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, 1996
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 31, 1997 (based upon closing price) was $1,188,034.
At March 31, 1997, 2,481,264 shares of Registrant's Common Stock were
outstanding.
PART I
ITEM 1. BUSINESS
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The Company currently operates in three primary business segments for which it
has formed the following subsidiaries; restaurants, factoring, and real estate
development.
Performance Restaurants Group, Inc. (Restaurants)
Restaurants was formed in 1993 to acquire six operating restaurants in
California. Four of the restaurants operate under the trade name Bobby McGee's
and are full service restaurants/nightclubs. The fifth was converted to a sports
bar/nightclub concept operating under the trade name McGee's Grill. In 1995, a
sixth restaurant was acquired in Scottsdale, Arizona. It is a full service
restaurant and bar operating under the trade name Buster's Restaurant Bar &
Grill. In 1996, the Company acquired two Carlos Murphy's restaurants in San
Diego, California, with rights to open other Carlos Murphy's Restaurants in the
San Diego and Los Angeles, Metropolitan areas and Maricopa County, Arizona. In
1996, the Company sold one of the original Bobby McGee's locations.
The Bobby McGee's concept is a full service restaurant using costumed servers
and a lounge offering music and dancing at the same location. The restaurant
appeals to a wide range of diners as a special event restaurant. Diners come to
the restaurant to celebrate birthdays, anniversaries, graduations, and other
special occasions.
McGee's Grill was opened in 1994. It features pool tables and television screens
for the viewing of sports events and a limited menu for dinner and lunch in the
sports bar. The sports bar is combined with the more traditional nightclub
offered at other Bobby McGee's restaurants.
During 1996, the company bought two Carlos Murphy's Mexican Restaurants in the
San Diego, California area. Carlos Murphy's is in the casual dining restaurant
segment and features an extensive menu of Mexican Food choices. Limited
renovations to these locations is expected. Part of the renovations will be to
upgrade the lounge by adding a dance floor and a D.J. playing recorded music.
This will help increase sales in the later hours when their are fewer diners.
Restaurants has developed a franchising package for its concept domesticaly and
internationally. The franchisees will pay a fee for each restaurant they
develop, plus a royalty based upon gross sales of each location. Area
Development Agreements will cover multi unit franchises in a specific geographic
area. Restaurants will offer assistance to the franchisee in training employees,
advertising, site selection, and operation of a franchised location. Restaurants
has not actively marketed any franchises.
Performance Funding Corp. (Funding)
This subsidiary was formed in Arizona and is engaged in the factoring business.
Factoring is the purchase of accounts receivable at a discount from face value.
All purchases are full recourse against the seller. This means that, after a
predetermined period, the seller must either repurchase the invoice at full face
value or substitute an invoice for the face value, plus accrued fees.
At the time of purchase of the invoice, Funding purchases the invoice at a
discount from the face value of the invoice. The discount is set at the maximum
fees possible, plus a reserve for bad debt. Upon collection of the invoice, the
seller is paid the difference between the fee holdback and earned fees to the
date of payment. Funding receives a security interest in other receivable, of
the seller to further secure payment of fees and to secure performance of the
recourse provision of the contract.
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Funding looks for sellers with annual sales between $250,000 and $15,000,000.
The decision to purchase any receivable is based upon the financial condition of
the client, the profitability of the seller, payment terms of the receivable,
and the credit worthiness of the account debtors.
Performance Development Corp. (Development)
Camelback Plaza Development, L.C.
Development was formed in Arizona in 1993 to act as managing member of Camelback
Plaza Development, L.C. with a 71.6% ownership, which was developing and leasing
Camelback Plaza, a retail/restaurant development in Phoenix, Arizona. The retail
phase of the project opened in late 1994 with Just for Feet and Blockbuster
Music as its first tenants.
The restaurant phase, consisting of a free standing building for the Hard Rock
Cafe, was constructed in 1995. The Hard Rock Cafe opened for business in October
1995.
In 1996, one of the tenants in the retail area, a full service restaurant opened
and closed, vacating the premises. The company is taking action against the
tenant for breach of the lease, while actively seeking a new tenant for the
space.
In January 1997, Blockbuster Music closed its store and is seeking a subtenant
for the space. They continue to meet all of their financial obligations under
the terms of the lease.
Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)
The company sold the subsidiary in July, 1996 for $1,000,000 and a note payable
to the company for $2,000,000. The note is to be paid, inclusive of interest in
18 payments of $120,000 each.
Ixtapa
The Company purchased land for development as a condominium complex. At the time
of purchase, the seller had committed to construction financing for the project.
As discussed further below, the Company has indefinitely delayed the project due
to the continuing financial situation in Mexico. Currently, the Company has the
property listed for sale with a broker.
A. Competition
The factoring business is a niche market for financing. Funding competes with
several companies that have greater financial resources than Funding. Funding
competes on the basis of rates, service and market concentration.
The restaurant business is highly competitive. Restaurants competes in the
restaurant business with a number of chains and restaurants owned by
substantially larger companies with greater financial resources than
Restaurants. Restaurants competes on the basis of name recognition, concept of
restaurants, location, quality of product and other intangible elements.
Restaurants believes that the costume concept, along with the adjoining
nightclub, offers a unique experience for the consumer that has a broad appeal.
Restaurants further believes its present locations offer a competitive advantage
over other areas.
The real estate development business is highly competitive. Development competes
with several other development companies in the Phoenix market that are more
experienced and have greater financial resources. However, Development feels the
location of the development is highly desirable to the high volume tenants who
have signed leases.
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B. Trademarks and Patents
The Company's registered trademark for restaurants is an important factor in
marketing for this group due to the high degree of name recognition in its
geographical area and general market. The name Bobby McGee's is federally
trademarked.
C. Environmental Matters
An investigation of environmental matters related to facilities and property
owned and leased by the Company was performed to determine contingencies that
may have affected the Company's emergence from Chapter 11. Certain reports
received by the Company have identified areas of environmental contamination and
potential environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and governmental
agencies have been notified by the Company of the related possible liabilities.
In addition, the Company notified its insurance carriers of potential claims
under its general liability and property insurance coverage from prior years.
a. Reyes Ave Compton, CA
This facility housed the manufacturing plant of the former Wheel business which
was sold in 1992.
In 1991 possible contamination at the site was discovered. The Richter Family
Trust, the owner of this facility, filed an action against the Company and
others in the U.S. District Court for the Central District of California and
served it on the Company in April 1995. The Company responded to the complaint
on its behalf and on behalf of Joe Hrudka as an officer of the Company. The
complaint seeks damages of an unspecified amount for environmental contamination
at the site under several theories. Currently, the action is stayed by
stipulation of the parties, so that further testing to determine the extent of
the contamination can be completed.
The Company tendered defense of the action to several insurance carriers under
policies in force for the periods when it owned and operated its wheel division
at the site. Two insurers have agreed to pay some legal costs of defending the
action under their policies, although they have reserved the right to ultimately
deny coverage.
b. Warehousing and Office Facility in Ohio
In 1990, potential contamination was discovered at this location. Environmental
studies performed to date have determined that the contamination is confined to
the site with no evidence of migration to groundwater or surrounding properties.
At the present time, analysis of the potential remediation alternatives has not
been completed, nor has a plan been submitted for approval by the Ohio EPA.
As part of the sale of the Performance Division to Echlin, Inc., the Company
entered into an indemnity agreement with a predecessor-in-interest at the site.
The predecessor-in-interest and the buyer of the Performance division have
agreed to pay for the remediation of the major known environmental contamination
at the site. However, the Company was required to guarantee the obligations of
the purchaser.
The Company had to agree to remove two above ground storage tanks, an
underground storage tank, and to submit a closure plan to the State for a drum
storage area. In March, 1995, the State of Ohio EPA accepted the company's
closure of the drum storage area as being in compliance with the previously
filed closure plan. This was the last requirement for the release of the escrow
funds held by Echlin, Inc., from the sale proceeds of the Brookpark Road
facility. The Company had also completed the removal of an underground storage
tank at the Brookpark Road facility in 1994. With this closure, the Company
believes it has no further expense for environmental contamination related to
the Brookpark Road facility.
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ITEM 2. PROPERTIES
As of December 31, 1996, the Company and its subsidiaries owned and leased a
total of approximately 104,402 square feet of restaurant, office, and other
space for its principal facilities. Management believes that the Company's and
its subsidiaries' facilities and equipment are modern and well maintained.
The locations and general description of the principal properties owned and
leased by the Company and its subsidiaries are as follows:
Approximate Area
Location Primary Functions in Square Feet Lease Expiration
Phoenix, Office 6,314 7/31/97
Arizona
Scottsdale, Buster's Restaurant Bar & Grill 9,123 4/31/2000
Arizona
Brea, Restaurant/Nightclub 11,000 6/30/2005
California
Burbank, Restaurant/Nightclub 11,000 6/30/2010
California
Burlingame, Restaurant/Nightclub 9,000 12/31/2006
California
Citrus Heights, Restaurant/Nightclub 10,600 9/14/2005
California
San Bernardino, Restaurant/Nightclub 10,500 11/13/2002
California
San Ramon, Restaurant/Nightclub 9,980 6/30/2002
California (2)
Ixtapa Raw Land 8,748 sq. meters Owned
Phoenix, Development Project 5 Acres ((1)) Land Lease
Arizona 2/28/2052
Las Vegas, Restaurant/Nightclub 9,185 12/31/2005
Nevada
La Mesa, Restaurant/Nightclub 8,700 12/31/2005
California
La Jolla, Restaurant/Nightclub 9,000 1/15/2000
California
5
((1)) The real property of five (5) acres is subject to a long term land
lease. The subsidiary has the option to purchase the real property
after the year 2015 at its fair market value without consideration of
value added for any improvements on the property.
