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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2008
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-116310
Real Mex Restaurants, Inc.
(Exact name of Registrant as specified in its charter)
| DELAWARE | 13-4012902 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 5660 Katella Avenue, Suite 100, Cypress, CA | 90630 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (562) 346-1200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is not applicable as no public market for the voting stock of the registrant exists.
As of March 27, 2009, Real Mex Restaurants, Inc. had outstanding 1,000 shares of Common Stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
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FORWARD-LOOKING STATEMENTS
This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” “should,” “may,” or “could” or words or phrases of similar meaning. They may relate to, among other things: our liquidity and capital resources; legal proceedings and regulatory matters involving our Company; food-borne illness incidents; increases in the cost of ingredients; our dependence upon frequent deliveries of food and other supplies; our vulnerability to changes in consumer preferences and economic conditions; our ability to compete successfully with other casual dining restaurants; our ability to expand; and anticipated growth in the restaurant industry and our markets.
These forward looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause actual results to differ materially from trends, plans or expectations set forth in the forward looking statements. These risks and uncertainties may include these factors and the risks and uncertainties described in Item 1A “Risk Factors” of this report and elsewhere in this report. Given these risks and uncertainties, we urge you to read this report completely and with the understanding that actual future results may be materially different from what we plan or expect. All of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and we cannot assure you that the actual results or developments anticipated by our Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our Company or its business or operations. In addition, these forward-looking statements present our estimates and assumptions only as of the date of this report. Except for any ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward looking statements to reflect events or circumstances occurring after the date of this report.
Unless otherwise provided in this report, references to “we”, “us”, “Real Mex” and “our Company” refer to Real Mex Restaurants, Inc. and our consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
Our Company
We are one of the largest full service Mexican casual dining restaurant chain operators in the United States in terms of number of restaurants. As of December 28, 2008, we had 190 restaurants, located principally in California. Our four primary restaurant concepts, El Torito®, El Torito Grill®, Chevys Fresh Mex® and Acapulco Mexican Restaurant®, offer a large variety of traditional, innovative and authentic Mexican dishes and a wide selection of alcoholic beverages at moderate prices, seven days a week for lunch and dinner, as well as Sunday brunch. Our restaurant concepts feature fresh, high quality and flavorful foods, served in casual atmospheres. For Fiscal Year 2008, we generated revenues of $553.7 million, a decrease in same store sales of 2.3%, a net loss of $177.2 million (including $190.1 million in non-cash charges) and net cash provided by operating activities of $24.9 million.
Our Fiscal Year consists of 52 or 53 weeks and ends on the last Sunday in December of each year. Fiscal Year 2006 is comprised of 53 weeks and all other fiscal years presented are comprised of 52 weeks. See additional breakdown of these years into reported periods in Results of Operations below.
Merger Agreement
On August 17, 2006, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Holdco and its subsidiary, RM Integrated, Inc. (“RM Integrated”, and together with Holdco, “Buyer”). The majority of the stock of Holdco is owned by Sun Cantinas LLC (“Sun LLC”), an affiliate of Sun Capital Partners, Inc. (“Sun Capital”). On August 18, 2006, the stockholders of the Company entitled to vote thereon (including the holders of a majority of the Company’s Series C Preferred Stock, par value $0.001 per share) approved the Merger Agreement. On August 21, 2006 (the “Effective Time”), the closing of the transactions contemplated by the Merger Agreement occurred, and RM Integrated merged with and into the Company, with the Company continuing as the surviving corporation and the 100% owned subsidiary of Holdco. The net purchase price of the Company was $200.9 million, consisting of $359.0 million in cash, plus net cash acquired of $35.2 million, plus $4.6 million in working capital and other adjustments plus direct acquisition costs of $3.9 million, less indebtedness assumed of $188.2 million and seller costs of $9.3 million. Pursuant to the Merger Agreement, $6.0 million of the Merger Consideration was held in escrow.
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Exchange Agreement
Effective November 13, 2008, RM Restaurant Holding Corp. (“Holdco”), the Company’s parent, and each of Holdco’s existing lenders executed an agreement to exchange Holdco’s then outstanding borrowings under its unsecured term loan facility for 94.5% of the common stock of Holdco (the “Exchange”). Immediately prior to the Exchange, Holdco effected a 100:1 reverse stock split of its common stock and after the exchange the immediately post-split existing holders retained 5.5% of the shares of Holdco common stock. Immediately after the Exchange, no stockholder, together with its affiliates, owned more than 50% of the capital stock of Holdco. Affiliates of Sun Capital remain stockholders of Holdco. The Management Agreement described in Note 10 “Related Party Transactions” was terminated effective November 13, 2008, with the exception of certain provisions having to do with limitation of liability and indemnification, which will survive and continue in full force and effect.
In connection with the Exchange, the cross-default provision (as described in Note 6 to the consolidated financial statements) was terminated as it related to the Holdco debt. Concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment No. 3 to its Senior Secured Revolving Credit Facility (the “Amendment”) which extended the term for one year to January 29, 2010, modified the definition of Applicable Margin and Base Rate, amended Leverage and Adjusted Leverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward, replaced the Cash Flow Ratio covenant with a Minimum Interest Coverage Ratio covenant, and added a Monthly Debt to EBITDA Ratio covenant. Also concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment to its Senior Unsecured Credit Facility which provided a change in the interest rate from variable to a fixed rate of 12.5% and amended the Maximum Leverage Ratio and Minimum Interest Coverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward. The Company was in compliance with all of the loan covenants, as amended, at December 28, 2008.
The Exchange was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”) and affected the Company as push-down accounting is required. As no cash consideration was exchanged, the Company completed a valuation to determine the value of the equity exchanged, the assets acquired and the liabilities assumed based on their estimated fair market values at the date of the Exchange. The allocation of the purchase price is a preliminary estimate as the determination of the fair market values of the assets acquired and the liabilities assumed has not been finalized. The Company attributes the goodwill associated with the Exchange to the historical financial performance and the anticipated future performance of the Company’s operations. As this was a non-cash transaction, it has been excluded from the statement of consolidated cash flows.
The following table presents the allocation to the assets acquired and liabilities assumed based on their estimated fair values as determined by the valuation of the Company (in thousands):
| Cash and cash equivalents | $ | 1,417 | ||
| Trade and other accounts receivable | 12,100 | |||
| Inventories | 12,938 | |||
| Other current assets | 5,692 | |||
| Property and equipment | 113,154 | |||
| Other assets | 41,841 | |||
| Trademark and other intangibles | 68,900 | |||
| Goodwill | 43,178 | |||
| Total assets acquired | 299,220 | |||
| Accounts payable and accrued liabilities | 60,614 | |||
| Long-term debt | 166,028 | |||
| Deferred tax liability | 31,549 | |||
| Other liabilities | 13,854 | |||
| Total liabilities assumed | 272,045 | |||
| Net assets acquired | $ | 27,175 | ||
As a result of the Exchange, Fiscal Year 2008 is presented as the Successor Period from November 14, 2008 to December 28, 2008 and the Predecessor Period from December 31, 2007 to November 13, 2008.
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Our Restaurant Concepts
El Torito and El Torito Grill (42.2% of Fiscal Year 2008 restaurant revenues). Founded in 1954, El Torito has been a pioneer in the full service, casual dining Mexican restaurant segment in California. As of December 28, 2008, we operated 82 El Torito restaurants, including 10 El Torito Grill restaurants and 2 Sinigual restaurants, and this concept was the largest full service Mexican casual dining restaurant chain in California, in terms of number of restaurants. Our El Torito concept is dedicated to fresh, quality ingredients and authentic, made-from-scratch Mexican cuisine, including sizzling fajitas, hand-made tamales and traditional Mexican combination platters. During 2008, we opened our first Sinigual restaurants in Brandon, Florida and New York, New York. Sinigual is the name for El Torito Grill style restaurants outside of southern California.
We feature authentic regional specialties created by our executive chef, Pepe Lopez. El Torito restaurants are modeled after a traditional Mexican hacienda. Lunch and dinner entrees range in price from $6.99 to $19.99 with an average dining room check per guest of $15.39 and $16.58 for El Torito and El Torito Grill, respectively, for Fiscal Year 2008.
El Torito restaurants are primarily free standing buildings. The restaurants average approximately 8,800 square feet with average seating of approximately 306 guests. All of the El Torito properties are leased.
In the El Torito concept, we drive the traditionally slower day-parts of early evening and weekday traffic through Happy Hour offers and specialty theme menus. During Happy Hour, guests enjoy value priced appetizers and drinks. Our Pronto Lunch menu offers guests value priced, time sensitive entrees. We stimulate incremental traffic with value promotions such as happy hour and our longstanding Tacorito Tuesday programs where guests may enjoy grilled chicken, steak or carnitas tacos in the cantina.
Chevys (37.9% of Fiscal Year 2008 restaurant revenues).Chevys was founded in Alameda, California in 1986. As of December 28, 2008, we operated 68 Company-owned restaurants, franchised 27 restaurants and this concept was the second largest full service, Mexican casual dining restaurant chain in California in terms of number of restaurants. Chevys is a comfortable yet high-energy restaurant concept that offers guests an array of freshly prepared Mexican dishes in an ultra-casual atmosphere. We offer an extensive variety of Mexican dishes, including traditional enchiladas, burritos and tacos, as well as a variety of combination platters. The food menu is complemented by a wide selection of margaritas and an assortment of Mexican and American beers. Lunch and dinner entrees range in price from $8.99 to $16.99 with an average dining room check per guest of $14.37 for Fiscal Year 2008.
Chevys restaurants are primarily freestanding and located in high-traffic urban and suburban areas. Chevys restaurants generally average approximately 7,800 square feet with average seating for approximately 327 guests in the dining room and cantina. All of the Chevys properties are leased. The restaurant design is cantina-style with a vibrant, ultra-casual layout. A signature item of Chevys is its fresh tortilla maker called “El Machino”. El Machino is generally featured in the dining room and helps reinforce the Company’s commitment to freshness.
Acapulco (14.8% of Fiscal Year 2008 restaurant revenues).The first Acapulco restaurant opened in Pasadena, California in 1960. As of December 28, 2008, we had 32 Acapulco restaurant locations and this concept was the third largest full service, Mexican casual dining restaurant chain in California in terms of number of restaurants. We offer California style Mexican food featuring traditional favorites as well as seafood specialties such as grilled halibut, shrimp and crab entrees. We also feature a host of specialty drinks, including our signature Acapulco Gold Margarita™ made with premium Jose Cuervo Gold Tequila. Lunch and dinner entrees range in price from $5.99 to $17.99 with an average dining room check per guest of $15.17 for Fiscal Year 2008.
Acapulco restaurants are primarily freestanding and located in high-traffic urban and suburban areas. Acapulco restaurants generally average approximately 8,500 square feet with average seating for approximately 240 guests. Many locations have attractive outdoor patios. All but one of the properties are leased. Acapulco currently uses three models for restaurant decor: Hacienda, Aztec and Resort. The three styles, which are similar to one another, have allowed our Company to match design and capital expenditures with each location’s physical plant and the site’s customer demographics. A consistent appearance is achieved through similar exterior signage and the use of Mexican furnishings and vibrant primary color schemes in interior design throughout all Acapulco restaurants.
Acapulco benefits from long-standing value oriented day-part programs designed to drive incremental traffic during slow periods. Beginning with Sunday brunch, guests can indulge in a champagne brunch with a variety of fresh soups, chilled salads, a taco bar with handmade tortillas, a made to order taco bar and a variety of traditional Mexican favorites. Weekday value promotions include Happy Hour, Margarita Mondays, and a lunch buffet for time sensitive guests.
Other Restaurant Concepts (5.1% of Fiscal Year 2008 restaurant revenues).As of December 28, 2008, we operated 8 additional restaurant locations, all of which are also full service Mexican formats, under the following brands: Las Brisas; Casa Gallardo; El Paso Cantina; and Who ·Song & Larry’s. We acquired most of these restaurants with the acquisition of El Torito Restaurants, Inc.
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Business Strengths
Fresh, Authentic, Mexican Food.Our food and beverage offerings range from guest favorites such as sizzling fajitas, hand-made tamales and traditional Mexican combination platters to authentic regional specialties created by our executive chef. Our executive chef makes regular visits to small villages throughout many regions of Mexico to identify new flavors and recipes, and introduces distinct dishes to our restaurant guests. We believe that these freshly prepared made-from-scratch items underscore our authenticity. We prepare all our recipes with fresh, high quality ingredients, from our salsa to our sizzling fajitas. El Torito is known for tableside preparations, including our most popular appetizer, our guacamole, which is made to our guests’ specifications at their table. Our food is complemented by a variety of specialty drinks, including our Cadillac Margarita™, made with premium 1800 Tequila and Grand Marnier.
Service. We train our servers to follow a service program designed to achieve fast and consistent service while also promoting a casual and festive atmosphere. Our service program outlines procedures, such as the server’s first approach to the guest, product recommendations throughout the visit, timing and manner of food delivery, plate clearing, payment processing, and bidding the guest farewell. Throughout the day, managers are responsible for generating energy and enthusiasm throughout their restaurants by circulating and visiting with guests at their tables. Our primary goal is to ensure that every guest leaves fully satisfied, thereby promoting repeat visits.
Internal Production, Purchasing and Distribution Facilities. We centralize purchasing and distribution for the majority of our raw ingredients, fresh products and alcoholic beverages through two facilities located in Buena Park and Union City, California and manufacture food products through a facility in Vernon, California. The purchasing and distribution facilities, encompassing approximately 67,000 square feet in Buena Park and 54,000 square feet in Union City enable us to order and deliver food items and ingredients on a timely basis. We are able to leverage our purchasing power and reduce delivery costs, contributing to our restaurant gross margins. Our manufacturing facility, encompassing approximately 101,000 square feet, produces certain high volume items for our Acapulco restaurants including soups, baked goods and sauce bases, enabling us to maintain food quality and consistency while reducing costs. This facility also manufactures specialty products for sales to outside customers, marketed under the Real Mex Foods® label as well as co-packaged under other branded names. All three facilities have additional capacity to allow for growth in our distribution operations and production for outside customers.
Business Strategy
Our primary business objective is to increase stockholder value through same store sales and store margin improvements, new restaurant openings, expansion of the Chevys franchise network and growth in outside sales by Real Mex Foods. During 2008 we experienced a 2.3% decrease in comparable store sales, primarily as a result of the slowing U.S. economy which has negatively impacted overall consumer traffic in the restaurant industry. We do not expect the economy to improve during 2009. We are focused on minimizing the impact on our 2009 sales by providing increased value offerings to our customers to increase guest count and customer loyalty.
Same store sales and store margin improvements. At our El Torito concept, we intend to communicate our commitment to creating fresh, authentic Mexican dishes and drinks through in-restaurant merchandising, direct mail, newspaper, internet advertising and public relations. We sought to improve sales and margins through new product introductions and signature specials during five promotional events. Our Acapulco concept built upon the positioning of a family of local Mexican neighborhood restaurants delivering generous portions of California-Mexican food and drink at a good value. In Fiscal Year 2008, we sustained the same number of direct mail drops and coupons as in Fiscal Year 2007. We launched five promotions featuring new product introductions as limited time offers and communicated these promotions vis-à-vis direct mail and in-restaurant merchandising. In the Chevys concept, we leveraged our equity in “Fresh Mex” and further enhanced the brand by incorporating fun and flavor into the concept’s positioning. We introduced five promotions that boasted fresh, fun and flavor and communicated the new offers through in-restaurant merchandising and direct mail with coupon incentives.
New Restaurant Openings. During 2008, we opened five restaurants, including our first Sinigual restaurants in Brandon, Florida and New York, New York. Sinigual is the name for El Torito Grill style restaurants outside southern California. The other three restaurants opened in 2008 include one El Torito and two Chevys restaurants in California. In 2007, we opened four restaurants, including two El Torito, one El Torito Grill and one Chevys restaurants, all in California. During 2006, we opened six restaurants, including three El Torito, one El Torito Grill and one Chevys restaurants, all in California, and one Chevys restaurant in New York. Due to the current downturn in the economy, we do not expect to open any new restaurants in 2009 and do not plan to resume new restaurant openings until the economy shows signs of recovery.
Expansion of the Chevys franchise network. We currently have 10 franchisees operating 27 franchised Chevys restaurants in 12 states. We plan to continue to develop new franchise relationships and expand existing franchise relationships in order to increase Chevys brand awareness and marketing efficiencies and to increase revenues from new store franchise fees along with revenues from ongoing franchise royalties. We plan to franchise those markets that do not fit into our Company restaurant development plans either because of size or geographic location.
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Growth in outside sales by Real Mex Foods. We manufacture bulk food packages and individually wrapped retail products under the Real Mex Foods® label, as well as co-package these products under other branded company names. We plan to expand this area of our business as we continue to develop a core group of standard products for retail sales including premium quality burritos, enchiladas and tamales. We currently sell directly to, or package for fast food and casual restaurants, amusement parks, club stores, and food service, retail, vending and institutional customers. We plan to continue expanding this business to include other products and to market these products to additional customers in these and other business segments. Outside sales increased 15.7% from 2007 to 2008.
Purchasing and Distribution
We seek to obtain high quality ingredients, products and supplies from a variety of reliable sources at competitive prices. We centralize purchasing of most of our food ingredients, products and supplies, and in February 2005, opened a distribution facility in Union City, California to service the northern California Chevys restaurants and other northern California, Nevada, Oregon and Washington restaurants. Our purchasing and distribution facilities enable us to order and distribute food items timely, enabling delivery of fresh products to our restaurants. In addition, we obtain our beer from a variety of state regulated distributors who deliver directly to our restaurants. In January 2008 we opened a new manufacturing plant in Vernon, California, in order to expand capacity to facilitate continued growth in our food manufacturing business and sales to external accounts.
Employees
As of December 28, 2008, we had 12,085 employees. Of these employees, 10,662 were employed as restaurant hourly team members, 892 as restaurant managers, 362 as distribution and production facility employees, and 169 as executive, senior, and general office staff. None of our workforce is unionized.
Restaurant Staffing.Restaurants are assigned between three and five managers — typically, a general manager, one or more assistant managers and one chef. The average restaurant employs approximately 61 team members — approximately 35% of who are in kitchen positions and 65% in guest service positions. The actual number of team members in each restaurant varies depending on sales volume, physical plant design, and unique operational needs.
Turnover.We believe one of our strengths is the relative stability of our employee staff. We believe that in Fiscal Year 2008, our hourly turnover of 81.5% and our management turnover of 26.0% were better than industry average. Our restaurant management is heavily tenured, with Regional Directors averaging approximately 17 years, General Managers averaging approximately 10 years and Managers averaging over 5 years. Hourly employee tenure averages almost 4 years. Other highly skilled positions such as chefs average 15 years with the Company.
Competition
The food service industry is competitive and affected by external changes such as economic conditions, disposable income, consumer tastes, and changing population and demographics. Competitive factors include: food quality, variety and price; customer service; location; the number and proximity of competitors; decor; and public reputation. We consider our principal competitors to be family dining venues and casual dining operations. Like other food service operations, we follow changes in both consumer preferences for food and habits in patronizing eating establishments. We intend to continue to expand into the specialty food market by selling directly to or co-packaging for restaurants, food service companies and other customers and will as a result face competition from other food service companies, many of which are more established than us.
Government Regulation
Our business, including each of the restaurants we operate, is subject to extensive federal, state and local government regulation, including those relating to, among others, public health, sanitation and safety, zoning and fire codes. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of facilities for an indeterminate period of time, or third party litigation, any of which could have a material adverse effect on our Company and its results of operations. We are also subject to laws and regulations governing our relationships with employees, including the Fair Labor Standards Act, the Immigration Reform and Control Act, minimum wage requirements, overtime, reporting of tip income, work and safety conditions and other regulations governing employment. Because a significant number of our employees are paid at rates tied to the federal and California state minimum wage, an increase in the minimum wage would increase our labor costs. An increase in the minimum wage rate or employee benefits costs could have a material adverse effect on our results of operations.
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Our restaurants’ sales of alcoholic beverages are subject to regulation in each state in which we operate. Typically our restaurants’ licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause. Alcoholic beverage control regulations relate to various aspects of daily operations of our restaurants, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. In Fiscal Year 2008, approximately 24.2% of our restaurant revenues were attributable to the sale of alcoholic beverages, and we believe that our ability to serve alcohol is an important factor in attracting customers. The failure of any of our restaurants to timely obtain and maintain liquor or other licenses, permits or approvals required to serve alcoholic beverages or food could delay or prevent the opening of, or adversely impact the viability of, the restaurant, and we could lose significant revenue.
Our restaurants are subject in each state in which we operate to “dram shop” laws, which allow a person to sue us if that person was injured by an intoxicated guest who was wrongfully served alcoholic beverages at one of our restaurants. A judgment against us under a dram shop law could exceed our liability insurance coverage policy limits and could result in substantial liability for us and have a material adverse effect on our profitability. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on us.
Our food manufacturing operations are subject to extensive regulation by the United States Department of Agriculture, or USDA, and other state and local authorities. Our facilities and products are subject to periodic inspection by federal, state and local authorities. We believe that we are currently in substantial compliance with all material governmental laws and regulations and maintain all material permits and licenses relating to our operations. We are required to have a USDA inspector on site at our manufacturing facility to ensure compliance with USDA regulations. Nevertheless, we cannot assure you that we are in full compliance with all such laws and regulations or that we will be able to comply with any future laws and regulations in a cost-effective manner. Failure by us to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, all of which could have a material adverse effect on our business, financial condition or results of operations.
We are also subject to the U.S. Bio-Terrorism Act of 2002 which, among other things, requires us to provide specific information about the food products we ship in the U.S. and to register our manufacturing facilities with the United States Food & Drug Administration, or FDA. In addition, we are subject to the Nutrition Labeling and Education Act of 1990 and the regulations promulgated there under by the FDA. This regulatory program prescribes the format and content of certain information required to appear on the labels of food products.
Additionally, restaurants and other facilities use electricity and natural gas, which are subject to various federal and state regulations concerning the allocation of energy. Our operating costs have been and will continue to be affected by increases in the cost of energy.
Environmental Matters
Our operations are also subject to federal, state and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although we are not aware of any material environmental conditions that require remediation by us under federal, state or local law at our properties, we have not conducted a comprehensive environmental review of our properties or operations and we cannot assure that we have identified all of the potential environmental liabilities at our properties or that such liabilities would not have a material adverse effect on our financial condition.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition can be adversely affected by numerous risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this report. If any of the following risks actually occur, our business, financial condition, operating results, cash flows and/or future prospects could be materially adversely affected.
Food-borne illness incidents could reduce our restaurant sales.
We cannot guarantee that our internal controls and training at our restaurants and distribution and manufacturing facilities will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third party suppliers makes it difficult to monitor food safety compliance and increases the risk that food-borne illness would affect multiple locations rather than single restaurants. Third party food suppliers and transporters outside of our control could cause some food borne illness incidents. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our restaurants could negatively affect our restaurant sales if highly publicized. This risk exists even if it were later determined that the illness was wrongly attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to food borne illnesses that have had a material adverse impact on their operations, and we cannot assure you that we can avoid a similar impact upon the occurrence of a similar incident at our restaurants. In addition, we may be subject to liability claims as a result of food-borne illnesses.
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Increases in the cost of ingredients could materially adversely affect our business, financial condition, and results of operations and cash flows.
The cost, availability and quality of the ingredients we use to prepare our food and beverages are subject to a range of factors, many of which are beyond our control. Changes in the cost of such ingredients can result from a number of factors, including seasonality, political conditions, weather conditions, shortages of ingredients and other factors. If we fail to anticipate and react to increasing ingredient costs by adjusting our purchasing practices and menu price adjustments, our cost of sales may increase and our operating results could be adversely affected.
We depend upon frequent deliveries of food and other supplies.
Our ability to maintain consistent quality menu items depends in part upon our ability to acquire fresh food products and related items, including essential ingredients used in the Mexican restaurant business such as avocados, from reliable sources in accordance with our specifications. Shortages or interruptions in the supply of fresh food products caused by unanticipated demand, problems in production or distribution, contamination of food products, an outbreak of food-borne diseases, inclement weather or other conditions could materially adversely affect the availability, quality and cost of ingredients, which could adversely affect our business, financial condition, results of operations and cash flows.
We have contracts with a large number of suppliers of most food, beverages and other supplies for our restaurants. In addition, we distribute substantially all of the products we receive from suppliers through our distribution facility. If suppliers do not perform adequately or if any one or more of such entities seeks to terminate its agreement or fails to perform as anticipated, or if there is any disruption in any of our supply relationships or distribution operations for any reason, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our inability to replace our distribution operations and our suppliers in a short period of time on acceptable terms could increase our costs and could cause shortages at our restaurants of food and other items that may cause our restaurants to remove certain items from a restaurant’s menu or temporarily close a restaurant. If we temporarily close a restaurant or remove popular items from a restaurant’s menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage or thereafter, as our customers may change their dining habits as a result.
We are vulnerable to changes in consumer preferences and economic and other conditions that could harm our business, financial condition, and results of operations and cash flows.
Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, consumer confidence in the economy and discretionary spending priorities. Factors such as traffic patterns, weather conditions, local demographics and the type, number and location of competing restaurants may adversely affect the performance of individual locations. In addition, inflation and increased food and energy costs may harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing, which could harm our business, financial condition, results of operations and cash flows. We cannot assure you that consumers will continue to regard our products favorably or that we will be able to develop new products that appeal to consumer preferences. Any failure to satisfy consumer preferences could have a materially adverse affect on our business. Our continued success will depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions.
The U.S. economic crisis adversely impacted our business and financial results in fiscal 2008 and a prolonged recession could materially affect us in the future.
