Repayments of debt subject to compromise - - (46,894)
(Increase) decrease in treasury stock 47 (1,765) (191)
--------------- -------------- ---------------
Net cash provided by (used in)
financing activities 915 2,201 (47,544)
--------------- -------------- ---------------
Net decrease in cash and cash equivalents (731) (3,869) (8,300)
Cash and cash equivalents, beginning of period 1,142 5,011 13,311
--------------- -------------- ---------------
Cash and cash equivalents, end of period $ 411 $ 1,142 $ 5,011
=============== ============== ===============
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.
25
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 development)
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 and has accounted for those businesses as discontinued
operations (see Note 5).
The Company also owns and leases certain real estate formerly used by the
automotive businesses. One of the buildings being leased is owned by
the Company's Mexican subsidiary, Fabricaciones Metalicas Mexicanas,
S.A. (FMMSA).
Performance Camelback Development Corp. has a 72% ownership interest in
Camelback Plaza Development Corp. 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.
Basis of presentation:
The consolidated financial statements of the Company have 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 Company (excluding its
subsidiaries) filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") in the United States
Bankruptcy Court for the Central District of California ("the
Bankruptcy Court") on April 21, 1991 (the "Filing Date"). On May 4,
1993, the Company's Plan of Reorganization was confirmed. See Note 2
for discussion of the bankruptcy proceedings.
26
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
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 the debt are comparable to current market rates on
debt with similar terms.
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 realizability of certain
receivables, valuation of net deferred tax assets, estimates of future
liabilities resulting from discontinued operations, estimates of
liabilities subject to compromise from the remaining bankruptcy claims,
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.
27
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
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.
Securities available for sale:
Securities available for sale are reported at fair value. Unrealized
appreciation, net of 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.
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 borrower's receivables and
obtain personal guarantees, when deemed necessary.
Rental real estate:
Rental real estate cost represents principally 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.
28
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Rental real estate, continued:
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.
Reorganization items:
Reorganization items include professional fees incurred as a result of
reorganization, losses on executory contracts, and interest income
earned as a result of suspending payments on liabilities subject to
compromise.
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.
2. Bankruptcy proceedings and Plan of Reorganization:
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 (see Note 3).
The Plan of Reorganization (the "Plan"), which was implemented on May 4,
1993, called for the Company to raise cash from operations, new
financing, or asset sales sufficient to pay the senior lender and the
subordinated debt holders approximately $42,600,000 at the
implementation date and the general unsecured trade creditors
approximately 66% of their allowed claims over several years. The
existing shareholders retained their equity interest subject to
dilution by the issuance of approximately 16% of new equity to certain
creditors as specified in the Plan. In December, 1992, the Company sold
the assets of the Wheel and Tire business for approximately
$11,348,000. On May 4, 1993, the Company sold the assets of its
Performance business for approximately $34,000,000 (see Note 5). The
funds from both of these sales were used to meet the requirements of
the Plan.
29
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Liabilities subject to compromise:
During 1995, the Company negotiated settlement of a claim subject to
compromise at December 31, 1994. The remaining liability for this claim
of $173,000 is included in accrued expenses and other current
liabilities on the accompanying consolidated balance sheet at December
31, 1995. Other liabilities subject to compromise at December 31, 1995
are approximately $750,000.
Gain on forgiveness of debt on the statement of operations for 1993
includes $15,477,000 of liabilities subject to compromise and
approximately $539,000 of other liabilities forgiven. The debt
forgiveness was not subject to income tax.
As a result of the bankruptcy filing, the Company did not accrue interest
on unsecured debt from April 21, 1991 through May 4, 1993. Contractual
interest on unsecured obligations for the period of the bankruptcy
proceedings exceeded reported interest expense by $2,180,000 during
1993.
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.
4. Reorganization items:
Reorganization items for 1993 consist of the following (in thousands):
Professional fees $ (1,662)
Rejection of executory contracts (350)
Interest income 134
---------------
$ (1,878)
===============
Cash flows from operating activities include the reorganization interest
income and cash payments of $1,662,000 for reorganization professional
fees for the year ended December 31, 1993.
