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EX-32.1 - EXHIBIT 32.1 - Real Mex Restaurants, Inc. | c16597exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Real Mex Restaurants, Inc. | c16597exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 27, 2011
Or
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)
Cypress, CA 90630
(Address of principal executive offices)
Registrants telephone number, including area code:
(562)-346-1200
(562)-346-1200
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 website, 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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. (See definition 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).
o Yes þ No
As of April 24, 2011, the registrant had outstanding 1,000 shares of Common Stock, par
value $0.001 per share.
Real Mex Restaurants, Inc.
Index
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Exhibit 31.1 | ||||||||
Exhibit 32.1 |
2
Table of Contents
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 elsewhere in this report and other filings with the Securities and
Exchange Commission, including the Item 1A. Risk Factors section of our annual report on Form
10-K for the year ended December 26, 2010. 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-Q
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 our ongoing obligation to disclose material
information as required by federal securities laws, we do not intend to update you concerning any
future revisions to any forward looking statements to reflect events or circumstances occurring
after the date of this report.
Unless otherwise provided in this report, references to we, us, our and Company refer
to Real Mex Restaurants, Inc. and its consolidated subsidiaries.
3
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. | Financial Statements |
Real Mex Restaurants, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except for share data)
March 27, | December 26, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,732 | $ | 3,359 | ||||
Trade receivables, net |
9,515 | 8,295 | ||||||
Other receivables |
707 | 621 | ||||||
Inventories, net |
13,181 | 11,618 | ||||||
Prepaid expenses |
2,080 | 2,877 | ||||||
Current portion of favorable lease asset, net |
3,355 | 3,357 | ||||||
Other current assets |
225 | 248 | ||||||
Total current assets |
30,795 | 30,375 | ||||||
Property and equipment, net |
69,082 | 72,730 | ||||||
Goodwill |
113,721 | 113,721 | ||||||
Trademarks and other intangible assets |
42,100 | 42,100 | ||||||
Deferred charges |
4,091 | 4,710 | ||||||
Favorable lease asset, less current portion, net |
10,817 | 11,655 | ||||||
Other assets |
6,036 | 6,154 | ||||||
Total assets |
$ | 276,642 | $ | 281,445 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 23,583 | $ | 18,745 | ||||
Accrued self-insurance reserves |
10,584 | 13,212 | ||||||
Accrued compensation and benefits |
8,832 | 12,091 | ||||||
Accrued interest |
5,723 | 10,188 | ||||||
Other accrued liabilities |
10,738 | 10,146 | ||||||
Current portion of long-term debt |
4,793 | 507 | ||||||
Current portion of capital lease obligations |
262 | 269 | ||||||
Total current liabilities |
64,515 | 65,158 | ||||||
Long-term debt, less current portion |
161,993 | 160,693 | ||||||
Capital lease obligations, less current portion |
452 | 514 | ||||||
Deferred tax liabilities |
19,522 | 19,522 | ||||||
Unfavorable lease liability, less current portion, net |
5,508 | 5,870 | ||||||
Other liabilities |
3,366 | 2,211 | ||||||
Total liabilities |
255,356 | 253,968 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value, 1,000 shares
authorized, issued and outstanding at March 27,
2011 and December 26, 2010 |
| | ||||||
Additional paid-in capital |
45,301 | 45,260 | ||||||
Accumulated deficit |
(24,015 | ) | (17,783 | ) | ||||
Total stockholders equity |
21,286 | 27,477 | ||||||
Total liabilities and stockholders equity |
$ | 276,642 | $ | 281,445 | ||||
See notes to consolidated financial statements.
4
Table of Contents
Real Mex Restaurants, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands)
Successor | Predecessor | |||||||
Three months | Three months | |||||||
ended | ended | |||||||
March 27, | March 28, | |||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Restaurant revenues |
$ | 106,114 | $ | 110,135 | ||||
Manufacturing and distribution revenues |
9,384 | 9,447 | ||||||
Franchise and other revenues |
735 | 837 | ||||||
Total revenues |
116,233 | 120,419 | ||||||
Costs and expenses: |
||||||||
Restaurant costs |
||||||||
Cost of sales |
25,897 | 26,743 | ||||||
Labor |
37,922 | 40,724 | ||||||
Direct operating and occupancy expense |
31,170 | 32,172 | ||||||
Total restaurant costs |
94,989 | 99,639 | ||||||
Manufacturing and distribution costs |
8,337 | 6,836 | ||||||
General and administrative expense |
6,504 | 5,593 | ||||||
Depreciation and amortization |
5,521 | 6,314 | ||||||
Total costs and expenses |
115,351 | 118,382 | ||||||
Operating income |
882 | 2,037 | ||||||
Other income (expense): |
||||||||
Interest expense |
(7,019 | ) | (7,663 | ) | ||||
Other income (expense), net |
(51 | ) | 115 | |||||
Total other expense, net |
(7,070 | ) | (7,548 | ) | ||||
Loss before income tax provision |
(6,188 | ) | (5,511 | ) | ||||
Income tax provision (benefit) |
44 | (12 | ) | |||||
Net loss |
$ | (6,232 | ) | $ | (5,499 | ) | ||
See notes to consolidated financial statements.