((2)) This property is currently subleased to an unrelated third party. The
Company is a guarantor of the lease.
ITEM 3. LEGAL PROCEEDINGS
A. On January 6th, 1994, the Company filed an action in the Superior Court
of Arizona for the County of Maricopa to determine the fair cash value
of its shares held by shareholders who dissented from the sale of the
Exhaust business. The dissenting shareholders are as follows: Ecco
Sales, Inc., Defined Benefit Plan and Mr. David E. Miller, its trustee;
Murray & Murray Co., L.P.A. Profit-Sharing Plan and Trust and Dennis E.
Murray., its trustee; and Murray and Murray Co., L.P.A. - Dennis Murray
Voluntary Account and Dennis E. Murray, Sr., its trustee; Monumental
Life Insurance Company, a Maryland Corporation; Ince & Co., a foreign
Corporation; The Travelers Corporation, a foreign corporation; The
Travelers Insurance Company, a Connecticut Corporation; Provident
Mutual Life Insurance Company, a foreign corporation; New England
Mutual Life Insurance Company, a Massachusetts Corporation; Angelo M.
Alesci, an individual; William R. Bagger, an individual:
All of the dissenting shareholders, except Ecco Sales and Murray &
Murray, LPA, agreed to accept and were paid $.75 per share, as the fair
market value, for their stock.
Two of the dissenting shareholders made a special appearance by Motion
to Dismiss for lack of personal jurisdiction, Murray & Murray Co.,
L.P.A. Profit Sharing Plan, and Murray & Murray Co., L.P.A. After the
remand from the Arizona Court of Appeals, the Maricopa County Superior
Court held it had jurisdiction over the defendants in February, 1995.
The defendants appealed the trial court decision to the Arizona Court
of Appeals. The court again upheld the trial court decision. The
defendants then appealed to the Arizona Supreme Court, which upheld the
Court of Appeals' decision.
The defendants sought review by the U.S. Supreme Court under a Writ of
Certiorari. The Writ was denied in February 1996. The matter will now
proceed to establish the fair market value of the defendants' shares as
of the date of their dissent. The matter was remanded to the Superior
Court County of Maricopa, State of Arizona for further proceedings in
the Fall, 1996. The Company requested a hearing pursuant to statute to
determine if the shareholders are entitled to receive the fair cash
value of their shares and to appoint an appraiser(s) to determine the
fair cash value.
The Court held a status conference with all parties in January, 1997.
The Court requested that each side submit the lists of appraisers from
whom the Court could appoint two appraisers. All other matters before
the Court were taken under advisement.
B. On January 26, 1994, an action filed by Murray & Murray in the Court of
Common Please, County of Cuyahoga, State of Ohio, was served on the
Company and three former or present officers and/or directors of the
Company; Joe Hrudka, Tom Hrudka and Howard B. Gardner. The action
against the Company seeks declaratory judgment holding that the fair
cash value determination be heard in the State of Ohio. The action
against the directors and officers alleges a breach of fiduciary duty
involving the negotiation of consulting and non-competition agreements
in connection with the Company's sale of its former businesses. The
Company has filed a motion to dismiss the action which motion has not
yet been decided.
6
C. In April 1995, the Company was served with an action filed by the
Richter Family Trust in the U.S. District Court for the Central
District of California against the Company and others for unspecified
damages for the remediation of the site of the Company's former wheel
manufacturing plant. The Company responded to the suit on its own
behalf and on behalf of Joe Hrudka, an officer and director of the
Company, who was sued personally. Currently, the case has been stayed
by stipulation of the parties, so that further testing can be conducted
on site to determine the extent of the contamination.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business, including product liability
claims. In the opinions of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial condition.
ITEM 4. 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: (1)
BID ASK
1996
Quarter ended March 31, 1996 5/8 1 3/8
Quarter ended June 30, 1996 5/8 1 3/8
Quarter ended September 30, 1996 5/8 1 3/8
Quarter ended December 31, 1996 3/4 1 3/8
1995 ((2))
Quarter ended March 31, 1995 2 1/2 3
Quarter ended June 30, 1995 2 2 1/4
Quarter ended September 30, 1995 1 1/2 2
Quarter ended December 31, 1995 3/4 1 1/4
((1)) All quotations represent inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual
trades.
((2)) Restated to reflect 4 for 1 reverse stock split effective June, 1996.
As of March 31, 1997, there were 790 holders of record of the Company's common
stock. No dividends have been declared since December 1984, nor does the Company
anticipate that any dividends will be declared in the foreseeable future.
The Company's shares are traded over the counter.
During 1994, the Company purchased approximately 558,500 shares of stock from
dissenters due to the sale of the Company's Exhaust division to Walker
Manufacturing. In addition, the Company purchased approximately 50,500 shares on
the open market in 1994.
7
During 1996, the Company effected a 4 for 1 reverse stock split and an odd lot
tender offer. Approximately 8200 shares were tendered to the Company.
ITEM 6. SELECTED FINANCIAL DATE (in thousands, except per share data).
The Company's selected consolidated financial data has been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which principles, except as otherwise disclosed, assume that assets
will be realized and liabilities will be discharged in the normal course of
business.
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1992 through 1996. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere herein. The selected
consolidated financial data for the years ended December 31, 1992 through 1996
are derived from the audited financial statements of the Company.
Year Ended December 31
OPERATING RESULTS: 1992 1993 1994 1995 1996
- ------------------ ---- ---- ---- ---- ----
Net revenues $ 78,478 $ 360 $ 19,004 $ 21,598 $ 22,407
Net income (loss) ($ 5,711) $ 27,623 $ 435 $ 294 (3,723)
Net income (loss) per ($ 2.16) $ 9.36 $ .17 $ .12 (1.50)
common share
Weighted average number of common 2,631 2,947 2,458 2,489 2,486
stock outstanding
Year Ended December 31
FINANCIAL POSITION: 1992 1993 1994 1995 1996
- ------------------- ---- ---- ---- ---- ----
Working capital
(deficiency) ($ 35,609) $ 2,636 $ 574 $ 2,424 $ 1,344
Total assets $ 68,320 $ 23,126 $ 24,108 $ 24,878 $ 21,971
Long term debt, excluding $ 955 $ 515 $ 5,962 $ 7,345 $ 8,950
current installments and
amount subject to compromise
Shareholders' equity ($ 16,108) $ 12,824 $ 11,494 $ 13,061 $ 8,530
(deficiency)
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated
For the year ended December 31, 1996, the Company had a consolidated loss from
continuing operations of ($3,723,000) compared to a loss of ($144,000) for the
same period in 1995.
During 1995 the Company had income from discontinued operations of approximately
$438,000, as a result of "changes in accounting estimates," and adjustments to
reserve accounts for claims and bad debt expense that offset the loss from
continuing operations yielding net income of $294,000. There were no such
adjustments in 1996.
The Company's general, and administrative expenses were $3,465,000, an increase
of $624,000 from 1995. The increase is a result of nonrecurring charges for the
closure of two restaurants, Las Vegas and San Ramon (See note #17 to
Consolidated Financial Statements), and an increase in bad debt expense of
$139,000.
Interest expense was $754,000 in 1996 compared to $533,000 in 1995. This
increase is attributable to the use of the factoring line of credit for a full
year and an increase in borrowing by the parent to meet the cash needs while the
Development subsidiary negotiated a long term third party financing for its
project and interest expense of the Development subsidiary that had been
capitalized during construction of the project.
The Company has an investment in shares of a publicly traded stock, Western
Pacific Airlines. These securities are subject to a restriction on sale limiting
the number of shares that can be sold by the Company during any quarter. As a
result of a change in the securities rules covering restricted stock, this
restriction should be lifted as of April 29, 1997 and the shares become free
trading (see Note 3 to Consolidated Notes to the Financial Statements). The
company realized a net gain of $387,000 on sale of a portion of this stock in
1995.
Performance Restaurants Group, Inc.
Revenues
Total revenues increased 5 % to $20,344,000 for 1996 compared to $19,357,000 for
1995. The increase in revenue is a result of the addition of two restaurants
during part of the year. Same store sales for stores open at least one year did
not increase or decrease significantly.
Stores closed during the year accounted for revenues of $1,734,000 and
$2,115,000 during 1996 and 1995 respectively.
Cost and Expenses
Cost of sales, consisting of food and beverage cost, increased in 1996 to 28.5%
of sales compared to 27.6% in 1995. This increase is partially attributable to a
higher percentage of sales being food which has a higher cost than beverages.
The restaurant division recorded a loss from operations of $2,774,000 for 1996
as compared to a loss from operations of $166,000 for 1995. The loss is
attributed to higher depreciation charges, increased advertising and for closure
of the Las Vegas and San Ramon restaurants. In addition $360,000 is attributed
to operating losses at the Las Vegas store (see Note #17 to Consolidated
Financial Statements).
9
Carlos Murphy's
The Company purchased two Carlos Murphy's restaurants in August and December,
1996. These are a mid-priced family oriented Mexican Food restaurant. Both
restaurants are located in San Diego, California.
The restaurants have not been part of the Company's operations long enough to
contribute significantly to income. Some limited renovations have been made to
the restaurants to add late night lounge business to the regular restaurant
business.
Restaurant Outlook
The Company has made some changes to the menu at the Bobby McGee's restaurants
which are aimed at increasing the per check average of sales. Initial results at
test restaurants have been promising and the Company will expand the new menu
throughout its operations over the next six months.