30
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Discontinued operations:
In December, 1993, the Company sold its remaining operations in the
automotive aftermarket segment. Consequently, net sales, cost of sales,
income and expenses related to all businesses in that segment were
reclassified to discontinued operations in the accompanying statements
of operations for 1993. Income from discontinued operations for 1995
and 1994 consists of adjustments to estimates in prior years. Net sales
of the discontinued operations were approximately $28,000,000 for 1993.
The sales of the automotive aftermarket businesses are described below.
Wheel and Tire Business:
During 1992, the Company sold its Wheel and Tire business in connection
with its proposed plan of reorganization.
Thenet sales price of the Wheel and Tire business was $11,348,000,
consisting of $4,000,000 paid in January, 1993, $4,000,000 paid in
March, 1993 pursuant to the terms of a secured promissory note and the
balance was to be paid by December 31, 1993 pursuant to the terms of
the purchase agreement. In September, 1993 in consideration of the
immediate payment of $500,000, the Company renegotiated the remaining
balance of $3,348,000 to $2,000,000, evidenced by an unsecured
promissory note.
During 1994, the Company renegotiated the remaining balance of its
unsecured promissory note after receiving a principal payment of
$360,000. The Company accepted a new note for $1,340,000 (see Note 7).
Performance business:
In connection with its Plan of reorganization, on May 4, 1993, the Company
sold to Echlin Acquisitions, Inc. (Echlin), substantially all of the
net assets of its Performance business, including most of its accounts
receivable, inventory, manufacturing equipment and intangible assets
from its manufacturing operation in Cleveland, Ohio. The Performance
business manufactured a number of high performance automotive products,
including gaskets and transmissions.
As part of the sale agreement, the Company leased its Cleveland
manufacturing facility to the purchaser. The lease contained an option
to purchase the property for $3,500,000. During 1993, management
anticipated that the option would be exercised and reduced the carrying
value of the building by approximately $3,000,000 to its net realizable
value of $3,500,000. The adjustment is included in income from
discontinued operations for 1993. The option was exercised in 1994.
31
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Discontinued operations, continued:
Performance business, continued:
The net sales price of the Performance business was $31,880,000 in cash
and a holdback receivable of approximately $2,000,000 held in escrow
for any losses incurred subsequent to the acquisition date. The
holdback was paid in full during 1994.
The terms of the agreement for the sale of the Performance business
provide that the Company will not engage in any business of
manufacturing or selling high performance custom products in the
automotive aftermarket for a period of four years. In addition, Echlin
entered into non-compete agreements with certain Company executives
(see Note 19).
Exhaust business:
In July, 1993, the Company adopted a formal plan to sell its Exhaust
business. On December 3, 1993, the Company completed the sale of the
Exhaust business. The assets sold consisted primarily of accounts
receivable, inventories, and property, plant and equipment. The
aggregate selling price of the Exhaust business was approximately
$7,500,000.
The terms of the agreement for the sale of the Exhaust business provide
that the Company will not engage in any business of manufacturing or
selling exhaust systems products for five years. In addition, the buyer
entered into noncompetition agreements with certain Company executives
(see Note 19).
Litigation settlement:
On March 21, 1991, a jury verdict was rendered against the Company in the
U.S. District Court for the Southern District of Florida in the sum of
$10,013,500. The plaintiff, Rally Manufacturing, Inc., was awarded
damages for Trade Dress and Trademark infringement, and unfair
competition.
The Company accrued the entire award as a liability subject to compromise.
During 1993, the Company settled the lawsuit for $1,375,000. A gain on
the settlement of approximately $8,639,000 has been included in income
from discontinued operations in the accompanying statements of
operation for 1993.
32
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Discontinued operations, continued:
Thecaption "Income from discontinued operations" in the accompanying
consolidated statement of operations for the years ended December 31
consists of the following (in thousands):
1995 1994 1993
------------- ------------ --------
Loss from operations of general and specialty
automotive parts and accessory divisions $ - $ - $ (997)
Gain on the sale of general and specialty
automotive parts and accessory divisions
net of income taxes - - 8,034
Litigation settlement - - 8,639
Adjustments for estimated allowances and
reserves on receivables and liabilities of
discontinued operations, net of income taxes 438 724 (2,233)
------------- ------------ -------------
$ 438 $ 724 $ 13,443
============= ============ =============
The gain on sale for 1993 includes a deferred tax benefit of approximately
$248,000 as a result of reversing deferred tax liabilities established
in previous years related to the assets and liabilities of the
divisions sold.