5
Table of Contents
Real Mex Restaurants, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Successor | Predecessor | |||||||
Three months | Three months | |||||||
ended | ended | |||||||
March 27, | March 28, | |||||||
2011 | 2010 | |||||||
Operating activities |
||||||||
Net loss |
$ | (6,232 | ) | $ | (5,499 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation |
5,044 | 5,435 | ||||||
Amortization of: |
||||||||
Favorable lease asset and unfavorable lease liability, net |
477 | 879 | ||||||
Debt discount |
32 | 929 | ||||||
Deferred financing costs |
619 | 616 | ||||||
Loss on disposal of property and equipment |
8 | 10 | ||||||
Stock-based compensation expense |
41 | 9 | ||||||
Changes in operating assets and liabilities: |
||||||||
Trade and other receivables |
(1,306 | ) | (463 | ) | ||||
Inventories |
(1,563 | ) | 303 | |||||
Prepaid expenses and other current assets |
820 | (2,903 | ) | |||||
Other assets |
118 | 58 | ||||||
Accounts payable and accrued liabilities |
(3,551 | ) | 1,770 | |||||
Other liabilities |
1,156 | 898 | ||||||
Net cash (used in) provided by operating activities |
(4,337 | ) | 2,042 | |||||
Investing activities |
||||||||
Purchases of property and equipment |
(1,485 | ) | (1,982 | ) | ||||
Net proceeds from disposal of property and equipment |
| 2 | ||||||
Net cash used in investing activities |
(1,485 | ) | (1,980 | ) | ||||
Financing activities |
||||||||
Net borrowings under revolving credit facility |
4,600 | | ||||||
Payments on long-term debt agreements and capital lease obligations |
(405 | ) | (487 | ) | ||||
Payments of financing costs |
| (22 | ) | |||||
Net cash provided by (used in) financing activities |
4,195 | (509 | ) | |||||
Net decrease in cash and cash equivalents |
(1,627 | ) | (447 | ) | ||||
Cash and cash equivalents at beginning of period |
3,359 | 3,317 | ||||||
Cash and cash equivalents at end of period |
$ | 1,732 | $ | 2,870 | ||||
Supplemental disclosure of cash flow information |
||||||||
Interest paid |
$ | 9,542 | $ | 9,219 | ||||
Income taxes paid (refunded) |
$ | 44 | $ | (12 | ) | |||
Supplemental disclosure of noncash investing and financing activities |
||||||||
In-kind interest on senior unsecured credit facility added to principal |
$ | 1,290 | $ | 1,095 | ||||
See notes to consolidated financial statements.
6
Table of Contents
Real Mex Restaurants, Inc.
Notes to Consolidated Financial Statements (unaudited)
March 27, 2011
(in thousands, except for share data)
1. Basis of Presentation
Real Mex Restaurants, Inc., a Delaware corporation, together with its subsidiaries (the
Company), is engaged in the business of owning and operating restaurants, primarily through its
major subsidiaries El Torito Restaurants, Inc. (El Torito), Chevys Restaurants, LLC (Chevys)
and Acapulco Restaurants, Inc. (Acapulco). The Company operated 178 restaurants as of March 27,
2011, of which 149 were located in California and the remainder were located in 11 other states,
primarily under the trade names El Torito Restaurant®, Chevys Fresh Mex® and Acapulco Mexican
Restaurant Y Cantina®. In addition, the Company franchised or licensed 32 restaurants in 11 states
and two foreign countries as of March 27, 2011. The Companys other major subsidiary, Real Mex
Foods, Inc., provides internal production, purchasing and distribution services for the restaurant
operations and also provides distribution services and manufactures specialty products for sale to
outside customers. The Company is a wholly-owned subsidiary of RM Restaurant Holding Corp.
(Holdco). The Companys financial statements include stock options granted by Holdco for which
the compensation expense has been pushed down to the Company. Holdco debt is not included in the
Companys financial statements.
The Companys fiscal year consists of 52 or 53 weeks ending on the last Sunday in December
which in 2011 is December 25, 2011 and in 2010 was December 26, 2010. Prior to June 28, 2010, the
Company is referred to as the Predecessor and after June 27, 2010 is referred to as the
Successor. The accompanying consolidated balance sheets present the Companys financial position
as of March 27, 2011 and December 26, 2010. The accompanying consolidated statements of operations
and cash flows present the Successor three months ended March 27, 2011 and the Predecessor three
months ended March 28, 2010. See further description of the successor and predecessor periods in
Note 3.