The restaurant industry is dependent upon consumer discretionary spending. The current economic crisis has reduced consumer confidence to historic lows impacting the public’s ability and/or desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses, personal bankruptcies and reduced access to credit, resulting in lower levels of guest traffic in our restaurants. If this difficult economic situation continues for a prolonged period of time and/or deepens in magnitude, our business, results of operation and ability to comply with the covenants under our credit facility could be materially affected. Continued deterioration in customer traffic and/or a reduction in the average amount guests spend in our restaurants will negatively impact our revenues and our profitability. This could result in further reductions in staff levels, additional asset impairment charges and potential restaurant closures.
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Future recessionary effects on the Company are unknown at this time and could have a potential material adverse effect on our financial position and results of operations. There can be no assurance that the government’s plan to stimulate the economy will restore consumer confidence, stabilize the financial markets, increase liquidity and the availability of credit, or result in lower unemployment.
Our business is highly sensitive to events and conditions in the State of California.
A majority of our restaurants are located in California. Because of this geographic concentration, we are susceptible to local and regional risks, such as energy shortages and related increased costs, increased government regulation, adverse economic conditions, adverse weather conditions, earthquakes and other natural disasters, any of which could have a material adverse effect on our business, financial condition and results of operations. In light of our current geographic concentration, adverse publicity relating to our restaurants could have a more pronounced adverse effect on overall sales than might be the case if our restaurants were more broadly dispersed.
There is intense competition in the restaurant industry.
The restaurant business is intensely competitive with respect to food quality, price value relationships, ambiance, service and location, and there are many well-established competitors with substantially greater financial, marketing, personnel and other resources. In addition, many of our competitors are well established in the markets where we operate. While we believe that our restaurants are distinctive in design and operating concept, other companies may develop restaurants that operate with similar concepts. In addition, with improving product offerings at quick-service restaurants and grocery stores, coupled with the present state of the economy, consumers may choose to trade down to these alternatives, which could also negatively affect revenues.
Negative publicity relating to one of our restaurants could reduce sales at some or all of our other restaurants.
We are, from time to time, faced with negative publicity relating to food quality, restaurant facilities, health inspection scores, employee relationships or other matters at specific restaurants. Adverse publicity may negatively affect us, regardless of whether the allegations are valid or whether we are liable. In addition, the negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant involved to affect some or all of our other restaurants. A similar risk exists with respect to totally unrelated food service businesses, if customers mistakenly associate such unrelated businesses with our own operations.
Uninsured losses could occur.
We have comprehensive insurance, including general liability and property (including business interruption) extended coverage. However, there are certain types of losses that may be uninsurable or that we believe are not economical to fully insure, such as earthquakes and other natural disasters. In view of the location of many of our existing and planned restaurants in California, our operations are particularly susceptible to damage and disruption caused by earthquakes. In the event of an earthquake or other natural disaster affecting our geographic area of operations, we could suffer a loss of the capital invested in, as well as anticipated earnings from, the damaged or destroyed properties.
Changes in employment laws may adversely affect our business.
Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers’ compensation rates and citizenship requirements. Significant additional government imposed increases in the following areas could materially affect our business, financial condition, operating results or cash flow:
| • | minimum wage; |
| • | paid leaves of absence; |
| • | provision to employees of mandatory health insurance; and |
| • | tax reporting; and |
| • | revisions in the tax payment requirements for employees who receive gratuities. |
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If we face labor shortages or increased labor costs, our growth and operating results could be adversely affected.
Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates or increases in the federal or applicable state minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be adversely affected. In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators and management personnel, as well as a sufficient number of other qualified employees, including guest service and kitchen staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in some geographic areas. In addition, full service casual dining segment restaurant operators have traditionally experienced relatively high employee turn over rates. Although we have not yet experienced any significant problems in recruiting or retaining employees, our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We have been affected by increasing healthcare and workers’ compensation expenses affecting business in most industries including ours. To manage premium increases we have elected to self-insure workers’ compensation. Higher deductibles could result in greater exposure to our operating results and liquidity. If we are exposed to material liabilities that are not insured it could materially adversely affect our financial condition and results of operations.
We may be locked into long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.
Many of our current leases are non-cancelable and typically have initial terms of 10 to 20 years and one or more renewal terms of three or more years that we may exercise at our option. Leases that we enter into in the future likely will also be long-term and non-cancelable and have similar renewal options. If we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. We may close or relocate the restaurant, which could subject us to construction and other costs and risks, and could have a material adverse effect on our business. Additionally, the revenue and profit, if any, generated at a relocated restaurant, may not equal the revenue and profit generated at the existing restaurant. Furthermore, in the past, we have been forced to close profitable restaurants due to the inability to renew a lease upon the expiration of its lease term and we expect this to occur from time to time in the future.
The current economic crisis could have a material adverse impact on our landlords or other tenants in shopping centers in which we are located, which in turn could negatively affect our financial results.
If the recession continues or increases in severity, our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to satisfy lease covenants to us. In addition other tenants at shopping centers in which we are located or have executed leases may fail to open or may cease operations. If our landlords fail to satisfy required co-tenancies, such failures may result in us terminating leases in these locations. Also, decreases in total tenant occupancy in shopping centers in which we are located may affect guest traffic at our restaurants. All of these factors could have a material adverse impact on our operations.
We face risks associated with government regulations.
We are subject to extensive government regulation at the federal, state and local government level. These include, but are not limited to, regulations relating to the preparation and sale of food and beverages, zoning and building codes, land use and employee, public health, sanitation and safety matters. We are required to obtain and maintain governmental licenses, permits and approvals.
Difficulty or failure in obtaining these approvals in the future could result in delaying or canceling the opening of new restaurants or could materially adversely affect the operation of existing restaurants. Local authorities may suspend or deny renewal of our governmental licenses if they determine that our operations do not meet the standards for initial grant or renewal. This risk would be even higher if there were a major change in the licensing requirements affecting our types of restaurants.
Typically our restaurants’ licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause. Alcoholic beverage control regulations relate to various aspects of daily operations of our restaurants, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. In Fiscal Year 2008, approximately 24.2% of our restaurant revenues were attributable to the sale of alcoholic beverages, and we believe that our ability to serve alcoholic beverages, such as our signature margarita drinks, is an important factor in attracting customers. The failure of any of our restaurants to timely obtain and maintain liquor or other licenses, permits or approvals required to serve alcoholic beverages or food could delay or prevent the opening of, or adversely impact the viability of, the restaurant and we could lose significant revenue. Our restaurants are also subject in each state in which we operate to “dram shop” laws, which allow a person to sue us if that person was injured by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A judgment against us under a dram shop law could exceed our liability insurance coverage policy limits and could result in substantial liability for us and have a material adverse effect on our profitability. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on us.
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The federal Americans with Disabilities Act and similar state laws prohibit discrimination because of disability in public accommodations and employment. Mandated modifications to our facilities (or related litigation) in the future to make different accommodations for persons with disabilities could result in material unanticipated expenses.
Our distribution and manufacturing operations are subject to extensive regulation by the FDA, USDA and other state and local authorities. Our processing facilities and products are subject to periodic inspection by federal, state and local authorities. We cannot assure you, however, that we are in full compliance with all currently applicable governmental laws, or that we will be able to comply with any or all future laws and regulations. Failure by us to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, financial condition or results of operations.
We may be subject to significant liability should the consumption of any of our specialty products cause injury, illness or death.
We may be required to recall specialty products that we manufacture and co-package at our manufacturing facility in the event of contamination, product tampering, mislabeling or damage to our products. We cannot assure you that product liability claims will not be asserted against us or that we will not be obligated to recall our products. A product liability judgment against us or a product recall could have a material adverse effect on our business, financial condition or results of operations.
The failure to enforce and maintain our trademarks could materially adversely affect our ability to establish and maintain brand awareness.
We have registered or filed applications to register certain names used by our restaurants and our food manufacturing operations as trademarks or service marks with the United States Patent and Trademark Office and in certain foreign countries, including the names Acapulco Mexican Restaurant®, El Torito Grill®, Sinigual®, Chevys Fresh Mex® and Real Mex Foods®. The success of our business strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes our intellectual property, either in print or on the Internet, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain market acceptance.
We cannot assure you that all of the steps we have taken to protect our intellectual property in the U.S. and foreign countries will be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S.
We face risks associated with environmental laws.
We are subject to federal, state and local laws, regulations and ordinances that:
| • | govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes; and |
| • | impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials. |
In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities, including liabilities resulting from lawsuits brought by private litigants, relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. If we are found liable for the costs of remediation of contamination at any of our properties our operating expenses would likely increase and our operating results would be materially adversely affected.
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We depend on the services of key executives, whose loss could materially harm our business.
Some of our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating and marketing our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could materially adversely affect our business until a suitable replacement could be found. We believe that they could not easily be replaced with executives of equal experience and capabilities. We do not maintain key person life insurance policies on any of our executives. See “Management.”
Compliance with regulation of corporate governance and public disclosure will result in additional expenses.
Keeping abreast of, and in compliance with, laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations require a significant amount of management attention and external resources. We are committed to observing high standards of corporate governance and public disclosure. Consequently, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment will result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
We may make acquisitions or enter into similar transactions.
We may expand by pursuing acquisitions, business combinations and joint ventures. We may encounter difficulties in integrating the expanded operations, entering into markets, or conducting operations where we have no or limited prior experience. Furthermore, we may not realize the benefits we anticipated when we entered into these transactions. In addition, the negotiation of potential acquisitions, business combinations or joint ventures as well as the integration of an acquired business could require us to incur significant costs and cause diversion of management’s time and resources.
Our substantial level of indebtedness could adversely affect our financial condition.
We have substantial indebtedness, including obligations under capital leases and unamortized debt discount, of approximately $161.8 million as of December 28, 2008, a majority of which matures in 2010. Subject to restrictions in the indenture for our senior secured notes and our senior secured and unsecured credit facilities, we may incur additional indebtedness. Our high level of indebtedness could have important consequences to holders of our indebtedness and significant effects on our business, including the following:
| • | our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; |
| • | we must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available to use for operations and other purposes; |
| • | our high level of indebtedness could place us at a competitive disadvantage compared to those of our competitors that may have proportionately less debt; |
| • | our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and |
| • | our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business. |
We expect to use cash flow from operations to pay our expenses and scheduled interest and principal payments due in the next 12 months under our outstanding indebtedness. Our ability to make these payments thus depends on our future performance, which is affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future and our anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, to pay interest on our indebtedness, or to fund other liquidity needs. If we do not have enough money, we may be required to refinance all or part of our then-existing debt, sell assets or borrow more money. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements, including the indenture for our senior secured notes and our senior secured and unsecured credit facilities, may restrict us from adopting any of these alternatives.
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The indenture for our senior secured notes and our senior secured and unsecured credit facilities impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.
Our senior secured and unsecured credit facilities and the indenture for our senior secured notes impose, and future debt agreements may impose, significant operating and financial restrictions on us. These restrictions will limit or prohibit, among other things, our ability to:
| • | incur additional indebtedness; |
| • | repay indebtedness before stated maturity dates; |
| • | pay dividends on, redeem or repurchase our stock or make other distributions; |
| • | make acquisitions or investments; |
| • | create or incur liens; |
| • | transfer or sell certain assets or merge or consolidate with or into other companies; |
| • | enter into certain transactions with affiliates; |
| • | sell stock in our subsidiaries; |
| • | restrict dividends, distributions or other payments from our subsidiaries; and |
| • | otherwise conduct necessary corporate activities. |
In addition, our senior secured and unsecured credit facilities require us to maintain compliance with specified financial covenants. These covenants could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness.
We have a material amount of goodwill and other indefinite lived intangible assets which, if impaired, would result in a reduction in our net income.
Goodwill is the amount by which the cost of an acquisition accounted for using the purchase method exceeds the fair value of the net assets we acquire. Current accounting standards require that goodwill and other indefinite lived intangible assets be periodically evaluated for impairment based on the fair value. The downturn in the economy has resulted in an unfavorable impact on current operations and growth projections. As a result, impairment charges of goodwill and other intangible assets of approximately $163.2 million and $10.0 million were recognized during fiscal years 2008 and 2007, respectively. After recording this impairment loss and the valuation of the company in accordance with the Exchange, approximately $112.1 million, or 37.6%, of our total assets represented goodwill and other indefinite lived intangible assets at December 28, 2008. Any further declines in our assessment of the fair value the Company could result in a further write-down of our goodwill and a reduction in our net income.
The interests of the stockholders of the voting stock of our parent, RM Restaurant Holding Corp, may conflict with the interests of the holders of our indebtedness.
By virtue of their stock ownership and the terms of various agreements between our parent and its stockholders, the stockholders of our parent have significant influence over our management and will be able to determine the outcome of all matters required to be submitted for approval, including the election of our directors and the approval of mergers, consolidations and the sale of all or substantially all of our assets. The interests of the stockholders of our parent may differ from the interests of the holders of our indebtedness if, for example we encounter financial difficulties or are unable to pay our debts as they mature. In addition, our parent’s stockholders may have an interest in pursuing acquisitions, divestitures, financing, or other transactions that, in their judgment, could enhance their equity investments, although such transactions might involve risks to the holders of our indebtedness.
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Future changes in financial accounting standards may cause adverse unexpected operating results and affect our reported results of operations.
A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the questioning of current accounting practices may adversely affect our reported financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Cypress, California. We occupy this facility under a lease that expires in 2012. As of December 28, 2008, we leased 189 restaurant facilities and owned one. The majority of our leases are for 10, 15 or 20-year terms, include options to extend the terms, include rent holidays, rent escalation clauses and/or contingent rent provisions and some of our leases have tenant improvement allowances. Our restaurant leases have terms that expire between 2009 and 2028 (excluding renewal options not yet exercised) and have an average remaining term of approximately 14 years, including options.
Restaurant Locations
As of December 28, 2008, we owned, licensed or franchised 225 restaurants in 16 states and three foreign countries, of which 190 are Company operated and 35 operate under franchise or license arrangements.
Our restaurant locations by concept and state as of December 28, 2008 were as follows:
| Concepts | ||||||||||||||||||||||||
| State | El Torito(1) | Chevys | Acapulco | Franchised | Other(2) | Total | ||||||||||||||||||
| California | 76 | 47 | 31 | 1 | 2 | 157 | ||||||||||||||||||
| Missouri | — | — | — | 9 | 4 | 13 | ||||||||||||||||||
| Illinois | — | 1 | — | 4 | 1 | 6 | ||||||||||||||||||
| Arizona | 2 | 3 | — | — | — | 5 | ||||||||||||||||||
| New Jersey | — | 2 | — | 3 | — | 5 | ||||||||||||||||||
| Oregon | 1 | 3 | 1 | — | — | 5 | ||||||||||||||||||
| Maryland | — | 2 | — | 2 | — | 4 | ||||||||||||||||||
| New York | 1 | 2 | — | 1 | — | 4 | ||||||||||||||||||
| Virginia | — | 3 | — | 1 | — | 4 | ||||||||||||||||||
| Washington | — | 1 | — | 1 | 1 | 3 | ||||||||||||||||||
| Florida | 1 | 2 | — | 1 | — | 4 | ||||||||||||||||||
| Louisiana | — | — | — | 2 | — | 2 | ||||||||||||||||||
| Nevada | — | 2 | — | — | — | 2 | ||||||||||||||||||
| Indiana | 1 | — | — | — | — | 1 | ||||||||||||||||||
| Minnesota | — | — | — | 1 | — | 1 | ||||||||||||||||||
| South Dakota | — | — | — | 1 | — | 1 | ||||||||||||||||||
| Total domestic | 82 | 68 | �� | 32 | 27 | 8 | 217 | |||||||||||||||||
| Japan | — | — | — | 6 | — | 6 | ||||||||||||||||||
| Turkey | — | — | — | 2 | — | 2 | ||||||||||||||||||
| Total including International | 82 | 68 | 32 | 35 | 8 | 225 | ||||||||||||||||||
| (1) | Includes El Torito Grill and Sinigual restaurants. | |
| (2) | Includes Las Brisas, Who ·Song&Larry’s, El Paso Cantina and Casa Gallardo restaurants. |
We also lease an approximately 101,000 square foot dedicated manufacturing facility located in Vernon, California, an approximately 67,000 square foot warehouse and distribution facility located in Buena Park, California and an approximately 54,000 square foot warehouse and distribution facility located in Union City, California, utilized by our subsidiary, Real Mex Foods, Inc.
Our owned and certain of our leased real property is pledged to secure indebtedness outstanding under our senior credit facility and our senior secured notes.
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ITEM 3. LEGAL PROCEEDINGS
We are periodically a defendant in cases involving personal injury and other matters that arise in the normal course of business. While any pending or threatened litigation has an element of uncertainty, we believe that the outcome of these lawsuits or claims, individually or combined, will not materially adversely affect the consolidated financial position, results of operations or cash flows of our Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of Fiscal Year 2008, no matters were submitted to a vote of stockholders through solicitation of proxies or otherwise.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There is currently no established public trading market for our outstanding common stock.
Holders
The number of record holders of each of our classes of common stock as of March 27, 2009 was as follows:
Common Stock: 1
Dividends
No dividends were paid during Fiscal Years 2008 or 2007. In Fiscal Year 2006, we paid dividends of $10.0 million on our common stock to our parent, Holdco. Our ability to pay dividends is restricted by certain covenants contained in our secured and unsecured senior credit facilities, as well as certain restrictions contained in our indenture relating to our senior secured notes.
Securities Authorized For Issuance under Equity Compensation Plans
For information on securities authorized for issuance under equity compensation plans, see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Equity Compensation Plan Information.”
Recent Sales of Unregistered Securities and Repurchases of Equity Securities
We have not sold any unregistered equity securities in Fiscal Year 2008 nor have we repurchased any equity securities in the fourth quarter of 2008.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial and other data of our Company. The selected historical consolidated financial data has been derived from our Company’s audited consolidated financial statements for the Successor Period from November 14, 2008 to December 28, 2008 (“Successor 2008”), the Predecessor Period from December 31, 2007 to November 13, 2008 (“Predecessor 2008”), the Predecessor Fiscal Year 2007 (“Predecessor 2007”), the Predecessor Period from August 21, 2006 to December 31, 2006 (“Predecessor 2006-2”), the Predecessor Period from December 26, 2005 to August 20, 2006 (“Predecessor 2006-1”) and the Predecessor Fiscal Years ended December 2005 and 2004. When combined, Fiscal Year 2006 consists of 53 weeks and all other fiscal years presented consist of 52 weeks. This data presented below should be read in conjunction with, and is qualified in its entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial statements and the notes thereto appearing elsewhere in this report.
| Successor | Predecessor | |||||||||||||||||||||||||||
| November | December | Fiscal | August | December | ||||||||||||||||||||||||
| 14, 2008 to | 31, 2007 to | Year | 21, 2006 to | 26, 2005 to | Predecessor | |||||||||||||||||||||||
| December | November | Ended | December | August | Fiscal Year Ended | |||||||||||||||||||||||
| 28, 2008 | 13, 2008 | 2007 | 31, 2006 | 20, 2006 | 2005(4) | 2004 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
| Restaurant revenues | $ | 52,448 | $ | 456,587 | $ | 523,352 | $ | 179,630 | $ | 351,591 | $ | 510,013 | $ | 314,157 | ||||||||||||||
| Other revenue | 4,571 | 37,110 | 38,164 | 11,094 | 18,358 | 20,532 | 10,787 | |||||||||||||||||||||
| Total revenues | 57,316 | 496,429 | 565,191 | 192,098 | 372,552 | 534,296 | 326,810 | |||||||||||||||||||||
| Cost of sales | 14,255 | 123,878 | 140,824 | 46,883 | 87,388 | 127,126 | 80,839 | |||||||||||||||||||||
| Labor | 21,210 | 178,962 | 199,843 | 67,729 | 125,748 | 186,390 | 118,888 | |||||||||||||||||||||
| Direct operating and occupancy expense | 14,886 | 133,351 | 148,088 | 51,127 | 94,422 | 140,648 | 76,760 | |||||||||||||||||||||
| Total operating costs | 50,351 | 436,191 | 488,755 | 165,739 | 307,558 | 454,164 | 276,487 | |||||||||||||||||||||
| General and administrative expenses | 3,234 | 26,493 | 31,718 | 11,414 | 18,893 | 28,346 | 17,725 | |||||||||||||||||||||
| Depreciation and amortization | 3,750 | 21,724 | 23,961 | 10,323 | 12,230 | 18,498 | 11,837 | |||||||||||||||||||||
| Goodwill impairment | — | 163,196 | 10,000 | — | — | — | — | |||||||||||||||||||||
| Operating (loss) income | (19 | ) | (158,668 | ) | 6,854 | 3,379 | 18,150 | 31,433 | 20,299 | |||||||||||||||||||
| Interest expense | 4,108 | 16,407 | 19,326 | 10,481 | 16,005 | 22,973 | 12,528 | |||||||||||||||||||||
| Debt termination costs | — | — | — | — | — | — | 4,677 | |||||||||||||||||||||
| (Loss) income before income tax provision | (4,103 | ) | (173,061 | ) | (10,802 | ) | (8,238 | ) | 2,787 | 8,677 | 4,546 | |||||||||||||||||
| Net (loss) income | (4,103 | ) | (173,113 | ) | (23,546 | ) | (5,047 | ) | 1,480 | 13,386 | 13,616 | |||||||||||||||||
| Redeemable preferred stock accretion | — | — | — | — | (10,126 | ) | (14,583 | ) | (11,862 | ) | ||||||||||||||||||
| Net (loss) income attributable to common stockholders(1) | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | $ | (5,047 | ) | $ | (8,646 | ) | $ | (1,197 | ) | $ | 1,754 | ||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||
| Cash and cash equivalents | 2,099 | 2,323 | 2,710 | 14,871 | 10,690 | |||||||||||||||||||||||
| Property and equipment, net | 110,505 | 96,179 | 90,802 | 82,592 | 36,589 | |||||||||||||||||||||||
| Total assets | 298,328 | 434,455 | 447,135 | 310,889 | 186,951 | |||||||||||||||||||||||
| Total debt(2) | 161,813 | 186,187 | 183,905 | 182,031 | 106,503 | |||||||||||||||||||||||
| Total stockholders’ equity | 23,044 | 163,113 | 184,077 | 50,584 | 29,849 | |||||||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||||
| Capital expenditures | $ | 736 | $ | 34,404 | $ | 23,545 | $ | 23,408 | $ | 9,982 | ||||||||||||||||||
| Ratio of earnings to fixed charges(3) | — | — | — | 1.2 | x | 1.2 | x | |||||||||||||||||||||
| (1) | Net (loss) income attributable to common stockholders includes the effect of the accretion of the liquidation preference on the redeemable preferred stock which reduces net income or increases net loss attributable to common stockholders for the relevant periods through August 20, 2006. | |
| (2) | Total debt includes long-term debt, obligations under capital leases and unamortized debt premium/discount. | |
| (3) | For purposes of calculating the ratio of earnings to fixed charges, earnings consist of net income before income taxes plus fixed charges. Fixed charges consist of interest expense on all indebtedness, plus one-third of rental expense (the portion deemed representative of the interest factor). For periods with a net loss before income taxes, this calculation is not performed since the ratio is not meaningful. | |
| (4) | Includes the results of Chevys since January 12, 2005, the date of acquisition. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as a result of certain factors, including those set forth under the heading “Forward-Looking Statements” above and elsewhere in this report. Unless otherwise provided below, references to “we”, “us” and “our Company” refer to Real Mex Restaurants, Inc. and our consolidated subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report.
Overview
We are one of the largest full service, casual dining Mexican restaurant chain operators in the United States in terms of number of restaurants. As of December 28, 2008, we operated 190 restaurants, 157 of which are located in California, with additional restaurants in Arizona, Florida, Indiana, Illinois, Maryland, Missouri, Nevada, New Jersey, New York, Oregon, Virginia and Washington. Our three major subsidiaries are El Torito Restaurants, Inc., Acapulco Restaurants, Inc., Chevys Restaurants LLC, and a purchasing, distribution, and manufacturing subsidiary, Real Mex Foods, Inc.
El Torito, El Torito Grill (including Sinigual), Acapulco and Chevys, our primary restaurant concepts, each offer high quality Mexican food, a wide selection of alcoholic beverages and excellent guest service. In addition to the El Torito, El Torito Grill, Acapulco and Chevys concepts, we operate 8 additional restaurant locations, most of which are also full service Mexican formats, under the following brands: Las Brisas; Casa Gallardo; El Paso Cantina; and Who·Song & Larry’s.
During Fiscal Year 2008, we opened five restaurants, including our first Sinigual restaurants in Brandon, Florida and New York, New York. Sinigual is the name for El Torito Grill style restaurants outside southern California. The other three restaurants opened in 2008 include one El Torito and two Chevys restaurants in California. During Fiscal Year 2007, we opened four restaurants, including two El Torito, one El Torito Grill and one Chevys restaurants, all in California. During Fiscal Year 2006, we opened six restaurants, including three El Torito, one El Torito Grill and one Chevys restaurants, all in California, and one Chevys restaurant in New York.
Our Fiscal Year consists of 52 or 53 weeks and ends on the last Sunday in December of each year. Fiscal Year 2006 is comprised of 53 weeks and all other fiscal years presented are comprised of 52 weeks. See additional breakdown of these years into reported periods in Results of Operations below. When calculating same store sales, we include a restaurant that has been open for more than 18 months and for the entirety of each comparable period. As of December 28, 2008, we had 180 restaurants that met this criterion.
In Fiscal Year 2008, we generated revenues of $553.7 million. Our revenues are comprised of restaurant sales, other revenues and royalty and franchise fees. Restaurant revenues include sales of food and alcoholic and other beverages. Other revenues consist primarily of sales by Real Mex Foods to outside customers of processed and packaged prepared foods and other merchandise items.