6. 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. The securities did not have
readily determinable market value and were restricted from sale at
December 31, 1994 and, therefore, were recorded as "other assets" on
the 1994 balance sheet.
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 become available for sale in May,
1996 subject to certain SEC limitations. As a result, the Company
considers its investments in equity securities to be available for sale
as of December 31, 1995.
At December 31, 1995, the aggregate fair value of securities available for
sale was approximately $1,783,000 with unrealized gains of
approximately $1,572,000 and a cost basis of approximately $211,000.
33
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Receivables from sale of businesses:
Receivables from sale of businesses at December 31, 1995 and 1994 consist
of the following (in thousands):
1995 1994
------ ------
Unsecured note receivable, interest at approximately 8%, principal and
interest payments due in 8 installments per year of approximately
$60,000 through May, 1998 $ 956 $1,340
Unsecured note receivable, interest at 8%, principal and interest payments
due in monthly installments of $5,000 through June, 1998 135 179
Note receivable, interest at 12.5%, principal and interest payments due in
monthly installments of approximately $6,600 through July, 1997,
secured by equipment 126 172
Other 63 93
---- ----
1,280 1,784
Less allowance for doubtful accounts (280) (760)
---- ----
$1,000 $1,024
====== ======
Approximate future maturities on receivables from sale of businesses for
the next five years at December 31, 1995 are as follows (in thousands):
1996 $ 580
1997 582
1998 118
1999 -
2000 -
34
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Investment in real estate:
Investment in real estate consists of the following at December 31, 1995
and 1994:
1995 1994
--------------- --------------
Rental real estate $ 10,980 $ 2,421
Less accumulated depreciation (1,076) (862)
--------------- --------------
9,904 1,559
Real estate under development - 4,896
Undeveloped real estate 1,169 1,118
--------------- --------------
$ 11,073 $ 7,573
=============== ==============
The Company's development subsidiary owns a retail and restaurant project
in Phoenix, Arizona. The development company completed the project in
1995. The subsidiary has entered into lease agreements with the current
and future tenants of the project (see Note 13). During 1994, the
results of operations for the subsidiary were minimal and were
capitalized as incidental operations to the project cost.
Certain rental property was reclassified from "property and equipment" to
"investment in real estate" in the accompanying consolidated balance
sheet for 1994.
9. Property and equipment, net:
The components of property and equipment consist of the following (in
thousands):
1995 1994
-------------- ---------------
Machinery and equipment $ 1,222 $ 808
Furniture and fixtures 684 548
Transportation equipment 493 493
Leasehold improvements 1,958 1,295
Equipment held under capital leases 134 -
-------------- ---------------
4,491 3,144
Less accumulated depreciation (913) (438)
-------------- ---------------
$ 3,578 $ 2,706
============== ===============
35
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Other assets:
Other assets consist of the following (in thousands):
1995 1994
-------------- ---------------
Restaurant small wares $ 427 $ 412
Liquor licenses 183 181
Deposits and other 311 484
-------------- ---------------
$ 921 $ 1,077
============== ===============
11. Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations consist of the following (in
thousands):
1995 1994
-------------- --------------
Notepayable, bank, with interest at 8.81%, principal and interest
due in 40 monthly installments of approximately $43,500 with the
remaining principal and interest balance due May 1, 1999,
secured by deed of trust on rental real estate.
$ 4,900 $ -
Notepayable, Mexico corporation, with interest at prime plus 3-7/8%,
with monthly principal payments of $6,000 plus interest
through December, 2006, secured by undeveloped real estate.
792 864
Revolving line of credit, finance company, with interest at prime
plus 4% (12.75% at December 31, 1995), payable monthly, maturing
July, 1997, secured by factored receivables and a personal
guarantee of the Company's principal shareholder.
367 -
Unsecured note payable, State of California, with interest at 6%,
with monthly principal payments of $25,000 plus interest through
June, 1999 1,050 1,200
Notepayable, unrelated corporation, non-interest bearing, paid in a
single payment in January, 1996, secured by restaurant equipment
and leasehold deed of trust.