The accompanying unaudited consolidated financial statements include the accounts of Real Mex
Restaurants, Inc. and its wholly-owned subsidiaries. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.
Certain information and footnote disclosures normally included in consolidated financial
statements in accordance with accounting principles generally accepted in the United States have
been omitted pursuant to requirements of the Securities and Exchange Commission (SEC). A
description of accounting policies and other financial information is included in the Companys
audited consolidated financial statements as filed with the SEC in its annual report on Form 10-K
for the year ended December 26, 2010. The Company believes that the disclosures included in its
accompanying interim consolidated financial statements and footnotes are adequate to make the
information not misleading, but should be read in conjunction with its consolidated financial
statements and notes thereto included in its annual report on Form 10-K. The accompanying
consolidated balance sheet as of December 26, 2010 has been derived from its audited financial
statements.
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Liquidity
The Companys financial statements as of March 27, 2011 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, fund planned capital
expenditures and meet financial covenants 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. Although the
Company had negative working capital as of March 27, 2011 (as has been the case for previous
periods reported on), based on the current level of operations and the Companys business plan,
management believes the cash flow generated from operations, available cash and available
borrowings under the Senior Secured Revolving Credit Facilities will be adequate to meet liquidity
needs for the near future.
7
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In addition, the Companys debt agreements require compliance with specified financial
covenants. These covenants could adversely affect the Companys ability to finance 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 other indebtedness could
result in a default under the terms of the Indenture governing the Notes. In such an event, the
Company may be required to refinance all or part of the then-existing debt (including the Notes),
sell assets or borrow more money. The Company may not be able to accomplish any of the alternatives
on acceptable terms, or at all. The failure to generate sufficient cash flow or to achieve any of
these alternatives could significantly adversely affect the Company.
Based upon managements projections, there is a possibility that certain financial covenants
related to the Notes and Senior Secured Revolving Credit Facilities will not be met as of June 26,
2011. Management is in negotiations with the lenders to amend these covenants. As noted above, if
negotiations are not successful, certain long-term debt balances may become current and subject to
the remedies set forth above. (See definitions of certain capitalized terms in Note 6.)
3. Share Purchase Successor
Effective June 28, 2010, immediately after a supplemental indenture was entered into (see Note
6), Sun Cantinas, LLC (Sun Cantinas), an affiliate of Sun Capital Partners (Sun Capital) that
is an equityholder of Holdco, consummated the acquisition of 43,338 shares of common stock of
Holdco (the Share Purchase) from Cocina Funding Corp., L.L.C. (Cocina), an existing
equityholder of Holdco that is managed by Farallon Capital Management, LLC (Farallon). As a
result, Sun Cantinas and SCSF Cantinas, LLC, another affiliate of Sun Capital, together own
approximately 70% of the outstanding common stock of Holdco. Together they are entitled, under the
cumulative voting provisions of Holdcos Certificate of Incorporation, to elect not fewer than five
members of the seven-member board of directors of Holdco and the Company, giving them the ability
indirectly to control the Company through such shareholdings and board memberships. Following the
Share Purchase, Cocina holds approximately 13% of the outstanding common stock of Holdco, and no
longer has a representative on the board of directors of either Holdco or the Company.
The Share Purchase was accounted for by Holdco under the purchase method of accounting and
push-down accounting was applied to the Company. The Company completed a valuation to determine the
value of the assets acquired and the liabilities assumed based on their estimated fair market
values at the date of the Share Purchase. The allocation of the purchase price is a preliminary
estimate and may be adjusted in subsequent periods. The Company attributes the goodwill associated
with the Share Purchase to the historical financial performance and the anticipated future
performance of the Companys operations. Since this was a non-cash transaction for the Company, it
has been excluded from the consolidated statement of 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 |
$ | 8,361 | ||
Trade and other accounts receivable |
10,248 | |||
Inventories |
11,719 | |||
Other current assets |
3,131 | |||
Property and equipment |
78,990 | |||
Other assets |
12,182 | |||
Trademarks and other intangibles |
43,200 | |||
Favorable and unfavorable lease asset/liability, net |
8,415 | |||
Goodwill |
113,989 | |||
Total assets acquired |
290,235 | |||
Accounts payable and accrued liabilities |
62,532 | |||
Long-term debt |
160,249 | |||
Deferred tax liability |
20,045 | |||
Other liabilities |
2,213 | |||
Total liabilities assumed |
245,039 | |||
Net assets |
$ | 45,196 | ||
As a result of the Share Purchase, prior to June 28, 2010, the Company is referred
to as the Predecessor and after June 27, 2010 is referred to as the Successor.