Cost of sales is comprised primarily of food and alcoholic beverage expenses. The components of cost of sales are variable and increase with sales volume. In addition, the components of cost of sales are subject to increase or decrease based on fluctuations in commodity costs and depend in part on the success of controls we have in place to manage cost of sales in our restaurants. The cost, availability and quality of the ingredients we use to prepare our food and beverages are subject to a range of factors including, but not limited to, seasonality, political conditions, weather conditions, and ingredient shortages.
Labor cost includes direct hourly and management wages, operations management bonus, vacation pay, payroll taxes, workers’ compensation insurance and health insurance.
Direct operating and occupancy expense includes operating supplies, repairs and maintenance, advertising expenses, utilities, and other restaurant related operating expenses. This expense also includes all occupancy costs such as fixed rent, percentage rent, common area maintenance charges, real estate taxes and other related occupancy costs.
General and administrative expense includes all corporate and administrative functions that support our operations. Expenses within this category include executive management, supervisory and staff salaries, bonus and related employee benefits, travel and relocation costs, information systems, training, corporate rent, professional fees and other consulting fees.
Depreciation principally includes depreciation of capital expenditures for restaurants.
Pre-opening costs are expensed as incurred and include costs associated with the opening of a new restaurant or the conversion of an existing restaurant to a different concept.
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Goodwill is deemed to have an indefinite life and is subject to an annual impairment test. Other intangible assets are amortized over their useful lives in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Impairment of goodwill and intangible assets reflects the impairment losses related to the difference between the fair value and recorded value as identified in our annual impairment test. The fair value was determined using discounted cash flow projections based upon management forecasts. We recorded impairment charges of $163.2 million and $10.0 million in 2008 and 2007, respectively as a result of the impact of the downturn in the economy on current operations and growth projections.
Amortization of favorable lease asset and unfavorable lease liability, net, represents the amortization of the asset in excess of the approximate fair market value and the liability in excess of the approximate fair market value of the leases assumed, which is revalued in purchase price accounting. The amounts are being amortized over the remaining primary term of the underlying leases.
Our annual operating results are impacted by restaurant closures to the extent we close locations. Due to our long operating history, restaurant closures are generally the result of lease expirations. Many of our leases are non-cancelable and have initial terms of 10 to 20 years with one or more renewal terms of three or more years that we may exercise at our option. As of December 28, 2008, we owned one restaurant location and leased the remaining 189.
We perform ongoing analyses of restaurant cash flow and in the case of negative cash flow or underperforming restaurants, we may negotiate early termination of leases, allow leases to expire without renewal or sell restaurants. In addition, from time to time we may be forced to close a successful restaurant if we are unable to renew the lease on satisfactory terms, or at all. From the end of Fiscal 2006 to the end of Fiscal Year 2008, we closed 24 restaurants, 16 of which were early lease terminations and 8 of which we were unable to renew the leases thereon.
Results of Operations
Our operating results for the Successor Period from November 14, 2008 to December 28, 2008 (“Successor 2008”), the Predecessor Period from December 31, 2007 to November 13, 2008 (“Predecessor 2008”), the Predecessor Fiscal Year 2007 (“Predecessor 2007”), the Predecessor Period from August 21, 2006 to December 31, 2006 (“Predecessor 2006-2”) and the Predecessor Period from December 26, 2005 to August 20, 2006 (“Predecessor 2006-1”) are expressed as a percentage of total revenues below. Because of purchase accounting adjustments to the fair market value of long-term assets and long-term liabilities, and because the number of days in each period presented vary, certain amounts may not be comparable between each period presented.
| Successor (1) | Predecessor (1) | |||||||||||||||||||
| November | December | Fiscal | August | December | ||||||||||||||||
| 14, 2008 to | 31, 2007 to | Year | 21, 2006 to | 26, 2005 to | ||||||||||||||||
| December | November | Ended | December | August | ||||||||||||||||
| 28, 2008 | 13, 2008 | 2007 (5) | 31, 2006 | 20, 2006 | ||||||||||||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
| Cost of sales | 24.9 | 25.0 | 24.9 | 24.4 | 23.5 | |||||||||||||||
| Labor | 37.0 | 36.0 | 35.4 | 35.3 | 33.8 | |||||||||||||||
| Direct operating and occupancy expense | 26.0 | 26.9 | 26.2 | 26.6 | 25.3 | |||||||||||||||
| Total operating costs | 87.8 | 87.9 | 86.5 | 86.3 | 82.6 | |||||||||||||||
| General and administrative expense | 5.6 | 5.3 | 5.6 | 5.9 | 5.1 | |||||||||||||||
| Depreciation and amortization | 5.8 | 4.0 | 3.9 | 4.4 | 3.3 | |||||||||||||||
| Goodwill impairment | — | 32.9 | 1.8 | — | — | |||||||||||||||
| Operating (loss) income | — | (32.0 | ) | 1.2 | 1.8 | 4.9 | ||||||||||||||
| Interest expense | 7.2 | 3.3 | 3.4 | 5.5 | 4.3 | |||||||||||||||
| (Loss) income before income tax provision | (7.2 | ) | (34.9 | ) | (1.9 | ) | (4.3 | ) | 0.7 | |||||||||||
| Net (loss) income | (7.2 | ) | (34.9 | ) | (4.2 | ) | (2.6 | ) | 0.4 | |||||||||||
| (1) | When combined, Fiscal Years 2008 and 2007 are comprised of 52 weeks and Fiscal Year 2006 is comprised of 53 weeks. |
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Fiscal Year 2008 Compared to Fiscal Year 2007
Total Revenues. Total revenues were $57.3 million in Successor 2008 and $496.4 million in Predecessor 2008, compared to $565.2 million in Predecessor 2007. The overall decrease of $11.4 million or 2.0% was due to a $3.5 million increase in other revenues, offset by a $14.3 million decrease in restaurant revenues and a $0.6 million decrease in royalty and franchise fees. The $3.5 million increase in other revenues was primarily due to an increase in sales to existing outside customers and the addition of new outside customers by Real Mex Foods, Inc., our distribution and manufacturing subsidiary. The $14.3 million decrease in restaurant revenues was primarily due to comparable store sales declines of 2.3% versus Fiscal Year 2007. The comparable store sales decline was approximately 1.2% during Predecessor 2008 and approximately 13.2% during Successor 2008. This decline is primarily attributable to a reduction in guest count at our existing restaurants resulting from the slowing U.S. economy, which has negatively impacted overall consumer traffic in the restaurant industry. This decline particularly impacted our December sales, combined with the shortened peak shopping period between Thanksgiving and Christmas holidays from almost 5 weeks in 2007 to 4 weeks in 2008.
Cost of Sales. Total cost of sales was $14.3 million in Successor 2008 and $123.9 million in Predecessor 2008, compared to $140.8 million in Predecessor 2007. The overall decrease of $2.7 million or 1.9% was primarily due to the comparable store sales decline noted above. As a percentage of total revenues, cost of sales remained consistent, at 24.9% in Successor 2008 and 25.0% in Predecessor 2008 compared to 24.9% in Predecessor 2007. The slight increase in Predecessor 2008 of 0.1% was primarily due to higher commodity costs, specifically poultry, dairy and oils during 2008.
Labor. Labor costs were $21.2 million in Successor 2008 and $179.0 million in Predecessor 2008, compared to $199.8 million in Predecessor 2007. The overall increase of $0.3 million or 0.2% was primarily due to higher benefits expense combined with annual restaurant management salary increases partially offset by lower hourly labor expense related to the comparable store sales decline. As a percentage of total revenues, labor costs increased to 37.0% in Successor 2008 and 36.0% in Predecessor 2008 compared to 35.4% in Predecessor 2007. Payroll and benefits remain subject to inflation and government regulation; especially wage rates that are currently at or near the minimum wage and expenses for health insurance.
Direct Operating and Occupancy Expense. Direct operating and occupancy expense was $14.9 million in Successor 2008 and $133.4 million in Predecessor 2008, compared to $148.3 million in Predecessor 2007. The overall decrease was less than $0.1 million or 0.0%. As a percentage of total revenues, direct operating and occupancy expense was 26.0% in Successor 2008 and 26.9% in Predecessor 2008 compared to 26.2% in Predecessor 2007. The increase as a percent of total revenues in Predecessor 2008 was primarily due to the comparable store sales decline, since a significant portion of these costs are fixed or take time to adjust for the reduction in sales.
General and Administrative Expense. General and administrative expense was $3.2 million in Successor 2008 and $26.5 million in Predecessor 2008 as compared to $31.9 million in Predecessor 2007. The overall decrease of $2.2 million or 6.8% was primarily due to lower salary expense associated with position eliminations during Predecessor 2008. As a percentage of total revenues, general and administrative expense was flat at 5.6% in Successor 2008 and decreased to 5.3% in Predecessor 2008 compared to 5.6% in Predecessor 2007. The increase from Predecessor 2008 to Successor 2008 resulted from the decrease in comparable sales for Successor 2008, as noted above, plus accrued severance of $0.5 million related to the resignation of our CEO in December 2008.
Depreciation and Amortization. Depreciation and amortization expense was $3.8 million in Successor 2008 and $21.7 million in Predecessor 2008 as compared to $22.3 million in Predecessor 2007. The overall increase of $3.2 million or 3.9% was primarily due to depreciation on the assets of new restaurants. In addition, in conjunction with the Exchange, we revalued our assets, which resulted in an increase in property and equipment of $18.7 million at November 13, 2008, resulting in additional depreciation in Successor 2008 of $0.8 million. As a percentage of total revenues, depreciation and amortization increased to 6.5% in Successor 2008 and 4.4% in Predecessor 2008 from 3.9% in Predecessor 2007.
Goodwill Impairment.Non-cash goodwill and intangible asset impairment charges of $163.2 million and $10.0 million were recorded in Predecessor 2008 and Predecessor 2007, respectively, to reflect the impairment losses related to the difference between the fair value and recorded value for goodwill and other indefinite lived intangible assets. The fair value was determined based upon a combination of two valuation techniques, including an income approach, which utilizes discounted future cash flow projections based upon management forecasts, and a market approach, which is based upon pricing multiples at which similar companies have been sold. No goodwill or trademark impairment was recognized by the Company during Successor 2008.
Interest Expense. Interest expense was $4.1 million in Successor 2008 and $16.4 million in Predecessor 2008 as compared with $19.3 million in Predecessor 2007. As a percentage of total revenues, interest expense increased to 7.2% in Successor 2008 and decreased to 3.3% in Predecessor 2008 as compared to 3.4% in Predecessor 2007. The decrease in interest as a percentage of total revenues during Predecessor 2008 resulted primarily from a reduction in the weighted average interest rate on our senior unsecured credit facility from 10.36% in Predecessor 2007 to 8.45% in Predecessor 2008. The increase in interest expense as a percentage of total sales during Successor 2008 was primarily due to the amortization of the discount recorded as a reduction of debt related to our senior secured notes, with total amortization of $1.5 million recorded as interest expense in Successor 2008.
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Income tax provision.No income tax expense was recorded during Successor 2008. We have recorded income tax expense of $0.1 million in Predecessor 2008 and $12.7 million in Predecessor 2007. During Predecessor 2007 we recorded a deferred tax valuation allowance of $13.3 million. In 2008 we continue to record a valuation allowance against our deferred tax assets, which was $23.1 million at December 28, 2008. The amount of deferred tax assets considered realizable is based upon our ability to generate future taxable income, exclusive of reversing temporary differences and carry forwards. In evaluating future taxable income for valuation allowance purposes as of December 28, 2008, we considered only income expected to be generated in Fiscal Years 2009, 2010 and 2011.
Fiscal Year 2007 Compared to Fiscal Year 2006
Total Revenues. Total revenues were $565.2 million in Predecessor 2007 as compared to $192.1 million in Predecessor 2006-2 and $372.6 million in Predecessor 2006-1. The overall increase of $0.5 million or 0.1% was due to an $8.7 million increase in other revenues, partially offset by a $7.9 million decrease in restaurant revenues. The $8.7 million increase in other revenues to $38.2 million in Predecessor 2007 was primarily due to an increase in sales to existing outside customers and the addition of new outside customers by Real Mex Foods, Inc., our distribution and manufacturing subsidiary. The $7.9 million decrease in restaurant revenues to $523.4 million in Predecessor 2007 was primarily due to one less week of operations in Predecessor 2007. Comparable store sales increased 1.3% in Predecessor 2007 when comparing 52 comparable weeks’ sales results with the combined Predecessor 2006 periods.
Cost of Sales. Total cost of sales was $140.8 million in Predecessor 2007 as compared to $46.9 million in Predecessor 2006-2 and $87.4 million in Predecessor 2006-1. The overall increase was $6.6 million or 4.9%. As a percentage of total revenues, cost of sales increased to 24.9% in Predecessor 2007 from 24.4% in Predecessor 2006-2 and from 23.5% in Predecessor 2006-1 primarily due to higher commodity costs, specifically beef, cheese, dairy and oils, in Predecessor 2007.
Labor. Total Labor costs were $199.8 million in Predecessor 2007 as compared to $67.7 million in Predecessor 2006-2 and $125.7 million in Predecessor 2006-1. The overall increase was $6.4 million or 3.3%. As a percentage of total revenues, labor costs increased to 35.4% in Predecessor 2007 from 35.3% in Predecessor 2006-2 and 33.8% in Predecessor 2006-1. These increases were primarily due to minimum wage increases which took place in January in the majority of the states in which we operate combined with annual management salary increases. Payroll and benefits remain subject to inflation and government regulation; especially wage rates that are currently at or near the minimum wage, and expenses for health insurance.
Direct Operating and Occupancy Expense. Direct operating and occupancy expense was $148.3 million in Predecessor 2007 as compared to $51.1 million in Predecessor 2006-2 and $94.4 million in Predecessor 2006-1. The overall increase was $2.8 million or 1.9%. Direct operating and occupancy expense as a percentage of sales of 26.2% was a decrease versus direct operating and occupancy expense of 26.6% in Predecessor 2006-2 and an increase versus direct occupancy and operating expense of 25.3% in Predecessor 2006-1 primarily due to an increase in expenditures for advertising and promotion and increases in property taxes, common area maintenance expense and rent expense in Predecessor 2007.
General and Administrative Expense. General and administrative expense was $31.9 million in Predecessor 2007 as compared to $11.4 million in Predecessor 2006-2 and $18.9 million in Predecessor 2006-1. The overall increase of $1.6 million or 5.3% was primarily due to higher salaried labor expense combined with higher insurance expense and stock-based compensation expense related to options issued during Predecessor 2007. General and Administrative expense as a percentage of sales decreased to 5.6% in Predecessor 2007 from 5.9% in Predecessor Fiscal Year 2006-2 and increased from 5.1% in Predecessor 2006-1.
Depreciation and Amortization. Depreciation and amortization expense was $22.3 million in Predecessor 2007 as compared to $8.5 million in Predecessor 2006-2 and $12.2 million in Predecessor 2006-1. The overall increase was $1.5 million or 7.3%. As a percentage of total revenues, depreciation and amortization was 3.9% in Predecessor 2007 as compared to 4.4% in Predecessor 2006-2 and 3.3% in Predecessor 2006-1. The increase to 3.9% in Predecessor 2007 from 3.7% in the combined Predecessor Year 2006 was due to the increase in the depreciable basis of furniture, fixtures and equipment to fair market value and net favorable lease asset and unfavorable lease liability amortization required under purchase accounting rules due to the Merger on August 21, 2006 and depreciation on the assets of new restaurants.
Goodwill Impairment.A non-cash goodwill impairment charge of $10.0 million was recorded in Predecessor 2007 to reflect the impairment losses related to the difference between the fair value and recorded value for goodwill. The fair value was determined based upon a combination of two valuation techniques, including an income approach, which utilizes discounted future cash flow projections based upon management forecasts, and a market approach, which is based upon pricing multiples at which similar companies have been sold. No goodwill or trademark impairment was recognized by the Company during Predecessor 2006-1 or Predecessor 2006-2.
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Interest Expense. Interest expense was $19.3 million in Predecessor 2007 as compared to $10.5 million in Predecessor 2006-2 and $16.0 million in Predecessor 2006-1. The overall decrease of $7.2 million or 27.0% was primarily due to a $10.0 million reduction in our senior unsecured credit facility and a reduction in the weighted average interest rate on our senior unsecured credit facility from 13.61% in the combined Predecessor 2006 to 10.36% in Predecessor 2007. As a percentage of total revenues, interest expense was 3.4% in Predecessor 2007 as compared to 4.7% in the combined Predecessor 2006.
Income tax provision.The income tax provision for Predecessor 2007 and for the combined Predecessor 2006 was based on estimated annual effective tax rates. A rate of 118.0% was applied to Predecessor 2007 versus a rate of 34.6% in the combined Predecessor 2006. The rates are comprised of the combined federal and state statutory rates. The difference in rates primarily results from the valuation allowance of $13.3 million recorded in Predecessor 2007.
Liquidity and Capital Resources
Our principal liquidity requirements are to service our debt and meet our capital expenditure and working capital needs. Our indebtedness at December 28, 2008, including obligations under capital leases and unamortized debt discount, was $161.8 million, and we had $7.4 million of revolving credit availability under our $15.0 million New Senior Secured Revolving Credit Facility. Our ability to make principal and interest payments and to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our New Senior Secured Revolving Credit Facility will be adequate to meet our liquidity needs for the near future. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our New Senior Secured Revolving Credit Facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If we consummate an acquisition, our debt service requirements could increase. As discussed below, our senior secured notes and senior unsecured credit facility each mature in 2010 and we will need additional financing to meet this obligation. Also, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
Working Capital and Cash Flows
We presently have, in the past have had, and in the future are likely to have, negative working capital balances. The working capital deficit principally is the result of accounts payable and accrued liabilities being more than current asset levels. The largest components of our accrued liabilities include reserves for our self-insured workers’ compensation and general liability insurance, accrued payroll and related employee benefits costs and gift card liabilities. We do not have significant receivables and we receive trade credit based upon negotiated terms in purchasing food and supplies. Funds available from cash sales not needed immediately to pay for food and supplies or to finance receivables or inventories typically have been used for capital expenditures and/or debt service payments under our existing indebtedness.
Operating Activities. We had net cash provided by operating activities of $7.2 million for Successor 2008 and $17.7 million for Predecessor 2008, compared to $25.4 million for Predecessor 2007, resulting in a net decrease overall of $0.5 million from Predecessor 2007 to the combined results from Predecessor and Successor 2008. Overall, we remained consistent year over year, with a slight decrease of $0.5 million. However, as shown on our consolidated statement of cash flows, the sources fluctuated when comparing Predecessor 2007 to Predecessor and Successor 2008, due to changes in the timing of accounts payable and accrued liabilities, mostly offset by decreases in trade and other receivables.
Investing Activities. We had net cash used in investing activities of $0.8 million for Successor 2008 and $23.6 million for Predecessor 2008, compared to $28.4 million for Predecessor 2007. The overall decrease in cash used in investing activities of $4.0 million was primarily the result of a decrease in additions to property and equipment of $11.1 million from Predecessor 2007 to Predecessor 2008, partially offset by the sale of all remaining Fuzio units, including the rights to the Fuzio trademark, of $6.0 million during Predecessor 2007.
We expect to make capital expenditures totaling approximately $11.9 million in Fiscal Year 2009 comprised of approximately $0.5 million for information technology, approximately $1.3 million for Real Mex Foods and approximately $10.1 million for restaurant maintenance and other capital expenditures related to our restaurants. These and other similar costs may be higher in the future due to inflation and other factors. We expect to fund the capital expenditures described above from cash flow from operations, available cash, available borrowings under our senior credit facility and trade financing received from trade suppliers. We do not plan to remodel or open any new restaurants during 2009 as a result of the continued impact of the downturn in the economy which we do not expect to improve during 2009.
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Financing Activities. We had net cash used in financing activities of $5.7 million for Successor 2008 and net cash provided by financing activities of $4.9 million for Predecessor 2008 and $2.6 million for Predecessor 2007. The changes are primarily a result of the timing of our borrowings under our revolving credit facilities, for which we had net repayments of $5.9 million during Successor 2008 compared to net borrowings of $2.5 million and $3.1 million in Predecessor 2008 and Predecessor 2007, respectively. In addition, during Predecessor 2008, we had a capital contribution from our parent company of $3.0 million, primarily to partially fund new store openings.
Debt and Other Obligations
Senior Secured Notes due 2010. Our $105.0 million senior secured registered notes (“Senior Secured Notes”) mature on April 1, 2010. We will need additional financing in order to meet our obligation to pay the Senior Secured Notes at maturity. Interest on our Senior Secured Notes accrues at a rate of 10.25% per annum. The interest rate increased from the stated rate of 10.00% to 10.25% on April 1, 2008. The increase to 10.25% resulted from us exceeding the capital expenditure limit in Fiscal Year 2007 under the indenture governing the Senior Secured Notes and as a result were required to pay a 0.25% increase from the stated rate. Exceeding the capital expenditure limit did not constitute a default with respect to the Senior Secured Notes or indenture. Interest is payable in arrears semiannually on April 1 and October 1 of each year. Our Senior Secured Notes are guaranteed on a senior secured basis by all of our present and future domestic subsidiaries which are restricted subsidiaries under the indenture governing our Senior Secured Notes. All of the subsidiary guarantors are 100% owned by the Company and such guarantees are full and unconditional and joint and several, and the Company has no independent assets or operations outside of the subsidiary guarantors. Our Senior Secured Notes and related guarantees are secured by substantially all of our domestic restricted subsidiaries’ tangible and intangible assets, subject to the prior ranking claims on such assets by the lenders under our New Senior Secured Revolving Credit Facilities. The indenture governing our Senior Secured Notes contains various affirmative and negative covenants, subject to a number of important limitations and exceptions, including but not limited to our ability to incur additional indebtedness, make capital expenditures, pay dividends, redeem stock or make other distributions, issue stock of our subsidiaries, make certain investments or acquisitions, grant liens on assets, enter into transactions with affiliates, merge, consolidate or transfer substantially all of our assets, and transfer and sell assets. The covenant that limits our incurrence of indebtedness requires that, after giving effect to any such incurrence of indebtedness and the application of the proceeds thereof, our fixed charge coverage ratio as of the date of such incurrence will be at least 2.50 to 1.00. The indenture defines consolidated fixed charge coverage ratio as the ratio of Consolidated Cash Flow (as defined therein) to Fixed Charges (as defined therein). The Company was in compliance with all specified financial and other covenants under the Senior Secured Notes indenture at December 28, 2008.
We can redeem our Senior Secured Notes at any time, with a prepayment penalty of 2.50% until March 31, 2009. We are required to offer to redeem our Senior Secured Notes under certain circumstances involving a change of control. Additionally, if we or any of our domestic restricted subsidiaries engage in asset sales, we generally must either invest the net cash proceeds from such sales in our business within 360 days, prepay the indebtedness obligations under our New Senior Secured Revolving Credit Facility or certain other secured indebtedness or make an offer to purchase a portion of our Senior Secured Notes.
As a result of the Exchange and under purchase accounting rules we recorded $ 20.0 million of unamortized debt discount as a reduction of debt related to our Senior Secured Notes as the fair market value of the debt on the Exchange date was less than its carrying value. The discount is amortized to interest expense over the remaining life of the debt. In addition, the remaining unamortized debt premium of $1.6 million recorded in conjunction with the Merger dated August 20, 2006 was written off in the purchase price allocation of the Exchange at November 13, 2008.
Senior Secured Revolving Credit Facilities. In 2004, the Company entered into an amended and restated revolving credit agreement providing for $30.0 million of senior secured credit facilities. The revolving credit agreement included a $15.0 million letter of credit facility and a $15.0 million revolving credit facility that could be used for letters of credit.
On October 5, 2006, the Company entered into a new amended and restated revolving credit facility, pursuant to which the existing $15.0 million revolving credit facility and $15.0 million letter of credit facility, was increased to a $15.0 million revolving credit facility (the “Old Senior Secured Revolving Credit Facility”) and a $25.0 million letter of credit facility (the “Old Senior Secured Letter of Credit Facility”, together with the Old Senior Secured Revolving Credit Facility, the “Old Senior Secured Revolving Credit Facilities”) maturing on October 5, 2008, pursuant to which the Lenders agreed to make loans to the Company and its subsidiaries (all of the proceeds of which were to be used for working capital purposes) and issue letters of credit on behalf of the Company and its subsidiaries.
On January 29, 2007, the Company entered into a Second Amended and Restated Credit Agreement pursuant to which the Old Senior Secured Revolving Credit Facilities were refinanced with a new agent and administrative agent, General Electric Capital Corporation, and a new $15.0 million revolving credit facility (the “New Senior Secured Revolving Credit Facility”) and $25.0 million letter of credit facility (the “New Senior Secured Letter of Credit Facility”, together with the New Senior Secured Revolving Credit Facility, the “New Senior Secured Revolving Credit Facilities”), maturing on January 29, 2009, were put into place, pursuant to which the lenders agree to make loans and issue letters of credit to and on behalf of the Company and its subsidiaries.
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The Company and its lender determined that the definition of the cash flow ratio covenant had been drafted improperly and therefore the lender and the Company executed an amendment (“Amendment No. 1”) to the New Senior Secured Revolving Credit Agreement in August 2007 which waived compliance of this ratio until the first quarter of 2008.
On April 17, 2008, the Company executed a second amendment (“Amendment No. 2”) to the New Senior Secured Revolving Credit Facilities. Amendment No. 2 modified certain definitions and measures related to covenants for the reporting periods ending March 30, 2008 and June 29, 2008, including the Applicable Margin, Leverage Ratio, Adjusted Leverage Ratio and Cash Flow Ratio, as defined in the agreement.