100 -
Capital lease obligations, with interest at approximately 10%,
payable in aggregate monthly payments of approximately $2,900
through November, 2000. 130 -
36
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Long-term debt and capital lease obligations, continued:
1995 1994
----------- -----------
Other $ 6 $ 28
Construction loans refinanced as long-term debt
during 1995
- 4,151
----------- -----------
7,345 6,243
Less current portion (594) (4,394)
-------- -----------
$ 6,751 $ 1,849
=========== ===========
Cash paid for interest was approximately $700,000, $70,000 and $77,000
during 1995, 1994 and 1993, respectively.
Approximately $273,000 and $48,000 of interest costs were capitalized as
construction period interest on the real estate project during 1995 and
1994, respectively.
Approximate future maturities of long-term debt, excluding capital lease
obligations, for the next five years as of December 31, 1995 are as
follows (in thousands):
1996 $ 573
1997 841
1998 484
1999 4,814
2000 72
Direct financing costs associated with obtaining a new line of credit are
included in other assets and is being amortized over the term of the
agreement. At December 31,1995, direct financing costs totalled
approximately $79,000, net of accumulated amortization of $27,000.
37
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Accrued expenses and other current liabilities:
At December 31, 1995 and 1994, the components of accrued expenses and
other current liabilities consist of the following (in thousands):
1995 1994
-------------- ---------------
Deferred rental income $ 150 $ -
Reserve for environmental remediation
and property restoration 261 358
Gift certificates 83 74
Legal matters 60 38
Accrued worker's compensation
insurance liability - 224
Sales taxes payable 156 110
Other accruals 306 178
-------------- ---------------
$ 1,016 $ 982
============== ===============
13. Leases:
As lessee:
----------
The Company's restaurant subsidiary leases eight restaurant locations
under operating leases including a restaurant currently under
construction. These leases expire at various dates through 2010 and
require aggregate annual payments of approximately $1,300,000. The
leases also contain provisions for contingent rental payments ranging
from 5% to 10% of sales. During 1995 and 1994, the restaurants paid
contingent rent of approximately $332,000 and $350,000, respectively.
The Company's restaurant subsidiary also leases certain equipment under
capital leases. The leases require aggregate monthly payments of
approximately $2,900 through November, 2000.
The Company's development subsidiary leases land under an operating lease.
The lease requires annual payments of approximately $200,000 through
2052. During 1995 and 1994, rent payments of approximately $48,000 and
$150,000, respectively, were capitalized as construction period costs
and are included with real estate held for sale.
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 1998.
38
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Leases, continued:
As lessee, continued:
Future minimum lease payments for capital and noncancellable operating
leases as of December 31, 1995 are as follows (in thousands):
Capital Operating
leases leases
------------- ---------------
1996 $ 37 $ 1,818
1997 34 1,622
1998 34 1,534
1999 34 1,440
2000 26 1,542
Thereafter - 16,065
-------------- ---------------
165 $ 24,021
===============
Less amount representing interest (35)
--------------
Present value of minimum lease
payments on capital leases $ 130
==============
Rent expense for operating leases was approximately $1,723,000, $1,398,000
and $689,000 for 1995, 1994 and 1993, respectively.
As lessor:
The Company leases to others certain land and buildings in Mexico owned by
the Company. The lease agreements are through January, 1997 and are
renewable at the option of the lessees through January, 2000. Rental
income related to these leases was approximately $536,000, $488,000 and
$278,000 for 1995, 1994 and 1993, respectively.
The Company's development subsidiary has entered into operating leases for
its development project with five primary tenants. The leases call for
aggregate monthly rental payments of approximately $94,000. 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.
39
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Leases, continued:
Aggregate minimum future rentals under the lease agreements as of December
31, 1995 are as follows (in thousands):
1996 $ 1,677
1997 1,566
1998 1,239
1999 1,146
2000 1,223
Thereafter 15,219
$ 22,070
14. 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.