8
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4. Intangible Assets
Trademarks and other intangibles consist of the following indefinite-lived assets resulting
from the Share Purchase:
March 27, | December 26, | |||||||
2011 | 2010 | |||||||
Trademarks |
$ | 37,000 | $ | 37,000 | ||||
Franchise agreements |
5,100 | 5,100 | ||||||
$ | 42,100 | $ | 42,100 | |||||
5. 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 actuarial 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 actual ultimate liability for
these claims may increase or decrease based on a number of assumptions and factors, such as
historical and future trends, economic conditions, safety programs and back to work programs. The
estimated liability is not discounted. If actual claims trends, including the severity or frequency
of claims, differ from estimates, the financial results could be significantly impacted. During the
first quarter of 2011, we engaged a new insurance broker with new actuarial specialists. Based upon
the actuarial calculation and improvements in our risk management procedures and loss trends,
management determined that an immediate reduction in the reserve in excess of $1,500 was
appropriate, with an ending balance in the accrued self-insurance reserve of $10,584 at March 27,
2011. The portion of the adjustment related to workers compensation was recorded in labor and the
portion related to general liability was recorded in direct operating and occupancy expense in the
consolidated statements of operations,
6. Long-Term Debt
Long-term debt consists of the following:
March 27, | December 26, | |||||||
2011 | 2010 | |||||||
Senior Secured Notes due 2013 |
$ | 130,000 | $ | 130,000 | ||||
Senior Secured Notes unamortized debt discount |
(228 | ) | (260 | ) | ||||
Senior Secured Revolving Credit Facility |
4,600 | | ||||||
Senior Unsecured Credit Facility Related Party |
31,890 | 30,599 | ||||||
Mortgage |
419 | 440 | ||||||
Other |
105 | 421 | ||||||
166,786 | 161,200 | |||||||
Less current portion |
(4,793 | ) | (507 | ) | ||||
$ | 161,993 | $ | 160,693 | |||||
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.
Effective June 28, 2010, the Company entered into a Supplemental Indenture, which amended the
Indenture to permit affiliates of Sun Capital to acquire a majority of the stock of Holdco without
requiring the Company to make a change of control offer to repurchase the Notes that would
otherwise have been required under the Indenture.
9
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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, 2012, the Company may also redeem some or all of the Notes at a premium ranging
from 1-2% of the aggregate principal amount of the notes redeemed. On or after July 1, 2012, 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 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 Senior Secured Revolving Credit Facilities or to make an excess cash flow offer. No
Excess Cash Flow Offer was required for 2010.
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 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. The Second Amended and Restated Revolving Credit
Agreement with General Electric Capital Corporation, as amended, provides for a $15.0 million
revolving credit facility and $25.0 million letter of credit facility, maturing on July 1, 2012
(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 its subsidiaries. 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
2009 amendment, which extended the due date and modified certain covenants 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 in 2009 related to the amendment.
Obligations under the 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
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. As of March 27, 2011, the Company had $8,393 available under the Senior
Secured Letter of Credit Facility and $10,400 available under the Senior Secured Revolving Credit
Facility that may also be utilized for the letters of credit.
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On April 2, 2010, the Company entered into an amendment to the Second Amended and Restated
Revolving Credit Agreement which modified certain definitions in order to allow the transfer of
shares in Holdco within current stockholders of Holdco. No such amendment was required related to
the Notes as a result of such transfer.
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 March 27,
2011, 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 connection with the offering of the Notes, the Company
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 (the Senior Unsecured Credit
Facility), 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 $65,000
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 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. Certain lenders to the Senior Unsecured Credit Facility are owners
of Holdco, and as a result, the Senior Unsecured Credit Facility is held by related parties to the
Company.
The 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 Senior Secured Revolving Credit Facilities). At March 27, 2011, the Company was in compliance
with all specified financial and other covenants under the Senior Unsecured Credit Facility, as
amended.
Mortgage. In 2005, concurrent with an acquisition, the Company assumed an $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 March 27, 2011, the principal amount outstanding
on the mortgage was $419.
Interest rates for the Companys long-term debt are shown in the following table:
March 27, | December 26, | |||||||
2011 | 2010 | |||||||
Senior Secured Notes due 2013 |
14.00 | % | 14.00 | % | ||||
Senior Secured Revolving Credit Facilities |
9.25 | % | 9.25 | % | ||||
Senior Unsecured Credit Facility Related Party |
16.50 | % | 16.50 | % | ||||
Mortgage |
9.28 | % | 9.28 | % | ||||
Other |
3.19 to 3.20 | % | 3.20 to 4.70 | % |
7. Capitalization
Common Stock
The Company is authorized to issue 1,000 shares of common stock. At March 27, 2011 and
December 26, 2010, there were 1,000 shares of common stock authorized, issued and outstanding.
