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EX-32.1 - EXHIBIT 32.1 - Real Mex Restaurants, Inc. | c98048exv32w1.htm |
EX-21.1 - EXHIBIT 21.1 - Real Mex Restaurants, Inc. | c98048exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - Real Mex Restaurants, Inc. | c98048exv31w1.htm |
EX-12.1 - EXHIBIT 12.1 - Real Mex Restaurants, Inc. | c98048exv12w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 27, 2009
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) |
Registrants 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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o 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 registrants 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 February 21, 2010, Real Mex Restaurants, Inc. had outstanding 1,000 shares of Common
Stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
None
None
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Exhibit 32.1 |
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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, as amended (the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (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 our 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 or the context otherwise requires, references to
we, us, Real Mex and 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 27, 2009, we had 187 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
2009, we generated revenues of $500.6 million, a decrease in same store sales of 10.4% from fiscal
year 2008, a net loss of $49.6 million and net cash provided by operating activities of $16.9
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 Managements
Discussion and Analysis of Financial Condition and Results of Operations below.
Merger Agreement
On August 17, 2006, we entered into an Agreement and Plan of Merger with our parent, RM
Restaurant Holding Corp., and its wholly owned subsidiary, RM Integrated, Inc. On August 18, 2006,
the stockholders of the Company entitled to vote thereon approved the Agreement and Plan of Merger.
On August 21, 2006, the closing of the transactions contemplated by the Agreement and Plan of
Merger occurred, and RM Integrated merged with and into the Company, with the Company continuing as
the surviving corporation and the 100% owned subsidiary of our parent. 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.
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Exchange Agreement
Effective November 13, 2008, our parent, and each of our parents existing lenders executed an
agreement to exchange our parents then outstanding borrowings under its unsecured term loan
facility for 94.5% of the common stock of our parent (the Exchange). Immediately prior to the
Exchange, our parent 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 our parents
common stock. Immediately after the Exchange, no stockholder, together with its affiliates, owned
more than 50% of the capital stock of our parent. In connection with the Exchange, certain terms
and conditions of our outstanding indebtedness were modified. See Managements Discussion and
Analysis of Financial Condition and Results of OperationsDebt and Other Obligations.
The Exchange was accounted for under the purchase method of accounting and affected the
Company as push-down accounting is required. As no cash consideration was exchanged, we 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. We attribute the goodwill
associated with the Exchange to the historical financial performance and the anticipated future
performance of our 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.
Significant Stockholders of RM Restaurant Holding Corp.
Farallon Capital Management, L.L.C. (Farallon), is an investment firm founded in 1986 which
manages equity capital for institutions, typically endowments and foundations, high net worth
individuals, other pooled investment vehicles, and charitable organizations. Farallon invests
globally in debt and equity of public and private companies.
Kohlberg Kravis Roberts & Co. (KKR), is a leading global alternative asset manager with
$54.8 billion in assets under management, over 600 people and 13 offices around the world as of
September 30, 2009. KKR manages assets through a variety of investment funds and accounts covering
multiple asset classes. KKR seeks to create value by bringing operational expertise to its
portfolio companies and through active oversight and monitoring of its investments. KKR complements
its investment expertise and strengthens interactions with investors through its client
relationship and capital markets platforms. KKR is publicly traded through KKR & Co. (Guernsey)
L.P. (Euronext Amsterdam: KKR).
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Sun Capital Partners, Inc. (Sun Capital) is a leading private investment firm focused on
leveraged buyouts, equity, debt, and other investments in market-leading companies that can benefit
from its in-house operating professionals and experience. Sun Capital
affiliates have invested in and managed more than 200 companies worldwide since Sun Capitals
inception in 1995. Sun Capital has offices in Boca Raton, Los Angeles and New York, and affiliates
with offices in London, Paris, Frankfort, and Shenzhen and Shanghai, China. Sun Capital has been
one of the most active private investment firms in the U.S., closing 161 transactions from 2002
through 2008.
Company Structure
The following chart summarizes our current organizational structure.
Our Restaurant Concepts
El Torito and El Torito Grill (42.3% of fiscal year 2009 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 27, 2009, we operated 81 El Torito restaurants, including 9 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.
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 $14.43 and $16.65 for El
Torito and El Torito Grill, respectively, for fiscal year 2009.
El Torito restaurants are primarily free standing buildings. The restaurants average
approximately 8,500 square feet with average seating of approximately 302 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 Weekday Lunch menu and lunch buffets offer
guests value priced, time sensitive entrees. We stimulate incremental traffic with value promotions
such as our longstanding Tacorito Tuesday program where guests may enjoy grilled chicken, steak or
carnitas tacos in the cantina, Kids Eat Free Wednesday and $2 off Cadillac Margaritas on Thursdays.
Chevys (37.9% of fiscal year 2009 restaurant revenues). Chevys was founded in Alameda,
California in 1986. As of December 27, 2009, we operated 66 Company-owned restaurants, franchised
26 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 $14.20 for fiscal year 2009.
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Chevys restaurants are primarily freestanding and located in high-traffic urban and suburban
areas. Chevys restaurants generally average approximately 7,700 square feet with average seating
for approximately 326 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 tortillas featured in the dining room which helps reinforce the
Companys commitment to freshness.
Chevys employs a number of promotions to drive sales during traditionally slower periods
anchored by Sunday Fun Day, which features value pricing on Cadillac Margaritas as well as $3
guacamole and $2 mini fried ice cream. Also featured is a popular Kids Eat Free Tuesday promotion
and a weekday Happy Hour with value drink pricing and half-price appetizers. Weekday lunch traffic
is boosted with a Fresh Mex Lunch Value Menu, which offers lunch portions on the very popular
Fajitas and a series of Lunch Bowls.
Acapulco (14.5% of fiscal year 2009 restaurant revenues). The first Acapulco restaurant opened
in Pasadena, California in 1960. As of December 27, 2009, 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 $14.45 for fiscal year 2009.
Acapulco restaurants are primarily freestanding and located in high-traffic urban and suburban
areas. Acapulco restaurants generally average approximately 8,400 square feet with average seating
for approximately 247 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 locations physical plant and the sites 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
and a variety of traditional Mexican favorites. Weekday value promotions include Happy Hour,
Margarita Mondays, Kids Eat Free Tuesdays, Crazy Combo Thursdays and a weekday lunch buffet for
time sensitive guests.
Other Restaurant Concepts (5.3% of fiscal year 2009 restaurant revenues). As of December 27,
2009, 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 &
Larrys. We acquired most of these restaurants with the acquisition of El Torito Restaurants, Inc.
Our Real Mex Foods Subsidiary
Founded in 1970, our Real Mex Foods, Inc. (Real Mex Foods) subsidiary provides purchasing
and distribution services for the restaurant operations and manufactures specialty products for
sales to outside customers. Real Mex Foods has built significant expertise in the procurement,
manufacturing, distribution, and product development of Mexican foods, and provides a one-stop
source of supply needs to our restaurants on the West Coast and coordinates purchasing for all
non-West Coast U.S. restaurants. Our relationship with Real Mex Foods generates significant
purchasing economies of scale and ensures quality and consistency across our entire store base.
This enables our restaurant managers to spend more time focusing on operations, without the burden
of purchasing and supply management.
In addition to the internal benefits it provides, Real Mex Foods has a customer base with deep
relationships in the quick service restaurant, or QSR, casual dining, retail, and foodservice
channels. Real Mex Foods custom manufacturing and research and development, or R&D, capabilities
provide quality Mexican food products to QSR brands such as El Pollo Loco, Rubios, and Baja Fresh
in addition to private label products for retailers such as Trader Joes, Costco and Albertsons and
a proprietary line of entrées under the Real Mex Foods label.
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Our Competitive Strengths
Leading Operator with Local Appeal. We are the largest operator of Mexican casual dining
restaurants in the U.S. and our El Torito, Chevys and Acapulco concepts are ranked #1, #2 and #3 in
market share, respectively, in California. While there is minimal overlap of our concepts due to
differing geographic concentrations, the high market density and long operating history of each
concept creates a strong brand identity and marketing efficiencies not available to our national
and mom and pop Mexican restaurant competitors. We believe our brands appeal to a wide
demographic and will continue to benefit from the growing demand for fresh, authentic Mexican food
and a fun, festive dining experience.
Demographic Trends and Long-Term Industry Dynamics. According to the U.S. Census Bureau,
California is expected to grow from 33.8 million people in 2000 to 46.4 million people by 2030, the
second largest incremental population increase of any state in the U.S. In addition, the U.S.
Census Bureau projects the Hispanic population, which accounts for approximately 31% of our total
restaurant revenue, to be the fastest growing demographic in the U.S., more than doubling in size
from 35.3 million people in 2000 to 73.0 million people by 2030. We expect to benefit from these
long-term demographic trends as we believe the Hispanic influence on dining trends will continue to
grow in tandem with population growth.
Our restaurants are positioned to benefit from the long-term trend of increased expenditure on
food consumed away from home. According to the USDA Economic Research Service, dollars spent on
food away from home was 49% of total dollars spent on food in 2007, and is expected to reach 52% of
total dollars spent on food by 2015. Additionally, our Real Mex Foods subsidiary is uniquely
positioned to benefit and grow as a result of increasing consumer demand for convenient, home meal
replacement solutions through
the manufacture of packaged entrées sold through the grocery and club store channels and
proprietary products developed for quick service restaurants.
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. 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.
Well Maintained Store Base and Limited Future Capital Requirements. We have consistently
invested in our restaurants in an effort to uphold their image as attractive, well maintained
concepts. Over the last four years, we have invested significant discretionary capital in our
restaurants to maintain a fresh and comfortable dining experience which we believe sets us apart
from our competitors. Furthermore, because we have no new restaurants or remodeling projects
currently planned, we believe our modest ongoing capital expenditure requirements enhance our
ability to generate free cash flow.
Proven Management Team with New and Experienced Leadership. We are led by a strong management
team with extensive experience in all aspects of restaurant operations. Our management team has an
average of more than 30 years of experience in the restaurant industry. Richard E. Rivera, our
President, CEO, Interim CFO and Chairman, has more than 38 years of management experience in the
restaurant and food service industries. Prior to joining Real Mex, Mr. Rivera served as Vice
Chairman, President and Chief Operating Officer of Darden Restaurants in addition to various other
executive positions at RARE Hospitality, Chart House, Applebees, TGI Fridays, El Chico, Del Taco
and Steak & Ale. Mr. Rivera also served as Chairman of the National Restaurant Association from
June 2007 to May 2008 and has been a board member since 1993. Mr. Rivera is joined by a very
talented and tenured senior management team and board of directors with considerable experience in
the restaurant and food industry.
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 servers 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 our two purchasing and distribution facilities and manufacture food products through our
manufacturing plant. 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.
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Business Strategy
Our primary business objective is to increase profitability through same store sales growth
and restaurant level margin improvements, identified reductions in overhead costs, and continued
growth in outside sales by Real Mex Foods. During fiscal year 2009 we experienced a 10.4% 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 2010. We are focused on minimizing the impact on our 2010 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, our intent is to
communicate our commitment to creating fresh, authentic Mexican dishes and drinks through
in-restaurant merchandising, direct mail, newspaper, internet advertising and public relations.
During fiscal year 2009, 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 2009, we sustained the same number of direct mail drops and coupons as
in fiscal year 2008. 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. At our Chevys concept, we leveraged our equity in Fresh Mex and further enhanced
the brand by incorporating fun and flavor into the concepts 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.
Growth in Outside Sales by Real Mex Foods. In addition to serving as the proprietary foods
procurement, manufacturing, product development and distribution operation for our restaurants,
Real Mex Foods leverages its scale and expertise through the development, manufacture and
distribution of proprietary Mexican food products to more than 100 outside customers. We currently
sell directly to or package for quick service and casual dining restaurants, amusement parks, club
stores, and food service, retail, vending and institutional customers. We manufacture and sell a
proprietary line of packaged multi-serve entrées including premium quality burritos, enchiladas and
tamales under the Real Mex Foods label, in more than 600 retail supermarkets. We have developed a
line of single-serve entrées that went into production in the third quarter, targeting smaller
households. We believe the introduction of this single-serve line will increase our shelf-space and
overall sales. 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, with a focus on
manufactured products, which are more profitable than distribution-only accounts. Outside sales
decreased 1.2% from 2008 to 2009, including an increase in manufactured sales of approximately $8.1
million, offset by a decrease in distribution sales of approximately $8.6 million.
Expansion of the Chevys franchise network. We currently have 10 franchisees operating 26
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.
Employees
As of December 27, 2009, we had 11,236 employees. Of these employees, 9,982 were employed as
restaurant hourly team members, 754 as restaurant managers, 357 as distribution and production
facility employees, and 143 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 58 team members approximately 35% of whom 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 2009, our hourly turnover of 56.7% and our management turnover of 23.1%
were better than industry average. Our restaurant management is heavily tenured, with Regional
Directors averaging approximately 15 years, General Managers averaging over 10 years and Managers
averaging over 5 years. Hourly employee tenure averages almost 5 years. Other highly skilled
positions such as chefs average 15 years with the Company.
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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.
Intellectual Property
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.
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.
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 2009, approximately 25.1% 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.
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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.
Risks Related to Our Company
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.
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.
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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 restaurants menu or temporarily close a restaurant. If we temporarily close a restaurant or
remove popular items from a restaurants 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 2009 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 publics 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.
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 governments 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.
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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 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; |
||
| tax reporting; and |
||
| revisions in the tax payment requirements for employees who receive gratuities. |
Wage and hour class action lawsuits may adversely affect our business.
The Company is subject from time to time to employee claims based, among other things, on
discrimination, harassment, wrongful termination, or violation of wage and labor laws in the
ordinary course of business. These claims may divert our financial and management resources that
would otherwise be used to benefit our operations. In recent years a number of restaurant companies
have been subject to wage and hour class action lawsuits alleging violations of federal and state
labor laws. A number of these lawsuits have resulted in the payment of substantial damages by the
defendants. We have been and may in the future be named as a defendant in wage and hour class
action lawsuits. Any significant judgment against us or settlement by us could adversely affect our
financial condition and adverse publicity resulting from these allegations could adversely affect
our business.
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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 well-qualified 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, 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 result in
higher employee turnover in our 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 2009, approximately 25.1% 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.
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.
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 managements
time and resources.
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 $16.3 million and $163.2 million were recognized during fiscal
years 2009 and 2008, respectively. After recording this impairment loss and the valuation of the
Company in accordance with the Exchange, approximately $99.5 million, or 39.4%, of our total assets
represented goodwill and other indefinite lived intangible assets at December 27, 2009. Any further
declines in our assessment of the fair value the Company could result in a further write-down of
our goodwill and other indefinite lived intangible assets 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 parents 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.
Risks Related to Our 14.0% Senior Secured Notes due January 1, 2013
Our substantial level of indebtedness could adversely affect our financial condition and prevent us
from fulfilling our obligations under the notes.
We have substantial indebtedness, including obligations under capital leases and unamortized
debt discount. As of December 27, 2009, we had approximately $147.1 million of total debt
outstanding, of which $120.6 million is secured. Subject to restrictions in the indenture and our
senior secured and unsecured credit facilities, we may incur additional indebtedness. Our high
level of indebtedness could have important consequences to you and significant effects on our
business, including the following:
| it may be more difficult for us to satisfy our financial obligations, including with respect to the notes; |
||
| 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 the notes and our other indebtedness
as well as to fund excess cash flow offers on the notes, which will reduce the funds available to use for operations and
other purposes; |
||
| all of the indebtedness outstanding under our senior secured credit facility will have a prior ranking claim on
substantially all of our assets, and all of the indebtedness outstanding under our other secured debt (like equipment
financing) will have a prior ranking claim on the underlying assets; |
||
| our ability to fund a change of control offer may be limited; |
||
| our ability to borrow additional funds may be limited; |
||
| 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; |
||
| we may be restricted from making strategic acquisitions or exploiting other business opportunities; 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, including the
notes. 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. The economic
downturn has negatively impacted our cash flow and has decelerated our growth plans. 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 or pay interest on our indebtedness, including the notes, 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 (including the notes), 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 and our senior secured and unsecured credit facilities,
may restrict us from adopting any of these alternatives. The failure to generate sufficient cash
flow or to achieve any of these alternatives could significantly adversely affect the value of the
notes and our ability to pay the amounts due under the notes.
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Despite our current indebtedness level, we and our subsidiaries may still be able to incur
substantially more debt, which could exacerbate the risks associated with our substantial leverage.
As of December 27, 2009, we had $15.0 million of revolving credit availability under our $15.0
million senior secured credit facility. We and our subsidiaries may also be able to incur
substantial additional indebtedness in the future. The terms of the indenture and the senior
secured and unsecured credit facilities do not fully prohibit us or our subsidiaries from doing so.
If we incur any additional indebtedness that ranks equally with the notes, the holders of that debt
will be entitled to share ratably with the holders of the notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or other winding up of us,
subject to any collateral securing the notes. If new debt is added to our or our subsidiaries
current debt levels, the related risks that we now face could intensify.
We are a holding company and, therefore, our ability to make payments under the notes and service
our other debt depends on cash flow from our subsidiaries.
We are, and are required under the indenture governing our notes to remain, a holding company.
Our only material assets are our ownership interests in our subsidiaries. Consequently, we will
depend on distributions or other intercompany transfers of funds from our subsidiaries to make
payments under the notes and service our other debt. Distributions and intercompany transfers of
funds to us from our subsidiaries will depend on:
| their earnings; |
||
| covenants contained in agreements to which we or our subsidiaries are or may become
subject, including our senior secured and unsecured credit facilities and the
notes; |
||
| business and tax considerations; and |
||
| applicable law, including laws regarding the payment of dividends and distributions. |
We cannot assure you that the operating results of our subsidiaries at any given time will be
sufficient to make distributions or other payments to us or that any distributions and/or payments
will be adequate to pay any amounts due under the notes or our other indebtedness.
Our senior secured and unsecured credit facilities and the indenture for the notes 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 the notes impose, and
future debt agreements may impose, significant operating and financial restrictions on us. These
restrictions limit or prohibit, among other things, our ability to:
| incur additional indebtedness; |
||
| repay indebtedness (including the notes) prior to stated maturities; |
||
| 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. |
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In addition, our senior secured and one of our 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.
Acceleration of our other indebtedness could result in a default under the terms of the indenture
governing the notes.
We may not be able to satisfy our obligations to holders of the notes upon a change of control or
in connection with an excess cash flow offer or asset sale offer.