The Company plans on expansion throughout 1996 by acquiring operating
restaurants that could be converted to one of its concepts; Bobby McGee's,
McGee's Grill, or Carlos Murphy's; at minimal expense. The Company has the
rights to Bobby McGee's and McGee's Grill nationwide except the state of
Arizona, and to Carlos Murphy's for San Diego and Los Angeles, California and
Maricopa County (Phoenix) Arizona.
The Company hopes that the new menu and additional stores will significantly add
to revenues for 1997 and expects to be profitable by year end, however, there
can be no assurance that the Company's strategy will be successful.
Performance Funding Corp. (Funding)
Gross Revenues for the year ended December 31, 1996 were $623,000 including an
intercompany charge for interest to the Company which is eliminated in
consolidation, as compared to $896,000 in 1995, a decrease of approximately 30%.
The decrease was a result of increased competition from banks for customers
resulting in a lowering of rates for factored accounts and directly from a
reduction from in gross fees of non-performing customers. Funding has added new
clients during the year, but none with the volume for years past.
Funding had a loss from continuing operations of $30,000 in 1996 as compared to
net earnings before taxes of $676,000 in 1995. This has resulted from lower
volume of business in 1996, increase of bad debt, and interest increase
associated with the use of the line of credit for a full year in 1996 as
compared to 5 months in 1995.
At December 31, 1996, funding had $1,270,000 invested in assets and
approximately $1,556,000 earning fees compared to $1,697,000 and $2,070,000,
respectively in 1995. The decline is based mainly on increased competition for
quality customers.
Most major banks, in the past year or two, have established divisions which are
allowed to finance somewhat higher risk companies. These are the companies
Funding seeks as clients. These are companies that almost qualify for
conventional financing but may not have enough history or are experiencing fast
paced growth. Funding cannot or will not compete with these divisions on
interest rates. But Funding can and does compete by offering a close personal
interest and understanding of the client's business. The ability to quickly
respond to the client's changing financing needs has also been a good selling
tool.
In July 1995, Funding obtained a line of credit from a financial institution in
the amount of $2,000,000. This has allowed the Company to lessen its cash
investment in Funding while providing capital for future growth. Under the
agreement, the Company must maintain an equity position of $1,000,000. The line
of credit expires in July 1997, and Funding is negotiating a reduced line of
credit for the future. Management believes, but there can be no assurance, that
the line of credit will be renewed in 1997.
10
Performance Development Corp. (Development)
Gross rent received for the year ending December 31, 1996, was approximately
$1,142,000 compared to approximately $770,000 for 1995. Development recorded a
net loss of approximately $153,000 for the year ended December 31, 1996, as
compared to a loss of $30,000 for 1995. This loss includes a charge for
intercompany interest that is eliminated in consolidation. The increase in the
loss is attributable to certain expenses including interest that had been
capitalized in prior years during construction of the project which are now
operating expenses. The rental increase is primarily a result of the opening of
the Hard Rock Cafe in 1995.
In November 1996, Development refinanced the property. The loan from a mortgage
company was for $7,250,000 amortized over 25 years with a balloon payment due at
the end of 7 years. Funds from the loan were used to payoff the mini-permanent
loan, repay loans from the Company to Development and to meet certain expenses
for the operation of the Plaza which were due.
One of the tenants has defaulted on its leases for restaurant space. A
replacement tenant has signed a lease which will commence on or before January
1, 1998, at a lower base rent, but with percentage rent clauses.
The Company does not currently have the property listed with a broker for sale.
Ixtapa, Mexico
At the present time the Company has placed the property in Ixtapa, Mexico with a
broker for sale. There are no future plans to develop this property.
Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)
FMMSA had gross rental income of $384,000 for the year ended December 31, 1996
as compared to $524,000 for the year ending December 31, 1995. The decrease is a
result of the sale of the subsidiary in July, 1996. Income from operations
before income taxes for FMMSA was $219,000 in 1996 compared to $195,000 in 1995.
The increase was a result of lower expenses due to completion of renovations at
the property in 1995 (see Note #6 to Consolidated Financial Statements).
During 1996, the Company sold the stock it held in FMMSA for $1,000,000 plus a
promissory note to the Company for $2 million dollars. The Company's net gain on
sale was $1.2 million dollars (see Notes #4 and 6 to Consolidated Financial
Statements).
Liquidity and Capital Resources
Short Term
The Company's cash and cash equivalents increased to $1,136,000 at December 31,
1996 from $411,000 in 1995. This increase is attributed mainly to the cash
realized from the sale of the Mexican subsidiary and the release of cash from
restricted accounts. Working Capital decreased significantly from $2,400,000 as
of December 31, 1995 to $1,329,000 at December 1996. This decrease is primarily
a result of a decrease in the value of securities available for sale during
1996.
The Funding line of credit expires in July 1997. The Company is negotiating for
an extension of the line of credit at a reduced amount in keeping with its
current outlook for the Funding division. Management believes but there can be
no assurance that the line of credit will be extended.
11
The Company has securities available for sale in the market value of $727,000 as
of December 31, 1996. Due to a change in the Rule 144 regarding Sale of
Securities, a restriction on the sale of these securities on the open market
will end on April 29, 1997.
Management believes that its short term cash requirements can be met with
available cash and cash equivalents.
Long Term
The Development subsidiary obtained a long term loan on the property from a
mortgage broker in 1996. The Company was repaid a portion of its loan to the
subsidiary but is still owed approximately $1.0 Million dollars for loans to the
subsidiary. The Company expects that the project will provide sufficient cash
flow in 1998 to reduce this indebtedness.
The Restaurant division is expected to add several locations over the next
several years. Expansion will be by purchasing operating restaurants that can be
converted into one of the Company's concepts with minimal renovation and costs.
The Company will only consider restaurants which will generate immediate
revenues and where costs associated with conversion can be controlled. The
Restaurant division is not looking to expand by opening new restaurants. The
Restaurants division does not expect to incur material costs in purchasing new
restaurants.
Restaurant expansion will be completed through cash on hand or by cash provided
by operations. The Company will seek Seller financing where appropriate and
available. It is not anticipated that the Company will need to borrow funds for
expansion of the Restaurant subsidiary.
The Restaurant and Factoring divisions are poised to realize income during 1997.
Management believes that, but there can be no assurance, that both will show
significantly improved results from operations during the year.
The development subsidiary should meet all of its obligations without a material
increase in the investment by the Company, although some costs associated with
Lessee Improvements for a new restaurant tenant may be advanced. The Development
is not expected to have positive cash flow until the restaurant tenant commences
operation in 1998.
Inflation
Management does not believe that inflation will have a material effect on the
results of operations.
ITEM 8. 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, 1996 were
as follows:
12
Name Age Position
Joe Hrudka 58 Chief Executive Officer
Edmund L. Fochtman, Jr. ((1)) 59 President/Director
Allen L. Haire ((1)) 54 Director
Jonathan Tratt ((1)) 38 Director
James W. Brown ((2)) 48 Chief Financial Officer/Director
Robert A. Cassalia 44 Secretary
All Directors are elected annually by the Company's shareholders and hold office
until their successors are duly elected and qualified.
((1)) Member of the Audit Committee
((2)) Mr. Brown tendered his resignation as an officer and director of the
company effective April 4, 1997.
Joe Hrudka is the founder and principal shareholder of the Company. Since 1981
he has served as the Chairman of the Board and a Director. Mr. Hrudka has served
as Chief Executive Officer of the Company since November 1993. In 1964, Mr.
Hrudka founded the original Mr. Gasket Company and served as Chairman of the
Board and President until the Company was purchased by W.R. Grace in 1971. He
was then employed as a Vice President of the Automotive Division of W.R. Grace
from 1972 to 1974 and as a consultant to W.R. Grace during 1975 and 1976. From
1977 until the formation of the Company in 1981, Mr. Hrudka was a private
investor. Mr. Hrudka had served as a director of Action Products, Inc., from
1987, and served as Secretary of Action Products, Inc., from October 1990 to May
1992. In November 1991, a receiver was appointed by the Maricopa County Superior
Court, State of Arizona, to manage the assets of Action Products, Inc., at the
request of a secured party. Action's assets were sold in May 1992 by the
receiver. Mr. Hrudka has served as a Director of each of the subsidiaries since
they have been formed.
Edmund L. Fochtman, Jr., has been President of the Company since May, 1993. He
was an executive Vice President of the Company since January, 1992. He was
Chairman of the Board of Directors and Chief Executive Officer of Action
Products, Inc., a company engaged in manufacture and sale of fiberglass bodied
mini-cars and sales of other promotional products from October 1986 until
January 1992. From 1984 to 1986, Mr. Fochtman was a private investor. From 1976
to 1984, her served as Vice President of F.W. & Associates, Inc. In November
1991, a receiver was appointed by the Maricopa County Superior Court, State of
Arizona, to manage the assets of Action Products, Inc., at the request of a
secured party. Action's assets were sold in May 1992 by the receiver. Mr.
Fochtman was elected a Director of the Company in June 1988 and as a director of
each of the subsidiaries since 1993.
Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical
Products, a manufacturer of gas-fired infra-red heating equipment, since July
1984. He was a manufacturer's representative from 1977 to 1984. Mr. Haire was
elected a Director in June 1988.
Jonathan Tratt has been President and Director of Industrial Brokerage, Inc., an
investment and commercial real estate brokerage company since 1992. Prior to
1992, Jonathan Tratt was a general investor and real estate agent in Phoenix,
Arizona. Mr. Tratt was elected a director of the Company in May, 1993.