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Stock Option Plans
In December 2006, the Board of Directors of Holdco (the Board), adopted a Non-Qualified
Stock Option Plan (the 2006 Plan). The 2006 Plan, as amended, reserves 1,000 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.
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 the three months ended March 27, 2010.
The following table summarizes the stock option activity as of and for the three months ended
March 27, 2011:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at December 26, 2010 |
194 | $ | 8,150 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited/expired |
| | ||||||
Outstanding at March 27, 2011 |
194 | $ | 8,150 | |||||
Vested and expected to vest at March 27, 2011 |
193 | $ | 8,150 | |||||
Exercisable at March 27, 2011 |
152 | $ | 8,150 |
The Company recorded $41 and $9 of stock-based compensation expense during the Successor three
months ended March 27, 2011 and the Predecessor three ended March 28, 2010, respectively.
Stock-based compensation is included in general and administrative expense on the consolidated
statements of operations. As of March 27, 2011, $68 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 0.5 years. At March
27, 2011, the aggregate intrinsic value of exercisable options was $0.
8. 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 March 27, 2011, based on quoted market prices, was
$134,068. 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 quarter end.
9. Fair Value Measurement
Fair value is an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is
established as a basis for considering such assumptions and for inputs used in the valuation
methodologies in measuring fair value:
Level 1: Quoted prices are available in active markets for identical assets or liabilities.
Level 2: Inputs are other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable.
Level 3: Unobservable inputs that are supported by little or no market activity, therefore
requiring an entity to develop its own assumptions that market participants would use in pricing.
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As of March 27, 2011, the Company had no assets or liabilities that were measured at fair
value on a recurring or non-recurring basis. In conjunction with the Share Purchase, the Company
completed a valuation and recorded adjustments to fair value for the following assets and
liabilities by level at June 28, 2010:
Level 1 | Level 2 | Level 3 | ||||||||||
Assets: |
||||||||||||
Property and equipment |
$ | | $ | 78,990 | $ | | ||||||
Liquor licenses |
| 5,082 | | |||||||||
Goodwill |
| | 113,989 | |||||||||
Trademarks and other intangible assets |
| | 43,200 | |||||||||
Favorable lease asset |
| | 16,456 | |||||||||
Liabilities: |
||||||||||||
Senior secured notes due 2013 |
129,675 | | | |||||||||
Unfavorable lease liability |
| | 8,041 |
10. Related Party Transactions
As discussed in Note 6, the Senior Unsecured Credit Facility is held by related parties to the
Company.
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 during the Successor three months ended March 27, 2011
and the Predecessor three months ended March 28, 2010, were $69 and $82, respectively, of which up
to approximately $17 and $31 are attributable to the Farallon funds indirect interest in the
shopping center, respectively. Additionally, certain funds managed by Farallon hold approximately
$13,000 aggregate principal amounts of the Notes.
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 March 27, 2011 or December 26, 2010.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations
contains forward looking statements within the meaning of the federal securities laws. See the
discussion under the heading Forward-Looking Statements 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 March 27, 2011, we operated 178
restaurants, 149 of which are located in California, with additional restaurants in Arizona,
Florida, Illinois, Maryland, Missouri, Nevada, New Jersey, New York, Oregon, Virginia and
Washington. In addition, we franchised or licensed 32 restaurants in 11 states and two foreign
countries as of March 27, 2011. 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, all 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 restrictions in our notes and the downturn in the economy, no new restaurants
were opened during fiscal year 2010. We are in the early stages of relocating two restaurants, but
do not have a definite date at this time.
Our fiscal year consists of 52 or 53 weeks ending on the last Sunday in December each year.
The three months ended March 27, 2011 and March 28, 2010 consist of thirteen weeks. When
calculating comparable 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 March 27, 2011, we had 178 restaurants
that met this criterion.
Our revenues are comprised of restaurant sales, manufacturing and distribution revenues and
franchise and other revenues. Restaurant revenues include sales of food and alcoholic and other
beverages. Manufacturing and distribution revenues consist of sales by Real Mex Foods to outside
customers of processed and packaged prepared foods and other merchandise items. Franchise and other
revenues primarily includes franchise and royalty fees from our franchisees of our Chevys concept.
Cost of sales is comprised primarily of food and alcoholic beverage expenses. The components
of cost of sales are variable and change 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 costs are semi-variable and include direct hourly and management wages, operations
management bonus, vacation pay, payroll taxes, workers compensation insurance and health
insurance.
Direct operating and occupancy expense consists primarily of fixed costs and 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.
Manufacturing and distribution costs include cost of sales, labor and direct operating and
occupancy expenses related to sales by Real Mex Foods to outside customers.
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 and professional and other consulting fees.
Depreciation and amortization principally includes depreciation of capital expenditures for
restaurants and Real Mex Foods and also includes amortization of favorable lease asset and
unfavorable lease liability. Amortization of favorable lease asset and unfavorable lease liability
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 terms of
the underlying leases.