Upon the occurrence of a change of control, as defined in the indenture, we will be required
to offer to purchase the notes at a price equal to 101% of the principal amount thereof, together
with any accrued and unpaid interest and liquidated damages, if any, to the date of purchase,
unless we have given a prior redemption notice. In addition, upon our accumulation of certain
levels of excess cash flow, we will be required to offer to purchase the notes at a price equal to
100% of the principal amount thereof, together with any accrued and unpaid interest and liquidated
damages, if any, to the date of purchase, unless we have given a prior redemption
notice. Furthermore, if we sell assets and we do not use the net proceeds for specified
purposes, we will be required to use such net proceeds to offer to repurchase the notes at 100% of
the principal amount thereof, plus accrued and unpaid interest up to the date of repurchase.
We cannot assure you that, if a change of control, excess cash flow or asset sale offer is
made, we will have available funds sufficient to pay the purchase price for any or all of the notes
that might be delivered by holders of the notes seeking to accept the offer or that we will be
permitted under the terms of our other indebtedness to make such offers and, accordingly, none of
the holders of the notes may receive the purchase price for their notes.
In addition, the events that constitute a change of control under the indenture may also be
events of default under our senior secured and unsecured credit facilities or other obligations we
incur in the future. These events may permit the lenders under our senior secured and unsecured
credit facilities to accelerate the debt outstanding thereunder and, if such debt is not paid, to
enforce security interests in our assets, thereby limiting our ability to raise cash to purchase
the notes, and reducing the practical benefit of the offer to purchase provisions to the holders of
the notes.
The notes will be structurally subordinated to indebtedness and other liabilities of any
non-guarantor subsidiaries.
The notes will be structurally subordinated to the indebtedness and other liabilities
(including trade payables) of any non-guarantor subsidiary, and holders of notes will not have any
claim as a creditor against any non-guarantor subsidiary. In addition, the indenture under which
the notes have been issued permits, subject to certain limitations, non-guarantor subsidiaries to
incur additional indebtedness and does not contain any limitations on the amount of liabilities
(such as trade payables) that may be incurred by them.
The proceeds from the sale of the collateral securing the notes may not be sufficient to pay all
amounts owed under the notes. The collateral securing the notes is subject to first priority liens,
and your right to receive payments on the notes will effectively be subordinated to payments under
the instruments governing our priority lien obligations, including our senior secured credit
facility, to the extent of the value of the assets securing that indebtedness.
The collateral securing the notes is subject to a first priority claim in favor of certain of
our other indebtedness, including our senior secured credit facility, which must be paid in full
before the collateral can be used to pay the notes. Indebtedness under our senior secured credit
facility and certain other senior secured indebtedness that we may incur in the future, referred to
in this report as priority lien debt, is and will be secured by a first priority lien on
substantially all of our tangible and intangible assets, with certain exceptions. In addition,
under the indenture certain other permitted prior liens may rank ahead of the second priority liens
securing the notes. In the event of a bankruptcy, liquidation, dissolution, reorganization or
similar proceeding, the assets that are pledged as collateral securing both the first priority
claims and/or the claims secured by other permitted prior liens and the notes must first be used to
pay the first priority claims and any claims secured by other permitted prior liens in full before
making any payments on the notes.
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In addition, the notes are secured by our assets only to the extent those assets constitute
collateral under the security documents. Not all of our and our subsidiaries assets are
collateral. Subject to limited exceptions, the notes are not secured by, among other assets, any
of the following assets that we currently own or may acquire in the future:
| any agreement or contract the terms of which prohibit, or would be breached by, the grant of a security interest therein
to secure the notes, if (i) the prohibition is legally enforceable and (ii) after using commercially reasonable efforts,
we have been unable to amend the agreement or contract to remove the offending terms; |
||
| money and letters of credit rights that are not supporting obligations; |
||
| any deposit accounts that have been pledged to secure priority lien obligations, if, after using commercially reasonable
efforts, we have been unable to obtain perfected liens on those accounts; |
||
| any foreign intellectual property or automobiles, vehicles or the like in which a security interest cannot be perfected by
the filing of a Uniform Commercial Code financing statement; |
||
| any other assets in which a security interest cannot be perfected by the filing of a Uniform Commercial Code financing
statement, so long as the aggregate fair market value of those assets is not more than $1.0 million at any time; |
||
| any leased real property; |
||
| the voting stock of any foreign subsidiary in excess of 65% of the outstanding voting stock of that foreign subsidiary; and |
||
| while any priority lien obligations remain outstanding, any other assets that have not been pledged to secure priority
lien obligations, so long as the aggregate fair market value of those assets is not more than $500,000 at any time. |
Absent the Intercreditor Agreement between the trustee for the note holders under the
indenture and the administrative agent for the lenders under our senior secured credit facility,
the failure by the lenders under the senior secured credit facility to perfect their liens on the
collateral properly might have allowed the security interests that secure the notes to assert first
priority. The Intercreditor Agreement, however, bars the noteholders from asserting such priority.
In addition, to the extent that third parties, including lenders under any credit facility, hold
liens on the collateral, such third parties will have rights and remedies with respect to the
assets or property subject to such liens that, if exercised, could adversely affect the value of
the collateral.
No appraisal of the value of the collateral securing the notes has been made and the value of
the collateral in the event of liquidation will depend on market and economic conditions, the
availability of buyers and other factors. However, we believe that the book value of our tangible
assets will be less than our secured indebtedness on a pro forma basis and we cannot assure you
that liquidating the collateral securing the notes would be likely to produce proceeds in an amount
sufficient to pay all or any amounts due on the notes, after first satisfying our obligations in
full under our senior secured credit facility and any other obligations secured by a first priority
lien or other permitted prior lien on the collateral. Under the Bankruptcy Code, unless the value
of the collateral securing the notes is greater than the amount of the remaining obligations under
the notes, holders of notes will not be entitled to post petition interest in a bankruptcy
proceeding.
We have not analyzed the effect of such exceptions, limitations, imperfections and liens, and
the existence of any could adversely affect the value of the collateral securing the notes as well
as the ability of the collateral agent to realize or foreclose on such collateral.
For each of the reasons set forth above, there may not be sufficient collateral to pay all or
any of the amounts due on the notes. Any claim for the difference between the amount realized by
holders of the notes from the sale of the collateral securing the notes and the obligations under
the notes will be an unsecured claim and will rank equally in right of payment with all of our
other unsecured unsubordinated indebtedness and other obligations, including trade payables.
Holders of notes will not control decisions regarding collateral.
The holders of the priority lien debt control substantially all matters related to the shared
collateral securing the first priority claims and the notes. The holders of priority lien debt may
cause the collateral agent under the applicable security agreements to take action (or delay or
refuse to take action) to dispose of, foreclose on, or exercise other remedies with respect to the
shared collateral with which holders of the notes may disagree or that may be contrary to the
interests of holders of the notes.
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The ability of the trustee to foreclose on the collateral may be limited.
The right of our secured creditors to foreclose on and sell collateral upon the occurrence of
an event of default also could be subject to certain limitations under applicable federal
bankruptcy laws if we become the subject of a case under the Bankruptcy Code. Various provisions of
the Bankruptcy Code could prevent the trustee from repossessing and disposing of the collateral
upon the occurrence of an event of default if a bankruptcy case is commenced by or against us
before the trustee repossesses and disposes of the collateral. Under the Bankruptcy Code, secured
creditors, such as the holders of the notes, may be prohibited from repossessing their collateral
from a debtor in a bankruptcy case, or from disposing of collateral repossessed from such debtor,
without prior bankruptcy court approval. Furthermore, other provisions of the Bankruptcy Code
permit a debtor to continue to retain and to use the collateral (and the proceeds, products, rents
or profits of such collateral) so long as the secured creditor is afforded adequate protection of
its interest in the collateral. Although the precise meaning of the term adequate protection may
vary according to circumstances, it is intended in general to protect a secured creditor against
any diminution in the value of the creditors interest in its collateral. Accordingly, a bankruptcy
court may find that a secured creditor is adequately protected if, for example, the debtor makes
certain cash payments or grants the creditor additional or replacement liens as security for any
diminution in the value of the collateral occurring for any reason during the pendency of the
bankruptcy case. In view of the fact that the application of the doctrine of adequate protection
will vary depending on the circumstances of the particular case and the broad discretionary powers
of a bankruptcy court, it is impossible to predict how long payments under the notes could be
delayed following commencement of a
bankruptcy case, whether or when the trustee could repossess or dispose of the collateral, or
whether or to what extent holders of the notes would be compensated for any delay in payment or
loss of value of the collateral through the requirement of adequate protection. Furthermore, if
the bankruptcy court determines the value of the collateral is not sufficient to repay all amounts
due on the notes, you would hold secured claims to the extent of the value of the collateral to
which a note holder is entitled, and would hold unsecured claims with respect to any shortfall.
Moreover, secured creditors that hold a security interest in real property may be held liable
under environmental laws for the costs of remediating or preventing release or threatened releases
of hazardous substances at such real property. The trustee may therefore need to evaluate the
impact of such potential liabilities before determining to foreclose on collateral consisting of
real property. Consequently, the trustee may decline to foreclose on such collateral or exercise
remedies available if it does not receive indemnification to its satisfaction from the holders of
the notes.
In addition, the trustees ability to foreclose on the collateral on your behalf may be
subject to lack of perfection, the consent of third parties, prior liens (as discussed above) and
practical problems associated with the realization of the trustees security interest in the
collateral. We did not and will not obtain legal opinions on any of the real property included in
the collateral. Therefore, the enforceability of the provisions of the deeds of trust securing our
real property, including the remedial provisions, have not been and will not be passed on by local
counsel.
Moreover, the Bankruptcy Code contains provisions permitting both secured and unsecured claims
to be impaired, including materially re-written as to their terms and under certain circumstances,
extinguished, pursuant to a Chapter 11 plan of reorganization that has been approved by a
bankruptcy court. There are statutory requirements (including requirements intended to provide
specific
economic protections for holders of both secured and unsecured claims) that are to be satisfied
before a bankruptcy court is legally entitled to approve or confirm a Chapter 11 plan of
reorganization.
However, the bankruptcy court will determine, based on evidence at the confirmation hearing on
such plan, whether certain of those statutory requirements have been satisfied upon the basis of
the factual circumstances existing at the time of such confirmation hearing. The bankruptcy courts
factual findings on such matters generally are accorded deference by any appellate court and
generally are not to be reversed on appeal unless clearly erroneous. Also, there is another
doctrine generally applied by federal appellate courts, which generally is referred to as the
equitable mootness doctrine and generally requires dismissal of any appeal of a bankruptcy
courts order confirming a Chapter 11 plan if a stay pending appeal has not been granted and if the
plan has been so consummated (e.g., the transactions contemplated under the plan such as the
payment of certain claims and/or the issuance of new debt or equity instruments have taken place)
such that it would be unduly burdensome or unfair to third persons to unravel or unwind the plan.
Thus, a bankruptcy courts determination to confirm a Chapter 11 plan of reorganization is likely
to be based in part on the bankruptcy courts factual findings as to the future circumstances
existing at the time of confirmation (as well as on its legal conclusions), may be subject with
respect to those factual findings to a deferential review standard if appealed, and further may
evade appellate review altogether if the appellate court determines that the equitable mootness
doctrine is applicable to the circumstances surrounding such appeal and that, consequently, the
appeal of that plan should be dismissed as being equitably moot. Accordingly, there can be no
guarantee as to the manner in which the claims under the notes will be treated under any confirmed
Chapter 11 plan of reorganization for us or any of our subsidiaries.
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Rights of the holders of the notes in the collateral may be adversely affected by the failure to
perfect security interests in certain collateral acquired in the future.
The collateral securing the notes includes certain assets that we may acquire in the future.
Applicable law requires that certain property and rights, including real property, acquired after
the grant of a general security interest can only be perfected at the time such property and rights
are acquired and identified. The collateral agent for the notes has no obligation to monitor the
acquisition of, or the perfection of any security interests in, additional property or rights that
constitute collateral. There can be no assurance that the trustee or the collateral agent will
monitor, or that we will inform the trustee or the collateral agent of, the future acquisition of
property and rights that constitute collateral, or that the necessary action will be taken to
properly or timely perfect the security interest in such after acquired collateral. Such failure
may result in the loss of the security interest in the collateral or the priority of the security
interest in favor of the notes against third parties.
Any future pledge of collateral might be avoidable in bankruptcy.
Any future pledge of collateral to secure the notes, including pursuant to security documents
delivered after the date of the indenture, might be avoidable by the pledgor (as debtor in
possession) or by its trustee in bankruptcy if certain events or circumstances
exist or occur, including, among others, if (1) the pledgor is insolvent at the time of the
pledge, (2) the pledge permits the holders of the notes to receive a greater recovery than if the
pledge had not been given, and (3) a bankruptcy proceeding in respect of the pledgor is commenced
within 90 days following the pledge, or, in certain circumstances, a longer period.
Federal and state fraudulent transfer or conveyance laws permit a court to void the notes, the
security interests or the guarantees, and, if that occurs, you may not receive any payments on the
notes.
The issuance of the notes, the grant of the security interests and the issuance of the
guarantees may be subject to review under federal and state fraudulent transfer and conveyance
statutes in a bankruptcy or reorganization case or lawsuit commenced by or on behalf of our or our
guarantors unpaid creditors. Under these laws, if a court were to find that, at the time we issued
the notes and our guarantors issued the guarantees or we or our guarantors granted the security
interests, we or our guarantors:
| incurred the indebtedness or granted the security interests with the intent of hindering, delaying or defrauding present or
future creditors; |
||
| received less than reasonably equivalent value or fair consideration for incurring the indebtedness or granting the
security interests; |
||
| were insolvent or rendered insolvent by reason of the incurrence of the indebtedness or the grant of the security interests; |
||
| were left with inadequate capital to carry on business; or |
||
| intended to incur, or did incur, or believed or reasonably should have believed that we or our restricted subsidiaries
would incur, debts beyond our or our restricted subsidiaries ability to repay as they matured or became due, |
then, such court might:
| subordinate the notes, the guarantees or the security interests to our or
our guarantors presently existing or future indebtedness or any liens
securing such indebtedness; |
||
| void the issuance of the notes, the guarantees or the security interests; or |
||
| take other actions detrimental to holders of the notes, including avoiding
any payment by us pursuant to the notes or by the guarantors pursuant to
the guarantees and requiring the return of any such payment to a fund for
the benefit of our or our guarantors unpaid creditors. |
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In the event of a finding that a fraudulent conveyance occurred, a note holder may not receive
any repayment on the notes. Further, the avoidance of the notes could result in an event of default
with respect to our other debt that could result in acceleration of such debt.
Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:
| the sum of its debts, including contingent liabilities, was greater than the fair salable value of all its assets; |
||
| the present fair salable value of its assets was less than the amount that would be required to pay its probable
liability on its existing debts and liabilities, including contingent liabilities, as they become absolute and
mature; or |
||
| it could not (or believed that it could not, or intended not to) pay its debts as they become due. |
Without limiting the generality of the preceding paragraphs, we cannot predict:
| what standard a court would apply in order to determine whether we or
our guarantors were insolvent as of the date we or our guarantors
issued the notes or the guarantees or granted the security interests,
as applicable, or that regardless of the method of valuation, a court
would determine that we or our guarantors were insolvent on that date;
or |
||
| whether a court would not determine that the notes, the guarantees or
the security interests constituted fraudulent transfers on another
ground. |
Because the notes were issued with original issue discount, the interest payable in a bankruptcy
case could be reduced, including by deduction of amounts of unmatured interest at the time of
bankruptcy filing.
If a bankruptcy case is commenced by or against us under the Bankruptcy Code, the claim of a
holder of notes with respect to the principal amount thereof may be limited to an amount equal to
the sum of (i) the issue price of the notes and (ii) that portion of the original issue discount
which is not deemed to constitute unmatured interest for purposes of the Bankruptcy Code.
Accordingly, holders of the notes under such circumstances may, even if sufficient funds are
available, receive a lesser amount than they would be entitled to under the express terms of the
notes. In addition, there can be no assurance that a bankruptcy court would compute the accrual of
interest by the same method as that used for the calculation of original issue discount under U.S.
federal income tax law and, accordingly, a holder might be required to recognize gain or loss in
the event of a distribution related to such a bankruptcy case.
Because the notes were issued with original issue discount, U.S. holders of the notes generally
must include interest in income in advance of the receipt of cash attributable to such income.
The notes were issued with original issue discount for U.S. federal income tax purposes.
Holders of notes who are U.S. persons generally must include original issue discount in gross
income for U.S. federal income tax purposes on an annual basis under a
constant yield accrual method regardless of their regular method of tax accounting. These holders
must include original issue discount in income in advance of the receipt of cash attributable to
such income.
There is no established trading market for the notes, and an active trading market may not develop
for the notes. Therefore, a holder of the notes may not be able to sell the notes readily or at all
or at or above the price that such holder paid.
There is no established trading market for the notes. We do not intend to apply for the notes
to be listed on any securities exchange or to arrange for quotation on any automated dealer
quotation systems. A note holder may not be able to sell its notes at a particular time or at
favorable prices. As a result, we cannot provide any assurance as to the liquidity of any trading
market for the notes. As a result, a note holder may be required to bear the financial risk of its
investment in the notes indefinitely. If any of the notes are traded after they are initially
issued, they may trade at a discount from their initial offering price. If a trading market were to
develop, future trading prices of the notes may be volatile and will depend on many factors,
including:
| our operating performance and financial condition; |
||
| prevailing interest rates; |
||
| the interest of securities dealers in making a market for them; and |
||
| the market for similar securities. |
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In addition, the market for non-investment grade debt historically has been subject to
disruptions that have caused substantial volatility in the prices of securities similar to the
notes. The market for the notes, if any, may be subject to similar disruptions that could adversely
affect their value and liquidity.
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 27, 2009, we leased 186 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
fiscal years 2010 and 2028 (excluding renewal options not yet exercised) and have an average
remaining term of approximately 13 years, including options.
Restaurant Locations
As of December 27, 2009, we owned, licensed or franchised 221 restaurants in 16 states and two
foreign countries, of which 187 are Company operated and 34 operate under franchise or license
arrangements.
Our restaurant locations by concept and state as of December 27, 2009 were as follows:
Concepts | ||||||||||||||||||||||||
State | El Torito(1) | Chevys | Acapulco | Franchised | Other(2) | Total | ||||||||||||||||||
California |
75 | 46 | 31 | 1 | 2 | 155 | ||||||||||||||||||
Missouri |
| | | 8 | 4 | 12 | ||||||||||||||||||
Illinois |
| 1 | | 4 | 1 | 6 | ||||||||||||||||||
New Jersey |
| 2 | | 3 | | 5 | ||||||||||||||||||
Oregon |
1 | 3 | 1 | | | 5 | ||||||||||||||||||
Florida |
1 | 2 | | 1 | | 4 | ||||||||||||||||||
Maryland |
| 2 | | 2 | | 4 | ||||||||||||||||||
New York |
1 | 2 | | 1 | | 4 | ||||||||||||||||||
Virginia |
| 3 | | 1 | | 4 | ||||||||||||||||||
Arizona |
2 | 2 | | | | 4 | ||||||||||||||||||
Washington |
| 1 | | 1 | 1 | 3 | ||||||||||||||||||
Louisiana |
| | | 2 | | 2 | ||||||||||||||||||
Nevada |
| 2 | | | | 2 | ||||||||||||||||||
Indiana |
1 | | | | | 1 | ||||||||||||||||||
Minnesota |
| | | 1 | | 1 | ||||||||||||||||||
South Dakota |
| | | 1 | | 1 | ||||||||||||||||||
Total domestic |
81 | 66 | 32 | 26 | 8 | 213 | ||||||||||||||||||
Japan |
| | | 6 | | 6 | ||||||||||||||||||
Turkey |
| | | 2 | | 2 | ||||||||||||||||||
Total including International |
81 | 66 | 32 | 34 | 8 | 221 | ||||||||||||||||||
(1) | Includes El Torito Grill and Sinigual restaurants. |
|
(2) | Includes Las Brisas, Who ·Song&Larrys, El Paso Cantina and Casa Gallardo restaurants. |
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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.