James W. Brown, a certified public accountant, has been Chief Financial Officer
and Director since December 1993. From 1989 until joining the Company in May,
1993, Mr. Brown was CFO of RACAM Amusements Group. From 1985 to 1988 he was the
Chief Operating Officer of American Educational Computers, Inc., a publicly
traded software and video publisher. Prior to 1985 he was Vice President of
13
Finance of National Zinc Company, a primary metals manufacturer. Mr. Brown has
served as a Director of the subsidiaries since 1993. Mr. Brown resigned as an
officer and director effective April 4, 1997.
Robert A. Cassalia was hired by the Company as Assistant Secretary, in January
of 1991. On May 4, 1993, he was elected Secretary. Before joining the Company
Mr. Cassalia was General Counsel of Action Products, Inc., a manufacturer of
fiberglass bodied mini-cars since October, 1986, he was in private practice in
Phoenix, Arizona and Syracuse, New York.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein from the Company's
proxy statement to be filed pursuant to Regulation 14(a) under the Securities
Exchange Act of 1934, within 120 days from December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following tables sets forth the number and percentage of the outstanding
shares of common stock beneficially owned as of March 29, 1996, by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned of Class
- ------------------- ------------------ --------
Joe Hrudka
9716 N. 71st Street Paradise Valley, AZ 85253 1,689,241 69%
ITEM 13. 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, 1996
and 1995
Consolidated Statements of Operations - Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - Years
14
ended December 31, 1996, 1995 and 1994
(2) Index to Consolidated Financial Statement Schedules:
All schedules have been omitted because the material
is not applicable or is not required as permitted by
the rules and regulations of the Commission, or the
required information is included in Notes to the
Consolidated Financial Statements.
(3) Exhibits:
Exhibit No.
- -----------
2.1 Disclosure Statement and Plan of Reorganization filed on July
21, 1992 by the Official Creditors' Committee. Incorporated by
reference to the Company's Report on Form 10- Q filed on
August 12, 1992.
2.2 Amended Plan of Reorganization filed by the Company on August
3, 1992. Incorporated by reference to the Company's Report on
Form 10-Q filed on august 12, 1992.
2.3 Amended Disclosure Statement including a Joint Plan of
Reorganization approved by the Court to be distributed to
interested parties on October 27, 1992. Incorporated by
reference to the Company's Report on Form 10-Q filed on
November 10, 1992.
2.4 The Confirmed Joint Plan of Reorganization, approved by the
United States Bankruptcy Court, Central District of California
on April 21, 1993, as filed with the Company's report on Form
10-Q for the period ended March 31, 1993.
2.5 Notice of satisfaction to all conditions precedent to
implementation of Option "A" of the Joint Plan of
Reorganization dated September 30, 1992, as filed with the
Company's report on Form 10-Q for the period ended March 31,
1993.
3.3 Amended and Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3.3 of the Company's
Annual Report on Form 10-K, dated March 29, 1988.
3.4 Revised Code of Regulations, as amended, of the Company.
Incorporated by reference to Exhibit 3.4 of the Company's
Annual Report on Form 10-K, dated March 29, 1988.
10.45 Asset purchase agreements relating to the sale of the Wheel
and Tire business dated December 31, 1992 by and between
Cragar Industries, Inc., and the Company. Incorporated by
reference to the Company's report on Form 8-K filed on January
12, 1993.
10.46 The following exhibits relate to the sale of the Performance
business on May 4, 1993 as filed with the Company's report on
Form 10-Q for the period ended March 31, 1995 and incorporated
herein by reference:
10.47 The following documents related to the sale of the Company's
Exhaust Division to Walker Manufacturing Company as filed with
Notice of Annual Meeting of shareholders dated November 8,
1994 and incorporated herein by reference.
15
10.48 1993 Stock Option Plan of Performance Industries, Inc. filed
with the Company's Notice of Annual Meeting of shareholders
dated November 8, 1993 and incorporated herein by reference.
10.49 Documents relating to its purchase of operating assets from
Bobby McGee's USA, Inc., effective December 20, 1993, which
were filed with the Company's report on Form 10-K for the
period ended December 31, 1993, and are incorporated herein by
reference.
10.50 The following documents relating to the purchase of the ground
lease for 2671 E. Camelback Road, Phoenix, Arizona, effective
December 30, 1993, as filed with the Company's report on Form
10-K for the year ended December 31, 1993, and are
incorporated herein by reference:
10.51 Lease dated May 9, 1994, by and between Just for Feet, Inc.
(Lessee) and Camelback Development L.C. (Lessor) dated May 9,
1994. Which were filed with the Company's report on form 10-K
for the year ended December 31, 1994, and are incorprated
herein by reference.
10.52 Lease dated June 30, 1994, by and between Blockbuster Music
Retail, Inc. (Lessee) and Camelback Plaza Development, L.C.
(Lessor). Which were filed with the Company's report on form
10-K for the year ended December 31, 1994, and are incorprated
herein by reference.
10.53 Lease dated January 17, 1995 by and between Restaurants of
America, Inc. (Lessee) and Camelback Plaza Development, L.C.
(Lessor). Which were filed with the Company's report on form
10-K for the year ended December 31, 1995, and are incorprated
herein by reference.
10.54 Design Build Lease Agreement dated December 18, 1992, by and
between Hard Rock Cafe Investors, Ltd., XIV (Lessee) and
Imprimis Partners II (Lessor) and amendment thereto dated
September 26, 1995. Which were filed with the Company's report
on form 10-K for the year ended December 31, 1995, and are
incorprated herein by reference.
10.55 Offer to purchase Buster's Restaurant, Bar and Grill dated
February 25, 1995, including a first assignment and Assumption
of Lease and landlord's consent dated March 15, 1995, by and
between Mercado Del Lago, L.L.C., Buster's & Company, Inc. and
Performance Restaurants Group, Inc., and lease dated the 20th
of November 1989 by and between Mercado Project Group, Inc.,
and lease dated the 20th of November 1989 by and between
Mercado Project Limited (Lessor) and Buster's & Company, Inc.
(Lessee), and Bill of Sales dated March 15, 1995. Which were
filed with the Company's report on form 10-K for the year
ended December 31, 1995, and are incorprated herein by
reference.
10.56 Documents from the Caliber Bank loan dated June 24, 1994, as
amended September 21, 1994. Which were filed with the
Company's report on form 10-K for the year ended December 31,
1995, and are incorprated herein by reference.
- Restaurant Phase Construction Agreement,
dated June 24, 1994.
- Restaurant Phase Promissory Note.
- Irrevocable Letter of Credit - $1,900,000.
- Environmental Indemnification Agreement.
- Amendment to Restaurant Phase Construction
Loan Agreement, Restaurant Phase Promissory
Note, and Restaurant Phase Deed of Trust,
dated September 21, 1994.
- Restaurant Phase Leasehold Construction Deed
of Trust and Security Agreement with
Assignment of Rents and Fixtures Filing.
- Assignment of Hard Rock Cafe Lease.
16
- Retail Phase Construction Loan Agreement,
dated June 24, 1994.
- Retail Phase Promissory Note.
- Amendment to Retail Phase Construction Loan
Agreement, Retail Phase Promissory note, and
Retail Phase Deed of Trust, dated September
21, 1994.
- Retail Phase Leasehold Construction Deed of
Trust and Security Agreement with Assignment
of Rents and Fixtures Filing.
- Assignment of Retail Leases.
10.57 Line of Credit Agreement dated July 19, 1995, by and between
Performance Funding Corp. and Capital Factors, Inc., and
Guarantee of Performance Industries, Inc. Which were filed
with the Company's report on form 10-K for the year ended
December 31, 1995, and are incorprated herein by reference.
10.58 Lease dated September 1, 1995, between Performance Restaurants
of Nevada, Inc. and 1030 East Flamingo, L.L.C. Which were
filed with the Company's report on form 10-K for the year
ended December 31, 1995, and are incorprated herein by
reference.
10.59 Second Amendment to Retail Phase Construction Loan Agreement
dated October 31, 1995 by and between Camelback Plaza
Development, L.C. and Norwest Bank. Which were filed with the
Company's report on form 10-K for the year ended December 31,
1995, and are incorprated herein by reference.
10.60 Tenth Amendment to Restaurant Phase Construction Loan
Agreement dated October 31, 1995, by and between Camelback
Plaza Development, L.C. and Norwest Bank. Which were filed
with the Company's report on form 10-K for the year ended
December 31, 1995, and are incorprated herein by reference.
10.61 Cash Collateral Agreement by and between Performance
Industries, Inc., and Norwest Bank dated October 31, 1995.
Which were filed with the Company's report on form 10-K for
the year ended December 31, 1995, and are incorprated herein
by reference.
10.62 Promissory Note, Deed of Trusts, Assignment of Lease and Rents
by and between the Camelback Plaza Development L.C. and Boston
Capital Mortgage dated as of November 1, 1996 for the sum of
$7,250,000 on the property of the subsidiary at 2621 E.
Camelback Rd., Phoenix, AZ.
10.63 Stock Purchase Agreement, dated February 28, 1996, Letter
Amendment there to dated March 20, 1996, Letter Amendment
there to dated July 15, 1996, and Deposit Escrow Agreement
between Markwood L.L.C. as Buyer and the Company as seller of
stock in its wholly owned subsidiary Fabricaciones Metalicas
Mexicanas - S.A.
22. Subsidiaries of the Registrant. Which were filed with the
Company's report on form 10-K for the year ended December 31,
1995, and are incorprated herein by reference.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 1997 Performance Industries, Inc.
By: /s/ Edmund L. Fochtman, Jr.
Edmund L. Fochtman, Jr.