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Critical Accounting Policies
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 and other intangible assets, 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.
For further information regarding the critical accounting policies that affect our more
significant judgments and estimates used in preparing our consolidated financial statements, see
Note 3 of the Consolidated Financial Statements in our report on Form 10-K filed for the fiscal
year ended December 26, 2010.
Results of Operations
As a result of the Share Purchase, periods prior to June 28, 2010 are referred to as
Predecessor and periods after June 27, 2010 are referred to as Successor. The discussion of and
the results of operations are based on the Successor three months ended March 27, 2011 and the
Predecessor three months ended March 28, 2010.
Our operating results for the Successor three months ended March 27, 2011 and the Predecessor
three months ended March 28, 2010 are expressed as a percentage of total revenues below:
Successor | Predecessor | |||||||
Three months | Three months | |||||||
ended | ended | |||||||
March 27, | March 28, | |||||||
2011 | 2010 | |||||||
Total revenues |
100.0 | % | 100.0 | % | ||||
Restaurant costs: |
||||||||
Cost of sales |
22.3 | 22.2 | ||||||
Labor |
32.6 | 33.8 | ||||||
Direct operating and occupancy expense |
26.8 | 26.7 | ||||||
Total restaurant costs |
81.7 | 82.7 | ||||||
Manufacturing and distribution costs |
7.2 | 5.7 | ||||||
General and administrative expense |
5.6 | 4.6 | ||||||
Depreciation and amortization |
4.7 | 5.2 | ||||||
Operating income |
0.8 | 1.7 | ||||||
Interest expense |
6.0 | 6.4 | ||||||
Loss before income tax provision |
(5.3 | ) | (4.6 | ) | ||||
Net loss |
(5.4 | ) | (4.6 | ) |
Our restaurant and manufacturing and distribution operating results for the Successor three
months ended March 27, 2011 and the Predecessor three months ended March 28, 2010 are expressed as
a percentage of their respective revenues below:
Successor | Predecessor | |||||||
Three months | Three months | |||||||
ended | ended | |||||||
March 27, | March 28, | |||||||
2011 | 2010 | |||||||
Restaurant revenues |
100.0 | % | 100.0 | % | ||||
Restaurant costs: |
||||||||
Cost of sales |
24.2 | 24.1 | ||||||
Labor |
35.5 | 36.7 | ||||||
Direct operating and occupancy expense |
29.2 | 29.0 | ||||||
Total restaurant costs |
88.9 | 89.8 | ||||||
Manufacturing and distribution revenues |
100.0 | 100.0 | ||||||
Manufacturing and distribution costs |
88.8 | 72.4 |
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Three months ended March 27, 2011 compared to the three months ended March 28, 2010
Total Revenues. Total revenues decreased by $4.2 million, or 3.5%, to $116.2 million in the
Successor first quarter of 2011 from $120.4 million in the Predecessor first quarter of 2010 due to
a $4.0 million decrease in restaurant revenues, a $0.1 million decrease in manufacturing and
distribution revenues and a $0.1 million decrease in franchise and other revenues. The decrease in
restaurant revenues was primarily due to comparable store sales decreases of 1.6% in the Successor
first quarter of 2011 as compared with the Predecessor first quarter of 2010. This decline is
primarily attributable to a 3.8% reduction in check count, partially offset by a 2.3% increase in
average check.
Restaurant Cost of Sales. Total restaurant cost of sales of $25.9 million in the Successor
first quarter of 2011 decreased $0.8 million, or 3.2%, as compared to the Predecessor first quarter
of 2010, primarily due to the decrease in restaurant revenue. As a percentage of restaurant
revenues, restaurant cost of sales increased to 24.2% in the Successor first quarter of 2011 from
24.1% in the Predecessor first quarter of 2010.
Restaurant Labor. Restaurant labor costs of $37.9 million in the Successor first quarter of
2011 decreased by $2.8 million, or 6.9%, as compared to the Predecessor first quarter of 2010,
primarily due to adjustments in staffing and wages as a result of the decrease in restaurant
revenue combined with a non-recurring adjustment to workers compensation insurance expense due to
a change in the actuarial estimate for self-insurance reserves. As a percentage of restaurant
revenues, restaurant labor costs decreased to 35.5% in the Successor first quarter of 2011 from
36.7% in the Predecessor first quarter of 2010. Payroll and benefits remain subject to inflation
and government regulation, especially wage rates currently at or near the minimum wage and expenses
for health insurance.
Restaurant Direct Operating and Occupancy Expense. Restaurant direct operating and occupancy
expense of $31.2 million in the Successor first quarter of 2011 decreased $1.0 million, or 3.1%, as
compared to the Predecessor first quarter of 2010, primarily due to lower liability and property
insurance expense combined with lower advertising expense and utilities expense as a result of
managements focus on decreasing costs to minimize the impact of lower restaurant revenues. As a
percentage of restaurant revenues, restaurant direct operating and occupancy expense increased to
29.2% in the Successor first quarter of 2011 from 29.0% in the Predecessor first quarter of 2010.