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.
ITEM 3. LEGAL PROCEEDINGS
We are periodically a defendant in cases involving personal injury, employment-related claims,
third-party Americans with Disabilities Act accessibility claims 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. (REMOVED AND RESERVED)
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANTS 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 February 21, 2010
was as follows:
Common Stock: 1
Dividends
No dividends were paid during fiscal years 2009, 2008 or 2007. We presently intend to retain
all earnings, if any, for use in our business operations and, accordingly, we currently do not
anticipate declaring any dividends in the foreseeable future. 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
MattersEquity Compensation Plan Information.
Recent Sales of Unregistered Securities and Repurchases of Equity Securities
We did not sell any unregistered equity securities in fiscal year 2009 nor did we repurchase
any equity securities in the fourth quarter of 2009.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial and other data of
our Company, with respect to the periods prior to (the Predecessor Period) and following (the
Successor Period) the Exchange. The selected historical consolidated financial data has been
derived from our Companys audited consolidated financial statements for the Successor Period
fiscal year ended 2009 (Successor 2009), 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 Period 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 Period fiscal
year ended December 2005. 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, Managements 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 | |||||||||||||||||||||||||||
Fiscal | November 14, | December 31, | Fiscal | August 21, | December 26, | Fiscal | ||||||||||||||||||||||
Year | 2008 to | 2007 to | Year | 2006 to | 2005 to | Year | ||||||||||||||||||||||
Ended | December 28, | November 13, | Ended | December 31, | August 20, | Ended | ||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2006 | 2005(4) | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||
Restaurant revenues |
$ | 456,699 | $ | 52,448 | $ | 456,587 | $ | 523,352 | $ | 179,630 | $ | 351,591 | $ | 510,013 | ||||||||||||||
Other revenue |
41,302 | 4,571 | 37,110 | 38,164 | 11,094 | 18,358 | 20,532 | |||||||||||||||||||||
Total revenues |
500,597 | 57,316 | 496,429 | 565,191 | 192,098 | 372,552 | 534,296 | |||||||||||||||||||||
Cost of sales |
121,451 | 14,255 | 123,878 | 140,824 | 46,883 | 87,388 | 127,126 | |||||||||||||||||||||
Labor |
185,455 | 21,210 | 178,962 | 199,843 | 67,729 | 125,748 | 186,390 | |||||||||||||||||||||
Direct operating and occupancy expense |
136,395 | 14,886 | 133,351 | 148,307 | 51,127 | 94,422 | 140,648 | |||||||||||||||||||||
Total operating costs |
443,301 | 50,351 | 436,191 | 488,974 | 165,739 | 307,558 | 454,164 | |||||||||||||||||||||
General and administrative expenses |
25,323 | 3,234 | 26,493 | 31,901 | 11,414 | 18,893 | 28,346 | |||||||||||||||||||||
Depreciation and amortization |
31,230 | 3,750 | 21,724 | 23,961 | 10,323 | 12,230 | 18,498 | |||||||||||||||||||||
Impairment of goodwill and intangible assets |
16,294 | | 163,196 | 10,000 | | | | |||||||||||||||||||||
Gain on extinguishment of debt |
(10,875 | ) | | | | | | | ||||||||||||||||||||
Operating (loss) income |
(9,384 | ) | (19 | ) | (158,668 | ) | 6,854 | 3,379 | 18,150 | 31,433 | ||||||||||||||||||
Interest expense |
45,870 | 4,108 | 16,407 | 19,326 | 10,481 | 16,005 | 22,973 | |||||||||||||||||||||
(Loss) income before income tax provision |
(55,005 | ) | (4,103 | ) | (173,061 | ) | (10,802 | ) | (8,238 | ) | 2,787 | 8,677 | ||||||||||||||||
Net (loss) income |
(49,598 | ) | (4,103 | ) | (173,113 | ) | (23,546 | ) | (5,047 | ) | 1,480 | 13,386 | ||||||||||||||||
Redeemable preferred stock accretion |
| | | | | (10,126 | ) | (14,583 | ) | |||||||||||||||||||
Net loss attributable to common
stockholders(1) |
$ | (49,598 | ) | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | $ | (5,047 | ) | $ | (8,646 | ) | $ | (1,197 | ) | |||||||
Balance Sheet Data: |
||||||||||||||||||||||||||||
Cash and cash equivalents |
3,317 | 2,099 | 2,323 | 2,710 | 14,871 | |||||||||||||||||||||||
Property and equipment, net |
84,524 | 110,505 | 96,179 | 90,802 | 82,592 | |||||||||||||||||||||||
Total assets |
252,361 | 298,328 | 434,455 | 447,135 | 310,889 | |||||||||||||||||||||||
Total debt(2) |
147,114 | 161,813 | 186,187 | 183,905 | 182,031 | |||||||||||||||||||||||
Total stockholders equity |
2,320 | 23,044 | 163,113 | 184,077 | 50,584 | |||||||||||||||||||||||
Other Financial Data: |
||||||||||||||||||||||||||||
Capital expenditures |
$ | 6,773 | $ | 24,068 | $ | 34,404 | $ | 26,380 | $ | 23,408 | ||||||||||||||||||
Ratio of earnings to fixed charges(3) |
| | | | 1.2 | x |
(1) | Net loss 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. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements 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 or the context otherwise requires, references to we, us, our and
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 27, 2009, we operated 187
restaurants, 154 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 four major subsidiaries are El Torito Restaurants, Inc., Acapulco Restaurants,
Inc., Chevys Restaurants LLC, and a purchasing, distribution, and manufacturing subsidiary, Real
Mex Foods.
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 &
Larrys.
As a result of the downturn in the economy, no new restaurants were opened during fiscal year
2009. 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 restaurant, all in
California.
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 27, 2009, we had 180
restaurants that met this criterion.
In fiscal year 2009, we generated revenues of $500.6 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.
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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.
Goodwill and other indefinite lived intangible assets are deemed to have an indefinite life
and are subject to an annual impairment test. Other intangible assets are amortized over their
useful lives. 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
tests. The fair value of goodwill was determined using discounted cash flow projections based upon
management forecasts. For the valuation of other indefinite lived intangible assets, including
trademarks and franchise agreements, discounted future royalty methods are used. We recorded
impairment charges related to goodwill and other indefinite lived intangible assets of $16.3
million and $163.2 million in fiscal years 2009 and 2008, 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
27, 2009, we owned one restaurant location and leased the remaining 186.
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 year 2007 to the end of fiscal year 2009, we closed 20 restaurants, 13 of which
were early lease terminations and 7 of which we were unable to renew the leases thereon.
Results of Operations
Our operating results for the Successor 2009, Successor 2008, Predecessor 2008 and Predecessor
2007 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 | Predecessor | |||||||||||||||
Fiscal | November 14, | December 31, | Fiscal | |||||||||||||
Year | 2008 to | 2007 to | Year | |||||||||||||
Ended | December 28, | November 13, | Ended | |||||||||||||
2009 | 2008 | 2008 | 2007 | |||||||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
24.3 | 24.9 | 25.0 | 24.9 | ||||||||||||
Labor |
37.0 | 37.0 | 36.0 | 35.4 | ||||||||||||
Direct operating and occupancy expense |
27.2 | 26.0 | 26.9 | 26.2 | ||||||||||||
Total operating costs |
88.6 | 87.8 | 87.9 | 86.5 | ||||||||||||
General and administrative expense |
5.1 | 5.6 | 5.3 | 5.6 | ||||||||||||
Depreciation and amortization |
6.2 | 6.5 | 4.4 | 4.2 | ||||||||||||
Impairment of goodwill and intangible assets |
3.3 | | 32.9 | 1.8 | ||||||||||||
Operating (loss) income |
(1.9 | ) | | (32.0 | ) | 1.2 | ||||||||||
Interest expense |
9.2 | 7.2 | 3.3 | 3.4 | ||||||||||||
Loss before income tax provision |
(11.0 | ) | (7.2 | ) | (34.9 | ) | (1.9 | ) | ||||||||
Net loss |
(9.9 | ) | (7.2 | ) | (34.9 | ) | (4.2 | ) |
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Fiscal Year 2009 Compared to Fiscal Year 2008
Total Revenues. Total revenues were $500.6 million in Successor 2009 compared to $57.3 million
in Successor 2008 and $496.4 million in Predecessor 2008. The overall decrease of $53.1 million, or
9.6%, was due to a $52.3 million decrease in restaurant
revenues, a $0.4 million decrease in other revenues and a $0.4 million decrease in royalty and
franchise fees. The $52.3 million decrease in restaurant revenues was primarily due to comparable
store sales declines of 10.4% versus fiscal year 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. The decrease in other
revenues was primarily due to a decrease in sales to outside customers by Real Mex Foods, including
a decrease in distribution sales of $8.6 million, partially offset by an increase in manufacturing
sales of $8.1 million.
Cost of Sales. Total cost of sales was $121.5 million in Successor 2009 compared to $14.3
million in Successor 2008 and $123.9 million in Predecessor 2008. The overall decrease of $16.7
million, or 12.1%, was primarily due to lower commodity costs, primarily cheese, dairy, beef and
poultry, combined with the comparable store sales decline noted above. As a percentage of total
revenues, cost of sales decreased to 24.3% from 24.9% in Successor 2008 and 25.0% in Predecessor
2008.
Labor. Labor costs were $185.5 million in Successor 2009 compared to $21.2 million in
Successor 2008 and $179.0 million in Predecessor 2008. The overall decrease of $14.7 million, or
7.4%, was primarily due to adjustments in staffing and wages as a result of the decrease in
restaurant revenue combined with lower casualty insurance expense and health insurance expense. As
a percentage of total revenues, labor costs were 37.0% in Successor 2009 as compared to 37.0% in
Successor 2008 and 36.0% in Predecessor 2008. 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 $136.4
million in Successor 2009 compared to $14.9 million in Successor 2008 and $133.4 million in
Predecessor 2008. The overall decrease of $11.8 million, or 8.0%, was primarily due to lower
utilities, maintenance and cleaning and advertising expense in Successor 2009 as a result of
managements focus on decreasing costs to minimize the impact of lower restaurant revenues. As a
percentage of total revenues, direct operating and occupancy expense was 27.2% in Successor 2009 as
compared to 26.0% in Successor 2008 and 26.9% in Predecessor 2008. The increase as a percent of
total revenues in Successor 2009 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 $25.3 million in
Successor 2009 compared to $3.2 million in Successor 2008 and $26.5 million in Predecessor 2008.
The overall decrease of $4.4 million, or 14.8%, was primarily due to lower labor expense as a
result of reductions in headcount and wage rate reductions to minimize the impact of lower
restaurant revenues. As a percentage of total revenues, general and administrative expense was
5.1% in Successor 2009 as compared to 5.6% in Successor 2008 and 5.3% in Predecessor 2008.
Depreciation and Amortization. Depreciation and amortization expense was $31.2 million in
Successor 2009 compared to $3.8 million in Successor 2008 and $21.7 million in Predecessor 2008.
The overall increase of $5.7 million, or 22.6%, was primarily due to depreciation of the assets of
new restaurants combined with the revaluation of tangible and intangible assets in conjunction with
the Exchange. As a percentage of total revenues, depreciation and amortization was 6.2% in
Successor 2009 as compared to 6.5% in Successor 2008 and 4.4% in Predecessor 2008.
Impairment of Goodwill and Other Intangible Assets. Goodwill and other intangible asset
impairment charges of $16.3 million were recorded in Successor 2009 compared to $163.2 million
recorded in Predecessor 2008, 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 of goodwill 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. For the valuation of other indefinite lived intangible assets, including
trademarks and franchise agreements, discounted future royalty methods are used. No goodwill or
trademark impairment was recognized by the Company during Successor 2008.
Interest Expense. Interest expense was $45.9 million in Successor 2009 compared to $4.1
million in Successor 2008 and $16.4 million in Predecessor 2008. The overall increase of $25.4
million, or 123.6%, was primarily due to the refinancing of our debt during the third quarter of
2009, resulting in the write off of the remaining deferred debt fees and unamortized debt discount
on our senior secured notes due 2010, with total amortization of $22.9 million recorded as interest
expense in Successor 2009. The remaining increase of $2.5 million was primarily related to the
increase in principal and interest rate on the new issuance of our notes in July 2009. (See Debt
and Other Obligations for details on the refinancing of our debt). As a percentage of total
revenues, interest expense was 9.2% in Successor 2009 as compared to 7.2% in Successor 2008 and
3.3% in Predecessor 2008.
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Gain on Extinguishment of Debt. As a result of the exchange by a lender under the senior
unsecured credit facility, as amended, of $15.0 million of unsecured debt for $4.6 million
aggregate principal amount of our notes issued in July 2009 (which were issued for $4.1 million),
we recorded $10.9 million as a gain on extinguishment of debt in Successor 2009. (See Debt and
Other Obligations for details on the refinancing of our debt).
Income tax provision. We have recorded a full valuation allowance against our deferred tax
assets. During Succesor 2009 we recorded an income tax benefit of $5.4 million as a result of the
impairment to our intangible assets, resulting in a reduction of our related deferred tax
liability. As a result of our valuation allowance, no income tax benefit was recorded in Successor
2008. The provision recorded of less than $0.1 million in Predecessor 2008 represents various
state taxes incurred.
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, 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, which is consistent overall with
$148.3 million in Predecessor 2007. 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 former 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 $24.0 million in Predecessor
2007. The overall increase of $1.5 million, or 6.3%, 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.
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Impairment of Goodwill and Other Intangible Assets. 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.
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.
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 27, 2009, including obligations under
capital leases and unamortized debt discount, was $147.1 million, and we had $15.0 million of
revolving credit availability under our $15.0 million senior secured revolving credit facility. As
discussed below, in July 2009, we refinanced our notes, amended the credit agreement relating to
our senior secured revolving credit facilities and amended and restated the credit agreement
relating to our senior unsecured 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 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 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. 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 $16.9 million for
Successor 2009 compared to $7.2 million for Successor 2008 and $17.7 million for Predecessor 2008,
resulting in a net decrease overall of $8.0 million from the combined results from Predecessor 2008
and Successor 2008 to Successor 2009. The decrease in cash provided by operating activities was
primarily attributable to the decrease in revenues resulting in a $7.6 million decrease in net
profits (net loss adjusted for non-cash items), combined with $0.4 million in working capital
changes.
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Investing Activities. We had net cash used in investing activities of $7.2 million for
Successor 2009 compared to $0.8 million for Successor 2008 and $23.6 million for Predecessor 2008.
The overall decrease in cash used in investing activities of $17.1 million was primarily the result
of a decrease in additions to property and equipment of $17.3 million. The decrease in additions
primarily results from no construction of new restaurants during 2009, combined with managements
focus on reducing capital expenditures in order to minimize the impact of lower restaurant revenues
and restrictions in our notes issued during July 2009.
We expect to make capital expenditures totaling approximately $8.0 million in fiscal year 2010
comprised of approximately $0.6 million for information technology, approximately $1.3 million for
Real Mex Foods and approximately $6.1 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 2010 as a result of the continued impact of the downturn in the economy which we
do not expect to improve during 2010 and restrictions in our notes issued during July 2009.
Financing Activities. We had net cash used in financing activities of $8.5 million for
Successor 2009 compared to $5.7 million for Successor 2008 and net cash provided by financing
activities of $4.9 million for Predecessor 2008. The overall increase in cash used in financing
activities of $7.7 million was primarily the result of a decrease in the net repayment of our
senior secured revolving credit facility during the current year of approximately $3.9 million,
combined with a decrease in capital contributions of $2.9 million. Additionally, as a result of the
refinancing of our debt, we had a net cash outflow of approximately $0.7 million. See Debt and
Other Obligations below for further discussion of the refinancing transactions.
Debt and Other Obligations
On July 7, 2009, we completed an offering of $130.0 million aggregate principal amount of
14.0% senior secured notes due January 1, 2013, which are guaranteed by RM Restaurant Holding Corp.
(Holdco), our parent company, and all of our existing and future domestic restricted
subsidiaries, or the guarantors. The notes were offered and sold in a private placement to
qualified institutional buyers pursuant to Rule 144A under the Securities Act, a limited number of
institutional accredited investors in the United States, and outside the United States in reliance
on Regulation S under the Securities Act. The notes were issued pursuant to an indenture, dated
July 7, 2009, by and among the Company, the Guarantors and Wells Fargo Bank, National Association,
as trustee. The net proceeds from the issuance of the notes was used to refinance a portion of the
existing indebtedness, including repayment of our existing $105.0 million senior secured notes due
2010 and to pay fees and expenses in connection therewith. Deferred debt fees of $6.5 million were
recorded related to the issuance of the notes. The remaining deferred debt fees and unamortized
debt discount related to the $105.0 million senior secured notes due 2010 of $11.7 million were
recorded as interest expense on July 7, 2009.
Prior to July 1, 2011, we may redeem up to 35% of the original aggregate principal amount of
the notes at a redemption price equal to 114% of the principal amount thereof, plus accrued and
unpaid interest thereon, with the net proceeds of certain equity financings; provided that (i) at
least 65% of the aggregate principal amount of notes remains outstanding immediately after such
redemption and (ii) the redemption occurs within 90 days of the date of the closing of such sale of
our equity interests. Prior to July 1, 2011, we may also redeem some or all of the notes at a
make-whole premium. On or after July 1, 2011, we may redeem some or all of the notes at 100% of
the notes principal amount, plus accrued and unpaid interest up to the date of redemption.
Within 90 days of the end of each four fiscal quarter period ending on or near December 31,
beginning in 2009, we must, subject to certain exceptions, offer to repay the notes with 75% of the
Excess Cash Flow (as defined in the indenture) from the period, at 100% of the principal amount
plus any accrued and unpaid interest and liquidated damages. If the excess cash flow offer is
prohibited by the terms of the Second Amended and Restated Credit Agreement entered into in
connection with the senior secured revolving credit facilities, as described below, we will deposit
the amount that would have been used to fund the excess cash flow offer into an escrow account.