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 29th day of March, 1996, by the following persons
on behalf of the Registrant in the capacities indicated:
/s/ Joe Hrudka Chairman of the Board and Director
Joe Hrudka (Chief Executive Officer)
/s/ Edmund L. Fochtman, Jr. President and Director
Edmund L. Fochtman, Jr.
/s/ Allen L. Haire Director
Allen L. Haire
/s/ Jonathan Tratt Director
Jonathan Tratt
/s/ James W. Brown Chief Financial Officer and Director
James W. Brown (principal Accounting Officer)
/s/ Robert A. Cassalia Secretary
Robert A. Cassalia
18
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
19
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
CONTENTS
Page
Independent auditor's report 21
Consolidated financial statements:
Balance sheets 22
Statements of operations 23
Statements of shareholders' equity 24
Statements of cash flow 25 - 26
Notes to financial statements 27 - 48
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, 1996 and 1995
and the related consolidated statements of operations, shareholders' equity and
cash flows for the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Performance Industries, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
TOBACK CPAs, P.C.
Phoenix, Arizona
March 26, 1997
21
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
-------------- -------------
Current assets:
Cash and cash equivalents $ 1,136 $ 411
Restricted cash (Note 2) 409 1,267
Securities available for sale (Note 3) 727 1,783
Accounts and other receivables, less allowance for
doubtful accounts of $25 and $25, respectively (Note 5) 503 416
Current portion of receivables from sale of businesses,
net of allowance (Notes 4 and 5) 1,356 480
Factored accounts receivable, net of allowance for
doubtful accounts of $417 and $201, respectively (Notes 5 and 9) 1,139 1,868
Inventories 328 293
Prepaid expenses and other current assets 192 322
Other assets held for sale 206 212
-------------- -------------
Total current assets 5,996 7,052
Receivables from sale of businesses, less current portion,
net of allowance (Notes 4 and 5) 119 520
Investment in real estate (Notes 6 and 9) 9,481 11,073
Deferred income taxes (Note 13) 1,460 1,734
Property and equipment (Notes 7 and 9) 3,084 3,578
Other assets (Notes 8 and 9) 1,831 921
-------------- -------------
Total assets $ 21,971 $ 24,878
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations (Note 9) $ 547 $ 594
Accounts payable 1,000 1,260
Accrued employment costs 491 288
Accrued expenses and other current liabilities (Note 10) 1,339 1,366
Factored receivables reserve 286 390
Liabilities subject to compromise (Note 11) 754 754
Foreign tax liability 250 -
-------------- ------------
Total current liabilities 4,667 4,652
Long-term debt and capital lease obligations, less current portion (Note 9) 8,403 6,751
Commitments and contingencies (Notes 12, 18, 19 and 20)
Minority interest (Notes 6, 12 and 19) 371 414
Shareholders' equity:
Preferred stock, par value $1.00 per share; authorized
100,000 shares; none issued - -
Common stock, no par value; authorized 5,000,000
shares; issued 3,157,332 shares; outstanding 2,481,264
and 2,489,530, respectively (Notes 15 and 16) 31,202 31,202
Accumulated deficit (20,139) (16,416)
Unrealized holding gains on securities available for sale,
net of income taxes (Note 3) 443 1,226
-------------- -------------
11,506 16,012
Treasury stock at cost (Note 16) (2,976) (2,951)
-------------- -------------
Total shareholders' equity 8,530 13,061
-------------- -------------
Total liabilities and shareholders' equity $ 21,971 $ 24,878
============== =============
The accompanying notes are an integral
part of these consolidated financial statements. 22
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- -------------- ------------
Revenues $ 22,407 $ 21,598 $ 19,004
Cost of revenues (20,715) (19,403) (16,356)
Selling, general and administrative expenses (Note 21) (3,465) (2,841) (3,500)
Interest expense (754) (533) (18)
Other income (expenses), net 132 1,012 420
Gain on sale of subsidiary (Note 6) 1,224 - -
Loss on closure of restaurants (Note 17) (1,795) - -
------------- -------------- -------------
Loss from continuing operations
before income taxes (2,966) (167) (450)
Income tax (expense) benefit (Note 13) (800) 21 161
-------------- -------------- -------------
Loss from continuing operations before minority interest (3,766) (146) (289)
Minority interest in loss from subsidiary 43 2 -
------------- -------------- -------------
Loss from continuing operations (3,723) (144) (289)
Income from discontinued operations (Note 14) - 438 724
------------- -------------- -------------
Net (loss) income $ (3,723) $ 294 $ 435
============= ============== =============
Income (loss) per common share:
Continuing operations $ (1.50) (.06) $ (.12)
Discontinued operations - .18 .29
------------ ------------- -------------
Net income (loss) per common share $ (1.50) $ .12 $ .17
============ ============= =============
Average number of shares outstanding 2,486,086 2,489,530 2,458,280
============ ============= =============
The accompanying notes are an integral
part of these consolidated financial statements. 23
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Treasury Unrealized
Stock Stock holding gains
--------------------- --------------------- on securities
Number Number Accumulated available for
Amount of shares Amount of shares Deficit sale
--------- --------- --------- --------- --------- ---------
Balance, January 1, 1994 $ 31,202 3,157,332 $ (1,233) 89,939 $ (17,145) $ --
Net income -- -- -- -- 435 --
Treasury stock purchased -- -- (1,765) 609,113 -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 31,202 3,157,332 (2,998) 699,052 (16,710) --
Net income -- -- -- -- 294 --
Adjustment to treasury stock purchased -- -- 47 (31,250) -- --
Holding gain on securities available
for sale, net of income taxes -- -- -- -- -- 1,226
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 31,202 3,157,332 (2,951) 667,802 (16,416) 1,226
Net loss -- -- -- -- (3,723) --
Treasury stock purchased -- -- (25) 8,266 -- --
Holding loss on securities
available for sale, net of
income taxes (Note 3) -- -- -- -- -- (783)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 $ 31,202 3,157,332 $ (2,976) 676,068 $ (20,139) $ 443
========= ========= ========= ========= ========= =========
See Note 16 regarding a one-for-four reverse stock split which occurred in 1996.
The accompanying notes are an integral
part of these consolidated financial statements. 24
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------------- -------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (3,723) $ 294 $ 435
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 1,020 788 348
Gain on sale of securities available for sale - (343) -
Loss on settlement of receivables from sale of
business 99 - -
Loss on disposal of restaurants 1,795 - -
Gain on sale of Mexican subsidiary (1,219) - -
Minority interest in loss from subsidiary (43) (2) -
Adjustments and changes in estimates for
receivables related to previously
discontinued businesses - (480) (1,225)
(Gain) loss on sale of property and equipment 70 - (93)
Provision for allowance for doubtful accounts 408 133 113
Changes in:
Accounts receivable (86) (62) 258
Factored accounts receivable, net of reserve 276 1,836 (3,310)
Refundable income taxes - - 100
Inventories (6) (17) (35)
Prepaid expenses and other current assets (305) (121) 114
Other assets held for sale - 19 -
Other assets (321) (94) 57
Accounts payable (260) (214) 366
Foreign tax liability 250 - -
Other current liabilities, net 205 (1,450) (1,408)
Deferred income taxes 548 3 317
--------------- -------------- ---------------
Net cash (used in)
provided by operating activities (1,292) 290 (3,963)
--------------- --------------- ---------------
The accompanying notes are an integral
part of these consolidated financial statements. 25
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------------- -------------- ---------------
Cash flows from investing activities:
Changes in restricted cash $ 1,358 $ 1,633 $ (2,900)
Payments received on receivables from sale
of businesses 1,305 709 4,153
Proceeds from sale of securities available for sale - 387 -
Investment in real estate (283) (3,250) (3,684)
Purchase of property and equipment (1,486) (960) (1,666)
Net proceeds from sale of:
Mexican subsidiary 837 - -
Property and equipment 147 - 2,206
Other assets held for sale 6 - 34
Payment for purchase of restaurant assets (240) (450) -
Investment in preferred stock (120) - -
Loan to officer (150) - -
Repayment of officer loan 150 - -
Other, net (192) (5) (250)
--------------- -------------- ---------------
Net cash provided by (used in)
investing activities 1,332 (1,936) (2,107)
--------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings 2,659 1,115 4,151
Repayments of borrowings (1,949) (247) (185)
Changes in treasury stock (25) 47 (1,765)
--------------- -------------- ---------------
Net cash provided by
financing activities 685 915 2,201
--------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 725 (731) (3,869)
Cash and cash equivalents, beginning of year 411 1,142 5,011
--------------- -------------- ---------------
Cash and cash equivalents, end of year $ 1,136 $ 411 $ 1,142
=============== ============== ===============
Supplemental Disclosure of Noncash Investing and Financing Activities
See notes to financial statements for noncash investing and financing
activities.
The accompanying notes are an integral
part of these consolidated financial statements. 26
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies:
Business:
Performance Industries, Inc. has three primary subsidiaries:
o Performance Restaurants Group, Inc. (restaurant operations)
o Performance Funding Corp. (receivable factoring)
o Performance Camelback Development Corp. (real estate operations)
These subsidiaries conduct business primarily in Arizona and California.
Prior to 1994, Performance Industries, Inc. operated in the general and
specialty automotive parts and accessory businesses as Mr. Gasket
Company. During 1993, the Company completed the disposition of those
operations. Any gains, losses or activity related to these operations
have been accounted for as income from discontinued operations.
Performance Camelback Development Corp. has a 72% ownership interest in
Camelback Plaza Development Corp., L.L.C., an Arizona limited liability
company.