The increase as a percent of restaurant revenues was primarily due to the comparable store sales
decline, since a significant portion of these costs are fixed in nature.
Manufacturing and Distribution Costs. Manufacturing and distribution expense of $8.3 million
in the Successor first quarter of 2011 increased $1.5 million, or 22.0%, as compared to the
Predecessor first quarter of 2010, primarily due to higher produce and groceries expense combined
with higher labor and non-recurring consulting expense. As a percentage of manufacturing and
distribution revenues, manufacturing and distribution expense increased to 88.8% in the Successor
first quarter of 2011 from 72.4% in the Predecessor first quarter of 2010.
General and Administrative Expense. General and administrative expense of $6.5 million in the
Successor first quarter of 2011 increased by $0.9 million, or 16.3%, as compared to the Predecessor
first quarter of 2010, primarily due to higher labor expense as a result of a reinstatement of wage
rates which were reduced in the Predecessor first quarter of 2010, higher legal costs and higher
consulting expense. General and administrative expense as a percentage of total revenues increased
to 5.6% in the Successor first quarter of 2011 from 4.6% in the Predecessor first quarter of 2010.
Depreciation and amortization. Depreciation and amortization expense of $5.5 million in the
Successor first quarter of 2011 decreased $0.8 million, or 12.6%, as compared to the Predecessor
first quarter of 2010, primarily due to assets which became fully depreciated during 2010. As a
percentage of total revenues, depreciation and amortization decreased to 4.7% in the Successor
first quarter of 2011 from 5.2% in the Predecessor first quarter of 2010.
Interest Expense. Interest expense of $7.0 million in the Successor first quarter of 2011
decreased $0.6 million, or 8.4%, as compared to the Predecessor first quarter of 2010. This
decrease was primarily due to the share purchase by Sun Capital in June 2010, as a result of which
we adjusted our notes to fair value under purchase accounting, resulting in a decrease in the
amortization of the debt discount of $0.9 million. This was partially offset by an increase in
interest expense on the senior unsecured credit facility of $0.2 million. As a percentage of total
revenues, interest expense decreased to 6.0% in the Successor first quarter of 2011 from 6.4% in
the Predecessor first quarter of 2010.
Income tax provision. We have recorded a full valuation allowance against our deferred tax
assets. The provision recorded of less than $0.1 million during the Successor first quarter of 2011
represents various state taxes incurred. The benefit recorded of less than $0.1 million during the
Predecessor first quarter of 2010 represents refunds received offset by various state taxes
incurred.
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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 March 27, 2011, including obligations under capital
leases and unamortized debt discount, was $167.5 million, and we had $10.4 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.
In addition, our debt agreements require compliance with specified financial covenants. These
covenants could adversely affect our ability to finance 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
other indebtedness could result in a default under the terms of the indenture governing the notes.
In such an event, we may be required to refinance all or part of the then-existing debt (including
the notes), sell assets or borrow more money. We may not be able to accomplish any of the
alternatives on acceptable terms, or at all. The failure to generate sufficient cash flow or to
achieve any of these alternatives could significantly adversely affect us.
Based upon managements projections, there is a possibility that certain financial covenants
related to the notes and senior secured revolving credit facilities will not be met as of June 26,
2011. Management is in negotiations with the lenders to amend these covenants. As noted above, if
negotiations are not successful, certain long-term debt balances may become current and subject to
the remedies set forth above.
Working Capital and Cash Flows
We presently have and anticipate continuing to have negative working capital balances. The
working capital deficit principally is the result of accounts payable and accrued liabilities
exceeding 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 in
excess of our normal operating requirements have been used for capital expenditures and/or debt
service payments under our existing indebtedness.
Operating Activities. We had net cash used in operating activities of $4.3 million for the
Successor quarter ended March 27, 2011 compared to net cash provided by operating activities of
$2.0 million for the Predecessor quarter ended March 28, 2010. The decrease in cash provided by
operating activities of $6.3 million was primarily attributable to the decrease in revenues
combined with changes in working capital, primarily due to increases in purchases of inventory
related to Real Mex Foods related to some larger buys on protein items in anticipation of price
increases.
Investing Activities. We had net cash used in investing activities of $1.5 million for the
Successor quarter ended March 27, 2011 compared to $2.0 million for the Predecessor quarter ended
March 28, 2010. The decrease in net cash used in investing activities of $0.5 million was primarily
the result of a decrease in additions to property and equipment related to routine maintenance of
our restaurants.