Funds from the escrow account will only be released to us to repay borrowings under the senior
secured revolving credit facilities or to make an excess cash flow offer.
If we undergo a change of control, we will be required to make an offer to each holder to
repurchase all or a portion of their notes at 101% of their principal amount, plus accrued and
unpaid interest up to the date of purchase. If we sell assets outside the ordinary course of
business and we do not use the net proceeds for specified purposes, we may be required to use such
net proceeds to repurchase the notes at 100% of their principal amount, together with accrued and
unpaid interest up to the date of repurchase.
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The terms of the indenture generally limit our ability and the ability of our restricted
subsidiaries to, among other things: (i) make certain investments or other restricted payments;
(ii) incur additional debt and issue preferred stock; (iii) create or incur liens on assets
to secure debt; (iv) incur dividends and other payment restrictions with regard to restricted
subsidiaries; (v) transfer, sell or consummate a merger or consolidation of all, or substantially
all, of our assets; (vi) enter into transactions with affiliates; (vii) change our line of
business; (viii) repay certain indebtedness prior to stated maturities; (ix) pay dividends or make
other distributions on, redeem or repurchase, capital stock or subordinated indebtedness; (x)
engage in sale and leaseback transactions; or (xi) issue stock of subsidiaries.
The notes and the guarantees are secured by a second-priority security interest in
substantially all of our assets and the assets of the guarantors, including the pledge of 100% of
all outstanding equity interests of each of our domestic subsidiaries. On the closing date of the
issuance of the notes, the Company and the guarantors entered into a registration rights agreement,
pursuant to which we agreed to file with the SEC, and cause to become effective, a registration
statement with respect to a registered offer to exchange the notes for an issue of our senior
secured notes with terms identical to the notes in all material respects. The registration
statement was declared effective on October 8, 2009. In addition, we agreed to file, in certain
circumstances, a shelf registration statement covering resales of the notes. A shelf registration
statement covering resales of the notes was declared effective by the SEC on December 1, 2009.
Senior Secured Revolving Credit Facilities. On January 29, 2007, we entered into a Second
Amended and Restated Revolving Credit Agreement with General Electric Capital Corporation, which
provided for a $15.0 million revolving credit facility and $25.0 million letter of credit facility,
maturing on January 29, 2009, collectively, the senior secured revolving credit facilities. Under
the senior secured revolving credit facilities, the lenders agreed to make loans and issue letters
of credit to and on behalf of the Company and our subsidiaries.
In connection with the offering of the notes, we amended the Second Amended and Restated
Revolving Credit Agreement. The amendment extended the term of the senior secured revolving credit
facilities to July 1, 2012 and modified certain financing covenants. Interest on the outstanding
borrowings under the senior secured revolving credit facilities is based on either prime rate plus
Applicable Margin or ninety-day LIBOR plus Applicable Margin, as defined in and subject to certain
restrictions in the amendment, and fees on the letters of credit issued thereunder accrue at a rate
of 4.5% per annum. Deferred debt fees of $1.6 million were recorded related to the amendment.
Obligations under the senior secured revolving credit facilities are guaranteed by all of our
subsidiaries, as well as by Holdco, which has made a first priority pledge of all of its equity
interests in the Company as security for the obligations. The senior secured revolving credit
facilities are secured by, among other things, first priority pledges of all of the equity
interests of our direct and indirect subsidiaries, and first priority security interests (subject
to customary exceptions) in substantially all of our current and future property and assets and our
direct and indirect subsidiaries, with certain limited exceptions. As of December 27, 2009, we had
$7.5 million available under the $25.0 million letter of credit facility and $15.0 million
available under the $15.0 million revolving credit facility that may also be utilized for the
letters of credit.
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 cash flow ratios), and limits the Company 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, sell assets, engage in transactions with affiliates and effect a
consolidation or merger. The agreement contains a cross-default provision wherein if we are in
default on any other credit facilities, default on this facility is automatic. At December 27,
2009, we were in compliance with all specified financial and other covenants under the Second
Amended and Restated Credit Agreement, as amended.
Senior Unsecured Credit Facility. On October 5, 2006, we entered into an Amended and Restated
Senior Unsecured Credit Agreement, which provided for a single term loan of $65.0 million maturing
on October 5, 2010. Obligations under the senior unsecured credit facility are guaranteed by all of
our subsidiaries.
On November 13, 2008, concurrent with the Exchange, we executed a Limited Waiver, Consent and
Amendment to the 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, as well as the
Capital Expenditure covenant going forward. As a result of the Exchange, the existing lenders to
the senior unsecured credit facility became owners of Holdco. As a result, the senior unsecured
credit facility is now held by related parties to the Company.
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In connection with the offering of the notes, we entered into a Second Amended and Restated
Credit Agreement, by and among the Company, Holdco, the lenders party thereto and Credit Suisse,
Cayman Islands Branch, pursuant to which the principal balance of the existing unsecured loan owing
by the Company under the existing senior unsecured credit facility, as amended, was reduced from
$65.0 million to $25.0 million through (i) the assumption by Holdco of $25.0 million of such
unsecured debt and (ii) the exchange by
a lender under the senior unsecured credit facility, as amended, of $15.0 million of such
unsecured debt for $4.6 million aggregate principal amount of notes, subject to an original issue
discount of 10%. As a result, we recorded a gain on extinguishment of debt of $10.9 million.
Deferred debt fees of $0.2 million were recorded related to the Second Amended and Restated Credit
Agreement. Interest accrues at an annual rate of 16.5% and is payable quarterly; provided that (i)
such interest is payable in kind for the first four quarters following the closing date of the
issuance of the notes and (ii) thereafter will be payable in a combination of cash and in kind. The
term of the senior unsecured credit facility was extended to July 1, 2013 and certain covenants
were modified.
The 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 the Company 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 the notes and the senior secured revolving
credit facilities). At December 27, 2009, we were in compliance with all specified financial and
other covenants under the senior unsecured credit facility, as amended.
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 27, 2009, the principal amount
outstanding on the mortgage was $0.5 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 2009. The remaining capital lease obligations have a weighted-average interest rate of
8.5%. As of December 27, 2009, the principal amount due relating to capital lease obligations was
$1.2 million. Principal and interest payments on the capital lease obligations are due monthly and
range from $2,500 to $11,000 per month. The capital lease obligations mature between 2010 and 2025.
The following table represents our contractual commitments as of December 27, 2009 associated
with obligations under debt agreements, other obligations discussed above and from our operating
leases:
Less than | More than 5 | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | Years | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Long Term Debt Obligations(1) |
$ | 157,071 | $ | 657 | $ | 182 | $ | 156,192 | $ | 40 | ||||||||||
Capital Lease Obligations |
1,533 | 496 | 589 | 171 | 277 | |||||||||||||||
Operating Lease Obligations(2) |
260,740 | 41,641 | 72,225 | 54,250 | 92,624 | |||||||||||||||
Purchase Obligations |
52,267 | 38,462 | 5,522 | 5,522 | 2,761 | |||||||||||||||
Total |
$ | 471,611 | $ | 81,256 | $ | 78,518 | $ | 216,135 | $ | 95,702 | ||||||||||
(1) | Includes our notes, senior unsecured credit facility, senior secured revolving credit
facility, mortgage and an obligation to a vendor. We have not included any scheduled interest
payments in this table. See Debt and Other Obligations for a discussion of terms for each
significant component of long term debt. |
|
(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 $1,538 in Successor
2009, $198 in Successor 2008, $1,926 in Predecessor 2008 and $2,164 in Predecessor 2007.
Operating Lease Obligations do not reflect potential renewals or replacements of expiring
leases. |
Off-Balance Sheet Arrangements
None.
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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.
Critical Accounting Policies
Our Companys 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 managements 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 assets 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.
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During Successor 2009, Predecessor 2008 and Predecessor 2007, management determined that
certain identified property and equipment was impaired and recorded an impairment charge of $4.7
million, $5.2 million and $1.4 million, respectively, reducing the carrying value of such assets to
the estimated fair value. Management recorded no impairment for Successor 2008.
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. Management performs its annual impairment tests during the last quarter of the Companys
fiscal year. An impairment loss is recognized to the extent that the carrying amount exceeds an
assets 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 units 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. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. For the valuation of
other indefinite lived intangible assets, including trademarks and franchise agreements, discounted
future royalty methods are used.
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 third quarter of 2009, management recorded $2.7 million in goodwill impairment that
was related to the Agreement and Plan of Merger at the time of the Exchange. During the fourth
quarter of 2009, management forecasts were revised due to the continued impact of the downturn in
the economy on current operations and growth projections. As a result, we recorded impairment of
approximately $13.2 million related to trademarks and franchise agreements. We recorded total
non-cash charges of $16.3 million for the write-down of the goodwill and other intangible assets
during the fiscal year ended December 27, 2009, which also includes $0.4 million related to
favorable lease assets.
During the second quarter of 2008, management 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, we 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. We 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 states political and economic environment increase the
variability in the unpaid claim liabilities.
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Income Taxes
Our Company utilizes the liability method of accounting for income taxes, under which 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. 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 $51.9 million and $23.1 million at December 27, 2009 and December 28, 2008,
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.
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.
Recently Adopted Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) amended GAAP with respect
to business combinations. This amendment 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. This amendment 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. This amendment is effective for business combinations
occurring in fiscal years beginning after December 15, 2008, which required us to adopt these
provisions for business combinations occurring in fiscal year 2009 and thereafter. The adoption of
this amendment had no effect on our consolidated financial statements. However, the effect is
dependent upon whether we make any future acquisitions and the specifics of those acquisitions.
In April 2008, the FASB amended GAAP with respect to the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of the amendments is to improve the consistency between the useful
life of a recognized intangible asset under previously existing GAAP related to goodwill and other
intangible assets and the period of expected cash flows used to measure the fair value of the asset
under GAAP with respect to business combinations. The amendment must be applied prospectively to
all intangible assets acquired subsequent to fiscal years beginning after December 15, 2008.
Adoption of this amendment in the first quarter of fiscal year 2009 did not have any impact on our
consolidated financial statements.
In April 2009, the FASB amended GAAP to address concerns regarding (a) determining whether a
market is not active and a transaction is not orderly, (b) recognition and presentation of
other-than-temporary impairments and (c) interim disclosures of fair values of financial
instruments. These amendments are effective for interim and annual reporting periods ending after
June 15, 2009. We adopted these amendments effective April 1, 2009. There was no impact of the
adoption on our consolidated financial statements, except for the addition of required interim
disclosures to the consolidated financial statements.
In May 2009, the FASB amended GAAP with respect to subsequent events. This amendment, among
other things, established general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. This amendment is effective for interim or annual periods ending after June 15, 2009. We
adopted this amendment in the second quarter of fiscal year 2009. There was no impact of the
adoption on our consolidated financial statements.
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In June 2009, the FASB established the FASB Accounting Standards Codification (the
Codification) as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification
carries an equal level of authority. The Codification will be updated by Accounting Standards
Updates (the ASUs) issued by the FASB. The Codification became effective for us in the third
quarter of 2009. Adoption of the Codification did not have a material effect on our consolidated
financial statements.
In August 2009, the FASB amended GAAP with respect to measuring liabilities at fair value.
These amendments provide clarification that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is required to measure fair
value of such liability using one or more of the techniques prescribed by the ASU. We adopted these
amendments in the fourth quarter of fiscal year 2009. There was no impact of the adoption 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 21, 2010, there were no
borrowings outstanding under our senior secured revolving credit facilities.
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 sheets of Real Mex Restaurants, Inc. (a
Delaware corporation) and subsidiaries (the Company) as of December 27, 2009 and December 28,
2008 (the Successor) and the related consolidated statements of operations, stockholders equity,
and cash flows for the periods December 29, 2008 to December 27, 2009, and November 14, 2008 to
December 28, 2008 (the Successor Periods), 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 Companys parent, and the parents creditors. We have also audited 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 Companys 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
Companys 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 27, 2009 and December 28, 2008, 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 19, 2010
March 19, 2010
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Real Mex Restaurants, Inc.
Consolidated Balance Sheets
(In Thousands, Except For Share Data)
(In Thousands, Except For Share Data)
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,317 | $ | 2,099 | ||||
Trade receivables, net |
9,491 | 9,102 | ||||||
Other receivables |
603 | 873 | ||||||
Inventories, net |
10,834 | 13,563 | ||||||
Prepaid expenses |
3,206 | 7,253 | ||||||
Other current assets |
359 | 1,848 | ||||||
Current portion of favorable lease asset, net |
5,418 | 5,902 | ||||||
Total current assets |
33,228 | 40,640 | ||||||
Property and equipment, net |
84,524 | 110,505 | ||||||
Goodwill, net |
43,812 | 43,200 | ||||||
Trademarks and other intangible assets |
55,700 | 68,900 | ||||||
Deferred charges |
7,108 | 1,404 | ||||||
Favorable lease asset, less current portion, net |
19,599 | 25,382 | ||||||
Other assets |
8,390 | 8,297 | ||||||
Total assets |
$ | 252,361 | $ | 298,328 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 16,785 | $ | 23,198 | ||||
Accrued self-insurance reserves |
14,790 | 15,619 | ||||||
Accrued compensation and benefits |
12,923 | 16,216 | ||||||
Accrued interest |
9,759 | 3,444 | ||||||
Other accrued liabilities |
11,966 | 11,982 | ||||||
Current portion of long-term debt |
657 | 8,313 | ||||||
Current portion of capital lease obligations |
402 | 453 | ||||||
Total current liabilities |
67,282 | 79,225 | ||||||
Long-term debt, less current portion |
145,271 | 152,105 | ||||||
Capital lease obligations, less current portion |
784 | 942 | ||||||
Deferred tax liabilities |
26,059 | 31,549 | ||||||
Unfavorable lease liability, less current portion, net |
6,415 | 8,445 | ||||||
Other liabilities |
4,230 | 3,018 | ||||||
Total liabilities |
250,041 | 275,284 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value, 1,000 shares
authorized, issued and outstanding at December 27,
2009 and December 28, 2008 |
| | ||||||
Additional paid-in capital |
56,021 | 27,147 | ||||||
Accumulated deficit |
(53,701 | ) | (4,103 | ) | ||||
Total stockholders equity |
2,320 | 23,044 | ||||||
Total liabilities and stockholders equity |
$ | 252,361 | $ | 298,328 | ||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Consolidated Statements of Operations
(In Thousands)
(In Thousands)
Successor | Predecessor | |||||||||||||||
Fiscal | November 14, | December 31, | Fiscal | |||||||||||||
Year Ended | 2008 to | 2007 to | Year Ended | |||||||||||||
December 27, | December 28, | November 13, | December 30, | |||||||||||||
2009 | 2008 | 2008 | 2007 | |||||||||||||
Revenues: |
||||||||||||||||
Restaurant revenues |
$ | 456,699 | $ | 52,448 | $ | 456,587 | $ | 523,352 | ||||||||
Other revenues |
41,302 | 4,571 | 37,110 | 38,164 | ||||||||||||
Franchise revenues |
2,596 | 297 | 2,732 | 3,675 | ||||||||||||
Total revenues |
500,597 | 57,316 | 496,429 | 565,191 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
121,451 | 14,255 | 123,878 | 140,824 | ||||||||||||
Labor |
185,455 | 21,210 | 178,962 | 199,843 | ||||||||||||
Direct operating and occupancy expense |
136,395 | 14,886 | 133,351 | 148,307 | ||||||||||||
General and administrative expense |
25,323 | 3,234 | 26,493 | 31,901 | ||||||||||||
Depreciation and amortization |
31,230 | 3,750 | 21,724 | 23,961 | ||||||||||||
Pre-opening costs |
| | 2,342 | 2,139 | ||||||||||||
Impairment of goodwill and intangible assets |
16,294 | | 163,196 | 10,000 | ||||||||||||
Impairment of property and equipment |
4,708 | | 5,151 | 1,362 | ||||||||||||
Gain on extinguishment of debt |
(10,875 | ) | | | | |||||||||||
Operating (loss) income |
(9,384 | ) | (19 | ) | (158,668 | ) | 6,854 | |||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(45,870 | ) | (4,108 | ) | (16,407 | ) | (19,326 | ) | ||||||||
Other income, net |
249 | 24 | 2,014 | 1,670 | ||||||||||||
Total other expense, net |
(45,621 | ) | (4,084 | ) | (14,393 | ) | (17,656 | ) | ||||||||
Loss before income tax provision |
(55,005 | ) | (4,103 | ) | (173,061 | ) | (10,802 | ) | ||||||||
Income tax (benefit) provision |
(5,407 | ) | | 52 | 12,744 | |||||||||||
Net loss |
$ | (49,598 | ) | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | ||||
See notes to consolidated financial statements.
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Table of Contents
Real Mex Restaurants, Inc.
Consolidated Statements of Stockholders Equity
(In Thousands, Except For Share Data)
(In Thousands, Except For Share Data)
Predecessor | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
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 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | 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 | ||||||||||||||
Contribution from parent |
| | 28,614 | | 28,614 | |||||||||||||||
Stock-based compensation |
| | 260 | | 260 | |||||||||||||||
Net loss |
| | | (49,598 | ) | (49,598 | ) | |||||||||||||
Balance at December 27, 2009 |
1,000 | $ | | $ | 56,021 | $ | (53,701 | ) | $ | 2,320 | ||||||||||
See notes to consolidated financial statements.