On November 13, 2008, concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment No. 3 to its New Senior Secured Revolving Credit Facility ( “Amendment No. 3”) which extended the term for one year to January 29, 2010, modified the definition of Applicable Margin and Base Rate, amended Leverage and Adjusted Leverage Ratio covenants for the period ending September 28, 2008 and thereafter, replaced the Cash Flow Ratio covenant with a Minimum Interest Coverage Ratio covenant, and added a Monthly Debt to EBITDA Ratio covenant. In addition, Amendment No. 3 terminated the cross-default provision described below as it relates to Holdco debt.
Obligations under the New Senior Secured Revolving Credit Facilities are guaranteed by all of the Company’s subsidiaries as well as by Holdco, which wholly owns the Company and has made a first priority pledge of all of its equity interests in the Company as security for the obligations. Interest on the New Senior Secured Revolving Credit Facility accrues pursuant to an Applicable Margin as set forth in Amendment No. 3 to the Amended and Restated Credit Agreement. The New Senior Secured Revolving Credit Facilities are secured by, among other things, first priority pledges of all of the equity interests of the Company’s direct and indirect subsidiaries, and first priority security interests (subject to customary exceptions) in substantially all of the current and future property and assets of the Company and its direct and indirect subsidiaries, with certain limited exceptions. In connection with the Company’s entrance into the New Senior Secured Revolving Credit Facilities on January 29, 2007, the Company borrowed $7.4 million under the New Senior Secured Revolving Credit Facility, the proceeds of which were used to pay the outstanding revolving borrowings under the Old Senior Secured Revolving Credit Facility. As of December 28, 2008, there was $7.6 million outstanding under the New Senior Secured Revolving Credit Facility and $5.1 million outstanding under the New Senior Secured Letter of Credit Facility.
The Second Amended and Restated Credit Agreement, as amended, contains various affirmative and negative covenants and restrictions, which among other things, require us to meet certain financial tests (including certain leverage and coverage ratios), and limits our and our subsidiaries’ ability to incur or guarantee additional indebtedness, make certain capital expenditures, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, enter into arrangements that restrict dividends from subsidiaries, sell assets, engage in transactions with affiliates and effect a consolidation or merger. This agreement contains a cross-default provision wherein if we are in default on any other credit facilities, default on this facility is automatic. The Company was in compliance with all specified financial and other covenants under the New Senior Secured Revolving Credit Facilities at December 28, 2008, as amended.
Senior Unsecured Credit Facility. In 2005 we entered into a $75.0 million senior unsecured credit facility (the “Old Senior Unsecured Credit Facility”) consisting of a single term loan maturing on December 31, 2008, all of the proceeds of which were used to finance a portion of the cash consideration of an acquisition and pay related fees and expenses. On October 5, 2006, the Company entered into an Amended and Restated Senior Unsecured Credit Facility, pursuant to which the Old Senior Unsecured Credit Facility was decreased to a $65.0 million senior unsecured credit facility (the “ New Senior Unsecured Credit Facility”), consisting of a single term loan maturing on October 5, 2010. All of the proceeds of the New Senior Unsecured Credit Facility were used to repay in full any term loans outstanding under the Old Senior Unsecured Credit Facility and not continued on the restatement date. The total amount of term loans repaid was $10.0 million. Obligations under the New Senior Unsecured Credit Facility are guaranteed by all of the Company’s subsidiaries.
On November 13, 2008, concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment to its New Senior Unsecured Credit Facility which provided a change in the interest rate from variable to a fixed rate of 12.50% and amended the Maximum Leverage Ratio and Minimum Interest Coverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward. As a result of the Exchange, the existing lenders to the New Senior Unsecured Credit Facility became owners of Holdco, the Company’s parent. As a result, the New Senior Unsecured Credit Facility is now held by related parties to the Company.
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Our New Senior Unsecured Credit Facility, as amended, contains various affirmative and negative covenants which, among other things, require us to meet certain financial tests (including certain leverage and interest coverage ratios) and limits our and our subsidiaries’ ability to incur or guarantee additional indebtedness, grant certain liens, make certain restricted payments, make capital expenditures, engage in transactions with affiliates, make certain investments, sell our assets, make acquisitions, effect a consolidation or merger and amend or modify instruments governing certain indebtedness (including relating to our Senior Secured Notes and the New Senior Secured Revolving Credit Facilities). The Company was in compliance with all specified financial and other covenants under the New Senior Unsecured Credit Facility at December 28, 2008.
Mortgage.In 2005, concurrent with an acquisition, we assumed a $0.8 million mortgage secured by the building and improvements of one of the restaurants acquired in the transaction. The mortgage carries a fixed annual interest rate of 9.28% and requires equal monthly payments of principal and interest through April 2015. As of December 28, 2008, the principal amount outstanding on the mortgage was $0.6 million.
Capital Leases. In conjunction with our acquisition of El Torito, we assumed capital lease obligations, collateralized with leasehold improvements, in an aggregate amount of $9.2 million. In addition, we have entered into additional capital leases for equipment of $0.3 million during Fiscal Year 2008. The remaining capital lease obligations have a weighted-average interest rate of 8.7%. As of December 28, 2008, the principal amount due relating to capital lease obligations was $1.4 million. Principal and interest payments on the capital lease obligations are due monthly and range from $2,600 to $11,400 per month. The capital lease obligations mature between 2009 and 2025.
The following table represents our contractual commitments as of December 28, 2008 associated with obligations under debt agreements, other obligations discussed above and from our operating leases:
| Less than | More than 5 | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | Years | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
| Long Term Debt Obligations(1) | $ | 178,833 | $ | 8,313 | $ | 170,166 | $ | 199 | $ | 155 | ||||||||||
| Capital Lease Obligations | 1,794 | 565 | 702 | 223 | 304 | |||||||||||||||
| Operating Lease Obligations(2) | 251,670 | 41,389 | 68,976 | 52,301 | 89,004 | |||||||||||||||
| Purchase Obligations | 43,810 | 27,244 | 5,522 | 5,522 | 5,522 | |||||||||||||||
| Total | $ | 476,107 | $ | 77,511 | $ | 245,366 | $ | 58,245 | $ | 94,985 | ||||||||||
| (1) | Includes our Senior Secured Notes, unsecured term loan, New Senior Secured Revolving Credit Facility, mortgage and an obligation to a vendor. We have not included any scheduled interest payments in this table. Please see discussion of terms for each significant component of long term debt above. | |
| (2) | In addition to the base rent, many of our leases contain percentage rent clauses, which obligate us to pay additional rents based on a percentage of sales, when sales levels exceed a contractually defined base. We recorded such additional rent expenses of $198 in Successor 2008, $1,926 in Predecessor 2008, $2,164 in Predecessor 2007, $907 in Predecessor 2006-2 and $1,755 in Predecessor 2006-1. Operating Lease Obligations do not reflect potential renewals or replacements of expiring leases. |
Off-Balance Sheet Arrangements
None.
Inflation
The impact of inflation on labor, food and occupancy costs could, in the future, significantly affect our operations. We pay many of our employees hourly rates related to the federal or applicable state minimum wage. Our workers’ compensation and health insurance costs have been and are subject to continued inflationary pressures. Costs for construction, taxes, repairs, maintenance and insurance all impact our occupancy costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which may be subject to inflationary increases.
Management continually seeks ways to mitigate the impact of inflation on our business. We believe that our current practice of maintaining operating margins through a combination of periodic menu price increases, cost controls, careful evaluation of property and equipment needs, and efficient purchasing practices is our most effective tool for dealing with inflation.
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Critical Accounting Policies
Our Company’s accounting policies are fully described in Note 3 of the Consolidated Financial Statements. As disclosed in Note 3, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to property and equipment, impairment of long-lived assets, valuation of goodwill, self-insurance reserves, income taxes and revenue recognition. We base our estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Based on our ongoing review, we plan to adjust our judgments and estimates where facts and circumstances dictate. Actual results could differ from our estimates.
We believe the following critical accounting policies are important to the portrayal of our financial condition and results and require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Property and Equipment
Property and equipment is recorded at cost and depreciated over its estimated useful life using the straight-line method for financial reporting purposes. The lives for furniture, fixtures and equipment range from three to 10 years. The life for buildings is the shorter of 20 years or the term of the related operating lease. Costs of leasehold rights and improvements and assets held under capital leases are amortized on the straight-line basis over the shorter of the estimated useful lives of the assets or the non-cancelable term of their underlying leases. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that extend the useful life of an asset are capitalized.
Long-Lived Asset Impairment
We assess the impairment of long-lived assets, including restaurant sites and other assets, when events or changes in circumstances indicate that the carrying value of the assets or the asset group may not be recoverable. The asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from the disposition of the asset (if any) are less than the related asset’s carrying amount. Impairment losses are measured as the amount by which the carrying amounts of the assets exceed their fair values. The net proceeds expected from the disposition of the asset are determined by independent quotes or expected sales prices developed by internal specialists. Estimates of future cash flows and expected sales prices are judgments based on our experience and knowledge of local operations. These estimates can be significantly affected by future changes in real estate market conditions, the economic environment, and capital spending decisions and inflation.
For properties to be closed that are under long-term lease agreements, the present value of any remaining liability under the lease, discounted using risk-free rates and net of expected sublease rentals that could be reasonably obtained for the property, is recognized as a liability and expensed. The value of any equipment and leasehold improvements related to a closed store is reduced to reflect net recoverable values. Internal specialists estimate the subtenant income, future cash flows and asset recovery values based on their historical experience and knowledge of (1) the market in which the store to be closed is located, (2) the results of its previous efforts to dispose of similar assets and (3) the current economic conditions. Specific real estate markets, the economic environment and inflation affect the actual cost of disposition for these leases and related assets.
Management recorded no impairment for Successor 2008 or Predecessor 2006-2. During Predecessor 2008, Predecessor 2007, and Predecessor 2006-1, management determined that certain identified property and equipment was impaired and recorded an impairment charge of $5.2 million, $1.4 million and $1.2 million, respectively, reducing the carrying value of such assets to the estimated fair value.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Management performs its annual impairment test during the last quarter of the Company’s fiscal year. An impairment loss is recognized to the extent that the carrying amount exceeds an asset’s fair value. Management considers the reporting unit level to be the Company level, as the components (e.g., brands) within the Company have similar economic characteristics, including production processes, types or classes of customers and distribution methods. This determination is made at the reporting unit level and consists of two steps. First, management determines the fair value of a reporting unit and compares it to its carrying amount. The fair value is determined based upon a combination of two valuation techniques, including an income approach, which utilizes discounted future cash flow projections based upon management forecasts, and a market approach, which is based upon pricing multiples at which similar companies have been sold. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
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Factors that could change the result of our goodwill impairment test include, but are not limited to, different assumptions used to forecast future revenues, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. A variance in the discount rate could have a significant impact on the valuation of the goodwill for purposes of the impairment test. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions made in response to the economic environment on our customer base or a material negative change in relationships with our customers.
During the second quarter of 2008, management forecasts were revised due to the continued impact of the downturn in the economy on current operations and growth projections. As a result, the Company identified impairment of approximately $34.0 million, including $30.0 million related to goodwill and $4.0 million related to trademarks. As of November 13, 2008, in conjunction with the Exchange, the Company completed a valuation and identified additional impairment of approximately $129.2 million, including $87.6 million related to goodwill and $41.6 million related to trademarks. The Company recorded total non-cash charges of $163.2 million for the write-down of the goodwill and trademarks during the Predecessor Period December 31, 2007 to November 13, 2008.
Self-Insurance
Our business is primarily self-insured for workers’ compensation and general liability costs. Our recorded self-insurance liability is determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. Any actuarial projection of ultimate losses is subject to a high degree of variability. Sources of this variability are numerous and include, but are not limited to, future economic conditions, court decisions and legislative actions. Our workers’ compensation future funding estimates anticipate no change in the benefit structure. Statutory changes could have a significant impact on future claim costs.
Our workers’ compensation liabilities are from claims occurring in various states. Individual state workers’ compensation regulations have received a tremendous amount of attention from state politicians, insurers, employers and providers, as well as the public in general. Recent years have seen an escalation in the number of legislative reforms, judicial rulings and social phenomena affecting our business. The changes in a state’s political and economic environment increase the variability in the unpaid claim liabilities.
Income Taxes
Our Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the liability method, deferred taxes are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not to be realizable in future periods. We have significant deferred tax assets, which are subject to periodic recoverability assessments. In accordance with SFAS 109, net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We recorded a valuation allowance of $23.1 million and $13.3 million at December 28, 2008 and December 30, 2007, respectively. The amount of deferred tax assets considered realizable was based upon our ability to generate future taxable income, exclusive of reversing temporary differences and carry-forwards. In evaluating future taxable income for valuation allowance purposes as of December 28, 2008, we concluded that it was appropriate to consider only income expected to be generated in fiscal years 2009, 2010 and 2011.
Under Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” the Company is required to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. Management has concluded that there are no significant uncertain tax positions requiring recognition in the financial statements.
Revenue Recognition
Revenues from the operation of Company-owned restaurants are recognized when sales occur. Fees from franchised and licensed restaurants are included in revenue as earned. Royalty fees are based on franchised restaurants’ revenues and we record these fees in the period the related franchised restaurants’ revenues are earned. Real Mex Foods’ revenues from sales to outside customers are recognized upon delivery, when title transfers to the customer, and are included in other revenues. Sales tax collected from customers and remitted to governmental authorities is presented on a net basis (excluded from revenue) in our financial statements.
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Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and was adopted by us in the first quarter of 2008. As a result, the adoption of SFAS 159 had no impact on our consolidated results of operations and financial condition as of December 28, 2008.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008, which will require us to adopt these provisions for business combinations occurring in fiscal year 2009 and thereafter. Early adoption of SFAS 141R is not permitted. The Company does not believe that the adoption of SFAS 141R will have an effect on its financial statements; however, the effect is dependent upon whether the company makes any future acquisitions and the specifics of those acquisitions.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired subsequent to fiscal years beginning after December 15, 2008. Implementation of this staff position in the first quarter of fiscal 2009 will not have a material impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The inherent risk in market risk sensitive instruments and positions primarily relates to potential losses arising from adverse changes in foreign exchange rates and interest rates.
We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales are denominated in U.S. dollars. Therefore, foreign currency fluctuations did not materially affect our financial results in any period presented.
We are also subject to market risk from exposure to changes in interest rates based on our financing activities. This exposure relates to borrowings under our senior secured credit facilities that are payable at floating rates of interest. As of February 22, 2009, we had borrowings of $15.0 million outstanding under our New Senior Secured Revolving Credit Facilities. A hypothetical 10% fluctuation in interest rates as of February 22, 2009 would have a net after tax impact of $0.06 million on our earnings in 2008, in addition to its effect on cash flows.
Many of the food products purchased by us are affected by changes in weather, production, availability, seasonality and other factors outside our control. In an effort to control some of this risk, we have entered into certain fixed price purchase agreements with varying terms of generally no more than a year in duration. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to control food commodity risks.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements are set forth below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Real Mex Restaurants, Inc.
Real Mex Restaurants, Inc.
We have audited the accompanying consolidated balance sheet of Real Mex Restaurants, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 28, 2008 (the “Successor”) and the related consolidated statements of operations, stockholders’ equity, and cash flows for the period November 14, 2008 to December 28, 2008 (the “Successor Period”) subsequent to the exchange of debt for equity transaction that was reflected on the financial statements of the Company, between RM Restaurant Holding Corp., the Company’s parent, and the parent’s creditors. We have also audited the consolidated balance sheet of Real Mex Restaurants, Inc. as of December 30, 2007 (the “Predecessor”) and the consolidated statements of operations, stockholders’ equity, and cash flows for the period December 31, 2007 to November 13, 2008, and the year ended December 30, 2007 (the “Predecessor Periods”), prior to the exchange of debt for equity transaction. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial position of Real Mex Restaurants, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the results of its operations and its cash flows for the Successor and Predecessor Periods in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Irvine, California
March 27, 2009
March 27, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Real Mex Restaurants, Inc.
Real Mex Restaurants, Inc.
We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Real Mex Restaurants, Inc. and its subsidiaries (collectively, the Company), for the period from August 21, 2006 to December 31, 2006, subsequent to the acquisition of the Company by RM Restaurant Holding Corp., a majority owned subsidiary of Sun Cantinas LLC. We have also audited the consolidated statements of operations, stockholders’ equity, and cash flows for the period ended December 26, 2005 through August 20, 2006, prior to the acquisition of the Company by RM Restaurant Holding Corp. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 aspects, the consolidated results of the operations and cash flows of the Company for the period from August 21, 2006 to December 31, 2006, subsequent to the acquisition of the Company by RM Restaurant Holding Corp., a majority owned subsidiary of Sun Cantinas LLC., and for the period from December 26, 2005 through August 20, 2006, prior to the acquisition of the Company by RM Restaurant Holding Corp., in conformity with accounting principles generally accepted in the United States.
As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for Share Based Payments in accordance with Statements of Accounting Financial Standards No. 123 (revised 2004) on December 26, 2005.
/s/ Ernst & Young LLP
Los Angeles, California
March 16, 2007
March 16, 2007
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Real Mex Restaurants, Inc.
Consolidated Balance Sheets
(In Thousands, Except For Share Data)
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,099 | $ | 2,323 | ||||
| Trade receivables, net | 9,102 | 10,160 | ||||||
| Other receivables | 873 | 2,594 | ||||||
| Inventories, net | 13,563 | 12,049 | ||||||
| Deferred compensation plan assets | 1,848 | 3,115 | ||||||
| Prepaid expenses and other current assets | 7,253 | 7,186 | ||||||
| Current portion of favorable lease asset, net | 5,902 | 3,454 | ||||||
| Total current assets | 40,640 | 40,881 | ||||||
| Property and equipment, net | 110,505 | 96,179 | ||||||
| Goodwill, net | 43,200 | 160,621 | ||||||
| Trademarks and other intangibles | 68,900 | 113,000 | ||||||
| Deferred charges | 1,404 | 3,115 | ||||||
| Favorable lease asset, less current portion, net | 25,382 | 11,313 | ||||||
| Other assets | 8,297 | 9,346 | ||||||
| Total assets | $ | 298,328 | $ | 434,455 | ||||
Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 23,198 | $ | 22,692 | ||||
| Accrued self-insurance reserves | 15,619 | 15,479 | ||||||
| Accrued compensation and benefits | 16,216 | 17,402 | ||||||
| Other accrued liabilities | 15,426 | 14,014 | ||||||
| Related party payables | — | 2,505 | ||||||
| Current portion of long-term debt | 8,313 | 12,579 | ||||||
| Current portion of capital lease obligations | 453 | 433 | ||||||
| Total current liabilities | 79,225 | 85,104 | ||||||
| Long-term debt, less current portion | 152,105 | 172,057 | ||||||
| Capital lease obligations, less current portion | 942 | 1,118 | ||||||
| Deferred tax liabilities | 31,549 | — | ||||||
| Unfavorable lease liability, less current portion, net | 8,445 | 4,394 | ||||||
| Other liabilities | 3,018 | 8,669 | ||||||
| Total liabilities | 275,284 | 271,342 | ||||||
| Commitments and contingencies | — | — | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.001 par value, 1,000 shares authorized, issued and outstanding at December 28, 2008 and December 30, 2007 | — | — | ||||||
| Additional paid-in capital | 27,147 | 201,706 | ||||||
| Accumulated deficit | (4,103 | ) | (38,593 | ) | ||||
| Total stockholders’ equity | 23,044 | 163,113 | ||||||
| Total liabilities and stockholders’ equity | $ | 298,328 | $ | 434,455 | ||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Consolidated Statements of Operations
(In Thousands)
| Successor | Predecessor | |||||||||||||||||||
| November 14, | December 31, | Fiscal | August 21, | December 26, | ||||||||||||||||
| 2008 to | 2007 to | Year Ended | 2006 to | 2005 to | ||||||||||||||||
| December 28, | November 13, | December 30, | December 31, | August 20, | ||||||||||||||||
| 2008 | 2008 | 2007 | 2006 | 2006 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Restaurant revenues | $ | 52,448 | $ | 456,587 | $ | 523,352 | $ | 179,630 | $ | 351,591 | ||||||||||
| Other revenues | 4,571 | 37,110 | 38,164 | 11,094 | 18,358 | |||||||||||||||
| Franchise revenues | 297 | 2,732 | 3,675 | 1,374 | 2,603 | |||||||||||||||
| Total revenues | 57,316 | 496,429 | 565,191 | 192,098 | 372,552 | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of sales | 14,255 | 123,878 | 140,824 | 46,883 | 87,388 | |||||||||||||||
| Labor | 21,210 | 178,962 | 199,843 | 67,729 | 125,748 | |||||||||||||||
| Direct operating and occupancy expense | 14,886 | 133,337 | 148,088 | 51,127 | 94,422 | |||||||||||||||
| General and administrative expense | 3,219 | 25,726 | 31,718 | 11,414 | 18,893 | |||||||||||||||
| Depreciation and amortization | 3,750 | 21,724 | 23,961 | 10,323 | 12,230 | |||||||||||||||
| Legal settlement costs | 15 | 781 | 402 | 19 | 4,180 | |||||||||||||||
| Merger costs | — | — | — | 307 | 9,434 | |||||||||||||||
| Pre-opening costs | — | 2,342 | 2,139 | 917 | 910 | |||||||||||||||
| Impairment of goodwill and intangible assets | — | 163,196 | 10,000 | — | — | |||||||||||||||
| Impairment of property and equipment | — | 5,151 | 1,362 | — | 1,197 | |||||||||||||||
| Operating (loss) income | (19 | ) | (158,668 | ) | 6,854 | 3,379 | 18,150 | |||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (4,108 | ) | (16,407 | ) | (19,326 | ) | (10,481 | ) | (16,005 | ) | ||||||||||
| Other income (expense), net | 24 | 2,014 | 1,670 | (1,136 | ) | 642 | ||||||||||||||
| Total other expense, net | (4,084 | ) | (14,393 | ) | (17,656 | ) | (11,617 | ) | (15,363 | ) | ||||||||||
| (Loss) income before income tax provision | (4,103 | ) | (173,061 | ) | (10,802 | ) | (8,238 | ) | 2,787 | |||||||||||
| Income tax provision (benefit) | — | 52 | 12,744 | (3,191 | ) | 1,307 | ||||||||||||||
| Net (loss) income before redeemable preferred stock accretion | (4,103 | ) | (173,113 | ) | (23,546 | ) | (5,047 | ) | 1,480 | |||||||||||
| Redeemable preferred stock accretion | — | — | — | — | (10,126 | ) | ||||||||||||||
| Net loss attributable to common stockholders | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | $ | (5,047 | ) | $ | (8,646 | ) | |||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Consolidated Statements of Stockholders’ Equity
(In Thousands, Except For Share Data)
(In Thousands, Except For Share Data)
| Predecessor | ||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | ||||||||||||||||||||||||||||||||||
| Redeemable | Redeemable | Redeemable | Additional | |||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Shares | Amount | Warrants | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance at December 25, 2005 | $ | 35,646 | $ | 25,365 | $ | 58,080 | 316,290 | $ | — | $ | 4,027 | $ | 16,203 | $ | (88,737 | ) | $ | 50,584 | ||||||||||||||||||
| Issuance of Series A Redeemable Preferred Stock | 1,897 | — | — | — | — | — | — | — | 1,897 | |||||||||||||||||||||||||||
| Issuance of Series B Redeemable Preferred Stock | — | 1,433 | — | — | — | — | — | — | 1,433 | |||||||||||||||||||||||||||
| Issuance of Series D Redeemable Preferred Stock | — | — | 2,352 | — | — | — | — | — | 2,352 | |||||||||||||||||||||||||||
| Tax benefit from employee stock option exercise | — | — | — | — | — | — | 1,800 | — | 1,800 | |||||||||||||||||||||||||||
| Accretion on redeemable preferred stock | 2,861 | 2,177 | 5,089 | — | — | — | — | (10,127 | ) | — | ||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | 1,480 | 1,480 | |||||||||||||||||||||||||||
| Balance at August 20, 2006 | 40,404 | 28,975 | 65,521 | 316,290 | — | 4,027 | 18,003 | (97,384 | ) | 59,546 | ||||||||||||||||||||||||||
| Initial capitalization of the Company, August 21, 2006 | — | — | — | 1,000 | — | — | 199,124 | — | 199,124 | |||||||||||||||||||||||||||
| Dividend distribution to parent | — | — | — | — | — | — | — | (10,000 | ) | (10,000 | ) | |||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (5,047 | ) | (5,047 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2006 | — | — | — | 1,000 | — | — | 199,124 | (15,047 | ) | 184,077 | ||||||||||||||||||||||||||
| Contribution from parent | — | — | — | — | — | — | 1,743 | — | 1,743 | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | 839 | — | 839 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (23,546 | ) | (23,546 | ) | |||||||||||||||||||||||||
| Balance at December 30, 2007 | — | — | — | 1,000 | — | — | 201,706 | (38,593 | ) | 163,113 | ||||||||||||||||||||||||||
| Contribution from parent | — | — | — | — | — | — | 5,554 | — | 5,554 | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | 406 | — | 406 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (173,113 | ) | (173,113 | ) | |||||||||||||||||||||||||
| Balance at November 13, 2008 | $ | — | $ | — | $ | — | 1,000 | $ | — | $ | — | $ | 207,666 | $ | (211,706 | ) | $ | (4,040 | ) | |||||||||||||||||
| Successor | ||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | ||||||||||||||||||||||||||||||||||
| Redeemable | Redeemable | Redeemable | Additional | |||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Shares | Amount | Warrants | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Recapitalization of the Company, November 14, 2008 | $ | — | $ | — | $ | — | 1,000 | $ | — | $ | — | $ | 27,175 | $ | — | $ | 27,175 | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | (28 | ) | (28 | ) | ||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (4,103 | ) | (4,103 | ) | |||||||||||||||||||||||||
| Balance at December 28, 2008 | $ | — | $ | — | $ | — | 1,000 | $ | — | $ | — | $ | 27,147 | $ | (4,103 | ) | $ | 23,044 | ||||||||||||||||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
| Successor | Predecessor | |||||||||||||||||||
| November 14, | December 31, | August 21, | December 26, | |||||||||||||||||
| 2008 | 2007 | Fiscal Year | 2006 | 2005 | ||||||||||||||||
| to | to | Ended | to | to | ||||||||||||||||
| December 28, | November 13, | December 30, | December 31, | August 20, | ||||||||||||||||
| 2008 | 2008 | 2007 | 2006 | 2006 | ||||||||||||||||
Operating activities | ||||||||||||||||||||
| Net (loss) income | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | $ | (5,047 | ) | $ | 1,480 | ||||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation | 3,334 | 19,780 | 22,254 | 8,505 | 12,230 | |||||||||||||||
| Amortization of: | ||||||||||||||||||||
| Favorable lease asset and unfavorable lease liability, net | 416 | 1,944 | 1,707 | 1,818 | — | |||||||||||||||
| Deferred financing costs | 169 | 1,571 | 1,828 | 2,286 | 1,179 | |||||||||||||||
| Debt discount/(premium) | 1,535 | (1,050 | ) | (1,563 | ) | — | — | |||||||||||||
| Impairment of goodwill and intangible assets | — | 163,196 | 10,000 | — | — | |||||||||||||||
| (Gain) loss on disposal of property and equipment | — | (402 | ) | (877 | ) | 706 | (19 | ) | ||||||||||||
| Gain on lease termination | — | (600 | ) | — | — | — | ||||||||||||||
| Impairment of property and equipment | — | 5,151 | 1,362 | — | 1,197 | |||||||||||||||
| Stock-based compensation expense | (28 | ) | 406 | 839 | — | 1,800 | ||||||||||||||
| Deferred income taxes | — | — | 12,731 | (3,218 | ) | (1,108 | ) | |||||||||||||
| Other | — | — | 231 | — | — | |||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Trade and other receivables | 2,125 | 654 | (2,578 | ) | 1,449 | (1,071 | ) | |||||||||||||
| Inventories | (625 | ) | (889 | ) | (1,484 | ) | (553 | ) | (35 | ) | ||||||||||
| Deferred compensation plan assets | (51 | ) | 1,347 | (745 | ) | (755 | ) | (573 | ) | |||||||||||
| Prepaid expenses and other current assets | (3,358 | ) | 3,291 | 544 | (3,310 | ) | (952 | ) | ||||||||||||
| Related party receivable/payable | — | (66 | ) | 6,096 | (3,591 | ) | — | |||||||||||||
| Deferred charges, net | — | 35 | (148 | ) | (80 | ) | (301 | ) | ||||||||||||
| Other assets | 6 | 66 | 73 | (107 | ) | 912 | ||||||||||||||
| Accounts payable and accrued liabilities | 7,342 | (7,551 | ) | (6,519 | ) | (2,151 | ) | 14,235 | ||||||||||||
| Other liabilities | 424 | 3,959 | 5,225 | 629 | 1,484 | |||||||||||||||
| Net cash provided by (used in) operating activities | 7,186 | 17,729 | 25,430 | (3,419 | ) | 30,458 | ||||||||||||||
Investing activities | ||||||||||||||||||||
| Purchases of property and equipment | (736 | ) | (23,332 | ) | (34,404 | ) | (10,495 | ) | (15,885 | ) | ||||||||||
| Exchange transaction costs | (20 | ) | (1,153 | ) | — | — | — | |||||||||||||
| Sale of Fuzio trademark | — | — | 1,200 | — | — | |||||||||||||||
| Proceeds from lease termination | — | 600 | — | — | — | |||||||||||||||
| Net proceeds from disposal of property and equipment | — | 302 | 4,789 | — | — | |||||||||||||||
| Net cash used in investing activities | (756 | ) | (23,583 | ) | (28,415 | ) | (10,495 | ) | (15,885 | ) | ||||||||||
Financing activities | ||||||||||||||||||||
| Net (payment) borrowing under revolving credit facility | (5,900 | ) | 2,500 | 3,050 | 7,950 | — | ||||||||||||||
| Borrowings under long-term debt agreements | 466 | 1,375 | 981 | 437 | — | |||||||||||||||
| Payments on long-term debt agreements and capital lease obligations | (314 | ) | (1,449 | ) | (577 | ) | (10,148 | ) | (174 | ) | ||||||||||
| Payment of financing costs | — | (500 | ) | (856 | ) | (885 | ) | — | ||||||||||||
| Dividend paid | — | — | — | (10,000 | ) | — | ||||||||||||||
| Capital contributions | — | 3,022 | — | — | — | |||||||||||||||
| Net cash (used in) provided by financing activities | (5,748 | ) | 4,948 | 2,598 | (12,646 | ) | (174 | ) | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 682 | (906 | ) | (387 | ) | (26,560 | ) | 14,399 | ||||||||||||
| Cash and cash equivalents at beginning of period | 1,417 | 2,323 | 2,710 | 29,270 | 14,871 | |||||||||||||||
| Cash and cash equivalents at end of period | $ | 2,099 | $ | 1,417 | $ | 2,323 | $ | 2,710 | $ | 29,270 | ||||||||||
Supplemental disclosure of cash flow information | ||||||||||||||||||||
| Interest paid | $ | 873 | $ | 16,910 | $ | 19,722 | $ | 11,225 | $ | 11,405 | ||||||||||
| Income taxes paid | $ | — | $ | 52 | $ | 38 | $ | 17 | $ | 44 | ||||||||||
Supplemental disclosure of noncash investing and financing activities | ||||||||||||||||||||
| Preferred and common stock issued as consideration for the Chevys Acquisition | $ | — | $ | — | $ | — | $ | — | $ | 5,682 | ||||||||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Notes to Consolidated Financial Statements
December 28, 2008
(In Thousands, Except For Share Data)
(In Thousands, Except For Share Data)
1. Description of Business
Real Mex Restaurants, Inc., (together with its subsidiaries, the “Company”) is a Delaware corporation which is engaged in the business of owning and operating restaurants, primarily under the names El Torito®, Acapulco Mexican Restaurant Y Cantina® and Chevys Fresh Mex®. At December 28, 2008, the Company, primarily through its major subsidiaries (El Torito Restaurants, Inc., Chevys Restaurants LLC and Acapulco Restaurants, Inc.), owned and operated 190 restaurants, of which 157 were in California and the remainder in 12 other states. The Company’s other major subsidiary, Real Mex Foods, Inc. (“RMF”), provides internal production, purchasing and distribution services for the restaurant operations and manufactures specialty products for sales to outside customers.