Income tax benefit (expense) consists of the following (in thousands):
1995 1994 1993
--------------- -------------- ----------
Federal:
Current $ - $ - $ -
Deferred (349) (317) 2,648
Foreign (16) (23) -
State and local (2) - -
--------------- -------------- ---------------
$ (367) $ (340) $ 2,648
=============== ============== ===============
Allocated to:
Continuing operations $ 21 $ 161 $ 2,400
Discontinued operations (42) (501) 248
Unrealized appreciation on
securities available for sale (346) - -
--------------- -------------- ---------------
$ (367) $ (340) $ 2,648
=============== ============== ===============
40
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income taxes, continued:
Thefollowing is a reconciliation between the income tax benefit from
continuing operations and income taxes calculated at the statutory
federal income tax rate for continuing operations, 35% for 1995 and
1994 and 34% for 1993 (in thousands):
1995 1994 1993
------------- ------------- ---------
Income tax benefit at statutory rate $ 58 $ 158 $ 1,440
Foreign and state income taxes (18) (23) -
Tax effect of valuation allowance on
deferred tax assets (25) 26 960
Other 6 - -
------------- ------------- -------------
Income tax benefit from continuing operations $ 21 $ 161 $ 2,400
============= ============= =============
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 carryforwards. Significant components of
the Company's net deferred tax assets as of December 31, 1995 and 1994
are as follows (in thousands):
1995 1994
--------------- ----------
Current deferred tax assets and liabilities:
Reserves not currently deductible $ 552 $ 1,200
Unrealized gain on investment (346) -
Valuation allowance (206) (946)
--------------- ---------------
Net current deferred tax asset $ - $ 254
=============== ===============
Non-current deferred tax assets and liabilities:
Difference between book and tax basis of assets $ (144) $ -
Capital loss and contribution carryforwards 9 -
Net operating loss carryforwards 8,662 7,861
General business credit carryforwards 444 385
--------------- ---------------
8,971 8,246
Valuation allowance (7,237) (6,417)
--------------- ---------------
Net non-current deferred tax asset $ 1,734 $ 1,829
=============== ===============
41
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income taxes, continued:
The Company has recorded a net deferred tax asset of $1,734,000 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.
The Company has available at December 31, 1995, 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 $ - $ 348
1998 1,151 -
2003 - 37
2005 2,585 -
2006 3,866 -
2007 7,015 -
2008 2,997 -
2009 3,257 29
2010 2,272 30
--------------------- --------------------
$ 23,143 $ 444
===================== ====================
The Company has net operating carryforwards for state income tax purposes
of approximately $11,000,000 which expire through 2000.
15. Stock option plans:
The Company has a stock option plan which provides for a maximum of
2,000,000 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.
42
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Stock option plans, continued:
At December 31, 1995, all outstanding options were exercisable and 245,000
shares were available for future grant. All outstanding options expire through
2005.
A summary of transactions with respect to the current stock option plans
follows:
Number Option price
of shares per share
--------- ---------
Balance at January 1, 1995 1,480,000 $.5625 to $.75
Issued in 1995 1,755,000 $.219 to $.241
Cancelled in 1995 (1,480,000) $.5625 to $.75
-------------
Balance at December 31, 1995 1,755,000 $.219 to $.241
=============
16. Litigation:
In November, 1993, certain shareholders dissented from the sale of the
Company's exhaust 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 defendants,
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.
Two of the remaining dissenting shareholders have 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
carrier voluntarily paid out approximately $1,700,000 in benefits to
settle the claim. Management believes the action to be without merit
and intends to vigorously defend the suit.
43
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Litigation, continued:
The Company is involved in various other claims and legal actions arising
in the ordinary course of business, including product liability and
environmental remediation claims from discontinued operations. During
1995, the Company settled certain product liability claims for
approximately $550,000. Accrued reserves remaining for potential losses
as a result of product liability claims are approximately $350,000 at
December 31, 1995. Included in other current liabilities (Note 12) are
accrued reserves for environmental remediation 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.
17. Commitments:
During 1993, Performance Restaurant Group, Inc. (PRG) entered into a
consulting agreement with the previous owner of the six restaurants in
California whereby PRG pays $90,000 annually through December, 1999.
The agreement restricts disclosure of information and also includes
restrictive competition clauses.