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Real Mex Restaurants, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(In Thousands)
Successor | Predecessor | |||||||||||||||
Fiscal Year | November 14, | December 31, | Fiscal Year | |||||||||||||
Ended | 2008 to | 2007 to | Ended | |||||||||||||
December 27, | December 28, | November 13, | December 30, | |||||||||||||
2009 | 2008 | 2008 | 2007 | |||||||||||||
Operating activities |
||||||||||||||||
Net loss |
$ | (49,598 | ) | $ | (4,103 | ) | $ | (173,113 | ) | $ | (23,546 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||||||
Depreciation |
27,619 | 3,334 | 19,780 | 22,254 | ||||||||||||
Amortization of: |
||||||||||||||||
Favorable lease asset and unfavorable lease liability, net |
3,611 | 416 | 1,944 | 1,707 | ||||||||||||
Debt discount/(premium) |
20,273 | 1,535 | (1,050 | ) | (1,563 | ) | ||||||||||
Deferred financing costs |
2,626 | 169 | 1,571 | 1,828 | ||||||||||||
Impairment of goodwill and intangible assets |
16,294 | | 163,196 | 10,000 | ||||||||||||
Impairment of property and equipment |
4,708 | | 5,151 | 1,362 | ||||||||||||
Loss (gain) on disposal of property and equipment |
196 | | (402 | ) | (877 | ) | ||||||||||
Gain on lease termination |
| | (600 | ) | | |||||||||||
Gain on extinguishment of debt |
(10,875 | ) | | | | |||||||||||
Stock-based compensation expense |
260 | (28 | ) | 406 | 839 | |||||||||||
Non-cash consulting expense |
950 | | | | ||||||||||||
Deferred income taxes |
(5,423 | ) | | | 12,731 | |||||||||||
Other |
| | | 231 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Trade and other receivables |
(119 | ) | 2,125 | 654 | (2,578 | ) | ||||||||||
Inventories |
2,729 | (625 | ) | (889 | ) | (1,484 | ) | |||||||||
Prepaid expenses and other current assets |
5,536 | (3,409 | ) | 4,638 | (201 | ) | ||||||||||
Related party receivable/payable |
| | (66 | ) | 6,096 | |||||||||||
Deferred charges |
| | 35 | (148 | ) | |||||||||||
Other assets |
(330 | ) | 6 | 66 | 73 | |||||||||||
Accounts payable and accrued liabilities |
(2,750 | ) | 7,342 | (7,551 | ) | (6,519 | ) | |||||||||
Other liabilities |
1,211 | 424 | 3,959 | 5,225 | ||||||||||||
Net cash provided by operating activities |
16,918 | 7,186 | 17,729 | 25,430 | ||||||||||||
Investing activities |
||||||||||||||||
Purchases of property and equipment |
(6,773 | ) | (736 | ) | (23,332 | ) | (34,404 | ) | ||||||||
Exchange transaction costs |
(542 | ) | (20 | ) | (1,153 | ) | | |||||||||
Sale of Fuzio trademark |
| | | 1,200 | ||||||||||||
Proceeds from lease termination |
| | 600 | | ||||||||||||
Net proceeds from disposal of property and equipment |
66 | | 302 | 4,789 | ||||||||||||
Net cash used in investing activities |
(7,249 | ) | (756 | ) | (23,583 | ) | (28,415 | ) | ||||||||
Financing activities |
||||||||||||||||
Net (payment) borrowing under revolving credit facility |
(7,600 | ) | (5,900 | ) | 2,500 | 3,050 | ||||||||||
Borrowings under long-term debt agreements |
114,799 | 466 | 1,375 | 981 | ||||||||||||
Payments on long-term debt agreements and capital lease obligations |
(107,269 | ) | (314 | ) | (1,449 | ) | (577 | ) | ||||||||
Payment of financing costs |
(8,460 | ) | | (500 | ) | (856 | ) | |||||||||
Capital contributions from Parent |
79 | | 3,022 | | ||||||||||||
Net cash (used in) provided by financing activities |
(8,451 | ) | (5,748 | ) | 4,948 | 2,598 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
1,218 | 682 | (906 | ) | (387 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
2,099 | 1,417 | 2,323 | 2,710 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 3,317 | $ | 2,099 | $ | 1,417 | $ | 2,323 | ||||||||
Supplemental disclosure of cash flow information |
||||||||||||||||
Interest paid |
$ | 15,683 | $ | 873 | $ | 16,910 | $ | 19,722 | ||||||||
Income taxes paid |
$ | 16 | $ | | $ | 52 | $ | 38 | ||||||||
Supplemental disclosure of noncash investing and financing activities |
||||||||||||||||
In-kind interest on senior unsecured credit facility added to principal |
$ | 974 | $ | | $ | | $ | | ||||||||
See notes to consolidated financial statements.
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Table of Contents
Real Mex Restaurants, Inc.
Notes to Consolidated Financial Statements
December 27, 2009
(In Thousands, Except For Share Data)
December 27, 2009
(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 27,
2009, the Company, primarily through its major subsidiaries (El Torito Restaurants, Inc., Chevys
Restaurants LLC and Acapulco Restaurants, Inc.), owned and operated 187 restaurants, of which 154
were in California and the remainder in 12 other states. The Companys 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 Companys fiscal year consists of 52 or 53 weeks ending on the last Sunday in December
which in 2009 was December 27, 2009, in 2008 was December 28, 2008 and in 2007 was December 30,
2007. The accompanying consolidated balance sheets present the Companys financial position as of
December 27, 2009 and December 28, 2008. The accompanying consolidated statements of operations,
stockholders equity and cash flows present the 52 week Successor Year ended December 27, 2009, 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 and the 52 week Predecessor Year ended December 30,
2007. See further description of the successor and predecessor periods in Note 2.
Liquidity
The Companys financial statements as of December 27, 2009 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 Companys principal liquidity requirements are to
service debt and meet capital expenditure and working capital needs. The Companys 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 2010. Although
the Company had negative working capital as of December 27, 2009 (as has been the case for all
years being reported on), based on the current level of operations and the Companys 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.
2. Acquisitions
Exchange Agreement
Effective November 13, 2008, RM Restaurant Holding Corp. (Holdco), the Companys parent,
owned substantially by an affiliate of Sun Capital Partners (Sun Capital), and each of Holdcos
existing lenders executed an agreement to exchange Holdcos 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 Exchange was accounted for by Holdco under the purchase method of accounting. 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 Companys operations. As this
was a non-cash transaction, it has been excluded from the statement of consolidated cash flows.
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Table of Contents
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 | |||
Trademarks and other intangible assets |
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 Merger). Pursuant to the Merger Agreement, $6,000 of the Merger
consideration was held in escrow to be used for defined legal costs incurred by the Company, with
any remaining balance to be distributed to the prior owners on the third anniversary of the Merger
Agreement. During the third quarter of 2009, the remaining balance was distributed according to the
Merger Agreement, and as a result, the Company recorded $2,728 in goodwill impairment, since the
Company impaired all goodwill related to the Merger Agreement at the time of the Exchange.
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.
45
Table of Contents
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 RMFs 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 $694 and $34 at December 27, 2009 and December 28, 2008,
respectively. Activity during fiscal year 2009 included an increase in the allowance of $700,
including $565 related to franchisee receivables, partially offset by write-offs of $40.
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 annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the assets might be impaired. During the
Successor Year ended December 27, 2009, the Predecessor Period from December 31, 2007 through
November 13, 2008 and the Predecessor Year ended December 30, 2007, management of the Company
determined that certain identified property and equipment was impaired and recorded an impairment
charge of $4,708, $5,151 and $1,362, respectively, reducing the carrying value of such assets to
the estimated fair value. Fair value was based on managements estimate of future cash flows to be
generated by the property and equipment determined to be impaired. During the Successor Period from
November 14, 2008 through December 28, 2008, management recorded no impairment.
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. Management performs its annual impairment test during the last quarter of the Companys
fiscal year. An impairment loss is recognized to the extent that the carrying amount exceeds an
assets 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 units 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. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill. For the valuation
of other indefinite lived intangible assets, including trademarks and franchise agreements,
discounted future royalty methods are used.
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Table of Contents
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 third quarter of 2009, the Company recorded $2,728 in goodwill impairment that was
related to the Merger Agreement at the time of the Exchange. During the fourth quarter of 2009,
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 $13,200 related to trademarks and franchise agreements. The Company recorded total
non-cash charges of $16,294 for the write-down of the goodwill and other intangible assets during
the fiscal year ended December 27, 2009, which also includes $366 related to favorable lease
assets.
During the second quarter of 2008, the Company recorded impairment of $34,000, 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
as follows:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Trademarks |
$ | 46,800 | $ | 55,900 | ||||
Franchise agreements |
8,900 | 13,000 | ||||||
$ | 55,700 | $ | 68,900 | |||||
Deferred Charges
Deferred charges at December 27, 2009 consists of deferred financing costs of $5,666 related
to the sale of $130,000 aggregate principal amount of the senior secured notes due January 1, 2013,
$141 related to the $25,000 senior unsecured credit facility maturing on July 1, 2013 and $1,301
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 27, 2009:
2010 | 2011 | 2012 | 2013 | |||||||||||||
Deferred financing costs |
$ | 2,449 | $ | 2,449 | $ | 2,190 | $ | 20 |
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.
47
Table of Contents
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 27,
2009:
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||
Favorable lease asset |
$ | 5,418 | $ | 4,780 | $ | 4,344 | $ | 3,687 | $ | 2,889 | $ | 3,899 | ||||||||||||
Unfavorable lease liability |
(2,024 | ) | (1,516 | ) | (1,264 | ) | (860 | ) | (662 | ) | (2,113 | ) | ||||||||||||
Net amortization expense |
$ | 3,394 | $ | 3,264 | $ | 3,080 | $ | 2,827 | $ | 2,227 | $ | 1,786 | ||||||||||||
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 utilizes the liability method of accounting for income taxes in which deferred
taxes are determined based on the difference between the financial statement and 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 of realization in future periods.
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 Companys 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 27, 2009, the
Company has not recorded any interest and penalty expense. The Companys 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 2006 through 2008 tax years for federal purposes
and the 2005 through 2008 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. RMFs 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.
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.
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Segment Information
The Company operates 187 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 187
operating restaurants into a single reporting segment called restaurant operations. The Companys
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 $14,325,
$1,260, $15,077 and $15,478 in promotion and advertising expense during the Successor Year ended
December 27, 2009, 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 and the Predecessor Year ended
December 30, 2007, respectively.
Operating Leases
Most of our restaurant and office facilities are under operating leases with expirations in
fiscal years 2010 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. 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 27, 2009 and December 28,
2008, deferred rent equaled $2,092 and $174, 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 Companys cash accounts may
exceed the Federal Deposit Insurance Corporation (FDIC) limit. Most of the Companys 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 Companys 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 2013 at December 27, 2009, based on quoted market prices, was
$126,750. 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.
Recently Adopted Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) amended GAAP with respect
to business combinations. This amendment 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. This amendment 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. This amendment is effective for business combinations
occurring in fiscal years beginning after December 15, 2008, which required us to adopt these
provisions for business combinations occurring in fiscal year 2009 and thereafter. The adoption of
this amendment had no effect on the Companys consolidated financial statements. However, the
effect is dependent upon whether the Company makes any future acquisitions and the specifics of
those acquisitions.
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In April 2008, the FASB amended GAAP with respect to the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of the amendments is to improve the consistency between the useful
life of a recognized intangible asset under previously existing GAAP related to goodwill and other
intangible assets and the period of expected cash flows used to measure the fair value of the asset
under GAAP with respect to business combinations. The amendment must be applied prospectively to
all intangible assets acquired subsequent to fiscal years beginning after December 15, 2008.
Adoption of this amendment in the first quarter of fiscal year 2009 did not have any impact on the
Companys consolidated financial statements.
In April 2009, the FASB amended GAAP to address concerns regarding (a) determining whether a
market is not active and a transaction is not orderly, (b) recognition and presentation of
other-than-temporary impairments and (c) interim disclosures of fair values of financial
instruments. These amendments are effective for interim and annual reporting periods ending after
June 15, 2009. The Company adopted these amendments effective April 1, 2009. There was no impact of
the adoption on the Companys consolidated financial statements, except for the addition of
required interim disclosures in the consolidated financial statements.
In May 2009, the FASB amended GAAP with respect to subsequent events. This amendment, among
other things, established general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. This amendment is effective for interim or annual periods ending after June 15, 2009. The
Company adopted this amendment in the second quarter of fiscal year 2009. There was no impact of
the adoption on the Companys consolidated financial statements.
In June 2009, the FASB established the FASB Accounting Standards Codification (the
Codification) as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification
carries an equal level of authority. The Codification will be updated by Accounting Standards
Updates (the ASUs) issued by the FASB. The Codification became effective for the Company in the
third quarter of 2009. Adoption of the Codification did not have a material effect on the Companys
consolidated financial statements.
In August 2009, the FASB amended GAAP with respect to measuring liabilities at fair value.
These amendments provide clarification that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting entity is required to measure fair
value of such liability using one or more of the techniques prescribed by the ASU. The Company
adopted these amendments in the fourth quarter of fiscal year 2009. There was no impact of the
adoption on the Companys consolidated financial statements.
4. Property and Equipment
Property and equipment consists of the following:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Land and land improvements |
$ | 1,530 | $ | 1,530 | ||||
Buildings and improvements |
379 | 939 | ||||||
Furniture, fixtures and equipment |
46,340 | 43,789 | ||||||
Leasehold improvements and leasehold rights |
78,727 | 79,193 | ||||||
Property and equipment, total |
126,975 | 125,451 | ||||||
Less accumulated depreciation and amortization |
(42,451 | ) | (14,946 | ) | ||||
Property and equipment, net |
$ | 84,524 | $ | 110,505 | ||||
5. Accounts Payable and Other Accrued Liabilities
Accounts payable consist of the following:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Trade accounts payable |
$ | 14,241 | $ | 20,329 | ||||
Gift cards and gift certificates |
2,544 | 2,869 | ||||||
$ | 16,785 | $ | 23,198 | |||||
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Other accrued liabilities consist of the following:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Rent and occupancy expenses |
$ | 1,210 | $ | 1,500 | ||||
Sales taxes |
4,028 | 3,960 | ||||||
Other |
6,728 | 6,522 | ||||||
$ | 11,966 | $ | 11,982 | |||||
6. Long-Term Debt
Long-term debt consists of the following:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Senior Secured Notes due 2010 |
$ | | $ | 105,000 | ||||
Senior Secured Notes due 2013 |
130,000 | | ||||||
Senior Secured Notes unamortized debt discount |
(11,143 | ) | (18,415 | ) | ||||
Senior Secured Revolving Credit Facility |
| 7,600 | ||||||
Senior Unsecured Credit Facility Related Party |
25,974 | 65,000 | ||||||
Mortgage |
519 | 591 | ||||||
Other |
578 | 642 | ||||||
145,928 | 160,418 | |||||||
Less current portion |
(657 | ) | (8,313 | ) | ||||
$ | 145,271 | $ | 152,105 | |||||
Senior Secured Notes due 2013. On July 7, 2009 (the Closing Date), the Company completed an
offering of $130,000 aggregate principal amount of 14.0% Senior Secured Notes due January 1, 2013
(the Notes), which are guaranteed (the Guarantees) by Holdco and all of the Companys existing
and future domestic restricted subsidiaries (together with Holdco, the Guarantors). The Notes
were offered and sold in a private placement to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended (the Securities Act), a limited number of
institutional accredited investors in the United States, and outside the United States in reliance
on Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated
July 7, 2009 (the Indenture), by and among the Company, the Guarantors and Wells Fargo Bank,
National Association, as trustee. The net proceeds from the issuance of the Notes were used to
refinance a portion of the existing indebtedness, including repayment of the Companys $105,000
senior secured notes due 2010 and to pay fees and expenses in connection therewith. Deferred debt
fees of $6,596 were recorded related to the issuance of the Notes. The remaining deferred debt fees
and unamortized debt discount related to the $105,000 senior secured notes due 2010 of $11,717 were
recorded as interest expense on July 7, 2009.
Prior to July 1, 2011, the Company may redeem up to 35% of the original aggregate principal
amount of the Notes at a redemption price equal to 114% of the principal amount thereof, plus
accrued and unpaid interest thereon, with the net proceeds of certain equity financings; provided
that (i) at least 65% of the aggregate principal amount of Notes remains outstanding immediately
after such redemption and (ii) the redemption occurs within 90 days of the date of the closing of
such sale of our equity interests. Prior to July 1, 2011, the Company may also redeem some or all
of the Notes at a make-whole premium. On or after July 1, 2011, the Company may redeem some or
all of the Notes at 100% of the Notes principal amount, plus accrued and unpaid interest up to the
date of redemption.
Within 90 days of the end of each four fiscal quarter period ending on or near December 31,
beginning in 2009, the Company must, subject to certain exceptions, offer to repay the Notes with
75% of the Excess Cash Flow (as defined in the Indenture) from the period, at 100% of the principal
amount plus any accrued and unpaid interest and liquidated damages. If the excess cash flow offer
is prohibited by the terms of the Companys Second Amended and Restated Credit Facility, as
amended, governing the Companys New Senior Secured Revolving Credit Facilities, the Company will
deposit the amount that would have been used to fund the excess cash flow offer into an escrow
account. Funds from the escrow account will be released to the Company only to repay borrowings
under the New Senior Secured Revolving Credit Facilities or to make an excess cash flow offer.
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If the Company undergoes a change of control, the Company will be required to make an offer to
each holder to repurchase all or a portion of their Notes at 101% of their principal amount, plus
accrued and unpaid interest up to the date of purchase. If the Company sells assets outside the
ordinary course of business and the Company does not use the net proceeds for specified purposes,
the Company may be required to use such net proceeds to repurchase the Notes at 100% of their
principal amount, together with accrued and unpaid interest up to the date of repurchase.
The terms of the Indenture generally limit the Companys ability and the ability of the
Companys restricted subsidiaries to, among other things: (i) make certain investments or other
restricted payments; (ii) incur additional debt and issue preferred stock; (iii) create or incur
liens on assets to secure debt; (iv) incur dividends and other payment restrictions with regard to
restricted subsidiaries; (v) transfer, sell or consummate a merger or consolidation of all, or
substantially all, of the Companys assets; (vi) enter into transactions with affiliates; (vii)
change the Companys line of business; (viii) repay certain indebtedness prior to stated
maturities; (ix) pay dividends or make other distributions on, redeem or repurchase, capital stock
or subordinated indebtedness; (x) engage in sale and leaseback transactions; or (xi) issue stock of
subsidiaries.
The Notes and the Guarantees are secured by a second-priority security interest in
substantially all of the assets of the Company and the Guarantors, including the pledge of 100% of
all outstanding equity interests of each of the Companys domestic subsidiaries. On the Closing
Date, the Company and the Guarantors entered into a registration rights agreement, pursuant to
which the Company and the Guarantors have agreed for the benefit of the holders of the Notes to
file with the SEC and cause to become effective a registration statement with respect to a
registered offer to exchange the Notes for an issue of the Companys senior secured notes with
terms identical to the Notes in all material respects. The registration statement was declared
effective on October 8, 2009. A shelf registration statement covering resales of the Notes was
declared effective by the SEC on December 1, 2009.
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.
On January 29, 2007, the Company entered into a Second Amended and Restated Revolving 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 agreed 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 Second Amended and Restated Revolving Credit Agreement in August 2007 which waived
compliance with this ratio until the first quarter of 2008.
On April 17, 2008, the Company executed a second amendment (Amendment No. 2) to the Second
Amended and Restated Revolving Credit Agreement. Amendment No. 2 modified certain definitions and
measures related to covenants for the reporting periods ending March 30, 2008 and September 28,
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 the Second Amended and Restated Revolving Credit Agreement (
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.
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On July 7, 2009, the Company entered into Amendment No. 4 (Amendment No. 4) to the Second
Amended and Restated Revolving Credit Agreement in connection with the offering of the Notes.