Basis of Presentation
The Company prior to November 14, 2008 is referred to as the “Predecessor” and after November 13, 2008 is referred to as the “Successor”.
The Company’s fiscal year consists of 52 or 53 weeks ending on the last Sunday in December which in 2008 was December 28, 2008, in 2007 was December 30, 2007 and in 2006 was December 31, 2006. The accompanying consolidated balance sheets present the Company’s financial position as of December 28, 2008 (Successor) and December 30, 2007 (Predecessor). The accompanying consolidated statements of operations, stockholders’ equity and cash flows present the 6 week Successor Period from November 14, 2008 to December 28, 2008, the 46 week Predecessor Period from December 31, 2007 to November 13, 2008, the 52 week Predecessor Period ended December 30, 2007, the 19 week Predecessor Period from August 21, 2006 to December 31, 2006, the 34 week Predecessor Period from December 25, 2005 to August 20, 2006. See further description of the successor and predecessor periods in Note 2.
Liquidity
The Company’s financial statements as of December 28, 2008 have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s principal liquidity requirements are to service debt and meet capital expenditure and working capital needs. The Company’s ability to make principal and interest payments and to fund planned capital expenditures will depend on the ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the control of the Company. Based upon anticipated cash flow generated from operations and availability of other borrowings, the Company does not plan to open any new restaurants during fiscal year 2009. Although the Company had negative working capital as of December 28, 2008 (as has been the case at year end for all prior years being reported on), based on the current level of operations and the Company’s revised business plan, management believes the cash flow generated from operations, available cash and available borrowings under the New Senior Secured Revolving Credit Facility will be adequate to meet liquidity needs for the near future.
The Senior Secured Notes and senior unsecured credit facility each mature in 2010 and the Company will require additional financing to meet this obligation. The Company is currently evaluating its options to raise the necessary funds. No assurance can be given that the Company will be able to refinance any of its indebtedness on commercially reasonable terms or at all. If revenues decline further than management’s expectations, the Company will take steps to further reduce costs to ensure sufficient cash is available to allow the Company to meet its obligations for the next 12 months. No assurance can be given that the Company will generate sufficient cash flow from operations or that future borrowings will be available under the New Senior Secured Revolving Credit Facility in an amount sufficient to enable the Company to service existing indebtedness or to fund other liquidity needs.
2. Acquisitions
Exchange Agreement
Effective November 13, 2008, RM Restaurant Holding Corp. (“Holdco”), the Company’s parent, owned substantially by an affiliate of Sun Capital Partners (“Sun Capital”), and each of Holdco’s existing lenders executed an agreement to exchange Holdco’s then outstanding borrowings under its unsecured term loan facility for 94.5% of the common stock of Holdco (the “Exchange”). Immediately prior to the Exchange, Holdco effected a 100:1 reverse stock split of its common stock and after the exchange the immediately post-split existing holders retained 5.5% of the shares of Holdco common stock. Immediately after the Exchange, no stockholder, together with its affiliates, owned more than 50% of the capital stock of Holdco. Affiliates of Sun Capital remain stockholders of Holdco.
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In connection with the Exchange, the cross-default provision described in Note 6 was terminated as it related to the Holdco debt. Concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment No. 3 to its Senior Secured Revolving Credit Facility (the “Amendment”) which extended the term for one year to January 29, 2010, modified the definition of Applicable Margin and Base Rate, amended Leverage and Adjusted Leverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward, replaced the Cash Flow Ratio covenant with a Minimum Interest Coverage Ratio covenant, and added a Monthly Debt to EBITDA Ratio covenant. Also concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment to its Senior Unsecured Credit Facility which provided a change in the interest rate from variable to a fixed rate of 12.5% and amended the Maximum Leverage Ratio and Minimum Interest Coverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward.
The Exchange was accounted for by Holdco under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”). Holdco then applied push-down accounting to the Company as of November 13, 2008. As no cash consideration was exchanged, the Company completed a valuation to determine the value of the equity exchanged, the assets acquired and the liabilities assumed based on their estimated fair market values at the date of the Exchange. The allocation of the purchase price is a preliminary estimate as the determination of the fair market values of the assets acquired and the liabilities assumed has not been finalized, primarily with respect to income taxes. The Company attributes the goodwill associated with the Exchange to the historical financial performance and the anticipated future performance of the Company’s operations. As this was a non-cash transaction, it has been excluded from the statement of consolidated cash flows.
The following table presents the allocation to the assets acquired and liabilities assumed based on their estimated fair values as determined by the valuation of the Company (in thousands):
| Cash and cash equivalents | $ | 1,417 | ||
| Trade and other accounts receivable | 12,100 | |||
| Inventories | 12,938 | |||
| Other current assets | 5,692 | |||
| Property and equipment | 113,154 | |||
| Other assets | 41,841 | |||
| Trademark and other intangibles | 68,900 | |||
| Goodwill | 43,178 | |||
| Total assets acquired | 299,220 | |||
| Accounts payable and accrued liabilities | 60,616 | |||
| Long-term debt | 166,026 | |||
| Deferred tax liability | 31,549 | |||
| Other liabilities | 13,854 | |||
| Total liabilities assumed | 272,045 | |||
| Net assets acquired | $ | 27,175 | ||
As a result of the Exchange, fiscal year 2008 is presented as the Successor Period from November 14, 2008 to December 28, 2008 and the Predecessor Period from December 31, 2007 to November 13, 2008.
Merger Agreement
On August 17, 2006, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Holdco and its subsidiary, RM Integrated, Inc. On August 21, 2006, the closing of the transactions contemplated by the Merger Agreement occurred, and RM Integrated merged with and into the Company, with the Company continuing as the surviving corporation and the 100% owned subsidiary of Holdco. The net purchase price of the Company was $200,900, consisting of $359,000 in cash, plus net cash acquired of $35,200, plus $4,600 in working capital and other adjustments plus direct acquisition costs of $3,900, less indebtedness assumed of $188,200 and seller costs of $9,300. Pursuant to the Merger Agreement, $6,000 of the Merger Consideration was held in escrow. As a result of the Merger Agreement, fiscal year 2006 is presented as the 19 week Predecessor Period from August 21, 2006 to December 31, 2006 and the 34 week Predecessor Period from December 25, 2005 to August 20, 2006.
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3. Summary of Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and results of operations of the Company. All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and they may be adjusted as more information becomes available.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash balances in bank accounts and investments with a maturity of three months or less at the time of purchase.
Receivables
Receivables consist primarily of amounts due from credit card companies, outside customers of RMF and franchisees. Receivables from credit card companies are generally settled in the week following the transaction date. Receivables from RMF’s outside customers are generally collected within 30 days of the date of the sale and receivables from franchisees are generally collected within 21 days following the close of the royalty period. Receivables are stated net of an allowance for doubtful accounts of $333 and $320 at December 28, 2008 and December 30, 2007, respectively.
Inventories
Inventories, consisting primarily of food and beverages, are carried at the lower of cost (first-in, first-out method) or market. Inventories are reviewed for spoilage and excess or obsolete products and reserved accordingly.
Supplies and Expendable Equipment
The initial purchase of supplies and expendable equipment, when a restaurant is first opened, such as china, glass and silverware, is capitalized and depreciated over a period of 5 years. Replacements of supplies and expendable equipment are expensed.
Pre-Opening Costs
Pre-opening costs incurred with the start-up of a new restaurant, or the conversion of an existing restaurant to a different concept, are expensed as incurred.
Property and Equipment
Property and equipment is recorded at cost and depreciated over its estimated useful life using the straight-line method for financial reporting purposes. The lives for furniture, fixtures and equipment range from three to 10 years. The life for buildings is the shorter of 20 years or the term of the related operating lease. Costs of leasehold rights and improvements and assets held under capital leases are amortized on the straight-line basis over the shorter of the estimated useful lives of the assets or the non-cancelable term of their underlying leases. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that extend the useful life of an asset are capitalized. Depreciation expense includes the amortization of assets held under capital leases.
Impairment of Long-Lived Assets
Long-lived assets are tested for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management recorded no impairment for the Successor Period from November 14, 2008 through December 28, 2008. During the Predecessor Period from December 31, 2007 through November 13, 2008, the Predecessor year ended December 30, 2007, and the Predecessor Period from December 26, 2006 to August 20, 2006, management of the Company determined that certain identified property and equipment was impaired and recorded an impairment charge of $5,151, $1,362 and $1,197, respectively, reducing the carrying value of such assets to the estimated fair value. Fair value was based on management’s estimate of future cash flows to be generated by the property and equipment determined to be impaired. During the Predecessor Period ended December 30, 2006, management recorded no impairment.
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Impairment of Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Management performs its annual impairment test during the last quarter of the Company’s fiscal year. An impairment loss is recognized to the extent that the carrying amount exceeds an asset’s fair value. Management considers the reporting unit level to be the Company level, as the components (e.g., brands) within the Company have similar economic characteristics, including production processes, types or classes of customers and distribution methods. This determination is made at the reporting unit level and consists of two steps. First, management determines the fair value of a reporting unit and compares it to its carrying amount. The fair value is determined based upon a combination of two valuation techniques, including an income approach, which utilizes discounted future cash flow projections based upon management forecasts, and a market approach, which is based upon pricing multiples at which similar companies have been sold. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
Factors that could change the result of our goodwill impairment test include, but are not limited to, different assumptions used to forecast future revenues, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. A variance in the discount rate could have a significant impact on the valuation of the goodwill for purposes of the impairment test. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions made in response to the economic environment on our customer base or a material negative change in relationships with our customers.
During the second quarter of 2008, management forecasts were revised due to the continued impact of the downturn in the economy on current operations and growth projections. As a result, the Company recorded impairment of approximately $34,000 during the second quarter of 2008, including $30,000 related to goodwill and $4,000 related to trademarks. As of November 13, 2008, in conjunction with the Exchange, the Company completed a valuation and identified additional impairment of approximately $129,196, including $87,596 related to goodwill and $41,600 related to trademarks. The Company recorded total non-cash charges of $163,196 for the write-down of the goodwill and trademarks during the Predecessor Period December 31, 2007 to November 13, 2008.
Intangible Assets
Intangible assets consist of the following indefinite-lived assets resulting from the Exchange in the successor period and the Merger in the predecessor period:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Trademarks | $ | 55,900 | $ | 101,500 | ||||
| Franchise agreements | 13,000 | 11,500 | ||||||
| $ | 68,900 | $ | 113,000 | |||||
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Deferred Charges
Deferred charges at December 28, 2008 consists of deferred financing costs of $1,114 related to the sale of $105,000 aggregate principal amount of the Senior Secured Notes due 2010 (as defined in Note 6), $249 related to the $65,000 Senior Unsecured Credit Facility maturing on October 5, 2010 and $41 related to the Senior Secured Revolving Credit Facilities. Capitalized deferred charges are amortized over the lives of the respective long-term borrowings on a straight-line basis and are included in interest expense in the accompanying consolidated statements of operations. Amounts capitalized related to leases are amortized over the primary term of their respective leases and are included in occupancy expense in the accompanying statements of operations. The following table shows the estimated amortization expense for the years after December 28, 2008:
| 2009 | 2010 | |||||||
| Financing and lease acquisition costs | $ | 1,074 | $ | 330 | ||||
Favorable Lease Asset and Unfavorable Lease Liability
Favorable lease asset represents the approximate fair market value arising from lease rates that are below market rates as of November 13, 2008, the date of the Exchange. The amount is being amortized over the remaining primary term of the underlying leases.
Unfavorable lease liability represents the approximate fair market value arising from lease rates that are above market rates as of November 13, 2008, the date of the Exchange. The amount is being amortized over the remaining primary term of the underlying leases. The current portion of unfavorable lease liabilities is recorded in other accrued liabilities.
The following table shows the estimated amortization expense for the years after December 28, 2008:
| 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||||||
| Favorable lease asset | $ | 5,902 | $ | 5,511 | $ | 4,855 | $ | 4,404 | $ | 3,710 | $ | 6,902 | ||||||||||||
| Unfavorable lease liability | (2,286 | ) | (2,017 | ) | (1,532 | ) | (1,380 | ) | (833 | ) | (2,683 | ) | ||||||||||||
| Net amortization expense | $ | 3,616 | $ | 3,494 | $ | 3,323 | $ | 3,024 | $ | 2,877 | $ | 4,219 | ||||||||||||
Liquor Licenses
Transferable liquor licenses, which have a market value, are carried at the lower of aggregate acquisition cost or market and are not amortized. Liquor licenses are included in other assets.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). In accordance with SFAS 109, income taxes are accounted for using the liability method.
Under Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), the Company is required to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The Company has concluded that there are no significant uncertain tax positions requiring recognition in the financial statements.
The Company’s policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense. As of December 28, 2008, the Company has not recorded any interest and penalty expense. The Company’s determination on its analysis of uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include the 2005 through 2007 tax years for federal purposes and the 2004 through 2007 tax years for California purposes.
Revenue Recognition
Revenues from the operation of Company-owned restaurants are recognized when sales occur. Fees from franchised operations are included in revenue as earned. Royalty fees are based on franchised restaurants’ revenues and we record these fees in the period the related franchised restaurants’ revenues are earned. Real Mex Foods’ revenues from sales to outside customers are recognized upon delivery, when title transfers to the customer, and are included in other revenues. Sales tax collected from customers and remitted to governmental authorities is presented on a net basis (excluded from revenue) in our financial statements.
Self Insurance
The Company is self-insured for most workers’ compensation and general liability losses (collectively “casualty losses”). The Company maintains stop-loss coverage with third party insurers to limit its total exposure. The recorded liability associated with these programs is based on an estimate of the ultimate costs to be incurred to settle known claims and claims incurred but not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. If actual claims trends, including the severity or frequency of claims, differ from estimates, the financial results could be significantly impacted.
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Gift Certificates and Gift Cards
The Company records deferred revenue, included in accounts payable, for gift certificates and gift cards outstanding until they are redeemed. Revenues from unredeemed gift cards are recognized based on historical and expected redemption trends and are classified as revenues in our consolidated statement of operations.
Segment Information
The Company operates 190 restaurants through its three restaurant operating subsidiaries, providing similar products to similar customers. These restaurants possess similar economic characteristics resulting in similar long-term expected financial characteristics. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Based upon its methods of internal reporting and management structure, management believes that the Company meets the criteria for aggregating its 190 operating restaurants into a single reporting segment called restaurant operations. The Company’s RMF manufacturing operations are dissimilar from our restaurant operations, but do not meet the required quantitative thresholds and therefore qualify for aggregation.
Promotion and Advertising Expense
The cost of promotion and advertising is expensed as incurred. The Company incurred $1,260, $15,077, $15,478, $5,652 and $8,716 in promotion and advertising expense during the 6 week Successor Period from November 14, 2008 to December 28, 2008, the 46 week Predecessor Period December 31, 2007 to November 13, 2008, the Predecessor Year ended December 30, 2007, the 19 week Predecessor Period from August 21, 2006 to December 31, 2006, and the 34 week Predecessor Period December 26, 2005 to August 20, 2006, respectively.
Operating Leases
Most of our restaurant and office facilities are under operating leases with expirations in 2009 through 2028. The minimum lease payments, including any predetermined fixed escalations of the minimum rent, are recognized as rent expense on a straight-line basis over the lease term as defined in SFAS No. 13, “Accounting for Leases.” Most of the restaurant facilities have renewal clauses exercisable at the option of the Company and include rent escalation clauses stipulating specific rent increases upon exercise, some of which are based upon the Consumer Price Index. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenues. At December 28, 2008 and December 30, 2007, deferred rent equaled $174 and $2,958, respectively, which is included in other long-term liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with high quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation (FDIC) limit. Most of the Company’s restaurants are located in California. Consequently, the Company may be susceptible to adverse trends and economic conditions in California.
Fair Value of Financial Instruments
The Company’s financial instruments are primarily comprised of cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt. For cash and cash equivalents, receivables, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturity of these instruments. The estimated fair value of the Senior Secured Notes due 2010 at December 28, 2008, based on quoted market prices, was $79,800. Management estimates that the carrying values of its other financial instruments approximate their fair values since their realization or satisfaction is expected to occur in the short term or have been renegotiated at a date close to year end.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and was adopted by us in the first quarter of 2008. As a result, the adoption of SFAS 159 had no impact on our consolidated results of operations and financial condition as of December 28, 2008.
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In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008, which will require us to adopt these provisions for business combinations occurring in fiscal year 2009 and thereafter. Early adoption of SFAS 141R is not permitted. The Company does not believe that the adoption of SFAS 141R will have an effect on its financial statements; however, the effect is dependent upon whether the company makes any future acquisitions and the specifics of those acquisitions.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired subsequent to fiscal years beginning after December 15, 2008. Implementation of this staff position in the first quarter of fiscal 2009 will not have a material impact on our consolidated financial statements.
4. Property and Equipment
Property and equipment consists of the following:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Land and land improvements | $ | 1,530 | $ | 2,079 | ||||
| Buildings and improvements | 939 | 1,201 | ||||||
| Furniture, fixtures and equipment | 43,789 | 51,240 | ||||||
| Leasehold improvements and leasehold rights | 79,193 | 73,207 | ||||||
| Property and equipment, total | 125,451 | 127,727 | ||||||
| Less accumulated depreciation and amortization | (14,946 | ) | (31,548 | ) | ||||
| Property and equipment, net | $ | 110,505 | $ | 96,179 | ||||
5. Accounts Payable and Other Accrued Liabilities
Accounts payable consist of the following:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Trade accounts payable | $ | 20,329 | $ | 19,445 | ||||
| Gift cards and gift certificates | 2,869 | 3,247 | ||||||
| $ | 23,198 | $ | 22,692 | |||||
Other accrued liabilities consist of the following:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Rent and occupancy expenses | $ | 1,500 | $ | 1,345 | ||||
| Sales taxes | 3,960 | 4,378 | ||||||
| Accrued interest | 3,444 | 2,937 | ||||||
| Other | 6,522 | 5,354 | ||||||
| $ | 15,426 | $ | 14,014 | |||||
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6. Long-Term Debt
Long-term debt consists of the following:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Senior Secured Notes due 2010 | $ | 105,000 | $ | 105,000 | ||||
| Senior Secured Notes unamortized debt (discount)/premium | (18,415 | ) | 2,637 | |||||
| Senior Secured Revolving Credit Facility | 7,600 | 11,000 | ||||||
| Senior Unsecured Credit Facility — Related Party | 65,000 | 65,000 | ||||||
| Mortgage | 591 | 656 | ||||||
| Other | 642 | 343 | ||||||
| 160,418 | 184,636 | |||||||
| Less current portion | (8,313 | ) | (12,579 | ) | ||||
| $ | 152,105 | $ | 172,057 | |||||
Senior Secured Notes due 2010. Interest on our senior secured registered notes (“Senior Secured Notes”) accrues at a rate of 10.25% per annum. The interest rate increased from the stated rate of 10.00% to 10.25% on April 1, 2008. The increase to 10.25% resulted from us exceeding the capital expenditure limit in fiscal year 2007 under the indenture governing the Senior Secured Notes and as a result we were required to pay a 0.25% increase from the stated rate. Exceeding the capital expenditure limit did not constitute a default with respect to the Senior Secured Notes or indenture. Interest is payable semiannually on April 1 and October 1 of each year. Our Senior Secured Notes are guaranteed on a senior secured basis by all of our present and future domestic subsidiaries which are restricted subsidiaries under the indenture governing our Senior Secured Notes. All of the subsidiary guarantors are 100% owned by the Company and such guarantees are full and unconditional and joint and several, and the Company has no independent assets or operations outside of the subsidiary guarantors. Our Senior Secured Notes and related guarantees are secured by substantially all of our domestic restricted subsidiaries’ tangible and intangible assets, subject to the prior ranking claims on such assets by the lenders under our New Senior Secured Revolving Credit Facilities. The indenture governing our Senior Secured Notes contains various affirmative and negative covenants, subject to a number of important limitations and exceptions, including but not limited to our ability to incur additional indebtedness, make capital expenditures, pay dividends, redeem stock or make other distributions, issue stock of our subsidiaries, make certain investments or acquisitions, grant liens on assets, enter into transactions with affiliates, merge, consolidate or transfer substantially all of our assets, and transfer and sell assets. The covenant that limits our incurrence of indebtedness requires that, after giving effect to any such incurrence of indebtedness and the application of the proceeds thereof, our fixed charge coverage ratio as of the date of such incurrence will be at least 2.50 to 1.00. The indenture defines consolidated fixed charge coverage ratio as the ratio of Consolidated Cash Flow (as defined therein) to Fixed Charges (as defined therein). The Company was in compliance with all specified financial and other covenants under the Senior Secured Notes indenture at December 28, 2008.
