Item 1. BUSINESS
As of March 22, 2010, we own and operate 195 fast-casual Mexican restaurants, one licensed location, and three franchised restaurants that offer high-quality, fresh and distinctive Mexican cuisine, at attractive prices; including chargrilled chicken, steak and fresh seafood items such as burritos, tacos and quesadillas inspired by the Baja, California region of Mexico. We were incorporated in California in 1985 and re-incorporated in Delaware in October 1997. We have two wholly owned subsidiaries, Rubio’s Restaurants of Nevada, Inc., which was incorporated in Nevada in 1997, and Rubio’s Incentives, LLC, which was organized in Arizona in 2008. Our restaurants are located in California, Arizona, Nevada, Colorado and Utah. As of March 22, 2010, we had approximately 3,800 employees.
RUBIO’S FRESH MEXICAN GRILL® CONCEPT
The Rubio’s Fresh Mexican Grill® concept evolved from the original “Rubio’s, Home of the Fish Taco®” concept, which our co-founder Ralph Rubio first developed following his college spring break trips to the Baja peninsula of Mexico in the mid-1970s. Ralph and his father, Raphael, opened the first Rubio’s® restaurant 25 years ago in the Mission Bay area of San Diego, California and introduced fish tacos to America. Building on the initial success of the concept, we expanded our menu and upgraded our restaurant layout over the years to appeal to a broader customer base, including a concept name change to Rubio’s Baja Grill® in 1997 to reflect these improvements. In 2002, Rubio’s further evolved, completing a transformation from Rubio’s original fish taco concept to Rubio’s Fresh Mexican Grill. The Rubio’s concept now features grilled chicken, steak and seafood items as well as our original Baja-style World Famous Fish TacosSM. In 2007, we completed a multi-year re-imaging program for our existing restaurants so that our interiors and exteriors display distinctive designs that match our high-quality, fresh food. In 2007, we rolled out Rubio’s A-Go-Go, which features major enhancements in our to-go, delivery and catering program that include improved packaging, product offerings, order processing and order fulfillment that we believe makes our program more convenient and attractive for our guests. Since the end of fiscal 2002 through March 22, 2010, the number of company-owned restaurants has increased from 135 to 195. We believe Rubio’s Fresh Mexican Grill is well positioned as an innovator in the fast-casual Mexican cuisine segment. The critical elements of our market positioning are as follows:
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FRESHLY PREPARED HIGH-QUALITY FOOD WITH BOLD, DISTINCTIVE TASTES AND FLAVORS. We differentiate ourselves from competitive restaurants by offering high-quality, flavorful, and made-to-order products using Baja-inspired recipes at attractive prices. Our menu strategy is predicated on developing unique, distinctive and flavorful products that generate strong guest loyalty. Rubio’s excels with seafood, and our signature items include our World Famous Fish Tacos, Grilled Gourmet Tacos, Baja Grill® Burritos with chargrilled chicken or steak and our authentic Street Tacos. Rubio’s also offers a number of burritos, tacos and quesadillas prepared in a variety of ways featuring grilled, marinated chicken, steak, pork, shrimp and mahi mahi. In addition, we serve freshly prepared salads and bowls. Our menu also includes HealthMex® offerings that are lower in fat and calories, and Kid’s Meals designed especially for children. Our guacamole, chips, beans and rice are prepared fresh daily in our restaurants. Guests may enhance and customize their meals at our complimentary salsa bar that features a variety of freshly prepared salsas. Our menu is served at lunch and dinner, as well as breakfast in a limited number of our restaurants.
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CASUAL, FUN DINING EXPERIENCE. Our restaurants are designed to create a fun and casual ambiance by capturing the relaxed, comfortable and colorful atmosphere inspired by the Baja, California region of Mexico. Our design elements include colorful Mexican tiles, Baja beach photos and tropical prints, surfboards on the walls and authentic palm-thatched patio umbrellas, or palapas, in most locations. We believe our restaurants have broad appeal to a wide range of guests.
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EXCELLENT DINING VALUE. Our restaurants offer high-quality food typically associated with sit-down, casual dining restaurants, but generally at prices substantially lower than those found at casual dining restaurants. In addition to attractive prices, we offer the convenience and service platform of a traditional fast-casual or quick-service format. We provide guests a clean and comfortable environment in which to enjoy their meals on site. We also offer guests the convenience of take-out service for both individual meals and large party orders. We believe the strong value we deliver to our guests is critical to generating guest satisfaction, repeat business, and continued loyalty.
OUR BUSINESS STRATEGIES
Our business objective is to become a leading fast-casual Mexican restaurant brand. To achieve this objective, we are pursuing the following strategies:
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CREATE A DISTINCTIVE CONCEPT AND BRAND. Our restaurants provide guests with a fun and casual dining experience that we believe helps to promote frequent visits and strong guest loyalty. Our key initiatives are designed to deliver a great guest experience, enhance the performance of our existing restaurants, and strengthen our brand identity. These initiatives include developing proprietary menu offerings with bold, intense flavors, upgrading the ambiance of our restaurants, and delivering best-in-class service standards. We strive to promote awareness and generate trial through regional and local media campaigns and neighborhood brand-building efforts.
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ACHIEVE FAVORABLE RESTAURANT-LEVEL ECONOMICS. We believe we are able to achieve favorable operating results in our core markets due to the appeal of our concept, careful site selection, cost-effective development, consistent application of our management and training programs, and a focus on continuously improving our economic model. We utilize centralized and local restaurant information and accounting systems, which allow our management to monitor and control labor, food and other direct operating expenses on a real-time basis and provide them with timely access to financial and operating data. As we expand and optimize our menu, we continue to focus on creating highly desirable, high-margin items. We also believe that our culture, emphasis on training and our manager long-term incentive plan leads to lower employee turnover rates, and higher productivity, compared with industry averages.