Principles of consolidation:
The consolidated financial statements include the accounts of Performance
Industries, Inc., its wholly-owned subsidiaries and its majority owned
real estate limited liability company. All significant intercompany
balances and transactions are eliminated in consolidation.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
Fair value of financial instruments:
The carrying amount of cash values and cash equivalents approximates fair
value because of the short maturity of those instruments.
The carrying amount of other financial instruments including accounts
receivable, receivables from sale of business, factored receivables and
current liabilities approximate the fair value of these instruments
because of the short-term nature of the instruments.
The carrying amount of long-term debt approximates fair value because the
interest rates on debt are comparable to current market rates on debt
with similar terms.
27
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Advertising:
Advertising costs are charged to operations as incurred.
Accounting estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
The Company's significant estimates relate to the realizability of certain
receivables, valuation of net deferred tax assets, estimates of
liabilities subject to compromise, and certain litigation
contingencies.
Inventory:
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory consists of food
and beverages at restaurant locations.
Property and equipment:
Property and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives;
buildings, 35 years; machinery and equipment, furniture and fixtures
and vehicles, 5 to 10 years; land improvements, 10 years. Leasehold
improvements are depreciated over the term of the related lease.
Restaurant equipment available for sale:
Restaurant equipment available for sale represents assets removed from
closed restaurants and is reported at the lower of carrying amount or
fair value less costs of disposal.
28
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Securities available for sale:
Securities available for sale are reported at fair value. Unrealized
holding gains, net of income tax, on securities available for sale are
reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Fair values for securities available for sale are determined using quoted
market prices.
Income taxes:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax benefit (expense) is the tax
receivable (payable) for the period and the change during the period in
deferred tax assets and liabilities excluding the tax effect on
unrealized holding gains on securities available for sale.
Factoring operations:
The Company recognizes fees based upon a percentage of the gross factored
receivables. The Company makes advances of up to 80% of the face amount
of factored receivables. The remaining balance is held as a reserve for
fees and charge-backs for uncollected receivables. Management's policy
is to obtain a security interest in all borrowers' receivables and
obtain personal guarantees, when deemed necessary.
29
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and summary of significant accounting policies, continued:
Investment in real estate:
Rental real estate:
Rental real estate is stated at cost, which principally represents land
lease costs, capitalized carrying costs, offsite improvements and
building construction costs. Rental real estate is being depreciated
using the straight-line method over the estimated useful life of the
properties of approximately 35 years.
Rental income is recognized on the straight-line basis over the life of
the related leases. Lease incentives are recognized as reductions of
rental income over the terms of the related leases.
Undeveloped real estate:
Undeveloped real estate represents the cost of certain real estate held
for future development or sale.
Income (loss) per common share:
Income (loss) per common share is based upon the weighted average number
of shares outstanding. The assumed exercise of employee stock options
does not result in material dilution.
Reclassifications:
Certain reclassifications have been made to the financial statements for
1995 and 1994 to conform to the financial statement classifications for
1996.
2. Restricted cash:
In November 1996, the Company entered into an agreement with the minority
shareholders in the Camelback Plaza Development, L.C. (see Note 19).
The agreement contains a provision that restricts the use of a portion
of the proceeds from the refinancing of the real estate project. The
cash is to be used to fund operating expenses and shortfalls of the
project, if necessary.
The restrictions are partially released on February 1, 1997 and entirely
released on April 1, 1997.
30
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Securities available for sale:
During 1995, the Company implemented SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, related to the Company's
investment in certain equity securities.
In 1995, a portion of the securities became marketable as a result of a
public stock offering, and were sold for a gain of approximately
$343,000. The remaining securities became available for sale in May,
1996 subject to certain SEC limitations. As a result, the Company
considers its investments in marketable equity securities to be
available for sale as of December 31, 1996.
At December 31, 1996, the aggregate fair value of securities available for
sale was approximately $727,000, with unrealized holding gains of
$516,000 and a cost basis of $211,000.
Unrealized holding gains decreased in 1996 by $783,000, net of income
taxes of approximately $274,000.
4. Receivables from sale of businesses:
Receivables from sale of businesses consist of the following (in
thousands):
1996 1995
------ ------
Note receivable, interest at 10%, principal and
interest payments due in monthly installments of
approximately $120,000 through January, 1998,
secured by stock of former Mexican subsidiary (See
Note 6) 1,475 -
Note receivable, former employee, interest at 12.5%,
principal and interest payments due in monthly
installments of approximately $6,600 through July,
1998, unsecured. During 1996 the former employee
stopped making payments on the note. The note is
fully allowed for in the allowance for doubtful
accounts as of December 31, 1996. 123 126
Notes settled during 1996 - 1,154
------ ------
1,598 1,280
Less allowance for doubtful accounts (123) (280)
------ ------
$1,475 $1,000
====== ======
31
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Receivables from sale of businesses:
Approximate future maturities of receivables from sale of businesses at
December 31, 1996 are as follows (in thousands):
1997 $ 1,433
1998 165
5. Allowances for doubtful accounts:
The changes in allowances for doubtful accounts are as follows (in
thousands):
1996 1995 1994
------------ ------------ ---------
Balance at beginning of year $ 506 $ 1,016 $ 4,186
Additions charged to cost and expenses 408 133 113
Reduction of estimated allowances from
discontinued operations - (480) (1,225)
Accounts written off (349) (163) (2,058)
------------ ------------ ------------
Balance at end of year $ 565 $ 506 $ 1,016
============ ============ ============
The allowances for doubtful accounts include allowances for accounts and
other receivables, receivables from sale of business, and factored
accounts receivable.
6. Investment in real estate:
Investment in real estate included in the 1996 and 1995 balance sheets is
as follows:
1996 1995
----------------- ----------------
Rental real estate $ 8,742 $ 10,980
Less accumulated depreciation (430) (1,076)
----------------- ----------------
8,312 9,904
Undeveloped real estate 1,169 1,169
----------------- ----------------
$ 9,481 $ 11,073
================= ================
32
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate, continued:
Summaries of real estate transactions and related accumulated
depreciation are as follows (in thousands):
Real estate:
1996 1995
----------------- ----------------
Balance at beginning of year $ 12,149 $ 8,435
----------------- ----------------
Additions during the year: -
Construction costs - 3,663
Ground lease fees 99 -
Tenant improvements 291 -
Other - 51
----------------- ----------------
Total additions 390 3,714
----------------- ----------------
Reductions during the year:
Cost of real estate sold (2,619) -
Other (9) -
----------------- ----------------
Total reductions (2,628) -
----------------- ----------------
Balance at end of year $ 9,911 $ 12,149
================= ================
Accumulated depreciation: 1996 1995 1994
----------------- ---------------- ----------------
Balance at beginning of year $ 1,076 $ 862 $ 887
Additions during the year:
Depreciation 320 214 68
Reductions during the year:
Disposals (966) - (93)
----------------- ---------------- ----------------
Balance at end of year $ 430 $ 1,076 $ 862
================= ================ ================
The Company's real estate subsidiary owns a retail and restaurant project
in Phoenix, Arizona. The subsidiary completed the project in 1995. The
subsidiary has entered into lease agreements with the various tenants
of the project (see Note 12).
During 1996, the Company sold its stock in its Mexican subsidiary,
Fabricaciones Metalicas Mexicanas, S. A. (FMMSA). The total sales price
for the shares was $3,000,000, including $1,000,000 in cash and a note
receivable of $2,000,000 (See Note 4). The significant assets disposed
of by the Company for which the subsidiary held an ownership interest
included rental real estate with a carrying value of approximately
$1,500,000. The gain on the sale, net of selling costs, was
approximately $1,200,000 for 1996.
33
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Investment in real estate, continued:
FMMSA had gross rental revenues of approximately $524,000 and $544,000 and
net income of approximately $195,000 and $20,000 for the years ending
December 31, 1995 and 1994, respectively. For the seven months prior to
the sale in 1996, FMMSA had gross rental revenue of approximately
$384,000 and income from operations before income taxes of
approximately $219,000.
7. Property and equipment:
The components of property and equipment consist of the following (in
thousands):
1996 1995
-------------- ---------------
Machinery and equipment $ 1,315 $ 1,222
Furniture and fixtures 678 684
Transportation equipment 400 493
Leasehold improvements 1,783 1,958
Equipment held under capital leases 219 134
-------------- ---------------
4,395 4,491
Less accumulated depreciation (1,311) (913)
--------------- ---------------
$ 3,084 $ 3,578
============== ===============
8. Other assets:
Other assets consist of the following (in thousands):
1996 1995
-------------- ---------------
Deposits and other $ 309 $ 232
Investment in preferred stock 120 -
Lease incentives, net of accumulated
amortization of $9 117 -
Liquor licenses 191 183
Loan acquisition costs, net of accumulated
amortization of $87 and $26, respectively 360 79
Restaurant small wares 404 425
Restaurant equipment available for sale 330 2
-------------- ---------------
$ 1,831 $ 921
============== ===============
During 1996, the Company invested $120,000 in the preferred stock of a
closely held regional airline. There currently is no public market for
the preferred stock. The investment is recorded at cost.
Loan acquisition costs are being amortized over the 84 month term of the
debt and are shown net of accumulated amortization.