Amendment No. 4 extended the term of the New Senior Secured Revolving Credit Facilities to July 1,
2012 and modified certain financing covenants. Interest on the outstanding borrowings under the New
Senior Secured Revolving Credit Facility is based on either prime rate plus Applicable Margin or
ninety-day LIBOR plus Applicable Margin, as defined in and subject to certain restrictions in
Amendment No. 4, and fees on the letters of credit issued thereunder accrue at a rate of 4.5% per
annum. Deferred debt fees of $1,562 were recorded related to Amendment No. 4.
Obligations under the New Senior Secured Revolving Credit Facilities are guaranteed by all of
the Companys 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. The
New Senior Secured Revolving Credit Facilities are secured by, among other things, first priority
pledges of all of the equity interests of the Companys 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 Companys 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 27, 2009, the
Company had $7,538 available under the New Senior Secured Letter of Credit Facility and $15,000
available under the New Senior Secured Revolving Credit Facility that may also be utilized for the
letters of credit.
The Second Amended and Restated Revolving Credit Agreement, as amended, contains various
affirmative and negative covenants and restrictions, which among other things, require the Company
to meet certain financial tests (including certain leverage and cash flow ratios), and limits the
Company and its 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, sell assets, engage in transactions with affiliates and effect a
consolidation or merger. The agreement contains a cross-default provision wherein if the Company is
in default on any other credit facilities, default on this facility is automatic. At December 27,
2009, the Company was in compliance with all specified financial and other covenants under the
Second Amended and Restated Revolving Credit Agreement, as amended.
Senior Unsecured Credit Facility. In 2005, the Company 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 and not continued
on the restatement date. The total amount of term loans repaid was $10,000. Obligations under the
New Senior Unsecured Credit Facility are guaranteed by all of the Companys 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,
as well as 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 Companys parent. As a result, the New Senior Unsecured Credit
Facility is now held by related parties to the Company.
In connection with the offering of the Notes, the Company entered into a Second Amended and
Restated Credit Agreement governing the Companys New Senior Unsecured Credit Facility, by and
among the Company, Holdco, the lenders party thereto and Credit Suisse, Cayman Islands Branch,
pursuant to which the principal balance of the existing unsecured loan owing by the Company under
the New Senior Unsecured Credit Facility, as amended, was reduced from $65,000 to $25,000 through
(i) the assumption by Holdco of $25,000 of such unsecured debt and (ii) the exchange by a lender
under the New Senior Unsecured Credit Facility, as amended, of $15,000 of such unsecured debt for
$4,583 aggregate principal amount of Notes (which were issued for $4,125), resulting in a gain on
extinguishment of debt of $10,875. Deferred debt fees of $161 were recorded related to the Second
Amended and Restated Credit Agreement. Interest accrues at an annual rate of 16.5% and is payable
quarterly, provided that (i) such interest is payable in kind for the first four quarters following
the Closing Date and (ii) thereafter will be payable in a combination of cash and in kind. The term
of the Companys credit facility was extended to July 1, 2013 and certain covenants were modified.
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The Companys New Senior Unsecured Credit Facility, as amended, contains various affirmative
and negative covenants which, among other things, require the Company to meet certain financial
tests (including certain leverage and interest coverage ratios) and limits the Companys and its
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 its assets, make acquisitions, effect a consolidation or merger and
amend or modify instruments governing certain indebtedness (including relating to the Companys
Notes and the New Senior Secured Revolving Credit Facilities). At December 27, 2009, the Company
was in compliance with all specified financial and other covenants under the New Senior Unsecured
Credit Facility, as amended.
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 27, 2009, the principal amount outstanding on the
mortgage was $519.
Interest rates for the Companys long-term debt are shown in the following table:
December 27, | December 28, | |||
2009 | 2008 | |||
Senior Secured Notes due 2010 |
| 10.25% | ||
Senior Secured Notes due 2013 |
14.00% | | ||
Senior Secured Revolving Credit Facilities |
7.42 to 9.25% | 7.11 to 7.94% | ||
Senior Unsecured Credit Facility |
16.50% | 12.50% | ||
Mortgage |
9.28% | 9.28% | ||
Other |
3.20 to 4.70% | 3.98 to 4.70% |
The
maturity of long-term debt for the fiscal years succeeding December 27, 2009, is as
follows:
Unamortized | ||||||||||||
Debt | ||||||||||||
Principal | Discount | Total | ||||||||||
2010 |
$ | 657 | $ | (3,714 | ) | $ | (3,057 | ) | ||||
2011 |
87 | (3,714 | ) | (3,627 | ) | |||||||
2012 |
95 | (3,715 | ) | (3,620 | ) | |||||||
2013 |
156,078 | | 156,078 | |||||||||
2014 |
114 | | 114 | |||||||||
Thereafter |
40 | | 40 | |||||||||
$ | 157,071 | $ | (11,143 | ) | $ | 145,928 | ||||||
7. Capitalization
Common Stock
The Company is authorized to issue 1,000 shares of common stock. At December 27, 2009 and
December 28, 2008 there were 1,000 shares of common stock issued and outstanding.
Stock Option Plans
In December 2006, the Board of Directors of Holdco adopted a Non-Qualified Stock Option Plan
(the 2006 Plan). The 2006 Plan reserved 100,000 shares of Holdcos non-voting common stock for
issuance upon exercise of stock options granted under the 2006 Plan. Options vest 20% per year
according to the schedule specified in each option agreement. Accelerated vesting of all
outstanding options is triggered upon a change of control of Holdco. 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 options reserved for issuance from 100,000 to 1,000
and outstanding options from 62,750 to 630 at November 13, 2008. 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.
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When stock-based compensation is awarded, the Company measures 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 comparable companies to estimate its price
volatility and the simplified method to calculate option expected time to exercise. No options were
granted during 2008 or 2009.
The following table summarizes the stock option activity:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
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 | ||||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited/expired |
| | ||||||
Outstanding at December 27, 2009 Successor |
330 | $ | 8,150 | |||||
Vested and expected to vest at December 27, 2009 |
322 | $ | 8,150 | |||||
Exercisable at December 27, 2009 |
197 | $ | 8,150 |
The Company recorded $260 of stock-based compensation expense for the Successor Year ended
December 27, 2009. 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 of stock-based compensation expense for the Predecessor
Period from December 31, 2007 through November 13, 2008. Stock-based compensation expense is
included in general and administrative expense on the consolidated statements of operations.
As of December 27, 2009, $1,084 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 1.2 years. At December 27, 2009, 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 27, | December 28, | November 13, | December 30, | |||||||||||||
2009 | 2008 | 2008 | 2007 | |||||||||||||
Current: |
||||||||||||||||
Federal |
$ | | $ | | $ | 28 | $ | | ||||||||
State |
16 | | 24 | 58 | ||||||||||||
16 | | 52 | 58 | |||||||||||||
Deferred: |
||||||||||||||||
Federal |
(4,612 | ) | | | 10,621 | |||||||||||
State |
(811 | ) | | | 2,065 | |||||||||||
(5,423 | ) | | | 12,686 | ||||||||||||
Total income tax (benefit) expense |
$ | (5,407 | ) | $ | | $ | 52 | $ | 12,744 | |||||||
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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 Companys deferred tax assets and liabilities
are as follows:
December 27, | December 28, | |||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Federal net operating loss carry-forwards |
$ | 10,649 | $ | | ||||
State net operating loss carry-forwards |
6,662 | | ||||||
Goodwill and other intangibles |
20,262 | 24,808 | ||||||
Accrued expenses not currently deductible |
8,197 | 6,470 | ||||||
Tax credit carry-forwards |
900 | | ||||||
Property and equipment basis difference |
9,227 | 7,144 | ||||||
Deferred rent |
867 | 72 | ||||||
Gift certificates and other deferred income |
1,055 | 537 | ||||||
Deferred compensation |
761 | 1,262 | ||||||
State taxes |
2,704 | 1,872 | ||||||
Other |
4,554 | 5,204 | ||||||
Total deferred tax assets |
65,838 | 47,369 | ||||||
Deferred tax liabilities: |
||||||||
Prepaid expenses |
(535 | ) | (397 | ) | ||||
Trademarks and other indefinite lived intangibles |
(26,059 | ) | (31,549 | ) | ||||
Lease amortization |
(10,370 | ) | (12,732 | ) | ||||
Unamortized landlord allowance |
(3,036 | ) | (3,097 | ) | ||||
Unamortized debt discount |
| (8,019 | ) | |||||
Total deferred tax liabilities |
(40,000 | ) | (55,794 | ) | ||||
Valuation allowance |
(51,897 | ) | (23,124 | ) | ||||
Net deferred tax liability |
$ | (26,059 | ) | $ | (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.
The reconciliation of income tax at the U.S. federal statutory tax rates to income tax expense
is as follows:
Successor | Predecessor | |||||||||||
December 27, | December 28, | December 30, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Income tax at U.S. federal statutory tax rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State income tax, net of federal benefit |
0.9 | 0.0 | 4.7 | |||||||||
Valuation allowance |
(23.3 | ) | (13.0 | ) | (123.0 | ) | ||||||
Non-deductible transaction costs |
| | | |||||||||
Impairment of goodwill and intangibles |
(1.7 | ) | (92.1 | ) | | |||||||
Purchase accounting adjustment |
| 71.2 | | |||||||||
Permanent true-ups |
| | (33.3 | ) | ||||||||
Other |
(0.1 | ) | (0.1 | ) | (0.4 | ) | ||||||
Effective tax rate |
9.8 | % | 0.0 | % | (118.0 | )% | ||||||
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. In assessing the adequacy of the valuation allowance, the Company considers various
factors including reversal of deferred tax liabilities, future taxable income, and potential tax
planning strategies. Accordingly, the Company has recorded a valuation allowance since the Company
currently believes the deferred tax assets will not be realized. For the years ended December 27,
2009 and December 28, 2008, the Company recorded a valuation allowance of $ 51,897 and $23,124,
respectively.
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 Internal
Revenue Code (IRC) Section 108. Based upon the Companys preliminary analysis of IRC Section
108, the net operating losses were reduced to zero at December 28, 2008. Upon completion of the
final analysis during 2009, the Company concluded that at December 28, 2008, there were $23,578 of
federal net operating loss carry-forward and $ 68,862 of state net operating loss carry-forward,
respectively. As the Company had recorded a full valuation allowance on these items, this resulted
in no impact on the consolidated statement of operations in either period.
At December 27, 2009 and December 28, 2008, the Company had a federal net operating loss
carry-forward of $31,322 and $23,578 which will begin to expire in 2027 and a federal business tax
credit carry-forward of $830 and $10,360, respectively, which will begin to expire in 2012. In
addition, at December 27, 2009 and December 28, 2008, the Company had a state net operating loss
carry-forward of $75,365 and $68,862 which will begin to expire in 2011 and a state tax credit
carry-forward of $71 for both years, which will begin to expire in 2012. The utilization of the net
operating loss carry-forward is subject to limitations under the Internal Revenue Code Section 382
and similar state provisions.
9. Fair Value Measurement
The Company adopted the new fair value guidance related to financial assets and liabilities
effective December 31, 2007, and adopted the new fair value guidance for non-financial assets and
liabilities in 2009. The guidance 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 managements best estimate of fair value. At each balance sheet date, we perform
an analysis of all applicable instruments and include in Level 3 all of those whose fair
value is based on significant unobservable inputs. |
As of December 27, 2009, the Company had no financial assets or liabilities that were measured
using Level 1 or Level 3 inputs. The Company also had no non-financial assets or liabilities that
were required to be measured on a recurring basis.
Level 2: Significant Other Observable Inputs
As described in Note 3, goodwill and other intangibles assets were written down to fair value
as a result of impairment charges of $16,294.
As described in Note 3, certain long-lived assets were written down to fair value as a result
of impairment charges of $4,708.
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10. Commitments and Contingencies
Leases
The Company leases restaurant and office facilities that have terms with expirations in 2010
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 $1,464 and $1,228 at December 27, 2009 and December 28,
2008, respectively. Accumulated amortization of these assets was $354 and $39 at December 27, 2009
and December 28, 2008, respectively. Amortization of assets under capital leases is included in
depreciation expense. The amount of capital assets placed in service was $261 and $326 at December
27, 2009 and December 28, 2008.
The minimum annual lease commitment and subtenant income of the Company for the years
succeeding December 27, 2009 is approximately as follows:
Capital | Minimum | Net | ||||||||||||||
Lease | Lease | Sublease | Lease | |||||||||||||
Obligations | Commitments | Income | Commitments | |||||||||||||
2010 |
$ | 496 | $ | 41,641 | $ | (505 | ) | $ | 41,632 | |||||||
2011 |
332 | 37,709 | (420 | ) | 37,621 | |||||||||||
2012 |
257 | 34,516 | (345 | ) | 34,428 | |||||||||||
2013 |
92 | 29,870 | (240 | ) | 29,722 | |||||||||||
2014 |
79 | 24,380 | (240 | ) | 24,219 | |||||||||||
Thereafter |
277 | 92,624 | (320 | ) | 92,581 | |||||||||||
Total minimum lease payments |
1,533 | $ | 260,740 | $ | (2,070 | ) | $ | 260,203 | ||||||||
Less: Amount representing interest |
(347 | ) | ||||||||||||||
Present value of net minimum capital lease payments |
1,186 | |||||||||||||||
Less: Current maturities of capital lease obligations |
(402 | ) | ||||||||||||||
Long-term capital lease obligations |
$ | 784 | ||||||||||||||
The Company is contingently liable for leases on sold or assigned premises for $1,583 as of
December 27, 2009.
Some of the 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 27, | December 28, | November 13, | December 30, | |||||||||||||
2009 | 2008 | 2008 | 2007 | |||||||||||||
Rental expense |
$ | 47,946 | $ | 4,997 | $ | 41,935 | $ | 45,369 | ||||||||
Percentage rent
expense above
minimum rent
(included in rental
expense) |
1,538 | 198 | 1,926 | 2,164 | ||||||||||||
Net sublease income |
428 | 45 | 344 | 227 |
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 27, 2009, $2,176 had been purchased, representing
17% 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, third-party Americans with Disabilities Act accessibility 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.
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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 $14,790 and $15,619 as of December 27, 2009 and December 28,
2008, respectively.
The Company is also required to maintain collateral securing future payment under the
self-insured retention insurance programs. As of December 27, 2009 and December 28, 2008, this
collateral consisted of stand-by letters of credit of $13,902 and $16,892, 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. As a result, the New Senior Unsecured Credit
Facility is now held by related parties to the Company.
One of our directors is employed by Farallon Capital Management, LLC (Farallon). Certain
funds managed by Farallon are indirect stockholders of Holdco. Certain funds managed by Farallon
hold an indirect interest in a shopping center from which the Company leases property for the
operation of an Acapulco restaurant. Total payments in connection with the lease in 2009 were $190,
of which approximately $44 is attributable to the indirect interest of funds managed by Farallon in
the shopping center. Additionally, on July 7, 2009, certain funds managed by Farallon purchased
$13,000 aggregate principal amounts of the Notes.
On February 27, 2009, the Company entered into a contract for consulting services with an
entity which has a material relationship with one of Holdcos stockholders. This consulting
contract had a monthly fee of $190 with an initial term from March 1, 2009 to March 31, 2009 and
three optional one month renewal terms through June 30, 2009, each of which was exercised. The
Company extended the contract for one additional month through July 31, 2009 at the same terms.
Fees of $950 were recorded in general and administrative expense during 2009 and reflected as
non-cash consulting expense on the consolidated statement of cash flows. The fees were paid in
shares of Holdco common stock, resulting in an increase in additional paid in capital for the
Company. The shares were issued on September 28, 2009.
The Company periodically makes payments to (subject to restricted payment covenants under the
indenture governing the Notes), from and on behalf of Holdco. No related party payables or
receivables were outstanding at December 27, 2009 or December 28, 2008.
Predecessor Transactions
The Company had 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 transaction. The Manager was paid annual fees equal to the greater of
(i) $500 or (ii) 1% of the Companys EBITDA, as defined in the Management Agreement, for such
period. 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 and $500 were recorded as
general and administrative expense in the Predecessor Period from December 31, 2007 to November 13,
2008 and the Predecessor Year ended December 30, 2007, respectively.
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During Predecessor 2008, the Company received advances from Holdco totaling $2,000, which were
recorded as a related party payable. During 2008, management determined that certain payments
received from its parent during 2007 and Predecessor 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 Holdco which was recorded as a capital contribution during
Predecessor 2008.
12. Employee Benefit Plan
The Company is the sponsor of 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 $144, $26, $207, and
$255, during the Successor Year ended December 27, 2009 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 and the Predecessor Year ended December 30, 2007, 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, which were fully amortized by August 2008. 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.
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 the 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
27, 2009 and December 28, 2008:
Successor | Successor | Successor | Successor | |||||||||||||
13 weeks ended | 13 weeks ended | 13 weeks ended | 13 weeks ended | |||||||||||||
March 29, | June 28, | September 27, | December 27, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
Total revenues |
$ | 128,493 | $ | 135,924 | $ | 124,211 | $ | 111,969 | ||||||||
Operating income (loss) |
$ | 208 | $ | 4,643 | $ | (4,193 | ) | $ | (20,917 | ) | ||||||
Net loss |
$ | (8,948 | ) | $ | (4,135 | ) | $ | (13,446 | )(1) | $ | (23,069 | )(2) |
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 | )(3) | $ | (1,080 | ) | $ | (137,990 | )(4) | $ | (4,103 | ) |
(1) | Includes impairment of goodwill and other intangible assets of $2,728. |
|
(2) | Includes impairment of goodwill and other intangible assets of $16,294. |
|
(3) | Includes impairment of goodwill and other intangible assets of $34,000. |
|
(4) | Includes impairment of goodwill and other intangible assets of $129,196. |
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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 2009 fiscal year, we conducted an evaluation, under the supervision and
with the participation of our 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 2009 fiscal year, our disclosure controls and procedures are effective
to 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 SEC rules and forms.