We expect to make capital expenditures totaling approximately $10.0 million in fiscal year
2011 comprised of approximately $0.8 million for information technology, approximately $0.5 million
for Real Mex Foods and approximately $8.7 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 are in the early stages of relocating two
restaurants, but do not have a definite date at this time.
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Financing Activities. We had net cash provided by financing activities of $4.2 million for the
Successor quarter ended March 27, 2011 compared to net cash used in financing activities of $0.5
million for the Predecessor quarter ended March 28, 2010. The increase in cash provided by
financing activities of $4.7 million was primarily the result of a net draw on our senior secured
revolving credit facility during the current quarter of $4.6 million, for which there was no
outstanding balance at March 28, 2010.
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.
Effective June 28, 2010, we entered into a supplemental indenture, which amended the indenture
to permit affiliates of Sun Capital to acquire a majority of the stock of Holdco without requiring
us to make a change of control offer to repurchase the notes that would otherwise have been
required under the original indenture, as described below.
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, 2012, we may also redeem some or all of the notes at a
premium ranging from 1-2% of the aggregate principal amount of the notes redeemed. On or after July
1, 2012, 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. No Excess Cash Flow Offer
was required for 2010 or 2009.
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.
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. A shelf
registration statement covering resales of the notes was declared effective by the SEC on December
1, 2009.
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Senior Secured Revolving Credit Facilities. Our Second Amended and Restated Revolving Credit
Agreement with General Electric Capital Corporation, as amended, provides for a $15.0 million
revolving credit facility and $25.0 million letter of credit facility, maturing on July 1, 2012,
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. 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 2009
amendment, which extended the due date and modified certain covenants, 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 in 2009 related to the amendment.
On April 2, 2010, we amended the Second Amended and Restated Revolving Credit Agreement which
modified certain definitions in order to allow the transfer of shares in Holdco within current
stockholders of Holdco. No such amendment was required related to our senior secured notes due 2013
as a result of such transfer.
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 March 27, 2011, we had
$8.4 million available under the $25.0 million letter of credit facility and $10.4 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 Revolving 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 March 27, 2011,
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. 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. Certain lenders to the
senior unsecured credit facility are owners of Holdco, and as a result, the senior unsecured credit
facility is held by related parties to the Company.
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 March 27, 2011, 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 March 27, 2011, the principal amount outstanding
on the mortgage was $0.4 million.
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Interest rates for our long-term debt are shown in the following table:
March 27, | December 26, | |||||||
2011 | 2010 | |||||||
Senior Secured Notes due 2013 |
14.00 | % | 14.00 | % | ||||
Senior Secured Revolving Credit Facilities |
9.25 | % | 9.25 | % | ||||
Senior Unsecured Credit Facility Related Party |
16.50 | % | 16.50 | % | ||||
Mortgage |
9.28 | % | 9.28 | % | ||||
Other |
3.19 to 3.20 | % | 3.20 to 4.70 | % |
Capital Leases. We lease certain leasehold improvements and equipment under agreements that
are classified as capital leases. The capital lease obligations have a weighted-average interest
rate of 8.6%. As of March 27, 2011, the principal amount due relating to capital lease obligations
was $0.7 million. Principal and interest payments on the capital lease obligations are due monthly
and range from $3 to $4 per month. The capital lease obligations mature between 2011 and 2025.
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.
Item 3. | 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 and our expenses in 2011 and 2010 were denominated in U.S. dollars. Therefore, foreign
currency fluctuations did not materially affect our financial results in those periods.
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 April 24, 2011, we had borrowings
of $5.4 million outstanding under our senior secured revolving credit facilities. A hypothetical
10% fluctuation in interest rates as of April 24, 2011 would have a net after tax impact of less
than $0.1 million on our earnings in 2011, in addition to its effect on cash flows.
Many of the food products purchased by us are affected by changes in weather, production,
availability, seasonality and other factors outside our control. In an effort to control some of
this risk, we have entered into certain fixed price purchase agreements with varying terms of
generally no more than one year 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 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal 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 officer and principal financial officer concluded that, as
of the end of the period covered by this report, our disclosure controls and procedures are
effective.
Changes In Internal Controls 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.
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
We are periodically a defendant in cases involving personal injury, labor and employment and
other matters incidental to our 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 our consolidated financial position, results of operations or
cash flows.
Item 1A. | Risk Factors |
There were no material changes from the risk factors disclosed in Item 1A of our report on
Form 10-K for the fiscal year ended December 26, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Removed and Reserved) |
Not applicable.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit No. | Description | |||
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 Financial Officer. | ||
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 Financial Officer. |
* | Filed herewith |
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SIGNATURE
Pursuant to the requirements 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. |
||||
Dated: May 6, 2011 | By: | /s/ Richard P. Dutkiewicz | ||
Richard P. Dutkiewicz | ||||
Interim Chief Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) |
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