18. Contingencies:
An investigation of environmental matters related to facilities and
property 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 the Wheel business. All
assets at this facility were sold and the buyer vacated the premises
(Note 5).
44
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. 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. 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 Echlin. The Company's responsibility with
respect to the agreement was to pay remediation costs and to guarantee
payment of costs by Echlin related to specific 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.
45
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. 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 and $40,000 for repairs in
1994 and 1993, respectively.
During 1993, the Company had a month-to-month lease with F.W. Investments
for 35,000 square feet of warehouse and office space in Tempe, Arizona.
Edmund L. Fochtman, Jr., a Director and Officer of the Company, is a
general partner in F.W. Investments. The rental agreement required
monthly payments of $11,500. This lease expired in January, 1994.
Rockside Consultants received $50,000 in 1993 from the Company for
consulting services on financial and general business matters. Howard
B. Gardner, formerly an officer and director, is the principal of
Rockside Consultants.
The agreement for the sale of the Company's Performance business included
several Consulting Services and Non-competition agreements with
directors and officers of the Company who are also shareholders. The
agreements have terms of four years with initial cash payments and
monthly installments over either a 12 or a 48-month term. The total
amount to be paid to the directors and officers under the three
agreements is $2,800,000, including $500,000 which was paid upon
closing of the sale.
The agreement for the sale of the Company's Exhaust business also included
consulting and noncompetition agreements with three individuals who are
directors, former directors or officers of the Company and who are also
shareholders. The agreements have terms of five years for consulting
services and fifteen years for noncompetition. The total amount paid to
the directors and officers under the three agreements was $2,000,000,
which was paid upon closing of the sale.
During 1993, the Company financed the sale of certain assets for
approximately $238,000 to the former plant manager of the Exhaust
facility in Mexico. The agreement calls for monthly payments of
approximately $6,600 through February, 1997.
In December, 1993, the Company signed an exclusive broker agreement with
Industrial Brokerage, Inc., which is owned by Jonathan Tratt, a
director of the Company, to sell its facility in Mexicali, Mexico.
46
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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, net.
1995 1994 1993
--------------- -------------- ----------
Revenues and other income:
Restaurants $ 19,357 $ 17,350 $ 274
Factoring 896 1,065 86
Real estate 1,345 589 506
--------------- -------------- ---------------
$ 21,598 $ 19,004 $ 866
=============== ============== ===============
Operating income (loss):
Restaurants $ (166) $ 105 $ (41)
Factoring 676 895 43
Real estate 221 291 349
--------------- -------------- ---------------
Total principal business segments 731 1,291 351
Unallocated corporate general and
administrative expenses and other
income, net (898) (1,741) (2,709)
--------------- -------------- ---------------
$ (167) $ (450) $ (2,358)
=============== ============== ===============
Depreciation:
Restaurants $ 506 $ 194 $ 5
Factoring - - -
Real estate 214 67 255
Corporate and other 68 87 1,250
--------------- -------------- ---------------
$ 788 $ 348 $ 1,510
=============== ============== ===============
47
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Principal business segments, continued:
1995 1994 1993
--------------- -------------- ---------------
Capital expenditures:
Restaurants $ 1,441 $ 1,652 $ 811
Factoring - - -
Real estate 3,448 4,548 -
Corporate and other 5 14 1,379
--------------- -------------- ---------------
$ 4,894 $ 6,214 $ 2,190
=============== ============== ===============
Identifiable assets:
Restaurants $ 4,932 $ 3,890
Factoring 1,978 4,571
Real estate 12,418 7,662
Corporate and other 5,550 7,985
--------------- --------------
$ 24,878 $ 24,108
=============== ==============
The Company's restaurant subsidiary incurred approximately $425,000,
$334,000 and $14,000 of advertising expense in 1995, 1994 and 1993,
respectively.
21. Allowances for doubtful accounts:
The changes in allowances for doubtful accounts are as follows:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 1,016 $ 4,186 $ 2,603
Additions charged to cost and expenses 133 113 3,373
Reduction of estimated allowances from
discontinued operations (480) (1,225) -
Accounts written off (163) (2,058) (1,790)
------------ ------------ ------------
Balance at end of year $ 506 $ 1,016 $ 4,186
============ ============ ============
48