Managements 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 2009 fiscal year.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only managements 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 AND CORPORATE GOVERNANCE
Directors, Executive Officers and Key Employees
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 | ||||
Richard E. Rivera
|
63 | President, Chief Executive Officer and Chairman | ||||
Carlos Angulo
|
48 | President, Real Mex Foods, Inc. | ||||
Roberto (Pepe) Lopez
|
54 | Executive Chef and Senior Vice President, Research and Development | ||||
Raymond Garcia
|
55 | Senior Vice President of Operations El Torito & Acapulco | ||||
Nicholas Mayer
|
47 | Senior Vice President of Operations Chevys | ||||
Anatoly Bushler
|
33 | Director*+ | ||||
Jeff Campbell
|
65 | Director*+ | ||||
Evan Geller
|
33 | Director*+ | ||||
Craig S. Miller
|
60 | Director*+ | ||||
Anthony Polazzi
|
34 | Director*+ | ||||
Douglas Tapley
|
37 | Director*+ |
* | Member of our audit committee. |
|
+ | Member of our compensation committee. |
Richard E. Rivera has been our President, Chief Executive Officer and Chairman of the Board
since April 2009. Mr. Rivera is an owner of Rubicon Enterprises LLC, a Sarasota, FL-based
restaurant management and investment company with ownership in four T.G.I Fridays and six Marlows
Taverns, for which he has served as President and CEO since 2004. From 2002 to 2004, Mr. Rivera was
Vice Chairman, President and Chief Operating Officer responsible for the day-to-day operations at
Darden Restaurants, Inc., the parent company which operates casual dining concepts including Red
Lobster, Olive Garden, Bahama Breeze and Seasons 52. From 1997 to 2002, Mr. Rivera was President of
the Red Lobster division at Darden Restaurants, Inc. Prior to his employment with Darden
Restaurants, Inc., Mr. Rivera served at various times as an executive officer of the following
restaurant concepts: Chart House Enterprises, RARE Hospitality International (which operates Long
Horn Steakhouse and The Capital Grille among other restaurant concepts), Applebees, TGI Fridays,
Del Taco, El Chico, and Steak & Ale Restaurants of America. Mr. Rivera is also active on behalf of
the restaurant industry having served as Chairman of the National Restaurant Association in
2007-2008 and as a board member since 1993. Mr. Rivera has served as a director of Winn-Dixie Stores, Inc. since 2006.
Mr. Rivera was selected to serve as a member of our
Board of Directors as a result of his role as our President and Chief Executive Officer, for his
ability to provide key information about the Company during Board meetings.
Carlos Angulo has 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) Lopez has 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 Canos and Las Brisas, and
as Manager at El Torito. Between 1988 and 1992, he was Director of Product Development for Visions
Restaurants, Inc.
Raymond Garcia has 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 Mayer has 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.
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Anatoly Bushler became 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, a private
investment firm, since September 2004. Previously, Mr. Bushler managed the financial services group
at Wal-Mart Stores online division (Walmart.com); he also built and managed the online travel
business. Prior to joining Wal-Mart, Mr. Bushler was a management consultant with McKinsey &
Company. Mr. Bushler was selected to serve as a member of our Board of Directors by Farallon, in
accordance with Farallons rights as a shareholder.
Jeff Campbell became a Director of the Company in July 2009. Mr. Campbell is currently the
Brinker Executive in Residence at San Diego States School of Hospitality and Tourism. He is also
Chairman of The Chairmens Roundtable, a San Diego based organization composed of former CEOs
and entrepreneurs. Campbell is the former CEO of Burger King and ex-Chairman of the Pillsbury
Restaurant Group. He also served as Senior Vice President for Brand Development for Pepsi-Cola as
well as CEO of the Johnny Rockets and Catalina Restaurant Groups. Mr. Campbell was selected to
serve as a member of our Board of Directors because of his extensive background in restaurant and
related industries, as noted above.
Evan Geller became a Director of the Company in November 2008 as a result of the Exchange
transaction. Mr. Geller has served as a principal with 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. Mr.
Geller was selected to serve as a member of our Board of Directors by KKR, in accordance with KKRs
rights as a shareholder.
Craig S. Miller became a Director of the Company in July 2009. Mr. Miller formed Miller-Sinton
Capital Partners LLC in 2008 with his partner William C. Sinton. MSCP seeks investments and
provides advisory services to the Restaurant Industry. Mr. Miller has served as a director of Tim Hortons Inc since 2007. Mr. Miller is the former President, CEO and
Chairman of Ruths Chris Steak House, Inc, where he also served as a director from 2004-2008. He has also served as President and CEO of Furrs
Restaurant Group and Uno Restaurant Corporation. Mr. Miller was selected to serve as a member of
our Board of Directors because of his extensive background in the restaurant industry, as noted
above.
Anthony Polazzi was reappointed as a Director of the Company in October 2009. Mr. Polazzi
previously served as a Director of the Company from November 2008 until July 2009. Mr. Polazzi has
served as principal of Sun Capital Partners, a private investment firm, since October 2003. Mr.
Polazzi was selected to serve as a member of our Board of Directors by Sun Capital Partners, in
accordance with Sun Capital Partners rights as a shareholder.
Douglas Tapley became 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, a commercial lending
institution, from April 2002 through March 2006. Mr. Tapley was selected to serve as a member of
our Board of Directors by KKR, in accordance with KKRs rights as a shareholder.
Audit Committee Financial Expert
The non-employee directors currently act as the Companys Audit Committee. The Board of
Directors has determined Craig S. Miller qualifies as an Audit Committee Financial Expert as this
term has been defined under the rules and restrictions of the SEC and has designated him as such.
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.
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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 Officers 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 Officers 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.
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. Each compensation element is designed to
fit one or more components of the Companys compensation objectives, that when taken as a whole, is
competitive with the external market.
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 Officers 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 Officers
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 Companys attainment of certain
financial targets. During fiscal 2008, awards were based upon the attainment of pre-set annual
EBITDA targets (as defined in the annual bonus plan). On March 26, 2009, we amended the annual
bonus plan to provide that awards would be based upon the attainment of pre-set annual EBITDA and
cash-flow targets (as defined in the annual bonus plan). The annual bonus plan is designed to
reward our executives for achievement of annual financial performance of the Company. The amount of
the annual award to each executive is based upon a percentage of the executives base salary.
Awards are normally paid in cash in a lump sum following the completion of our Companys 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 Companys 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 participants share
being equal to a percentage of the additional bonus pool.
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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. The Stock Option Plan is intended to offer long-term incentives and to
reward our executives for superior performance. We also regard the 2006 Plan as an important
retention tool. 1,000 shares of our parents 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
Richard E. Rivera
We entered into an executive employment agreement with Richard E. Rivera, our Chief Executive
Officer, President and Chairman, effective April 6, 2009. Under the employment agreement, Mr.
Rivera is entitled to a base salary of $500,000 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. Rivera is eligible to receive a
bonus of up to 150% of his base salary
Unless sooner terminated in accordance with its terms, the employment agreement with Mr.
Rivera expires on April 6, 2011, subject to automatic 1 year renewals unless either party provides
notice of its intent not to renew 90 days prior to the renewal date. If Mr. Riveras employment is
terminated for cause or by reason of Mr. Riveras death within 6 months or less of employment or
permanent disability or by voluntary resignation without good reason and not due to a change in
control, Mr. Rivera will be entitled to unpaid base salary and health and other benefits up to the
date of termination. If Mr. Riveras employment is terminated as a result of his death after more
than 6 months of employment, he will be entitled to (i) unpaid base salary and health and other
benefits up to the date of termination; and (ii) 6 months base salary paid in regular installments.
If Mr. Riveras employment is terminated by us without cause for a reason other than Mr. Riveras
death or permanent disability or by voluntary resignation for good reason or within 30 days after a
change of control, Mr. Rivera would be entitled to: (i) unpaid base salary and health and other
benefits up to the date of termination; (ii) payment of coverage continuation costs for COBRA
eligible benefits for 12 months; (iii) 6 months base salary payable in regular installments and
(iv) vesting in the Companys long-term equity and/or profit sharing plan on a 3-year straight line
monthly basis pro rata through the date of termination. Mr. Rivera will only be entitled to the
above described payments upon termination if (a) upon the request of the Company he executes a
general release and waiver in favor of the Company and (b) he has not, and does not during the one
year period following the date of termination, breach certain obligations under his employment
agreement, including without limitation, obligations relating to: (i) non-disclosure and non-use of
confidential information of the Company, (ii) non-solicitation of employees, former employees or
other business relations of the Company and (iii) non-competition.
Steven Tanner
Mr. Steven Tanner served as our Chief Financial Officer until his departure from the Company
in February 2010. We entered into an executive employment agreement with Mr. Tanner effective
February 28, 2008. Under the employment agreement, Mr. Tanner was entitled to a base salary of
$296,587 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. Tanner was eligible to receive a bonus of up to 50% of his base salary. In
addition, the employment agreement imposed non-competition, non-solicitation and confidentiality
obligations on Mr. Tanner.
In connection with Mr. Tanners departure from the Company and in addition to the payments
provided by the employment agreement, the Company has entered into a Separation Agreement and
General Release with Mr. Tanner dated December 17, 2009 with an employment termination date of
February 12, 2010, pursuant to which the Company has agreed (i) to pay Mr. Tanner his annual
salary of $296,587 for one year following his termination date in installments to be paid on the
dates that he normally received his salary and (ii) to pay the cost of Mr. Tanners health
insurance premiums for one year if he elects to continue his health insurance through COBRA. Mr.
Tanners health insurance premiums will cease to be paid by the Company if he obtains health
insurance through another employer during the year after his departure.
Our obligation to make severance payments to Mr. Tanner under the Separation Agreement will
terminate in the event that Mr. Tanner breaches certain obligations, including without limitation,
obligations relating to non-solicitation of employees, former
employees or other business relations of the Company for a one year period following
termination and obligations relating to non-disclosure and non-use of confidential information of
the Company.
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Compensation Polices and Practices As They Relate to the Companys Risk Management
The Company believes that its compensation policies and practices for all employees, including
executive officers, do not create risks that are reasonably likely to have a material adverse
effect on the Company.
Compensation Committee Interlocks and Insider Participation
During Predecessor 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 Companys 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 Companys Board of Directors.
Compensation Committee Report
The non-employee directors of the Board discussed the Compensation Discussion and Analysis
with management, and recommended its inclusion in the Companys Form 10-K. The non-employee
directors at the time the Companys 10-K for the fiscal year ended December 27, 2009 was filed
were:
Anatoly Bushler,
Jeff Campbell,
Evan Geller,
Craig S. Miller,
Anthony Polazzi and
Douglas Tapley
Jeff Campbell,
Evan Geller,
Craig S. Miller,
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 2009, 2008 and 2007 paid to our Named
Executive Officers:
Change in | ||||||||||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||||||||||
Non- | and | |||||||||||||||||||||||||||||||||||
Equity | Nonqualified | |||||||||||||||||||||||||||||||||||
Incentive | Deferred | All | ||||||||||||||||||||||||||||||||||
Name and | Stock | Option | Plan | Compensation | Other | |||||||||||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Awards | Awards(1) | Compensation(2) | Earnings(3) | Compensation(4) | Total | |||||||||||||||||||||||||||
($) | ($) | (#) | (#) | ($) | (#) | ($) | ($) | |||||||||||||||||||||||||||||
Richard E. Rivera |
2009 | 349,039 | 50,000 | | | | | 38,242 | (5) | 437,281 | ||||||||||||||||||||||||||
CEO, President and Chairman (6) |
||||||||||||||||||||||||||||||||||||
Steven Tanner |
2009 | 307,995 | 103,649 | | | | | 28,479 | 440,122 | |||||||||||||||||||||||||||
CFO (7) |
2008 | 296,587 | | | | | | 26,111 | 322,698 | |||||||||||||||||||||||||||
2007 | 283,841 | 40,000 | | 433,745 | | | 46,970 | 804,556 | ||||||||||||||||||||||||||||
Carlos Angulo |
2009 | 284,450 | | | | | | 18,013 | 302,463 | |||||||||||||||||||||||||||
President, Real Mex |
2008 | 260,000 | | | | | | 21,229 | 281,229 | |||||||||||||||||||||||||||
Foods, Inc. |
2007 | 244,600 | 40,000 | | 433,745 | | | 39,225 | 757,570 | |||||||||||||||||||||||||||
Roberto (Pepe) Lopez |
2009 | 211,544 | | | | | | 6,376 | 217,920 | |||||||||||||||||||||||||||
Executive Chef and |
2008 | 210,330 | | | | | | 10,540 | 220,870 | |||||||||||||||||||||||||||
Senior Vice President, R&D |
2007 | 209,309 | 25,000 | | 78,863 | | | 17,491 | 330,663 | |||||||||||||||||||||||||||
Raymond Garcia |
2009 | 206,183 | | | | | | 5,807 | 211,990 | |||||||||||||||||||||||||||
Senior Vice President, |
2008 | 205,000 | | | | | | 5,284 | 210,284 | |||||||||||||||||||||||||||
Operations El Torito & Acapulco |
2007 | 201,963 | 28,000 | | 110,408 | | | 14,095 | 354,466 |
(1) | Represents grant date fair value related to options granted to acquire shares of RM
Restaurant Holding Corp., 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 grant date fair value of the equity
awards, see our Notes to Consolidated Financial Statements. |
|
(2) | The Company does not have a Non-Equity Incentive Plan. |
|
(3) | The Company does not have a pension plan and does not pay above market or preferential
earnings on deferred compensation plans. |
|
(4) | All Other Compensation includes medical and dental reimbursements, automobile expenses,
employer matching contribution of a nonqualified deferred compensation plan, relocation
reimbursements and amounts paid in connection with the Agreement and Plan of Merger with our
parent. |
|
(5) | Amount for Mr. Rivera includes reimbursements related to his relocation in accordance with his employment agreement. |
|
(6) | Mr. Rivera joined the Company as an executive officer in April 2009. |
|
(7) | Mr. Tanner departed from his position as an executive officer of the Company on February 12, 2010. |
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Option Grants in Fiscal Year Ended December 27, 2009
None.
Outstanding Equity Awards at Year End
The following table provides information regarding outstanding stock options held by our Named
Executive Officers at December 27, 2009. 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 | Rights That | 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 | |||||||||||||||||||||||||||
Richard E. Rivera |
| | | | | | | | | |||||||||||||||||||||||||||
Steven Tanner |
66 | 44 | | $ | 8,150 | 8/16/2016 | | | | | ||||||||||||||||||||||||||
Carlos Angulo |
66 | 44 | | $ | 8,150 | 8/16/2016 | | | | | ||||||||||||||||||||||||||
Roberto (Pepe) Lopez |
12 | 8 | | $ | 8,150 | 8/16/2016 | | | | | ||||||||||||||||||||||||||
Raymond Garcia |
17 | 11 | | $ | 8,150 | 8/16/2016 | | | | |
Options Exercised and Stock Vested
None of the Named Executive Officers exercised any stock options during the fiscal year ended
December 27, 2009.
Pension Benefits
None.
Nonqualified Deferred Compensation
The following table sets forth certain information with respect to our nonqualified deferred
compensation plan for fiscal year 2009 for our Named Executive Officers:
Aggregate | Aggregate | |||||||||||||||||||
Executive | Company | Aggregate | Withdrawals/ | Balance at | ||||||||||||||||
Contributions | Contributions | Earnings | Distributions | December 27, | ||||||||||||||||
Name | during 2009 | during 2009 | during 2009 | during 2009 | 2009 | |||||||||||||||
Richard E. Rivera |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Steven Tanner |
24,699 | 6,716 | 18,281 | 376,879 | 38,297 | |||||||||||||||
Carlos Angulo |
| | 3,099 | 115,525 | | |||||||||||||||
Roberto (Pepe) Lopez |
| | 523 | 65,996 | | |||||||||||||||
Raymond Garcia |
| | | | |
Potential Payments Upon Termination or Change in Control
We have arrangements with certain of our Named Executive Officers that may provide them with
compensation following termination of employment. These arrangements are discussed above under
Employment Agreements.
Compensation of Directors
Two of our directors, Jeff Campbell and Craig S. Miller, are entitled to $16,000 per year,
payable in installments of $4,000 per quarter in arrears, plus an annual option grant valued at
$35,000 per year. None of our other directors are compensated for serving as a director of the
Company. All 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 27, 2009, our parents 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. See Note 7 of our Notes
to Consolidated Financial Statements.
Equity Compensation Plan Information | ||||||||||||
Number of | ||||||||||||
Number of | securities remaining | |||||||||||
securities to be | available for future | |||||||||||
issued upon | Weighted-average | issuance under | ||||||||||
exercise of | exercise price of | equity compensation | ||||||||||
outstanding | outstanding | plans (excluding | ||||||||||
options, warrants | options, warrants | securities reflected | ||||||||||
and rights | and rights | in column (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders |
330 | $ | 8,150 | 670 | ||||||||
Equity compensation
plans not approved
by security holders |
| | | |||||||||
Total |
330 | $ | 8,150 | 670 | ||||||||
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 February 21, 2010:
| 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.
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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 |
||||||||
Richard E. Rivera |
| | ||||||
Steven Tanner |
| | ||||||
Carlos Angulo |
| | ||||||
Roberto (Pepe) Lopez |
| | ||||||
Raymond Garcia |
| | ||||||
Nicholas Mayer |
| | ||||||
Anatoly Bushler |
| | ||||||
Jeff Campbell |
| | ||||||
Evan Geller |
| | ||||||
Craig S. Miller |
| | ||||||
Anthony Polazzi |
| | ||||||
Douglas Tapley |
| | ||||||
All executive officers and directors as a group (12 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
One of our directors is employed by Farallon Capital Management, LLC (Farallon). Certain
funds managed by Farallon are indirect stockholders of Holdco. Certain funds managed by Farallon
hold an indirect interest in a shopping center from which the Company leases property for the
operation of an Acapulco restaurant. Total payments in connection with the lease in fiscal year
2009 were $0.2 million, of which less than $0.1 million is attributable to the indirect interest of
funds managed by Farallon in the shopping center. Additionally, on July 7, 2009, certain funds
managed by Farallon purchased $13.0 million aggregate principal amount of our notes.
On February 27, 2009, the Company entered into a contract for consulting services with an
entity which has a material relationship with one of Holdcos stockholders. This consulting
contract had a monthly fee of $0.2 million with an initial term from March 1, 2009 to March 31,
2009 and three optional one month renewal terms through June 30, 2009, each of which was exercised.
The Company extended the contract for one additional month through July 31, 2009 at the same terms.
Fees of $1.0 million were recorded in general and administrative expense during 2009 and reflected
as non-cash consulting expense on the consolidated statement of cash flows. The fees were paid in
shares of Holdco common stock, resulting in an increase in additional paid in capital for the
Company. The shares were issued on September 28, 2009.
Director Independence
We are not listed on any national securities exchange and therefore are not subject to any
listing standards for director independence. The Company has determined that 2 of our 7 directors,
Jeff Campbell and Craig S. Miller, are independent under the existing standards of the New York
Stock Exchange and the SEC. Because our other non-employee 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 27, 2009, 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 | |||||||
2009 | 2008 | |||||||
Audit Fees |
$ | 679,200 | $ | 362,200 | ||||
Audit Related Fees |
| 27,000 | ||||||
Tax Fees |
| | ||||||
All Other Fees |
| | ||||||
Total Fees |
$ | 679,200 | $ | 389,200 | ||||
Audit Fees represent 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 Fees represent 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 in fiscal year 2008 consisted of an audit of our 401(k) plan.
Tax Fees represent 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.
All Other Fees represent 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.