We can redeem our Senior Secured Notes at any time, with a prepayment penalty of 2.5% until March 31, 2009. We are required to offer to redeem our Senior Secured Notes under certain circumstances involving a change of control. Additionally, if we or any of our domestic restricted subsidiaries engage in asset sales, we generally must either invest the net cash proceeds from such sales in our business within 360 days, prepay the indebtedness obligations under our New Senior Secured Revolving Credit Facility or certain other secured indebtedness or make an offer to purchase a portion of our Senior Secured Notes.
As a result of the Exchange and under purchase accounting rules requiring fair value measurement, we recorded $19,950 of unamortized debt discount as a reduction of debt related to our Senior Secured Notes as the fair market value of the debt on the Exchange date was less than its carrying value. The discount is amortized to interest expense over the remaining life of the debt. In addition, the remaining unamortized debt premium of $1,587 recorded in conjunction with the Merger dated August 20, 2006 was written off in the purchase price allocation of the Exchange at November 13, 2008.
Senior Secured Revolving Credit Facilities. In 2004, the Company entered into an amended and restated revolving credit agreement providing for $30,000 of senior secured credit facilities. The revolving credit agreement included a $15,000 letter of credit facility and a $15,000 revolving credit facility that could be used for letters of credit.
On October 5, 2006, the Company entered into a new amended and restated revolving credit facility, pursuant to which the existing $15,000 revolving credit facility and $15,000 letter of credit facility, was increased to a $15,000 revolving credit facility (the “Old Senior Secured Revolving Credit Facility”) and a $25,000 letter of credit facility (the “Old Senior Secured Letter of Credit Facility”, together with the Old Senior Secured Revolving Credit Facility, the “Old Senior Secured Revolving Credit Facilities”) maturing on October 5, 2008, pursuant to which the Lenders agreed to make loans to the Company and its subsidiaries (all of the proceeds of which were to be used for working capital purposes) and issue letters of credit on behalf of the Company and its subsidiaries.
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On January 29, 2007, the Company entered into a Second Amended and Restated Credit Agreement pursuant to which the Old Senior Secured Revolving Credit Facilities were refinanced with a new agent and administrative agent, General Electric Capital Corporation, and a new $15,000 revolving credit facility (the “New Senior Secured Revolving Credit Facility��) and $25,000 letter of credit facility (the “New Senior Secured Letter of Credit Facility”, together with the New Senior Secured Revolving Credit Facility, the “New Senior Secured Revolving Credit Facilities”), maturing on January 29, 2009, were put into place, pursuant to which the lenders agree to make loans and issue letters of credit to and on behalf of the Company and its subsidiaries.
The Company and its lender determined that the definition of the cash flow ratio covenant had been drafted improperly and therefore the lender and the Company executed an amendment (“Amendment No. 1”) to the New Senior Secured Revolving Credit Agreement in August 2007 which waived compliance of this ratio until the first quarter of 2008.
On April 17, 2008, the Company executed a second amendment (“Amendment No. 2”) to the New Senior Secured Revolving Credit Facilities. Amendment No. 2 modified certain definitions and measures related to covenants for the reporting periods ending March 30, 2008 and June 29, 2008, including the Applicable Margin, Leverage Ratio, Adjusted Leverage Ratio and Cash Flow Ratio, as defined in the agreement.
On November 13, 2008, concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment No. 3 to its New Senior Secured Revolving Credit Facility ( “Amendment No. 3”) which extended the term for one year to January 29, 2010, modified the definition of Applicable Margin and Base Rate, amended Leverage and Adjusted Leverage Ratio covenants for the period ending September 28, 2008 and thereafter, replaced the Cash Flow Ratio covenant with a Minimum Interest Coverage Ratio covenant, and added a Monthly Debt to EBITDA Ratio covenant. In addition, Amendment No. 3 terminated the cross-default provision described below as it relates to Holdco debt.
Obligations under the New Senior Secured Revolving Credit Facilities are guaranteed by all of the Company’s subsidiaries as well as by Holdco, which wholly owns the Company and has made a first priority pledge of all of its equity interests in the Company as security for the obligations. Interest on the New Senior Secured Revolving Credit Facility accrues pursuant to an Applicable Margin as set forth in Amendment No. 3 to the Amended and Restated Credit Agreement. The New Senior Secured Revolving Credit Facilities are secured by, among other things, first priority pledges of all of the equity interests of the Company’s direct and indirect subsidiaries, and first priority security interests (subject to customary exceptions) in substantially all of the current and future property and assets of the Company and its direct and indirect subsidiaries, with certain limited exceptions. In connection with the Company’s entrance into the New Senior Secured Revolving Credit Facilities on January 29, 2007, the Company borrowed $7,400 under the New Senior Secured Revolving Credit Facility, the proceeds of which were used to pay the outstanding revolving borrowings under the Old Senior Secured Revolving Credit Facility. As of December 28, 2008, there was $7,600 outstanding under the New Senior Secured Revolving Credit Facility and $5,060 outstanding under the New Senior Secured Letter of Credit Facility.
The Second Amended and Restated Credit Agreement, as amended, contains various affirmative and negative covenants and restrictions, which among other things, require us to meet certain financial tests (including certain leverage and coverage ratios), and limits our and our subsidiaries’ ability to incur or guarantee additional indebtedness, make certain capital expenditures, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, enter into arrangements that restrict dividends from subsidiaries, sell assets, engage in transactions with affiliates and effect a consolidation or merger. This agreement contains a cross-default provision wherein if we are in default on any other credit facilities, default on this facility is automatic. The Company was in compliance with all specified financial and other covenants under the New Senior Secured Revolving Credit Facilities at December 28, 2008, as amended.
Senior Unsecured Credit Facility. In 2005 we entered into a $75,000 senior unsecured credit facility (the “Old Senior Unsecured Credit Facility”) consisting of a single term loan maturing on December 31, 2008, all of the proceeds of which were used to finance a portion of the cash consideration of an acquisition and pay related fees and expenses. On October 5, 2006, the Company entered into an Amended and Restated Senior Unsecured Credit Facility, pursuant to which the Old Senior Unsecured Credit Facility was decreased to a $65,000 senior unsecured credit facility (the “ New Senior Unsecured Credit Facility”), consisting of a single term loan maturing on October 5, 2010. All of the proceeds of the New Senior Unsecured Credit Facility were used to repay in full any term loans outstanding under the Old Senior Unsecured Credit Facility. The total amount of term loans repaid was $10,000. Obligations under the New Senior Unsecured Credit Facility are guaranteed by all of the Company’s subsidiaries.
On November 13, 2008, concurrent with the Exchange, the Company executed a Limited Waiver, Consent and Amendment to its New Senior Unsecured Credit Facility which provided a change in the interest rate from variable to a fixed rate of 12.5% and amended the Maximum Leverage Ratio and Minimum Interest Coverage Ratio covenants for the period ending September 28, 2008 and thereafter and the Capital Expenditure covenant going forward.
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As a result of the Exchange, the existing lenders to the New Senior Unsecured Credit Facility became owners of Holdco, the Company’s parent. As a result, the New Senior Unsecured Credit Facility is now held by related parties to the Company.
Our New Senior Unsecured Credit Facility, as amended, contains various affirmative and negative covenants which, among other things, require us to meet certain financial tests (including certain leverage and interest coverage ratios) and limits our and our subsidiaries’ ability to incur or guarantee additional indebtedness, grant certain liens, make certain restricted payments, make capital expenditures, engage in transactions with affiliates, make certain investments, sell our assets, make acquisitions, effect a consolidation or merger and amend or modify instruments governing certain indebtedness (including relating to our Senior Secured Notes and the New Senior Secured Revolving Credit Facilities). The Company was in compliance with all specified financial and other covenants under the New Senior Unsecured Credit Facility at December 28, 2008.
Mortgage.In 2005, concurrent with an acquisition, we assumed a $816 mortgage secured by the building and improvements of one of the restaurants acquired in the transaction. The mortgage carries a fixed annual interest rate of 9.28% and requires equal monthly payments of principal and interest through April 2015. As of December 28, 2008, the principal amount outstanding on the mortgage was $591.
Interest rates for the Company’s long-term debt are shown in the following table:
| Successor | Predecessor | |||
| December 28, | December 30, | |||
| 2008 | 2007 | |||
| Senior Secured Notes due 2010 | 10.25% | 10.00% | ||
| Senior Secured Revolving Credit Facilities | 7.11 to 7.94% | 7.02 to 8.00% | ||
| Senior Unsecured Credit Facility | 12.50% | 9.83% | ||
| Mortgage | 9.28% | 9.28% | ||
| Other | 3.98 to 4.70% | 6.45 to 7.75% |
The maturity of long-term debt for the fiscal years succeeding December 28, 2008, is as follows:
| Unamortized | ||||||||||||
| Debt | ||||||||||||
| Principal | Discount | Total | ||||||||||
| 2009 | $ | 8,313 | $ | (14,732 | ) | $ | (6,419 | ) | ||||
| 2010 | 170,079 | (3,683 | ) | 166,396 | ||||||||
| 2011 | 87 | — | 87 | |||||||||
| 2012 | 95 | — | 95 | |||||||||
| 2013 | 104 | — | 104 | |||||||||
| Thereafter | 155 | — | 155 | |||||||||
| $ | 178,833 | $ | (18,415 | ) | $ | 160,418 | ||||||
7. Capitalization
Common Stock-Successor
The Company is authorized to issue 1,000 shares of common stock. At December 28, 2008 and December 30, 2007 there were 1,000 shares of common stock issued and outstanding.
Redeemable Preferred Stock-Predecessor
Prior to the Merger on August 20, 2006, the Company was authorized to issue 100,000 shares of Preferred Stock. Shares were issued upon approval of the board of directors and all outstanding shares of Preferred Stock were redeemable at any time at the option of the Company, subject to restrictions under certain debt covenants.
Series A 12.5% Cumulative Compounding Redeemable Preferred Stock (Series A) and Series B 13.5% Cumulative Compounding Redeemable Preferred Stock (Series B) had a liquidation preference equal to $1 per share plus accreted dividends. With respect to dividend rights and rights of liquidation, Series A ranked senior to all classes of Common Stock and Series B. Series B ranked senior to all classes of Common Stock.
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Series C 15% Cumulative Compounding Participating Preferred stock (Series C) ranked senior with respect to payment of dividends, liquidation, and redemption to all other series of preferred stock and common stock of the Company. The Series C had a liquidation preference equal to two times the original issue price of $1 per share, plus accreted dividends. As a result of the liquidation preference, Series C was recorded at liquidation value at the date of issuance. Holders of Series C were entitled to receive, in addition to the liquidation preference, an amount equal to 40% of any amounts that would otherwise be available to the holders of Common Stock in the event of a liquidation or sale of the Company.
The liquidation preference on the Series A, Series B and Series C accreted at the stated rates on the liquidation preference value thereof; dividends (representing accreted liquidation preference) were to be paid from legally available funds, when and if declared by the board of directors. Dividends were payable only when and if declared, or upon a sale or liquidation of the Company or upon redemption of the applicable series of preferred stock. Accretion of the liquidation preference on the redeemable preferred stock was reflected as an increase in the preferred stock values and an increase in the accumulated deficit. Accretion of the liquidation preference on the Redeemable Preferred Stock during the two month and eight month Predecessor periods ended August 20, 2006 was $2,300 and $10,100, respectively. In the Predecessor periods, net loss attributable to common stockholders includes the effect of the accretion of the liquidation preference on the redeemable preferred stock which reduced net income attributable to common stockholders for the period.
On August 21, 2006, as a result of the Merger and in accordance with the terms of the Merger Agreement, all issued and outstanding preferred stock was converted into the right to receive a portion of the Merger consideration.
Stock Option Plans
As a result of the Merger and in accordance with the terms of the Merger Agreement all of the Company’s then outstanding vested and unvested stock options were cancelled and converted into the right to receive a portion of the purchase price, less the exercise prices thereon, as applicable. Concurrent with the Merger, the Company’s 1998 and 2000 Stock Option Plans were terminated.
In December 2006, the Board of Directors of Holdco (the “Board”), adopted a Non-Qualified Stock Option Plan (the “2006 Plan”). The 2006 Plan reserved 100,000 shares of Holdco’s non-voting common stock for issuance upon exercise of stock options granted under the 2006 Plan. In January 2007, the Board issued stock options to certain members of management. These options vest 20% per year beginning August 16, 2007, with full vesting on August 16, 2011. Accelerated vesting of all outstanding options is triggered upon a change of control of the Company. The options have a life of 10 years, and can only be exercised upon the earliest of the following dates: (i) the 10 year anniversary of the effective date; (ii) the date of a change in control, as defined in the 2006 Plan; or (iii) date of employment termination, subject to certain exclusions.
In conjunction with the Exchange, a 100:1 reverse stock split was effected immediately prior to the exchange related to Holdco common stock and all outstanding options to acquire Holdco stock. The reverse stock split reduced the number of outstanding options at November 13, 2008 from 62,750 to 630. The exercise price was adjusted accordingly from $81.50 per share to $8,150 per share. All disclosures related to the stock options have been presented as if the 100:1 reverse stock split had occurred as of the beginning of the periods for which the specific information is presented.
The Company accounts for stock-based compensation in accordance with SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS 123R”), which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the consolidated statement of operations over the period during which an employee is required to provide service in exchange for the award — the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee stock options is estimated using the Black-Scholes option pricing model.
The Company utilizes comparator companies to estimate its price volatility and the simplified method to calculate option expected time to exercise, under Staff Accounting Bulletin No. 107, “Share-Based Payment”. The fair value of stock-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values for the years ended December 28, 2008 and December 30, 2007:
| Successor | Predecessor | |||||||
| 2008 | 2007 | |||||||
| Weighted average fair value of grants | $ | 3,942.64 | $ | 3,942.64 | ||||
| Risk-free interest rate | 4.52 | % | 4.52 | % | ||||
| Expected volatility | 42.28 | % | 42.28 | % | ||||
| Expected life in years | 7.67 | 6.15 | ||||||
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The following table summarizes stock option activity:
| Weighted | ||||||||
| Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding at December 31, 2006 — Predecessor | — | — | ||||||
| Granted | 808 | $ | 8,150 | |||||
| Exercised | — | — | ||||||
| Forfeited/expired | (9 | ) | 8,150 | |||||
| Outstanding at December 30, 2007 — Predecessor | 799 | $ | 8,150 | |||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Forfeited/expired | (169 | ) | 8,150 | |||||
| Outstanding at November 13, 2008 — Predecessor | 630 | $ | 8,150 | |||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Forfeited/expired | (300 | ) | 8,150 | |||||
| Outstanding at December 28, 2008 — Successor | 330 | $ | 8,150 | |||||
| Vested and expected to vest at December 28, 2008 | 314 | $ | 8,150 | |||||
| Exercisable at December 28, 2008 | 129 | $ | 8,150 | |||||
The Company recorded a net stock-based compensation credit of $28 during the Successor Period November 14, 2008 through December 28, 2008. The credit resulted from the reversal of compensation cost for unvested shares related to a termination of one of our executives during that period. The Company recorded $406 and $839 of stock-based compensation expense for the Predecessor Period from December 31, 2007 through November 13, 2008 and the Predecessor year ended December 30, 2007, respectively. Stock-based compensation expense is included in general and administrative expense on the consolidated statements of operations.
As of December 28, 2008, $1,638 of total unrecognized compensation costs related to non-vested stock-based awards is expected to be recognized through fiscal year 2012, and the weighted average remaining vesting period of those awards is approximately 1.7 years. At December 28, 2008, the aggregate intrinsic value of exercisable options was $0.
8. Income Taxes
Significant components of the income tax provision (benefit) consist of the following:
| Successor | Predecessor | |||||||||||||||||||
| December 28, | November 13, | December 30, | December 31, | August 20, | ||||||||||||||||
| 2008 | 2008 | 2007 | 2006 | 2006 | ||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | — | $ | 28 | $ | — | $ | — | $ | 1,570 | ||||||||||
| State | — | 24 | 58 | 61 | 344 | |||||||||||||||
| — | 52 | 58 | 61 | 1,914 | ||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | — | — | (467 | ) | (2,729 | ) | (367 | ) | ||||||||||||
| State | — | — | (129 | ) | (523 | ) | (240 | ) | ||||||||||||
| — | — | (596 | ) | (3,252 | ) | (607 | ) | |||||||||||||
| — | — | (538 | ) | (3,191 | ) | 1,307 | ) | |||||||||||||
| Change in valuation allowance | — | — | 13,282 | — | ��� | |||||||||||||||
| $ | — | $ | 52 | $ | 12,744 | $ | (3,191 | ) | $ | 1,307 | ||||||||||
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| Successor | Predecessor | |||||||
| December 28, | December 30, | |||||||
| 2008 | 2007 | |||||||
| Deferred tax assets: | ||||||||
| Federal net operating loss carry-forwards | $ | — | $ | 9,481 | ||||
| State net operating loss carry-forwards | — | 1,805 | ||||||
| Goodwill and other intangibles | 24,808 | 4,398 | ||||||
| Accrued expenses not currently deductible | 6,470 | 3,394 | ||||||
| Tax credit carry-forwards | — | 592 | ||||||
| Property and equipment basis difference | 7,144 | 17,455 | ||||||
| Deferred rent | 72 | 1,006 | ||||||
| Gift certificates and other deferred income | 537 | 692 | ||||||
| Unamortized debt premium | — | 1,729 | ||||||
| Deferred compensation | 1,262 | 1,640 | ||||||
| State taxes | 1,872 | — | ||||||
| Other | 5,204 | 784 | ||||||
| Total deferred tax assets | 47,369 | 42,976 | ||||||
| Deferred tax liabilities: | ||||||||
| Prepaid expenses | (397 | ) | (504 | ) | ||||
| Trademarks and other indefinite lived intangibles | (31,549 | ) | (17,170 | ) | ||||
| Lease amortization | (12,732 | ) | (10,279 | ) | ||||
| State taxes | — | (631 | ) | |||||
| Unamortized landlord allowance | (3,097 | ) | (1,110 | ) | ||||
| Unamortized debt discount | (8,019 | ) | — | |||||
| Total deferred tax liabilities | (55,794 | ) | (29,694 | ) | ||||
| Valuation allowance | (23,124 | ) | (13,282 | ) | ||||
| Net deferred tax liability | $ | (31,549 | ) | $ | — | |||
Immediately prior to the Exchange, deferred tax assets and liabilities were $56,811 and $32,322, respectively, offset by a valuation allowance of $24,489. Approximately $3,000 of the change in deferred tax assets during 2007 was recorded as a reduction to goodwill, as it was related to the Merger.
The reconciliation of income tax at the U.S. federal statutory tax rates to income tax expense is as follows:
| Successor | Predecessor | |||||||||||||||
| December 28, | December 30, | December 31, | August 20, | |||||||||||||
| 2008 | 2007 | 2006 | 2006 | |||||||||||||
| Income tax at U.S. federal statutory tax rate | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
| State income tax, net of federal benefit | 0.0 | 4.7 | 5.8 | 5.7 | ||||||||||||
| Valuation allowance | (13.0 | ) | (123.0 | ) | — | — | ||||||||||
| Non-deductible transaction costs | — | — | — | 11.2 | ||||||||||||
| Impairment of goodwill and intangibles | (92.1 | ) | — | — | — | |||||||||||
| Purchase accounting adjustment | 71.2 | — | — | — | ||||||||||||
| Permanent true-ups | — | (33.3 | ) | — | — | |||||||||||
| Other | (0.1 | ) | (0.4 | ) | (1.1 | ) | (4.0 | ) | ||||||||
| Effective tax rate | (0.0 | )% | (118.0 | )% | 38.7 | % | 46.9 | % | ||||||||
In accordance with SFAS 109, net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The amount of deferred tax assets considered realizable was determined based on future reversals of existing taxable temporary differences and future taxable income, exclusive of reversing temporary differences and carry-forwards.
In evaluating future taxable income for valuation allowance purposes at December 28, 2008 and December 30, 2007 , the Company concluded that it was appropriate to consider income expected to be generated in 2009, 2010 and 2011. For the years ended December 28, 2008 and December 30, 2007, the Company recorded a valuation allowance of $23,124 and $13,282, respectively in accordance with SFAS 109.
In accordance with FAS 141, any changes regarding the realization of the acquired deferred tax assets which occur within the measurement period resulting from new information regarding facts and circumstances that existed at the date of the Exchange, then, to the extent there is a reduction in the valuation allowance, the benefit will reduce goodwill. All other reductions to the valuation allowance will benefit tax expense.
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The Company files U.S. and State consolidated tax returns with Holdco. The Company uses the separate return method for allocating taxes to its separate financial statements. One exception to the separate return method used in the current year was the reduction of tax attributes as a result of the Exchange transaction that took place on November 13, 2008 at Holdco. Consolidated tax attributes belonging to the Company have been reduced to reflect their utilization under IRC Section 108. No tax expense was recorded as these tax attributes were previously offset by a full valuation allowance, which was, accordingly, reduced. The Company has not completed the full analysis of the impact of the Exchange, but has preliminarily concluded that, while there may be additional reductions of deferred tax assets as a result of the transaction, there should be no additional income tax expense due to the corresponding release of the valuation allowance. The Company expects to complete the analysis during 2009.
At December 28, 2008, the Company no longer had federal and state net operating loss carry-forwards for utilization against future taxable income. At December 30, 2007, the Company had a federal net operating loss carry-forward of $19,170 and state net operating loss carry-forward of $37,613, respectively, which would have started to expire beginning in 2021.
9. Fair Value Measurement
On December 31, 2007, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application was deferred for one year.
SFAS 157 established the following fair value hierarchy that prioritizes the inputs used to measure fair value:
| Level 1: | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and U.S. government treasury securities. | |||
| Level 2: | Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over the counter forwards, options and repurchase agreements. | |||
| Level 3: | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, we perform an analysis of all instruments subject to SFAS 157 and include in Level 3 all of those whose fair value is based on significant unobservable inputs. |
We do not have any of financial assets and liabilities that we account for at fair value on a recurring basis. However, as a result of the Exchange, we completed a valuation of the Company as of November 13, 2008. The financial assets and liabilities that we accounted for at fair value by level within the fair value hierarchy:
Level 1: Quoted Prices in Active Markets
As of November 13, 2008, we revalued our senior secured notes by recording a discount of $19,950 against the carrying value of $105,000. This value was based upon quote market prices for recent trades of our senior secured notes. The discount is amortized to interest expense over the remaining life of the debt.
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Level 2: Significant Other Observable Inputs
As of November 13, 2008, we revalued certain assets and liabilities through valuation models, including goodwill and property and equipment. The values recorded as of November 13, 2008 are included in Note 2.
In accordance with the provisions of FAS 142, goodwill and other intangibles assets were written down to fair value as a result of impairment charges of $163,196, which was included in earnings for the predecessor period of 2008.
In accordance with the provisions of FAS 144, certain long-lived assets were written down to fair value as a result of impairment charges of $5,151 recorded in earnings during the predecessor period of 2008.
Level 3: Significant Unobservable Inputs
As of November 13, 2008, trademarks and other intangible assets were revalued using a discounted cash flow analysis. The values recorded as of November 13, 2008 are included in Note 2.
10. Commitments and Contingencies
Leases
The Company leases restaurant and office facilities that have terms with expirations in 2009 through 2028. Most of the restaurant facilities have renewal clauses exercisable at the option of the Company with rent escalation clauses stipulating specific rent increases, some of which are based upon the Consumer Price Index. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenues, as defined. Additionally, the Company leases several properties that are not being operated by the Company. Several of those properties are subleased.
The Company leases certain leasehold improvements and equipment under agreements that are classified as capital leases. The cost of assets under capital leases is included in the balance sheets as property and equipment and was $1,228 and $1,644 at December 28, 2008 and December 30, 2007, respectively. Accumulated amortization of these assets was $39 and $199 at December 28, 2008 and December 30, 2007, respectively. Amortization of assets under capital leases is included in depreciation expense. The amount of capital assets placed in service was $326 and $947 at December 28, 2008 and December 30, 2007.