34
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations consist of the following (in
thousands):
1996 1995
--------------- --------------
Note payable, limited partnership, non-recourse, with interest at 8.86%,
principal and interest due in monthly installments of approximately
$60,000 with a final balloon payment of approximately $6,500,000 due
November, 2003, secured by rental real estate. $ 7,243 $ -
Note payable, Mexican corporation, with interest at prime plus 3-7/8%,
with monthly principal payments of $6,000 plus interest through
December, 2006, secured by undeveloped real estate. 720 792
Unsecured note payable, State of California, with interest at 6%, with
monthly principal payments of $25,000 plus interest through June,
1999 750 1,050
Revolving line of credit, finance company, allows for advances up to $
2,000,000, with interest at prime plus 4% (12.25% at December 31,
1996), payable monthly, maturing July, 1997, secured by factored
receivables and a personal guarantee of the Company's principal
shareholder. - 367
Note payable, unrelated corporation, with interest at 10%, principal and
interest due April, 1997, secured by restaurant assets and other
assets held for sale 50 -
Capital lease obligations (Note 12) 187 130
Notes paid in full during 1996 - 5,006
--------------- --------------
8,950 7,345
Less current portion (547) (594)
--------------- --------------
$ 8,403 $ 6,751
=============== ==============
Cash paid for interest was approximately $818,000, $700,000, and $70,000
during 1996, 1995 and 1994, respectively.
Approximately $273,000 of interest costs were capitalized as construction
period interest on the real estate project during 1995.
35
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Long-term debt and capital lease obligations:
Approximate future maturities of long-term debt, excluding capital lease
obligations, for the next five years as of December 31, 1996 are as
follows (in thousands):
1997 $505
1998 463
1999 321
2000 181
2001 191
10. Accrued expenses and other current liabilities:
At December 31, 1996 and 1995, the components of accrued expenses and
other current liabilities consist of the following (in thousands):
1996 1995
-------------- ---------------
Gift certificates and advance
customer deposits $ 86 $ 83
Litigation settlements and estimated claims (Note 18) 619 60
Product liability costs 85 350
Reserve for environmental remediation
and property restoration - 261
Sales taxes payable 133 156
Deferred rental income - 150
Other accruals 416 306
-------------- ---------------
$ 1,339 $ 1,366
============== ===============
11. Liabilities subject to compromise:
From April 21, 1991 through May 4, 1993, Performance Industries, Inc.
(formerly Mr. Gasket Company) operated as debtor-in-possession under
the supervision of the Bankruptcy Court. In Chapter 11, the
shareholders' interests and substantially all liabilities as of the
filing date were subject to compromise.
Additions or deletions to the claims (liabilities subject to compromise)
may arise from the determination by the Bankruptcy Court or agreement
by parties in interest of allowed claims for contingencies and disputed
collateral and amounts. The Company is in the process of negotiating
settlements of the final claims outstanding. Liabilities subject to
compromise consist primarily of environmental remediation and tax
liabilities.
36
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases:
As lessee:
----------
The Company's restaurant subsidiary leases ten restaurant locations under
operating leases including one restaurant location which closed prior
to year end. These leases expire at various dates through 2010 and
require aggregate annual payments of approximately $1,400,000. The
leases also contain provisions for contingent rental payments ranging
from 5% to 9% of sales. During 1996 and 1995, the restaurants incurred
contingent rentals of approximately $358,000 and $332,000,
respectively.
The Company's restaurant subsidiary also leases certain equipment under
capital leases. The leases require aggregate monthly payments of
approximately $4,600 through May, 2001.
The Company's real estate subsidiary leases land under an operating lease.
The lease requires annual payments of approximately $200,000 through
2052.
The Company and its subsidiaries also lease their office space and two
warehouse facilities under operating leases. These leases require
aggregate monthly payments of approximately $15,000 and expire at
various dates through 1997.
Future minimum lease payments for capital leases and noncancellable
operating leases as of December 31, 1996 are as follows (in thousands):
Capital Operating
leases leases
------------ -------------
1997 $ 56 $ 1,704
1998 56 1,621
1999 56 1,506
2000 47 1,381
2001 9 1,359
Thereafter - 14,932
------------ -------------
224 $ 22,503
=============
Less amount representing interest (37)
------------
Present value of future minimum lease
payments on capital leases $ 187
============
Rent expense for operating leases was approximately $1,818,000, $1,723,000
and $1,398,000 for 1996, 1995 and 1994, respectively.
37
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Leases, continued:
As lessor:
----------
The Company's real estate subsidiary has entered into operating leases for
its rental real estate with four primary tenants. The leases call for
aggregate monthly rental payments of approximately $78,000. The leases
are for periods of 5 to 25 years and include rent escalation clauses
every 3 to 5 years tied to the consumer price index. Certain leases
also include percentage rent charges based on gross revenues of the
tenants.
Aggregate minimum future rentals under the lease agreements as of December
31, 1996 are as follows (in thousands):
1997 932
1998 932
1999 942
2000 1,036
2001 1,086
Thereafter 12,654
--------------
$ 17,582
==============
Percentage rental income earned was approximately $173,000 and $80,000 for
1996 and 1995, respectively. There was no percentage rental income
earned in 1994.
13. Income taxes:
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes as of January 1, 1994. There was no
cumulative effect on prior years from the change in accounting for
income taxes.
38
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
The provision for income taxes expense consists of the following (in
thousands):
1996 1995 1994
--------------- -------------- ---------------
Federal:
Current $ - $ - $ -
Deferred (548) (3) (317)
Foreign (250) (16) (23)
State and local (2) (2) -
---------------- -------------- ---------------
$ (800) $ (21) $ (340)
================ ============== ===============
Allocated to:
Continuing operations $ (800) $ 21 $ 161
Discontinued operations - (42) (501)
--------------- -------------- ---------------
$ (800) $ (21) $ (340)
================ ============== ===============
Foreign income taxes represent an estimate of the Mexican income tax on
the sale of the Company's Mexican subsidiary.
The following is a reconciliation between the income tax (expense) benefit
from continuing operations and income taxes calculated at the statutory
federal income tax rate of 34% for continuing operations (in
thousands):
1996 1995 1994
------------- ------------- -------------
Income tax benefit at statutory rate $ 1,008 $ 58 $ 158
Foreign and state income taxes (252) (18) (23)
Tax effect of change in valuation
allowance on deferred tax assets (1,556) (25) 26
Other - 6 -
------------- ------------- -------------
Income tax (expense) benefit from
continuing operations $ (800) $ 21 $ 161
============= ============= =============
39
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carry forwards. Significant components of
the Company's net deferred tax assets consist of the following (in
thousands):
1996 1995
--------------- ---------------
Current deferred tax assets (liabilities):
Reserves not currently deductible $ 332 $ 552
Unrealized holding gain on investment (72) (346)
Valuation allowance (260) (206)
---------------- ---------------
Net current deferred tax asset $ - $ -
=============== ===============
Non-current deferred tax assets (liabilities):
Difference between book and tax bases of assets $ 255 $ (144)
Capital loss and contribution carryforwards 24 9
Net operating loss carryforwards 9,477 8,662
General business credit carryforwards 414 444
--------------- ---------------
10,170 8,971
Valuation allowance (8,710) (7,237)
---------------- ---------------
Net non-current deferred tax asset $ 1,460 $ 1,734
=============== ===============
The deferred income tax liability related to unrealized holding gains on
securities available for sale decreased by $274,000 during 1996 as a
result of a decrease in the unrealized holding gain during 1996.
The Company has recorded a net deferred tax asset as of December 31, 1996,
of $1,460,000 primarily reflecting the benefit of net operating loss
carryforwards. Realization is dependent upon generating sufficient
taxable income prior to the expiration of the carryforwards. Although
realization is not assured, management believes it is more likely than
not that all of the net deferred tax asset will be realized. The amount
of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
40
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income taxes, continued:
The Company has available at December 31, 1996, federal net operating loss
carryforwards and unused general business credits, which may provide
future tax benefits as follows (in thousands):
Unused Unused federal
federal net general
Year of operating loss business
expiration carryforwards credits
-------------------- ----------------- ----------------
1997 $ - $ 318
1998 - -
2003 - 37
2005 2,585 -
2006 3,866 -
2007 7,015 -
2008 2,997 -
2009 3,257 29
2010 1,862 30
2011 3,790 -
----------------- ----------------
$ 25,372 $ 414
================= ================
The Company has net operating carryforwards for state income tax purposes
of approximately $14,000,000 which expire through 2001.
14. Discontinued operations:
Income from discontinued operations consists of adjustments for estimated
allowances and reserves on receivables and liabilities of previously
discontinued business segments, net of income taxes.
15. Stock option plans:
The Company has a stock option plan which provides for a maximum of
500,000 shares of common stock that may be issued to employees,
directors, or consultants of the Company and its subsidiaries.
The option price for options granted to eligible employees must be at
least 100% of the fair market value of the stock at the time the
options are granted. The option price for options granted to
non-employees is determined by the Board of Directors. Options granted
to employees are not exercisable after ten years. Restrictions on the
time to exercise options given to non-employees are set forth in the
options agreements.
41
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Stock option plans:
At December 31, 1996, all outstanding options were exercisable and 192,500
shares were available for future grant. All outstanding options expire
through 2005.
A summary of transactions with respect to the stock option plan follows:
Number Range of Weighted average
of shares exercise prices exercise price
------------- --------------- ----------------
Balance at January 1, 1996 438,750 $ .88 to $.96 .90
Issued -
Exercised -
Cancelled (131,250) $ .88 to $.96 .88
-------------
Balance at December 31, 1996 307,500 $ .88 to $.96 . .90
=============
16. Reverse stock split:
During the year, the Company approved a one-for-four reverse stock split
of its issued and outstanding common stock. In conjunction with the
reverse stock split, the Company also approved an offer to purchase
shares of the Company's stock held by shareholders with holdings of
less than 100 shares. The Company ultimately purchased 8,266 treasury
shares as a result of the offer.
17. Restaurant closures:
During the year, the Company opened a new restaurant in Las Vegas, Nevada.