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 Companys 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
Committees responsibility to pre-approve permitted services of the independent auditor. During
fiscal year 2009 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, 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 27, 2009 and December 28, 2008 |
| Consolidated Statements of Operations Successor Fiscal Year Ended December 27,
2009, 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 |
| Consolidated Statements of Stockholders Equity Successor Fiscal Year Ended
December 27, 2009, 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 |
| Consolidated Statements of Cash Flows Successor Fiscal Year Ended December 27,
2009, 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 |
| Notes to Consolidated Financial Statements December 27, 2009 and December 28,
2008 |
(2) FINANCIAL STATEMENT SCHEDULE
The financial statement schedules are not required under the related instructions, are
inapplicable or are included in our Notes to Consolidated Financial Statements, 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., dated November 13, 2008 (Filed with the Securities and
Exchange Commission as Exhibit 3.1 to the Companys Annual Report on Form
10-K (File No. 333-116310) on March 30, 2009 and incorporated by reference
herewith) |
|||
3.2 | Amended and Restated Bylaws of Real Mex Restaurants, Inc., dated November
13, 2008 (Filed with the Securities and Exchange Commission as Exhibit 3.2
to the Companys Annual Report on Form 10-K (File No. 333-116310) on March
30, 2009 and incorporated by reference herewith) |
|||
3.3 | Certificate of Incorporation of Acapulco Restaurants, Inc., dated May 21,
1985 (Filed with the Securities and Exchange Commission as Exhibit 3.3 to
the Companys 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 Companys 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., dated November
24, 1986 (Filed with the Securities and Exchange Commission as Exhibit 3.25
to the Companys 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., dated December 19, 1986 (Filed with
the Securities and Exchange Commission as Exhibit 3.6 to the Companys
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, dated August
16, 1996 (Filed with the Securities and Exchange Commission as Exhibit 3.7
to the Companys 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 Companys
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
May 8, 1986 (Filed with the Securities and Exchange Commission as Exhibit
3.9 to the Companys 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 Companys Registration
Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and
incorporated by reference herewith) |
|||
3.11 | Amendment to Bylaws of Acapulco Restaurant of Ventura, Inc., dated June 7,
2004 (Filed with the Securities and Exchange Commission as Exhibit 3.1 to
the Companys Annual Report on Form 10-Q (File No. 333-116310) on August
12, 2009 and incorporated by reference herewith) |
|||
3.12 | Articles of Incorporation of Acapulco Restaurant of Westwood, Inc., filed
April 25, 1994 (Filed with the Securities and Exchange Commission as
Exhibit 3.11 to the Companys Registration Statement on Form S-4 (File No.
333-116310) on June 9, 2004 and incorporated by reference herewith) |
|||
3.13 | Bylaws of Acapulco Restaurant of Westwood, Inc. (Filed with the Securities
and Exchange Commission as Exhibit 3.12 to the Companys Registration
Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and
incorporated by reference herewith) |
|||
3.14 | Amendment to Bylaws of Acapulco Restaurant of Westwood, Inc., dated June 7,
2004 (Filed with the Securities and Exchange Commission as Exhibit 3.2 to
the Companys Annual Report on Form 10-Q (File No. 333-116310) on August
12, 2009 and incorporated by reference herewith) |
|||
3.15 | Articles of Incorporation of Acapulco Restaurant of Downey, Inc., dated
November 11, 1988 (Filed with the Securities and Exchange Commission as
Exhibit 3.13 to the Companys Registration Statement on Form S-4 (File No.
333-116310) on June 9, 2004 and incorporated by reference herewith) |
|||
3.16 | Bylaws of Acapulco Restaurant of Downey, Inc., dated October 4, 1985 (Filed
with the Securities and Exchange Commission as Exhibit 3.14 to the
Companys 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 | |||
3.17 | Amendment to Bylaws of Acapulco Restaurant of Downey, Inc., dated June 7,
2004 (Filed with the Securities and Exchange Commission as Exhibit 3.3 to
the Companys Annual Report on Form 10-Q (File No. 333-116310) on August
12, 2009 and incorporated by reference herewith) |
|||
3.18 | Articles of Incorporation of Murray Pacific, dated January 12, 1981 (Filed
with the Securities and Exchange Commission as Exhibit 3.15 to the
Companys Registration Statement on Form S-4 (File No. 333-116310) on June
9, 2004 and incorporated by reference herewith) |
|||
3.19 | Bylaws of Murray Pacific, dated October 23, 1985 (Filed with the Securities
and Exchange Commission as Exhibit 3.16 to the Companys Registration
Statement on Form S-4 (File No. 333-116310) on June 9, 2004 and
incorporated by reference herewith) |
|||
3.20 | Amendment to Bylaws of Murray Pacific, dated June 7, 2004 (Filed with the
Securities and Exchange Commission as Exhibit 3.4 to the Companys Annual
Report on Form 10-Q (File No. 333-116310) on August 12, 2009 and
incorporated by reference herewith) |
|||
3.21 | Articles of Incorporation of Acapulco Restaurant of Moreno Valley, Inc.,
dated July 23, 1999 (Filed with the Securities and Exchange Commission as
Exhibit 3.19 to the Companys Registration Statement on Form S-4 (File No.
333-116310) on June 9, 2004 and incorporated by reference herewith) |
|||
3.22 | Bylaws of Acapulco Restaurant of Moreno Valley, Inc. (Filed with the
Securities and Exchange Commission as Exhibit 3.20 to the Companys
Registration Statement on Form S-4 (File No. 333-116310) on June 9, 2004
and incorporated by reference herewith) |
|||
3.23 | Amendment to Bylaws of Acapulco Restaurant of Moreno Valley, Inc., dated
June 7, 2004 (Filed with the Securities and Exchange Commission as Exhibit
3.5 to the Companys Annual Report on Form 10-Q (File No. 333-116310) on
August 12, 2009 and incorporated by reference herewith) |
|||
3.24 | Articles of Incorporation of El Paso Cantina, Inc., June 21, 1989 (Filed
with the Securities and Exchange Commission as Exhibit 3.21 to the
Companys Registration Statement on Form S-4 (File No. 333-116310) on June
9, 2004 and incorporated by reference herewith) |
|||
3.25 | Bylaws of El Paso Cantina, Inc. (Filed with the Securities and Exchange
Commission as Exhibit 3.22 to the Companys Registration Statement on Form
S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference
herewith) |
|||
3.26 | Articles of Incorporation of Real Mex Foods, Inc., dated January 15, 2003
(Filed with the Securities and Exchange Commission as Exhibit 3.23 to the
Companys Registration Statement on Form S-4 (File No. 333-116310) on June
9, 2004 and incorporated by reference herewith) |
|||
3.27 | Amendment to Articles of Incorporation of Real Mex Foods, Inc., dated June
7, 2004 (Filed with the Securities and Exchange Commission as Exhibit 3.6
to the Companys Annual Report on Form 10-Q (File No. 333-116310) on August
12, 2009 and incorporated by reference herewith) |
|||
3.28 | Bylaws of Real Mex Foods, Inc. (Filed with the Securities and Exchange
Commission as Exhibit 3.24 to the Companys Registration Statement on Form
S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference
herewith) |
|||
3.29 | Amendment to Bylaws of Real Mex Foods, Inc., dated June 7, 2004 (Filed with
the Securities and Exchange Commission as Exhibit 3.7 to the Companys
Annual Report on Form 10-Q (File No. 333-116310) on August 12, 2009 and
incorporated by reference herewith) |
|||
3.30 | Articles of Incorporation of TARV, Inc., dated November 24, 1986 (Filed
with the Securities and Exchange Commission as Exhibit 3.8 to the Companys
Report on Form 10-Q (File No. 333-116310) on August 12, 2009, and
incorporated by reference herewith) |
|||
3.31 | Bylaws of TARV, Inc. (Filed with the Securities and Exchange Commission as
Exhibit 3.26 to the Companys Registration Statement on Form S-4 (File No.
333-116310) on June 9, 2004 and incorporated by reference herewith) |
|||
3.32 | Amendment to Bylaws of TARV, Inc., dated June 7, 2004 (Filed with the
Securities and Exchange Commission as Exhibit 3.9 to the Companys Annual
Report on Form 10-Q (File No. 333-116310) on August 12, 2009 and
incorporated by reference herewith) |
|||
3.33 | Articles of Incorporation of ALA Design, Inc., dated December 22, 1976
(Filed with the Securities and Exchange Commission as Exhibit 3.27 to the
Companys 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 | |||
3.34 | Amendment to Articles of Incorporation of ALA Design, Inc., dated June 7,
2004 (Filed with the Securities and Exchange Commission as Exhibit 3.10 to
the Companys Annual Report on Form 10-Q (File No. 333-116310) on August
12, 2009 and incorporated by reference herewith) |
|||
3.35 | Bylaws of ALA Design, Inc. (Filed with the Securities and Exchange
Commission as Exhibit 3.28 to the Companys Registration Statement on Form
S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference
herewith) |
|||
3.36 | Amendment to Bylaws of ALA Design, Inc., dated June 7, 2004 (Filed with the
Securities and Exchange Commission as Exhibit 3.11 to the Companys Annual
Report on Form 10-Q (File No. 333-116310) on August 12, 2009 and
incorporated by reference herewith) |
|||
3.37 | Articles of Incorporation of Acapulco Mark Corp., dated October 3, 1996
(Filed with the Securities and Exchange Commission as Exhibit 3.29 to the
Companys Registration Statement on Form S-4 (File No. 333-116310) on June
9, 2004 and incorporated by reference herewith) |
|||
3.38 | Bylaws of Acapulco Mark Corp. (Filed with the Securities and Exchange
Commission as Exhibit 3.30 to the Companys Registration Statement on Form
S-4 (File No. 333-116310) on June 9, 2004 and incorporated by reference
herewith) |
|||
3.39 | Certificate of Incorporation of CKR Acquisition Corp., dated October 4,
2004 (Filed with the Securities and Exchange Commission as Exhibit 3.31 to
the Companys Annual Report on Form 10-K (File No. 333-116310) on March 24,
2005 and incorporated by reference herewith) |
|||
3.40 | Bylaws of CKR Acquisition Corp. (Filed with the Securities and Exchange
Commission as Exhibit 3.32 to the Companys Annual Report on Form 10-K
(File No. 333-116310) on March 24, 2005 and incorporated by reference
herewith) |
|||
3.41 | Articles of Formation of Chevys Restaurants, LLC, dated November 10, 2004
(formerly known as Chevys Acquisition Company LLC). (Filed with the
Securities and Exchange Commission as Exhibit 3.33 to the Companys Annual
Report on Form 10-K (File No. 333-116310) on March 24, 2005 and
incorporated by reference herewith) |
|||
3.42 | Operating Agreement of Chevys Restaurants, LLC, dated November 15, 2004
(formerly known as Chevys Acquisition Company LLC). (Filed with the
Securities and Exchange Commission as Exhibit 3.34 to the Companys Annual
Report on Form 10-K (File No. 333-116310) on March 24, 2005 and
incorporated by reference herewith) |
|||
3.43 | Amended and Restated Certificate of Incorporation of RM Restaurant Holding
Corp. dated November 13, 2008. (Filed with the Securities and Exchange
Commission as Exhibit 3.43 to the Companys Registration Statement on Form
S-4 (File No. 333-161605) on August 28, 2008 and incorporated by reference
herewith) |
|||
3.44 | Amended and Restated Bylaws of RM Restaurant Holding Corp. dated November
13, 2008 (Filed with the Securities and Exchange Commission as Exhibit 3.44
to the Companys Registration Statement on Form S-4 (File No. 333-161605)
on August 28, 2008 and incorporated by reference herewith) |
|||
3.45 | Amendment to Amended and Restated Bylaws of RM Restaurant Holding Corp.,
dated November 13, 2008 (Filed with the Securities and Exchange Commission
as Exhibit 3.45 to the Companys Registration Statement on Form S-4 (File
No. 333-161605) on August 28, 2008 and incorporated by reference herewith) |
|||
4.1 | Indenture, dated as of July 7, 2009, among Real Mex Restaurants, Inc., the
guarantors named therein and Wells Fargo Bank, National Association., as
trustee. (Filed with the Securities and Exchange Commission as Exhibit 4.2
to the Companys Report on Form 8-K (File No. 333-116310) on July 8, 2009
and incorporated by reference herewith) |
|||
10.1 | Separation Agreement and General Release, dated December 19, 2008 by and
between Real Mex Restaurants, Inc. and Frederick Wolfe (Filed with the
Securities and Exchange Commission as Exhibit 10.2 to the Companys Annual
Report on Form 10-K (File No. 333-116310) on March 30, 2009 and
incorporated by reference herewith) |
|||
10.2 | 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
Companys Report on Form 8-K (File No. 333-116310) on March 5, 2008 and
incorporated by reference herewith) |
|||
10.3 | 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 Companys Report on Form 8-K
(File No. 333-116310) on March 5, 2008 and incorporated by reference
herewith) |
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EXHIBIT | ||||
NO. | DESCRIPTION | |||
10.4 | 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
Companys Report on Form 8-K (File No. 333-116310) on August 23, 2006 and
incorporated by reference herewith) |
|||
10.5 | Second Amended and Restated Credit Agreement, dated July 7, 2009, by and
among Real Mex Restaurants, Inc., RM Restaurant Holding Corp., the lenders
party thereto and Credit Suisse, Cayman Islands Branch, as administrative
agent, sole bookrunner and sole lead arranger (Filed with the Securities
and Exchange Commission as Exhibit 4.2 to the Companys Report on Form 8-K
(File No. 333-116310) on July 8, 2009 and incorporated by reference
herewith) |
|||
10.6 | Amended and Restated Credit Agreement, dated January 29, 2007 (Filed with
the Securities and Exchange Commission as Exhibit 10.2 to the Companys
Report on Form 8-K (File No. 333-116310) on February 2, 2007 and
incorporated by reference herewith) |
|||
10.7 | Amendment No. 1 to Second Amended and Restated Credit Agreement Credit
Agreement, dated on or about August 2007 (Filed with the Securities and
Exchange Commission as Exhibit 10.1 to the Companys Report on Form 10-Q
(File No. 333-116310) on August 12, 2009, and incorporated by reference
herewith) |
|||
10.8 | Amendment No. 2 to Second Amended and Restated Credit Agreement dated April
17, 2008. (Filed with the Securities and Exchange Commission as Exhibit
10.1 to the Companys Report on Form 8-K dated April 23, 2008 and
incorporated by reference herewith) |
|||
10.9 | 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 Companys Report on Form 10-Q
(File No. 333-116310) on November 13, 2008 and incorporated by reference
herewith) |
|||
10.10 | Amendment No. 4 to Second Amended and Restated Revolving Credit Agreement,
dated July 7, 2009, by and among Real Mex Restaurants, Inc., the borrowers
party thereto, the lenders party thereto and General Electric Capital
Corporation, as agent and administrative agent (Filed with the Securities
and Exchange Commission as Exhibit 4.2 to the Companys Report on Form 8-K
(File No. 333-116310) on July 8, 2009 and incorporated by reference
herewith) |
|||
10.11 | Executive Employment Agreement, dated May 27, 2009, by and between Real Mex
Restaurants, Inc. and Richard E. Rivera. (Filed with the Securities and
Exchange Commission as Exhibit 10.1 to the Companys Report on Form 8-K
(File No. 333-116310) on June 2, 2009 and incorporated by reference
herewith) |
|||
10.12 | Registration Rights Agreement, dated July 7, 2009, by and among Real Mex
Restaurants, Inc., the guarantors party thereto and Jefferies & Company,
Inc. (Filed with the Securities and Exchange Commission as Exhibit 4.2 to
the Companys Report on Form 8-K (File No. 333-116310) on July 8, 2009 and
incorporated by reference herewith) |
|||
10.13 | Security Agreement, dated July 7, 2009, by Real Mex Restaurants, Inc. and
the other grantors party thereto in favor of Wells Fargo Bank, National
Association, as collateral agent (Filed with the Securities and Exchange
Commission as Exhibit 4.2 to the Companys Report on Form 8-K (File No.
333-116310) on July 8, 2009 and incorporated by reference herewith) |
|||
10.14 | Stock Pledge Agreement, dated July 7, 2009, by Real Mex Restaurants, Inc.
and the other grantors party thereto in favor of Wells Fargo Bank, National
Association, as collateral agent(Filed with the Securities and Exchange
Commission as Exhibit 4.2 to the Companys Report on Form 8-K (File No.
333-116310) on July 8, 2009 and incorporated by reference herewith) |
|||
10.15 | Membership Interest Pledge Agreement, dated July 7, 2009, by CKR
Acquisition Corp. in favor of Wells Fargo Bank, National Association, as
collateral agent (Filed with the Securities and Exchange Commission as
Exhibit 4.2 to the Companys Report on Form 8-K (File No. 333-116310) on
July 8, 2009 and incorporated by reference herewith) |
|||
10.16 | Trademark Collateral Security and Pledge Agreement, dated July 7, 2009,
Real Mex Restaurants, Inc. and the other assignors party thereto in favor
of Wells Fargo Bank, National Association, as collateral agent (Filed with
the Securities and Exchange Commission as Exhibit 4.2 to the Companys
Report on Form 8-K (File No. 333-116310) on July 8, 2009 and incorporated
by reference herewith) |
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EXHIBIT | ||||
NO. | DESCRIPTION | |||
10.17 | Credit Agreement, dated July 7, 2009, by and among RM Restaurant Holding
Corp., the lenders named therein and Wilmington Trust FSB, as
administrative agent (Filed with the Securities and Exchange Commission as
Exhibit 10.17) to the Companys Registration Statement on Form S-4 (File
No. 333-161605 ) on August 28, 2008 and incorporated by reference herewith) |
|||
10.18 | 2006 Stock Option Plan of RM Restaurant Holding Corp. (Filed with the
Securities and Exchange Commission as Exhibit 10.18 to the Companys
Registration Statement on Form S-4 (File No. 333-161605 ) on August 28,
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 Companys 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 Principal Executive and Principal
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 Principal Executive
and Principal Financial Officer. (Filed herewith) |
77
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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/ Richard E. Rivera | |||
Richard E. Rivera | ||||
Date: March 19, 2010 | 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/ Richard E. Rivera
|
Chief Executive Officer and Chairman (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
March 19, 2010 | ||
/s/ Anatoly Bushler
|
Director | March 19, 2010 | ||
Anatoly Bushler |
||||
/s/ Jeff Campbell
|
Director | March 19, 2010 | ||
Jeff Campbell |
||||
/s/ Evan Geller
|
Director | March 19, 2010 | ||
Evan Geller |
||||
/s/ Craig S. Miller
|
Director | March 19, 2010 | ||
Craig S. Miller |
||||
/s/ Anthony Polazzi
|
Director | March 19, 2010 | ||
Anthony Polazzi |
||||
/s/ Douglas Tapley
|
Director | March 19, 2010 | ||
Douglas Tapley |
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EXHIBIT INDEX
EXHIBIT | ||||
NO. | DESCRIPTION | |||
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 Principal Executive and Principal
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 Principal Executive
and Principal Financial Officer. (Filed herewith) |
79