The minimum annual lease commitment and subtenant income of the Company for the years succeeding December 28, 2008 is approximately as follows:
| Capital | Minimum | Net | ||||||||||||||
| Lease | Lease | Sublease | Lease | |||||||||||||
| Obligations | Commitments | Income | Commitments | |||||||||||||
| 2009 | $ | 565 | $ | 41,389 | $ | (678 | ) | $ | 41,276 | |||||||
| 2010 | 433 | 36,742 | (505 | ) | 36,670 | |||||||||||
| 2011 | 269 | 32,234 | (420 | ) | 32,083 | |||||||||||
| 2012 | 194 | 28,561 | (345 | ) | 28,410 | |||||||||||
| 2013 | 29 | 23,740 | (240 | ) | 23,529 | |||||||||||
| Thereafter | 304 | 89,004 | (559 | ) | 88,749 | |||||||||||
| Total minimum lease payments | 1,794 | $ | 251,670 | $ | (2,747 | ) | $ | 250,717 | ||||||||
| Less: Amount representing interest | (399 | ) | ||||||||||||||
| Present value of net minimum capital lease payments | 1,395 | |||||||||||||||
| Less: Current maturities of capital lease obligations | (453 | ) | ||||||||||||||
| Long-term capital lease obligations | $ | 942 | ||||||||||||||
The Company is contingently liable for leases on sold or assigned premises for $1,925 as of December 28, 2008.
Some of the above leases provide for additional rentals based on a percentage of revenues. The following table summarizes the rental expense, percentage rent expense above minimum rent and net sublease income:
| Successor | Predecessor | |||||||||||||||||||
| December 28, | November 13, | December 30, | December 31, | August 20, | ||||||||||||||||
| 2008 | 2008 | 2007 | 2006 | 2006 | ||||||||||||||||
| Rental expense | $ | 4,997 | $ | 41,935 | $ | 45,369 | $ | 14,893 | $ | 30,003 | ||||||||||
| Percentage rent expense above minimum rent (included in rental expense) | 198 | 1,926 | 2,164 | 907 | 1,755 | |||||||||||||||
| Net sublease income | 45 | 344 | 227 | 122 | 289 | |||||||||||||||
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Purchase Obligations
In December 2007, the Company entered into an agreement with a certain vendor to purchase a minimum volume of product from December 1, 2007 through December 31, 2015, to be extended for any shortfall in purchases until such volume is met. The contract is based upon expiration date or volume, which ever occurs last. As of December 28, 2008, $1,177 had been purchased, representing 9.3% of the total contractual volume to be purchased throughout the life of the contract.
Litigation
The Company is periodically a defendant in cases involving personal injury, employment-related claims and other matters that arise in the normal course of business. While any pending or threatened litigation has an element of uncertainty, the Company believes that the outcome of these lawsuits or claims, individually or combined, will not materially adversely affect the consolidated financial position, results of operations or cash flows of the Company.
Self-Insurance
The Company is self-insured for most casualty losses up to certain stop-loss limits. The Company has accounted for its liabilities for these casualty losses and claims, including both reported and incurred but not reported claims, based on information provided by independent actuaries. Management believes that it has recorded reserves for casualty losses at a level that has substantially mitigated the potential negative impact of adverse developments and/or volatility. Management believes that its calculation of casualty loss liabilities would not change materially under different conditions and/or different methods. However, due to the inherent volatility of actuarially determined casualty claims, it is reasonably possible that the Company could experience changes in estimated casualty losses, which could be material to both quarterly and annual net income. Amounts estimated to be ultimately payable with respect to existing claims and an estimate for claims incurred but not reported under these programs have been accrued and are included in the accompanying consolidated balance sheets. Estimated liabilities related to the self-insured casualty losses were $15,619 and $15,479 as of December 28, 2008 and December 30, 2007, respectively.
The Company is also required to maintain collateral securing future payment under the self-insured retention insurance programs. As of December 28, 2008 and December 30, 2007, this collateral consisted of stand-by letters of credit of $16,892 and $18,674, respectively.
11. Related Party Transactions
Successor Transactions
As discussed in Note 6, as a result of the Exchange, the existing lenders to the New Senior Unsecured Credit Facility became owners of Holdco, the Company’s parent. As a result, the New Senior Unsecured Credit Facility is now held by related parties to the Company.
Several of our directors are employed by Farallon Capital Management, LLC (“Farallon”). Funds managed by Farallon are indirect stockholders of Holdco. Funds managed by Farallon hold an indirect interest in a shopping center from which we lease property for the operation of an Acapulco restaurant. Total payments in connection with our lease in 2008 were $414, of which approximately $103 is attributable to the Farallon funds’ indirect interest in the shopping center.
On February 27, 2009, the Company entered into a contract for consulting services with an entity which has a material relationship with one of Holdco’s stockholders. This consulting contract has an initial term from March 1, 2009 to March 31, 2009 with three optional one month renewal terms through June 30, 2009. Prior to the end of the initial term, the Company may cancel the agreement with no fees due. The monthly fee of $190 will be recorded in general and administrative expense and will be paid in shares of Holdco common stock.
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Predecessor Transactions
The Company has a Management Services Agreement (the “Management Agreement”) dated August 21, 2006, by and between the Company and Sun Capital Partners Management IV, LLC (the “Manager”), an affiliate of Sun Cantinas LLC, the indirect holder of the majority of the capital stock of the Company prior to the Exchange. The Manager was paid annual fees equal to the greater of (i) $500 or (ii) 1% of the Company’s EBITDA for such period. EBITDA is defined as (A) net income (or loss) after taxes of the Company and its direct and indirect subsidiaries on a consolidated basis (“Net Income”), plus (B) interest expense which has been deducted in the determination of Net Income, plus (C) federal, state and local taxes which have been deducted in determining Net Income, plus (D) depreciation and amortization expenses which have been deducted in determining Net Income, including without limitation amortization of capitalized transaction expenses incurred in connection with the transactions contemplated by the Merger plus (E) extraordinary losses which have been deducted in the determination of Net Income, plus (F) un-capitalized transaction expenses incurred in connection with the Merger, plus (G) all other non-cash charges, minus (H) extraordinary gains which have been included in the determination of Net Income. EBITDA is computed without taking into consideration the fees payable under the Management Agreement. The Company paid the fees in quarterly installments in advance equal to the greater of (i) $125 or (ii) 1% of EBITDA for the immediately preceding fiscal quarter. In connection with the Exchange, the Management Agreement was terminated effective November 13, 2008, with the exception of certain provisions having to do with limitation of liability and indemnification, which will survive and continue in full force and effect. Expenses relating to the Management Agreement of $448, $500 and $174 were recorded as general and administrative expense in the Predecessor Period from December 31, 2007 to November 13, 2008, the Predecessor Year Ended December 30, 2007 and Predecessor Period from August 21, 2006 to December 31, 2006, respectively.
The Company periodically makes payments to (subject to restricted payment covenants under the indenture governing the senior secured notes), from and on behalf of RM Restaurant Holding Corp., its parent. In September 2006, the Company made a dividend distribution of $10,000 to RM Restaurant Holding, its parent, which was recorded as a reduction to retained earnings. A contribution of $1,743 was received from RM Restaurant Holding during 2007 related to a distribution to former stockholders of proceeds from the sale of land subsequent to the acquisition date, as specified in the Merger Agreement, and was recorded as additional paid in capital. The Company has also made subsequent additional distributions to and on behalf of RM Restaurant Holding Corp. in the amount of $5,399 and has recorded the distributions as a related party receivable. During 2007 and the predecessor period 2008, the Company received advances from RM Restaurant Holding totaling $8,036 and $2,000, respectively, which were recorded as a related party payable. During 2008, management determined that certain payments received from its parent during 2007 and the predecessor period of 2008 which had been recorded as intercompany payables should be recorded as capital contributions. As a result, a reclassification of $5,554 was recorded to reduce related party payables and increase additional paid in capital. The Company received an additional $335 from RM Restaurant Holding Corp. which was recorded as a capital contribution during the predecessor period of 2008. The Company had a net related party payable of $2,505 at December 30, 2007 and a net related party receivable of $3,591 at December 31, 2006. There was no outstanding balance at December 28, 2008.
The Company had an Amended and Restated Management Agreement dated June 28, 2000 with two of its former stockholders Bruckman, Rosser, Sherrill & Co., L.P. and FS Private Investments, LLC. The stockholders were paid annual fees equating to .667% and .333%, respectively, of consolidated earnings before interest, income taxes, depreciation and amortization of the Company. As described in the Merger Agreement, the Amended and Restated Management Agreement dated June 28, 2000 was terminated in connection with the Merger. Expenses relating to the agreement of $436 and $510 were recorded as general and administrative expense in the periods from December 26, 2005 to August 20, 2006 and the fiscal year ended December 25, 2005, respectively. Additionally, the Company recorded a termination fee of $1,819 in the period from December 26, 2005 to August 20, 2006, related to the termination of the Amended and Restated Management Agreement.
12. Employee Benefit Plan
The Company is the sponsor for a defined contribution plan (401(k) plan) for qualified Company employees, as defined. Participants may contribute from 1% to 50% of pre-tax compensation, subject to certain limitations. The plan contains a provision that provides that the Company may make discretionary contributions. The Company has recorded contribution expense of $26, $207, $255, $93 and $159 during the 6 week Successor Period November 14, 2008 through December 28, 2008, the 46 week Predecessor Period from December 31, 2007 through November 13, 2008, the Predecessor Year ended December 30, 2007, the 19 week Predecessor Period from August 21, 2006 to December 31, 2006 and the 34 week Predecessor Period from December 26, 2005 to August 20, 2006, respectively.
13. Other Events
In May 2007, the Company sold four Company-owned Fuzio restaurants to a franchisee, entered into a management agreement with the franchisee on a fifth Company-owned Fuzio restaurant and sold the Fuzio trademark, trade name and Fuzio franchise rights to the franchisee (the “Fuzio Transaction”). The selling price of $4,850 in cash included $714 in prepaid management fees associated with the management agreement. The management fees will be amortized over seven years beginning in May 2007. Concurrent with the sale, the Company purchased three franchised Chevys restaurants from the franchisee for $3,124 in cash.
The Company recorded a gain of $1,467 on the disposal of the assets of the Fuzio Transaction. The gain is included in other income on the consolidated statements of operations and has been recorded net of associated expenses and remaining net book value of the assets transferred.
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14. Condensed Consolidating Financial Statements
Pursuant to the notes accompanying Rule 3-10(f) of Regulation S-X, we have not provided the condensed consolidated financial statements of our subsidiaries guaranteeing our outstanding senior notes as (i) we have no independent assets or operations, (ii) the guarantees are full and unconditional, joint and several and (iii) we have no subsidiaries who are not subsidiary guarantors of our senior notes.
15. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 28, 2008 and December 30, 2007:
| Predecessor | Successor | |||||||||||||||||||
| Predecessor | Predecessor | Predecessor | Period from | Period from | ||||||||||||||||
| 13 weeks ended | 13 weeks ended | 13 weeks ended | September 29, 2008 | November 14, 2008 | ||||||||||||||||
| March 30, | June 29, | September 28, | to | to | ||||||||||||||||
| 2008 | 2008 | 2008 | November 13, 2008 | December 28, 2008 | ||||||||||||||||
| Total revenues | $ | 137,577 | $ | 152,528 | $ | 137,461 | $ | 68,863 | $ | 57,316 | ||||||||||
| Operating income (loss) | $ | 2,242 | $ | (27,728 | ) | $ | 1,931 | $ | (135,113 | ) | $ | (20 | ) | |||||||
| Net loss | $ | (2,204 | ) | $ | (31,839 | )(1) | $ | (1,080 | ) | $ | (137,990 | )(2) | $ | (4,103 | ) | |||||
| Predecessor | ||||||||||||||||
| 13 weeks ended | 13 weeks ended | 13 weeks ended | 13 weeks ended | |||||||||||||
| April 1, 2007 | July 1, 2007 | September 30, 2007 | December 30, 2007 | |||||||||||||
| Total revenues | $ | 138,511 | $ | 149,575 | $ | 142,510 | $ | 134,595 | ||||||||
| Operating income (loss) | $ | 5,593 | $ | 7,813 | $ | 4,070 | $ | (10,622 | ) | |||||||
| Net income (loss) | $ | 380 | $ | 2,973 | $ | (591 | ) | $ | (26,679 | )(3) | ||||||
| (1) | Includes goodwill impairment of $34,000. | |
| (2) | Includes goodwill impairment of $129,196. | |
| (3) | Includes goodwill impairment charge of $10,000 and a deferred tax valuation allowance of $13,300. |
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of our 2008 fiscal year, we conducted an evaluation, under the supervision and with the participation of the principal executive and financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.) Based on this evaluation, our principal executive and financial officer concluded that, as of the end of our 2008 fiscal year, our disclosure controls and procedures are effective provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Under the supervision and with the participation of our management, including our principal executive and financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that our internal control over financial reporting is effective as of the end of our 2008 fiscal year.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
As a result of the Exchange transaction, the composition of our Board of Directors has changed effective November 13, 2008. The following table sets forth certain information regarding the current board of directors, executive officers and other key employees of our Company:
| Name | Age | Position | ||||
| Steven Tanner | 58 | Interim Chief Executive Officer, Chief Financial Officer and Director | ||||
| Carlos Angulo | 47 | President, Real Mex Foods, Inc. | ||||
| Roberto (Pepe) Lopez | 53 | Executive Chef and Senior Vice President, Research and Development | ||||
| Raymond Garcia | 54 | Senior Vice President of Operations — El Torito & Acapulco | ||||
| Nicholas Mayer | 46 | Senior Vice President of Operations — Chevys | ||||
| Steven K. Wallace | 52 | Senior Vice President of Human Resources | ||||
| Anatoly Bushler | 32 | Director*+ | ||||
| Evan Geller | 32 | Director*+ | ||||
| Michael Linn | 30 | Director*+ | ||||
| Rajiv Patel | 37 | Director*+ | ||||
| Anthony Polazzi | 33 | Director*+ | ||||
| Douglas Tapley | 36 | Director*+ |
| * | Member of our audit committee. | |
| + | Member of our compensation committee. |
Steven Tannerhas been our Interim Chief Executive Officer and Director since December 2008 and Chief Financial Officer since January 2004. Before joining our Company, Mr. Tanner served as Chief Financial Officer at Sweet Factory during 2003, Executive Vice President and Chief Financial Officer for Pick Up Stix from 1997 to 2002 and Chief Financial Officer for In-N-Out Burger from 1991 to 1996. Mr. Tanner is a Certified Public Accountant and earned his bachelor’s degree in Accounting from the Brigham Young University.
Carlos Angulohas been the President of Real Mex Foods, Inc. since January 2005. Mr. Angulo joined us in 2000 as Vice President of Real Mex Foods, Inc. Previously, Mr. Angulo worked for Smart & Final for 18 years in a variety of positions from Store Manager to Vice President of Northern California Distribution. Mr. Angulo received a Bachelor of Science degree from the University of Southern California.
Roberto (Pepe) Lopezhas been our Executive Chef since 1992. In addition, in 1994, Mr. Lopez was promoted to Vice President, Research and Development and in 2004, he was promoted to Senior Vice President, Research and Development. Previously, Mr. Lopez served as Director of Product Development. His prior experience includes serving as Executive Chef at Cano’s and Las Brisas, and as Manager at El Torito. Between 1988 and 1992, he was Director of Product Development for Visions Restaurants, Inc.
Raymond Garciahas been our Senior Vice President of Operations for El Torito and Acapulco since June 2005. Previously, Mr. Garcia served from 1991 to present in a variety of positions at Acapulco rising from Assistant Manager to Vice President of Operations. Before joining Acapulco, Mr. Garcia held positions of General Manager and Regional Manager at El Torito.
Nicholas Mayerhas been our Senior Vice President of Operations for Chevys since January 2007. He was previously our Vice President of Franchise Operations upon acquisition of Chevys in January 2005, and held that same position for the Chevys predecessor company since January 2000. Mr. Mayer joined the Chevys predecessor company in May 1993 as a General Manager, and was promoted to positions of Regional Director of Operations in 1995 and Director of Franchise Operations in 1997.
Steven K. Wallacehas been our Senior Vice President of Human Resources since 2003. Mr. Wallace joined the Company in the summer of 2001 as Vice President of Human Resources. Previously, Mr. Wallace worked with El Torito’s predecessor company for 11 years, plus he obtained operations experience with Marriott Hotels and Stouffer Restaurants. Mr. Wallace obtained a business degree from Santa Clara University and earned his Masters Degree in Human Resources at Chapman University. He also holds the Senior Professional in Human Resources (SPHR) certification from the Society for Human Resources Management.
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Anatoly Bushlerbecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Bushler has served as an investment professional with Farallon Capital Management, LLC (“Farallon”), a private investment firm, since September 2004.
Evan Gellerbecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Geller has served as a principal with Kohlberg Kravis Roberts & Co. (“KKR”), a private investment firm, since July 2008. Prior to joining KKR, Mr. Geller served as Vice President at Lazard Freres, an investment banking firm, from June 2005 through June 2008. Prior to that, Mr. Geller served as an Associate with Banc of America Securities, an investment banking firm, from April 2004 to May 2005.
Michael Linnbecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Linn is a managing director with Farallon, a private investment firm, and has been with Farallon since July 2002.
Rajiv Patelbecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Patel is a managing member of Farallon, and has been with Farallon, a private investment firm, since August 1997. Mr. Patel is also a director of a private company.
Douglas Tapleybecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Tapley has served as a principal with KKR since April 2006. Prior to joining KKR, Mr. Tapley served as Vice President at General Electric Commercial Finance, an commercial lending institution, from April 2002 through March 2006.
Anthony Polazzibecame a Director of the Company in November 2008 as a result of the Exchange transaction. Mr. Polazzi has served as principal of Sun Capital Partners, a private investment firm, since October 2003.
Audit Committee Financial Expert
The non-employee directors currently act as the Company’s Audit Committee. As the Board of Directors changed significantly in connection with the Exchange, the Board has not determined whether any of the directors would qualify as an Audit Committee Financial Expert. As a result, at this time, no member of our board of directors is an “Audit Committee Financial Expert.”
Code of Ethics
On February 7, 2007 the Company adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and all persons performing similar functions.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Philosophy and Overall Objectives
We believe that the compensation paid to our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers, whom we collectively refer to as our named executive officers (“Named Executive Officers”), should be closely aligned with our performance as well as that of each Named Executive Officer’s individual performance on both a short- and long-term basis, and that such compensation should be sufficient to attract and retain highly qualified leaders who can create significant value for our organization. Our compensation programs are designed to provide Named Executive Officers meaningful incentives for superior performance. Performance is evaluated using both financial and non-financial objectives that we believe contribute to our long-term success. Among these objectives are financial strength, customer service, operational excellence, employee commitment and regulatory integrity.
How is Compensation Determined
Due to the unique nature of each Named Executive Officer’s duties, our criteria for assessing executive performance and determining compensation in any year is inherently subjective and is not based upon specific formulas or weighting of factors. We use companies in similar industries as benchmarks when initially establishing Named Executive Officers’ compensation. We also review peer company data when making annual base salary and incentive recommendations.
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Discussion of Specific Compensation Elements
The following describes the components of our executive compensation program and the basis upon which recommendations and determinations were made.
Base Salary
We determine base salaries for all of our Named Executive Officers by reviewing company and individual performance, the value each Named Executive Officer brings to us and general labor market conditions. While base salary provides a base level of compensation intended to be competitive with the external market, the base salary for each Named Executive Officer is determined on a subjective basis after consideration of these factors and is not based on target percentiles or other formal criteria. The base salaries of Named Executive Officers are reviewed on an annual basis, and any annual increase is the result of an evaluation of the Company and of the individual Named Executive Officer’s performance for the period. An increase or decrease in base pay may also result from a promotion or other significant change in a Named Executive Officer’s responsibilities during the year.
Annual Bonus Plan
We maintain an annual bonus plan that provides for annual incentive awards to be made to our senior management (including the Named Executive Officers) upon our Company’s attainment of pre-set annual EBITDA targets (as defined in the annual bonus plan). The amount of the annual award to each executive is based upon a percentage of the executive’s base salary. Awards are normally paid in cash in a lump sum following the completion of our Company’s audit for each plan year. To be eligible for a full share of the bonus, executives must be employed on the first day of the fiscal year, provided that under the plan we may adjust awards based on individual performance factors or special circumstances affecting our Company. In addition, pursuant to the annual bonus plan, senior management (including the Named Executive Officers) is entitled to receive additional annual incentive awards upon our Company’s exceeding the pre-set EBITDA target. The amount of the additional bonus pool is calculated based on a percentage of the amount by which EBITDA for the plan year exceeds the pre-set EBITDA target, with each eligible participant’s share being equal to a percentage of the additional bonus pool.
Stock Option Plan
We have a Non-Qualified Stock Option Plan (the “2006 Plan”) which was adopted by our Board of Directors in December 2006. 1,000 shares of our parent’s non-voting common stock are reserved for issuance upon exercise of stock options granted under the 2006 Plan. In January 2007, the Board of Directors issued stock options to certain members of management. These options vest 20% per year beginning August 16, 2007, with full vesting on August 16, 2011. Accelerated vesting of all outstanding options is triggered upon a change of control of the Company. The options have a life of 10 years, and can only be exercised upon the earliest of the following dates: (i) the 10 year anniversary of the effective date; (ii) the date of a change in control, as defined in the 2006 Plan; or (iii) date of employment termination, subject to certain exclusions. Shares above have been adjusted for the 100:1 reverse stock split effected in conjunction with the Exchange.
Employment Agreements
Mr. Frederick Wolfe served as our Chief Executive Officer until his resignation in December 2008. We entered into an executive employment agreement with Mr. Wolfe effective August 21, 2006, as amended and restated effective February 28, 2008. Under the employment agreement, Mr. Wolfe was entitled to a base salary of $473,000 per annum, or such greater amount as determined by the Board of Directors, and customary executive benefits. Contingent upon our meeting certain financial goals set annually in accordance with our bonus plan, Mr. Wolfe was eligible to receive a bonus of up to 66 2/3% of his base salary. In addition, the employment agreement imposes non-competition, non-solicitation and confidentiality obligations on Mr. Wolfe. In connection with Mr. Wolfe’s departure from the Company and in addition to the payments provided by the Amended and Restated Executive Employment Agreement dated February 28, 2008 by and between Mr. Wolfe and the Company, the Company has entered into a Separation Agreement and General Release with Mr. Wolfe dated December 19, 2008 pursuant to which the Company has agreed (i) to pay Mr. Wolfe his annual salary of $473,000 for one year in installments to be paid on the dates that he normally received his salary and (ii) to pay the cost of Mr. Wolfe’s health insurance premiums for one year if he elects to continue his health insurance through COBRA. The salary continuation payments will be reduced by the amount of salary earned by Mr. Wolfe through employment during the year after his departure. Mr. Wolfe’s health insurance premiums will cease to be paid by the Company if Mr. Wolfe obtains health insurance through another employer during the year after his departure.
We entered into an executive employment agreement with Mr. Tanner effective February 28, 2008. Under the employment agreement, Mr. Tanner is entitled to a base salary of $296,587 per annum, or such greater amount as the Board of Directors shall determine, and customary executive benefits. Contingent upon our meeting certain financial goals set annually in accordance with our bonus plan, Mr. Tanner is eligible to receive a bonus of up to 50% of his base salary. If Mr. Tanner’s employment is terminated by us without cause or by his resignation for “good reason,” he would be entitled to any unpaid previously awarded bonus and he would be entitled to severance payments equal in the aggregate to his annual base salary for a period of one year. The contract imposes non-competition, non-solicitation and confidentiality obligations on Mr. Tanner. The employment agreement with Mr. Tanner expires on January 1, 2012.
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Compensation Committee Interlocks and Insider Participation
During the Predecessor Period of Fiscal Year 2008, all compensation decisions were approved by the Compensation Committee. As of November 13, 2008, the non-employee directors assumed the duties of the Compensation Committee on an ad hoc basis. None of the Company’s executive officers currently serve, or in the past have served, as a director or member of any compensation committee of another entity that has one or more executive officers serving on the Company’s Board of Directors.