The Company incurred total costs of approximately $1,500,000 related to
the restaurant, including leasehold improvements, restaurant equipment
and pre-opening costs. The Company also has a lease obligation for the
restaurant building which requires annual payments totalling
approximately $180,000 per year through December, 2005. Operations of
the restaurant included sales of approximately $809,000 and losses of
approximately $360,000 during 1996. In October, 1996, management
determined that the location could not generate sufficient revenue to
become a profitable operation and closed the restaurant. Accordingly,
the Company recorded a loss resulting from the closure of the
restaurant of approximately $1,255,000 in 1996. At December 31, 1996,
management has estimated future costs of the disposal for additional
rental liabilities to be $80,000. These costs are included in the
recorded loss on closure of restaurants and in accrued expenses and
other current liabilities on the accompanying balance sheet for 1996.
42
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Restaurant closures:
During 1996, the Company also closed a restaurant in San Ramon, California
due to the inability of the restaurant operation to generate positive
cash flow. Operations of the restaurant included sales of approximately
$925,000 and losses of approximately $144,000 during 1996. The Company
recorded a loss related to the closure of the restaurant of
approximately $540,000 in 1996. Sales from the San Ramon restaurant
were approximately $2,116,000 and $2,257,000 during 1995 and 1994,
respectively. Losses from operations of the restaurant were
approximately $9,000 and $10,000 during 1995 and 1994, respectively.
Subsequent to year end, the Company sold its interest in the restaurant
property for $50,000 and the buyer assumed the lease commitment related
to the property.
18. Litigation:
In November, 1993, certain shareholders dissented from the sale of one of
the Company's automotive products business. As a result, the company
filed an action to obtain a determination of the "fair cash value" of
shares held by those shareholders as of November 28, 1993, as if the
sale had not occurred. The Company settled with the majority of the
dissenting shareholders during 1994 for $.75 a share. The remaining
dissenting shareholders, who hold 461,500 shares, are entitled to
payment of "fair cash value" of the shares within 30 days of the
determination of the value by the court.
During 1993, two of the remaining dissenting shareholders filed an action
against the Company and certain current and former directors, alleging
that certain actions taken by the Company and management have lowered
the value of the Company's stock. Management is aggressively defending
this action and does not currently expect to incur any material
liability at its conclusion.
In another matter, an insurance carrier has filed an action against the
Company alleging that Company representatives failed to notify the
insurance carrier of a product liability claim in a timely manner. The
accident occurred in 1990 and the carrier voluntarily paid out
approximately $1,700,000 in benefits to settle the claim in January
1995. Management believes the action to be without merit and intends to
vigorously defend the suit.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business, including product liability claims
and employment disputes.
Accrued liabilities at December 31, 1996, include approximately $600,000
for potential litigation settlements on various claims. (See Note 10).
In the opinion of management, any additional liabilities related to
legal actions will not have a material adverse effect on the Company's
consolidated financial condition.
43
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. Commitments:
During 1993, Performance Restaurant Group, Inc. (PRG) entered into a
consulting agreement with the previous owner of six restaurants in
California. The agreement provides for payments of $90,000 annually
through 1999. The agreement also restricts disclosure of information
and includes restrictive competition clauses.
During 1996, Camelback Plaza Development Corp., L.C. entered into an
agreement with a property manager to direct the operations of the
Company's Camelback rental real estate property. The agreement requires
a monthly payment of the greater of $1,600 or 2% of gross revenue
collected. The agreement is effective through July, 1997 with a one
year renewal option.
The Company entered into a Purchase and Sale and Settlement Agreement with
the minority members of Camelback Plaza Development, L.C. The agreement
provides that the minority members can purchase the Company's interest
in the L.C. for $1,150,000 which approximates the net carrying value of
the assets of the L.C. The agreement also contains provisions to settle
certain disputes between the parties. The agreement terminates if the
sale of the Company's interest is not completed by April 1, 1997.
20. Contingencies:
An investigation of environmental matters related to facilities and
property previously owned and leased by the Company was performed
during 1992 to determine contingencies that would affect the Company's
emergence from Chapter 11. Certain reports received by the Company
identified areas of environmental contamination and potential
environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and
governmental agencies were notified by the Company of the related
possible liabilities. In addition, the Company notified its insurance
carriers of potential claims under its general liability and property
insurance coverage from prior years.
Locations reviewed for potential environmental liability included the
following:
Manufacturing facility in California:
This facility housed the manufacturing plant of a wheel business
formerly owned by the Company. All assets at this facility were sold
and the buyer vacated the premises in a prior year.
44
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Contingencies, continued:
An environmental survey was conducted in the fall of 1991. Two areas
for further investigation were identified. Further investigation in the
spring of 1992 disclosed ground contamination and possible seepage into
groundwater. Management believed the contamination to have existed
prior to its purchase of the business in 1982 and has notified its
predecessor-in-interest. The Company has accrued the estimated minimum
remediation costs of approximately $500,000. These costs are included
as liabilities subject to compromise in the accompanying consolidated
balance sheets.
All appropriate county, state and federal agencies were notified
regarding contamination at this site. To management's knowledge, no
response was made by any notified governmental agency nor was the
facility inspected by any such agency. However, the Company may, at a
later date, be ordered to undertake further testing and/or remediation
at the location.
Warehousing and office facility in Ohio:
In 1990, potential contamination was discovered at this location.
Consultants were retained to perform testing and investigation of the
site to determine the extent of the contamination. In compliance with
bankruptcy statutes, rules and regulations regarding the
dischargeability of claims, in January, 1993, the Company notified the
Ohio Environmental Protection Agency (EPA) of contamination at the
site.
Environmental studies performed determined that the contamination is
confined to the site with no evidence of migration to groundwater or
surrounding properties. Management estimated the costs of remediation
to be as much as $5,600,000. The Company believed that a former
owner/operator of the site, which is a Fortune 500 company, caused the
contamination. The Company negotiated an agreement with the former
owner/operator regarding indemnification for the costs of remediation.
The agreement required that remediation costs be shared by the Company,
the Fortune 500 company and the successor to the Company as owner of
the property. The Company's responsibility with respect to the
agreement was to pay remediation costs and to guarantee payment of
costs by the successor related to clean-up areas pursuant to a "Final
Closure Plan" approved by the Ohio EPA. The "Closure Plan" was approved
by Ohio EPA in February, 1995. The Company incurred approximately
$170,000 of costs related to this clean-up in 1994.
45
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. Related party transactions:
The Company leased two buildings in Cleveland, Ohio, used predominately
for manufacturing, from Joe Hrudka, the Company's principal shareholder
and Chairman of the Board, as successor in interest to Hrudka Realty
Company. The buildings were vacated as of May, 1992. Under the lease,
the Company was required to return the building in essentially the same
state of repair as the building was in upon the signing of the lease.
The Company expended approximately $137,000 for repairs in 1994.
Howard Gardner Consultants received $30,000 in 1996 from the Company for
consulting services on financial and general business matters. Howard
B. Gardner is a former officer and director of the Company. The fees
are included in selling, general and administrative expenses in the
statement of operations.
A Director of the Company earned a 3% commission of $90,000 from the sale
of the Company's stock in its Mexican subsidiary during 1996. The
commission is included in selling, general and administrative expenses
in the accompanying statement of operations. Of the commission earned,
$45,000 was paid during 1996 and the remaining $45,000 is included in
accounts payable on the accompanying balance sheet for 1996.
During 1996, the Company approved a short term loan of $150,000 to the
principal shareholder. The loan was repaid to the Company prior to
December 31, 1996.
46
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. Principal business segments:
The Company has three primary business segments, its restaurant,
factoring, and real estate operations.
Operating income by segment represents revenues less costs of revenues,
selling, general and administrative expenses, interest expense, plus
other income, net before allocation of corporate general and
administrative expense, interest and other corporate income.
(In thousands)
1996 1995 1994
--------------- -------------- ---------------
Revenues:
Restaurants $ 20,344 $ 19,357 $ 17,350
Factoring 623 896 1,065
Real estate 1,555 1,345 589
--------------- -------------- ---------------
$ 22,522 $ 21,598 $ 19,004
=============== ============== ===============
Operating income (loss):
Restaurants $ (2,774) $ (166) $ 105
Factoring (31) 676 895
Real estate 374 221 291
--------------- -------------- ---------------
Total principal business segments (2,431) 731 1,291
Unallocated corporate general and
administrative expenses (535) (898) (1,741)
--------------- -------------- ---------------
$ (2,966) $ (167) $ (450)
=============== ============== ===============
Depreciation:
Restaurants $ 651 $ 506 $ 194
Factoring - - -
Real estate 313 214 67
Corporate and other 56 68 87
--------------- -------------- ---------------
$ 1,020 $ 788 $ 348
=============== ============== ===============
Revenues for factoring for 1996 include approximately $115,000 of interest
revenue from other segments.
47
PERFORMANCE INDUSTRIES , INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. Principal business segments, continued:
(In thousands)
1996 1995 1994
--------------- -------------- ---------------
Capital expenditures:
Restaurants $ 1,830 $ 1,441 $ 1,652
Factoring - - -
Real estate 283 3,448 4,548
Corporate and other 9 5 14
--------------- -------------- ---------------
$ 2,122 $ 4,894 $ 6,214
=============== ============== ===============
Identifiable assets:
Restaurants $ 4,805 $ 4,932
Factoring 1,191 1,978
Real estate 9,285 12,418
Corporate and other 6,690 5,550
--------------- --------------
$ 21,971 $ 24,878
=============== ==============
The Company's restaurant subsidiary incurred approximately $408,000,
$425,000 and $334,000 of advertising expense in 1996, 1995 and 1994,
respectively.
48