Compensation Committee Report
The non-employee directors of the Board have discussed the Compensation Discussion and Analysis with management, and have recommended its inclusion in the Company’s Form 10-K. The non-employee directors are:
Anatoly Bushler,
Evan Geller,
Michael Linn,
Rajiv Patel,
Anthony Polazzi and
Douglas Tapley
Evan Geller,
Michael Linn,
Rajiv Patel,
Anthony Polazzi and
Douglas Tapley
Summary Compensation Table
The following table sets forth certain information with respect to annual and long-term compensation for services in all capacities for Fiscal Years 2008, 2007 and 2006 paid to our Named Executive Officers:
| Change in | ||||||||||||||||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||||||||||||||||
| Non- | and | |||||||||||||||||||||||||||||||||||||
| Equity | Nonqualified | |||||||||||||||||||||||||||||||||||||
| Restricted | Incentive | Deferred | All | |||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Plan | Compensation | Other | |||||||||||||||||||||||||||||||||
| Principal Position | Year | Salary | Bonus | Other | Awards | Awards(2) | Compensation(5) | Earnings(1) | Compensation | Total | ||||||||||||||||||||||||||||
| ($) | ($) | (#) | (#) | ($) | (#) | ($) | ($) | |||||||||||||||||||||||||||||||
| Frederick F. Wolfe | 2008 | 549,513 | (6) | — | * | — | 150,832 | — | — | — | 700,345 | |||||||||||||||||||||||||||
| former CEO, President and | 2007 | 490,974 | 110,000 | * | — | 322,345 | — | — | 45,394 | (3) | 968,713 | |||||||||||||||||||||||||||
| Director | 2006 | 484,468 | 836,499 | * | — | — | — | — | 2,267,988 | (3) | 3,588,955 | |||||||||||||||||||||||||||
| Steven Tanner | 2008 | 296,587 | — | * | — | 86,371 | — | — | — | 382,958 | ||||||||||||||||||||||||||||
| Interim CEO, CFO and | 2007 | 283,841 | 40,000 | * | — | 118,193 | — | — | 19,433 | (3) | 461,467 | |||||||||||||||||||||||||||
| Director | 2006 | 269,135 | 462,676 | * | — | — | — | — | 1,290,320 | (3) | 2,022,131 | |||||||||||||||||||||||||||
| Carlos Angulo | 2008 | 260,000 | — | * | — | 86,371 | — | — | — | 346,371 | ||||||||||||||||||||||||||||
| President | 2007 | 244,600 | 40,000 | * | — | 118,193 | — | — | 20,281 | (4) | 423,074 | |||||||||||||||||||||||||||
| Real Mex Foods, Inc. | 2006 | 233,292 | 375,120 | * | — | — | — | — | 683,427 | (4) | 1,291,839 | |||||||||||||||||||||||||||
| Roberto (Pepe) Lopez | 2008 | 210,330 | — | * | — | 15,703 | — | — | — | 226,033 | ||||||||||||||||||||||||||||
| Executive Chef and | 2007 | 209,309 | 25,000 | * | — | 21,490 | — | — | 7,606 | (4) | 263,405 | |||||||||||||||||||||||||||
| Senior Vice President, R&D | 2006 | 198,162 | 142,794 | * | — | — | — | — | 256,317 | (4) | 597,273 | |||||||||||||||||||||||||||
| Raymond Garcia | 2008 | 205,000 | — | * | — | 22,299 | — | — | — | 227,299 | ||||||||||||||||||||||||||||
| Senior Vice President, | 2007 | 201,963 | 28,000 | * | — | 29,548 | — | — | 8,478 | (4) | 267,989 | |||||||||||||||||||||||||||
| Operations — El Torito & Acapulco | 2006 | 190,745 | 140,813 | * | — | — | — | — | 282,195 | (4) | 613,753 | |||||||||||||||||||||||||||
| Steven K. Wallace, | 2008 | 200,000 | — | * | — | 14,447 | — | — | — | 214,447 | ||||||||||||||||||||||||||||
| Senior Vice President | 2007 | 204,781 | 23,000 | * | — | 18,803 | — | — | 5,071 | (4) | 251,655 | |||||||||||||||||||||||||||
| of Human Resources | 2006 | 186,506 | 135,944 | * | — | — | — | — | 170,878 | (4) | 493,328 | |||||||||||||||||||||||||||
| * | Represents less than $50,000 or 10% of the total salary and bonus for the year indicated. | |
| (1) | The Company does not have a pension plan and does not pay above market or preferential earnings on deferred compensation plans. |
| (2) | Represents compensation expense recorded related to options to acquire shares of RM Restaurant Holding, parent of the Company. These amounts do not reflect the amount of compensation actually received by the named executive officer during the fiscal year. For a description of the assumptions used in calculating the fair value of the equity awards under SFAS No. 123 (R), see our financial statements “Notes to Consolidated Financial Statements”. | |
| (3) | Amounts for Mr. Wolfe and Mr. Tanner include restricted stock award payments and the exercise of stock option awards related to the Merger. | |
| (4) | Represents the exercise of stock option awards. No stock-based employee compensation cost is reflected in net income, as all options granted under the Plans had an exercise price equal to the market value as of the underlying common stock on the date of grant. | |
| (5) | The Company does not have a Non-Equity Incentive Plan. | |
| (6) | Mr. Wolfe resigned from his position as an executive officer of the Company in December 2008. His base salary includes $56,651 in accrued vacation paid upon termination. Mr. Wolfe’s severance package includes one year of salary and did not begin until January 2009. |
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Option Grants in Fiscal Year Ended December 28, 2008
None.
Outstanding Equity Awards at Year End
The following table provides information regarding outstanding stock options held by the Named Executive Officers at December 28, 2008. The number of options and exercise price have been adjusted to reflect the 100:1 reverse stock split effected in conjunction with the Exchange on November 13, 2008.
| Option/Warrant Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||
| Incentive | ||||||||||||||||||||||||||||||||||||
| Equity | Plan | |||||||||||||||||||||||||||||||||||
| Incentive | Awards: | |||||||||||||||||||||||||||||||||||
| Equity | Plan | Market or | ||||||||||||||||||||||||||||||||||
| Incentive | Awards: | Payout | ||||||||||||||||||||||||||||||||||
| Plan | Number of | Value of | ||||||||||||||||||||||||||||||||||
| Awards | Unearned | Unearned | ||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Number of | Market | Shares | Shares | ||||||||||||||||||||||||||||||
| Securities | Securities | Securities | Shares or | Value of | Units or | Units or | ||||||||||||||||||||||||||||||
| Underlying | Underlying | Underlying | Units of | Shares or | Other | Other | ||||||||||||||||||||||||||||||
| Unexercised | Unexercised | Unexercised | Option | Option | Stock That | Unit That | RightsThat | Rights That | ||||||||||||||||||||||||||||
| Options (#) | Options (#) | Unearned | Exercise | Expiration | Have Not | Have Not | Have Not | Have Not | ||||||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | Options (#) | Price | Date | Vested (#) | Vested | Vested (#) | Vested | |||||||||||||||||||||||||||
| Fredrick F. Wolfe | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Steven Tanner | 44 | 66 | — | 8,150 | 8/16/2016 | — | — | — | — | |||||||||||||||||||||||||||
| Carlos Angulo | 44 | 66 | — | 8,150 | 8/16/2016 | — | — | — | — | |||||||||||||||||||||||||||
| Roberto (Pepe) Lopez | 8 | 12 | — | 8,150 | 8/16/2016 | — | — | — | — | |||||||||||||||||||||||||||
| Raymond Garcia | 11 | 17 | — | 8,150 | 8/16/2016 | — | — | — | — | |||||||||||||||||||||||||||
| Steven K. Wallace | 7 | 11 | — | 8,150 | 8/16/2016 | — | — | — | — | |||||||||||||||||||||||||||
Potential Payments Upon Termination or Change in Control
We have arrangements with certain of the Named Executive Officers that may provide them with compensation following termination of employment. These arrangements are discussed above under “Employment Agreements”.
Compensation of Directors
None of our directors are compensated for serving as a director of the Company. Our directors are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board of Directors or committees thereof.
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
Equity Compensation Plan Information
As of December 28, 2008, our parent’s common stock authorized for issuance under its Non-Qualified Stock Option Plan included 1,000 shares of non-voting common stock, of which 330 options to purchase such shares are outstanding, with a weighted average exercise price of $8,150 per share. The number of options and exercise price have been adjusted to reflect the 100:1 reverse stock split effected in conjunction with the Exchange on November 13, 2008.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial ownership of outstanding common stock and preferred stock of Real Mex Restaurants, Inc. as of March 27, 2009 by:
| • | Each person (or group of affiliated persons) who is known by us to beneficially own 5% or more of Real Mex Restaurants, Inc.’s common and preferred stock; | ||
| • | Each of our Named Executive Officers; | ||
| • | Each of our Directors; and | ||
| • | All of our Directors and executive officers as a group. |
To our knowledge, each of the holders of shares listed below has sole voting and investment power as to the shares owned unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act.
Number and Percent of Shares of
Stock of
Real Mex Restaurants, Inc.
Stock of
Real Mex Restaurants, Inc.
| Common Stock | ||||||||
| Shares | Percentage | |||||||
Greater than 5% Stockholder | ||||||||
| RM Restaurant Holding Corp.(1) | 1,000 | 100.00 | ||||||
Named Executive Officers and Directors | ||||||||
| Fredrick F. Wolfe | — | — | ||||||
| Steven Tanner | — | — | ||||||
| Carlos Angulo | — | — | ||||||
| Roberto (Pepe) Lopez | — | — | ||||||
| Raymond Garcia | — | — | ||||||
| Nicholas Mayer | — | — | ||||||
| Steven K. Wallace | — | — | ||||||
| Anatoly Bushler | — | — | ||||||
| Evan Geller | — | — | ||||||
| Michael Linn | — | — | ||||||
| Rajiv Patel | — | — | ||||||
| Anthony Polazzi | — | — | ||||||
| Douglas Tapley | — | — | ||||||
| All executive officers and directors as a group (13 persons) | — | — | ||||||
| (1) | RM Restaurant Holding Corp. is located at 5660 Katella Avenue, Cypress, California 90630. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Management Agreements
The Company has a Management Services Agreement (the “Management Agreement”) dated August 21, 2006, by and between the Company and Sun Capital Partners Management IV, LLC (the “Manager”), an affiliate of Sun Cantinas LLC, the indirect holder of the majority of the capital stock of the Company prior to the Exchange. The Manager was paid annual fees equal to the greater of (i) $500 or (ii) 1% of the Company’s EBITDA for such period. EBITDA is defined as (A) net income (or loss) after taxes of the Company and its direct and indirect subsidiaries on a consolidated basis (“Net Income”), plus (B) interest expense which has been deducted in the determination of Net Income, plus (C) federal, state and local taxes which have been deducted in determining Net Income, plus (D) depreciation and amortization expenses which have been deducted in determining Net Income, including without limitation amortization of capitalized transaction expenses incurred in connection with the transactions contemplated by the Merger plus (E) extraordinary losses which have been deducted in the determination of Net Income, plus (F) un-capitalized transaction expenses incurred in connection with the Merger, plus (G) all other non-cash charges, minus (H) extraordinary gains which have been included in the determination of Net Income. EBITDA is computed without taking into consideration the fees payable under the Management Agreement. The Company paid the fees in quarterly installments in advance equal to the greater of (i) $125 or (ii) 1% of EBITDA for the immediately preceding fiscal quarter. In connection with the Exchange, the Management Agreement was terminated effective November 13, 2008, with the exception of certain provisions having to do with limitation of liability and indemnification, which will survive and continue in full force and effect. Expenses relating to the Management Agreement of $448, $500 and $174 were recorded as general and administrative expense in the Predecessor Period from December 31, 2007 to November 13, 2008, the Predecessor Year Ended December 30, 2007 and Predecessor Period from August 21, 2006 to December 31, 2006, respectively.
Other Related Party Transactions
As a result of the Exchange, the existing lenders to the New Senior Unsecured Credit Facility became owners of Holdco, the Company’s parent. The New Senior Unsecured Credit Facility is now held by related parties to the Company.
Several of our directors are employed by Farallon Capital Management, LLC (“Farallon”). Funds managed by Farallon are indirect stockholders of Holdco. Funds managed by Farallon hold an indirect interest in a shopping center from which we lease property for the operation of an Acapulco restaurant. Total payments in connection with our lease in 2008 were $414, of which approximately $103 is attributable to the Farallon funds’ indirect interest in the shopping center.
On February 27, 2009, the Company entered into a contract for consulting services with an entity which has a material relationship with one of Holdco’s stockholders. This consulting contract has an initial term from March 1, 2009 to March 31, 2009 with three optional one month renewal terms through June 30, 2009. Prior to the end of the initial term, the Company may cancel the agreement with no fees due. The monthly fee of $190 will be recorded in general and administrative expense and will be paid in shares of Holdco common stock.
The Company periodically makes payments to (subject to restricted payment covenants under the indenture governing the senior secured notes), from and on behalf of RM Restaurant Holding Corp., its parent. In September 2006, the Company made a dividend distribution of $10,000 to RM Restaurant Holding, its parent, which was recorded as a reduction to retained earnings. A contribution of $1,743 was received from RM Restaurant Holding during 2007 related to a distribution to former stockholders of proceeds from the sale of land subsequent to the acquisition date, as specified in the Merger Agreement, and was recorded as additional paid in capital. The Company has also made subsequent additional distributions to and on behalf of RM Restaurant Holding Corp. in the amount of $5,399 and has recorded the distributions as a related party receivable. During 2007 and the predecessor period 2008, the Company received advances from RM Restaurant Holding totaling $8,036 and $2,000, respectively, which were recorded as a related party payable. During 2008, management determined that certain payments received from its parent during 2007 and the predecessor period of 2008 which had been recorded as intercompany payables should be recorded as capital contributions. As a result, a reclassification of $5,554 was recorded to reduce related party payables and increase additional paid in capital. The Company received an additional $335 from RM Restaurant Holding Corp. which was recorded as a capital contribution during the predecessor period of 2008. The Company had a net related party payable of $2,505 at December 30, 2007 and a net related party receivable of $3,591 at December 31, 2006. There was no outstanding balance at December 28, 2008.
Director Independence
We are not listed on any national securities exchange and therefore are not subject to any listing standards for director independence. Because our directors are affiliated with stockholders of our parent company, they are not considered independent.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Fees and Services
The Board of Directors approved the engagement of Grant Thornton LLP (“Grant”) to continue as our independent auditors to conduct the audit of our books and records for the fiscal year ending December 28, 2008, including required quarterly reviews. The following table shows the aggregate fees for professional services rendered during the last two fiscal years:
| Fiscal Year | Fiscal Year | |||||||
| 2008 | 2007 | |||||||
| Audit Fees | $ | 362,200 | $ | 372,000 | ||||
| Audit Related Fees | 27,000 | 26,000 | ||||||
| Tax Fees | — | 116,900 | ||||||
| All Other Fees | — | 218,150 | ||||||
| Total Fees | $ | 389,200 | $ | 733,050 | ||||
Audit Feesrepresent the aggregate fees billed or estimated to be billed to us for professional services rendered for the audit of our annual financial statements, review of financial statements included in our Form 10-Qs and services normally provided by our accountants in connection with statutory and regulatory filings or engagements.
Audit-Related Feesrepresent the aggregate fees billed to us or estimated to be billed to us for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees” above. The nature of services provided consisted in both years of audits of our 401(k) plans.
Tax Feesrepresent the aggregate fees billed to us or estimated to be billed to us for professional services rendered for tax compliance, tax advice and tax planning. In addition, the services included analysis of the income tax deductibility of certain Merger expenses and a tax return review.
All Other Feesrepresent the aggregate fees billed to us or estimated to be billed to us for products or services provided to us, other than the services reported in the above categories, including fees for services rendered in connection with the Merger.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor
The Audit Committee is responsible for appointing, setting compensation for and overseeing the work of the independent auditor. The Audit Committee has established a policy requiring pre-approval of all audit and permissible non-audit services provided by the independent auditor. The Audit Committee considers whether such services are consistent with the rules of the SEC on auditor independence as well as whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as familiarity with our Company’s business, people, culture, accounting systems, risk profile and other factors and input from our management. The Audit Committee may delegate to one or more of its members the pre-approval of audit and permissible non-audit services provided that those members report any pre-approvals to the full committee. Pursuant to this authority, the Audit Committee has previously delegated to its Chair the authority to address any requests for pre-approval of services between Audit Committee meetings provided that the amount of fees for any particular services requested does not exceed $10,000, and required the Chair to report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The policy prohibits the Audit Committee from delegating to management the Audit Committee’s responsibility to pre-approve permitted services of the independent auditor. During Fiscal Year 2008 all of the services related to the audit or other fees described above were pre- approved by the Audit Committee and none were provided pursuant to any waiver of the pre-approval requirement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed as part of this report under Item 8 Financial Statements and Supplementary Data.
| • | Consolidated Balance Sheets — December 28, 2008 and December 30, 2007 | ||
| • | Consolidated Statements of Operations — Successor Period November 14, 2008 to December 28, 2008, Predecessor Period December 31, 2007 to November 13, 2008, Predecessor Fiscal Year Ended December 30, 2007, Predecessor Period August 21, 2006 to December 31, 2006 and Predecessor Period December 26, 2005 to August 20, 2006 | ||
| • | Consolidated Statements of Stockholders’ Equity — Successor Period November 14, 2008 to December 28, 2008, Predecessor Period December 31, 2007 to November 13, 2008, Predecessor Fiscal Year Ended December 30, 2007, Predecessor Period August 21, 2006 to December 31, 2006 and Predecessor Period December 26, 2005 to August 20, 2006 | ||
| • | Consolidated Statements of Cash Flows — Successor Period November 14, 2008 to December 28, 2008, Predecessor Period December 31, 2007 to November 13, 2008, Predecessor Fiscal Year Ended December 30, 2007, Predecessor Period August 21, 2006 to December 31, 2006 and Predecessor Period December 26, 2005 to August 20, 2006 | ||
| • | Notes to Consolidated Financial Statements — December 28, 2008 and December 30, 2007 |
(2) FINANCIAL STATEMENT SCHEDULE
The financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.
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(3) EXHIBITS
| EXHIBIT | ||||
| NO. | DESCRIPTION | |||
| 3.1 | Third Amended and Restated Certificate of Incorporation of Real Mex Restaurants, Inc. (Filed herewith) | |||
| 3.2 | Amended and Restated Bylaws of Real Mex Restaurants, Inc. (Filed herewith) | |||
| 3.3 | Certificate of Incorporation of Acapulco Restaurants, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.3 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.4 | Bylaws of Acapulco Restaurants, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.4 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.5 | Certificate of Incorporation of El Torito Restaurants, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.25 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.6 | Bylaws of El Torito Restaurants, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.6 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.7 | Certificate of Incorporation of El Torito Franchising Company (Filed with the Securities and Exchange Commission as Exhibit 3.7 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.8 | Bylaws of El Torito Franchising Company (Filed with the Securities and Exchange Commission as Exhibit 3.8 to Amendment No. 1 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on August 11, 2004 and incorporated by reference herewith) | |||
| 3.9 | Articles of Incorporation of Acapulco Restaurant of Ventura, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.9 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.10 | Bylaws of Acapulco Restaurant of Ventura, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.10 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.11 | Articles of Incorporation of Acapulco Restaurant of Westwood, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.11 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.12 | Bylaws of Acapulco Restaurant of Westwood, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.12 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.13 | Articles of Incorporation of Acapulco Restaurant of Downey, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.13 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.14 | Bylaws of Acapulco Restaurant of Downey, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.14 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
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| EXHIBIT | ||||
| NO. | DESCRIPTION | |||
| 3.15 | Articles of Incorporation of Murray Pacific (Filed with the Securities and Exchange Commission as Exhibit 3.15 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.16 | Bylaws of Murray Pacific (Filed with the Securities and Exchange Commission as Exhibit 3.16 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.17 | Articles of Incorporation of Acapulco Restaurant of Moreno Valley, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.19 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.18 | Bylaws of Acapulco Restaurant of Moreno Valley, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.20 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.19 | Articles of Incorporation of El Paso Cantina, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.21 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.20 | Bylaws of El Paso Cantina, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.22 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.21 | Articles of Incorporation of Real Mex Foods, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.23 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.22 | Bylaws of Real Mex Foods, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.24 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.23 | Articles of Incorporation of TARV, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.25 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.24 | Bylaws of TARV, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.26 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.25 | Articles of Incorporation of ALA Design, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.27 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.26 | Bylaws of ALA Design, Inc. (Filed with the Securities and Exchange Commission as Exhibit 3.28 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.27 | Articles of Incorporation of Acapulco Mark Corp. (Filed with the Securities and Exchange Commission as Exhibit 3.29 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 3.28 | Bylaws of Acapulco Mark Corp. (Filed with the Securities and Exchange Commission as Exhibit 3.30 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
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| EXHIBIT | ||||
| NO. | DESCRIPTION | |||
| 3.29 | Certificate of Incorporation of CKR Acquisition Corp. (Filed with the Securities and Exchange Commission as Exhibit 3.31 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith) | |||
| 3.30 | Bylaws of CKR Acquisition Corp. (Filed with the Securities and Exchange Commission as Exhibit 3.32 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith) | |||
| 3.31 | Articles of Formation of Chevys Restaurants, LLC (formerly known as Chevys Acquisition Company LLC). (Filed with the Securities and Exchange Commission as Exhibit 3.33 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith) | |||
| 3.32 | Operating Agreement of Chevys Restaurants, LLC (formerly known as Chevys Acquisition Company LLC). (Filed with the Securities and Exchange Commission as Exhibit 3.34 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith) | |||
| 4.1 | Indenture, dated as of March 31, 2004, among Real Mex Restaurants, Inc., the guarantors named therein and Wells Fargo Bank, N.A., as trustee. (Filed with the Securities and Exchange Commission as Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 4.2 | First Supplemental Indenture, dated as of November 29, 2004, among CKR Acquisition Corp., Real Mex Restaurants, Inc., the guarantors named therein and Wells Fargo Bank, N.A., as trustee. (Filed with the Securities and Exchange Commission as Exhibit 4.2 to the Company’s Annual Report on Form 10-K (File No. 333-116310) on March 24, 2005 and incorporated by reference herewith) | |||
| 4.3 | Second supplemental Indenture, dated as of January 10, 2005, among Chevys Restaurants, LLC, Real Mex Restaurants, Inc., the guarantors neared therein and Wells Fargo Bank, N.A., as trustee (Filed with the Securities and Exchange Commission as Exhibit 4.4 to the Company’s Registration Statement on Form S-4 (File No. 333-124670) on May 5, 2005 and incorporated reference herewith) | |||
| 10.1 | Intercreditor Agreement dated as of March 31, 2004, by and between Wells Fargo Bank, N.A., as collateral agent and as trustee, and Fleet National Bank, as administrative agent. (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference herewith) | |||
| 10.2 | Separation Agreement and General Release, dated December 19, 2008 by and between Real Mex Restaurants, Inc. and Frederick Wolfe (Filed herewith) | |||
| 10.3 | Amended and Restated Executive Employment Agreement, dated February 28, 2008 by and between Real Mex Restaurants, Inc. and Frederick Wolfe. (Filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company’s Report on Form 8-K (File No. 333-116310) on March 5, 2008 and incorporated by reference herewith) | |||
| 10.4 | Executive Employment Agreement, dated February 28, 2008 by and between Real Mex Restaurants, Inc. and Steven Tanner. (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 8-K (File No. 333-116310) on March 5, 2008 and incorporated by reference herewith) | |||
| 10.5 | Agreement and Plan of Merger, dated August 17, 2006 among Real Mex Restaurants, Inc., RM Restaurant Holding Corp. and RM Integrated, Inc (Filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company’s Report on Form 8-K (File No. 333-116310) on August 23, 2006 and incorporated by reference herewith) | |||
| 10.6 | Fourth Amendment to Credit Agreement and Amendment to Loan Documents (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 8-K (File No. 333-116310) on October 6, 2006 and incorporated by reference herewith) | |||
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| EXHIBIT | ||||
| NO. | DESCRIPTION | |||
| 10.7 | Amended and Restated Credit Agreement (Filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company’s Report on Form 8-K (File No. 333-116310) on October 6, 2006 and incorporated by reference herewith) | |||
| 10.8 | Limited Waiver, Consent and Amendment to Amended and Restated Credit Agreement dated November 13, 2008 (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 10-Q (File No. 333-116310) on November 13, 2008 and incorporated by reference herewith) | |||
| 10.9 | Amended and Restated Credit Agreement (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 8-K (File No. 333-116310) on February 2, 2007 and incorporated by reference herewith) | |||
| 10.10 | Amendment No. 2 to Credit Agreement dated April 17, 2008. (Filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 23, 2008 and incorporated by reference herewith) | |||
| 10.11 | Limited Waiver, Consent and Amendment No. 3 to Second Amended and Restated Credit Agreement dated November 13, 2008 (Filed with the Securities and Exchange Commission as Exhibit 10.2 to the Company’s Report on Form 10-Q (File No. 333-116310) on November 13, 2008 and incorporated by reference herewith) | |||
| 12.1 | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith) | |||
| 14.1 | Code of Ethics adopted by the Company on February 7, 2007 (Filed with the Securities and Exchange Commission as Exhibit 14.1 to the Company’s Annual Report on Form 10-K on March 20, 2007 and incorporated by reference herewith) | |||
| 21.1 | Subsidiaries of the Company and the Additional Registrants. (Filed herewith) | |||
| 31.1 | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive and Chief Financial Officer. (Filed herewith) | |||
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive and Chief Financial Officer. (Filed herewith) | |||
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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.
| REAL MEX RESTAURANTS, INC. | ||||||
| By: | /s/ Steven Tanner | |||||
| Steven Tanner | ||||||
| Date: March 27, 2009 | Interim Chief Executive Officer | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Steven Tanner | ||||
| Steven Tanner | Interim Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Financial Officer and Accounting Officer) | March 27, 2009 | ||
| /s/ Kathleen Burkett | ||||
| Kathleen Burkett | Controller | March 27, 2009 | ||
| /s/ Anatoly Bushler | ||||
| Anatoly Bushler | Director | March 27, 2009 | ||
| /s/ Evan Geller | ||||
| Evan Geller | Director | March 27, 2009 | ||
| /s/ Michael Linn | ||||
| Michael Linn | Director | March 27, 2009 | ||
| /s/ Rajiv Patel | ||||
| Rajiv Patel | Director | March 27, 2009 | ||
| /s/ Anthony Polazzi | ||||
| Anthony Polazzi | Director | March 27, 2009 | ||
| /s/ Douglas Tapley | ||||
| Douglas Tapley | Director | March 27, 2009 |
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EXHIBIT INDEX
| EXHIBIT | ||||
| NO. | DESCRIPTION | |||
| 3.1 | Third Amended and Restated Certificate of Incorporation of Real Mex Restaurants, Inc. (Filed herewith) | |||
| 3.2 | Amended and Restated Bylaws of Real Mex Restaurants, Inc. (Filed herewith) | |||
| 10.2 | Separation Agreement and General Release, dated December 19, 2008 by and between Real Mex Restaurants, Inc. and Frederick Wolfe (Filed herewith) | |||
| 12.1 | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith) | |||
| 21.1 | Subsidiaries of the Company and the Additional Registrants. (Filed herewith) | |||
| 31.1 | Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive and Chief Financial Officer. (Filed herewith) | |||
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive and Chief Financial Officer. (Filed herewith) | |||