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FOCUS ON BUILDING SALES AT EXISTING RESTAURANTS. We regularly conduct and evaluate marketing research to analyze our markets, customer base, product mix and competition in order to remain relevant in the eyes of our consumers. Rubio’s marketing mix includes a combination of regional radio, in-store merchandising, public relations, neighborhood marketing, e-marketing and print media tactics. We periodically implement new products and promotions to increase traffic in our restaurants.
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ENSURE A HIGH-QUALITY GUEST EXPERIENCE. We strive to provide a consistent, high-quality guest experience in order to generate frequent visits and customer loyalty. We focus on creating a fun, team-like culture for our restaurant employees, which we believe fosters a friendly and inviting atmosphere for our guests. Through extensive training, experienced restaurant-level management, and rigorous operational controls, we seek to ensure prompt, friendly and efficient service for our guests. We utilize an interactive voice response, or IVR, and Web-based guest feedback program to continually monitor our performance against guest expectations. We also seek out and respond to direct comments and questions from guests who utilize our toll-free guest comment line and “contact us” page on our Web-site.
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EXECUTE FOCUSED REGIONAL EXPANSION STRATEGY. We believe that our restaurant concept has significant opportunities for expansion in both our existing and neighboring markets. An expansion strategy focused primarily on company-owned unit growth will allow us to grow our brand and maintain the quality of food and service expected by our customers. We generally target high-traffic, high-visibility end-cap locations in urban and suburban markets with medium to high family income levels. Our three-year expansion plan includes an annual unit growth rate of approximately 10% compounded annually beginning in 2010. We currently plan to open 20 company-owned restaurants in fiscal 2010 in our existing geographic markets. The current slow down in housing, combined with general economic climate, has caused us to focus almost exclusively on sites located in mature trade areas. This narrower focus could limit our growth potential in 2010 and 2011. In addition, we secured a line of credit in 2008 to support our planned restaurant growth. We intend to tailor our expansion plan during fiscal 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility, we will slow or curtail our expansion plan.
UNIT ECONOMICS
For purposes of analyzing our store operating results, and to eliminate the effects of start-up, training, and other costs associated with new store openings, we measure comparable store results on only those units that have been open for at least 15 months. During fiscal 2009, we had 177 units that were open for over 15 months. These units generated average sales of $1,001,000 per unit, average operating income of $122,000, or 12.2% of sales, and average operating cash flows of $169,000, or 16.8% of sales. Comparable store sales decreased 0.7% in fiscal 2009 following a decrease of 2.4% in fiscal 2008 and an increase of 6.2% in fiscal 2007.
These results are not necessarily indicative of our future results or the results we may obtain in other units currently open, or those we may open in the future.
EXISTING LOCATIONS
The following table sets forth information about our existing restaurants as of March 22, 2010. We own and operate 195 restaurants. We also have three franchised locations in Las Vegas, Nevada and have licensed our concept to another restaurant operator for a non-traditional location at Petco Park Stadium in San Diego. The majority of our restaurants are in high-traffic retail centers and are not stand-alone units.
We currently lease all of our restaurant locations with the exception of one owned building. We plan to continue to lease substantially all of our future restaurant locations in high-traffic retail centers where purchasing the building is not an option.
Historically, our restaurants have ranged from 1,800 to 3,300 square feet, excluding our smaller, food court locations. We expect the size of our future sites to range from 2,000 to 2,800 square feet. We intend to continue to develop restaurants that will require, on average, a total cash investment of approximately $500,000 to $600,000, net of any tenant improvement allowances and excluding estimated pre-opening expenses of approximately $50,000 to $60,000 per unit, which includes approximately $15,000 to $25,000 of non-cash rent expense during the build-out period.
EXPANSION AND SITE SELECTION
Our expansion strategy targets major metropolitan areas that have attractive demographic characteristics. Once a metropolitan area is selected, we identify viable trade areas that have high-traffic patterns, strong demographics, such as medium to high family incomes, high education levels and high density of both daytime employment and residential developments, limited competition and strong retail and entertainment developments. Within a desirable trade area, we select sites that provide specific levels of visibility, accessibility, parking, co-tenancy and exposure to a large number of potential guests. In response to the current economic downturn, our current focus is on sites located exclusively in mature trade areas.
We believe that the quality of our site selection criteria is critical to our continuing success. Therefore, our senior management team is actively involved in the selection of new sites and markets, personally visiting all new markets and all sites prior to final approval. Each new market and site must be approved by our Real Estate Site Approval Committee, which consists of members of senior management. This process allows us to analyze each potential location, taking into account its effect on all aspects of our business, such as marketing, personnel, food service and supply chain dynamics.
Our three-year expansion plan includes an annual unit growth rate of approximately 10% compounded annually beginning in 2010. We currently plan to open 20 company-owned restaurants in fiscal 2010 in our existing geographic markets. The current slow down in housing, combined with the general economic climate, has caused us to focus almost exclusively on sites located in mature trade areas. The uncertain economy could limit our growth potential in 2010 and 2011. In addition, we secured a line of credit in 2008 to support our planned restaurant growth. We intend to tailor our expansion plan during fiscal 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility, we will slow or curtail our expansion plan.
In connection with our strategy to expand into selected markets, we have and will continue to consider franchising our restaurant concept. We currently have a limited franchising program. As of March 22, 2010, we have one signed franchise development agreement. This agreement represents a commitment to open five restaurants in five years. The franchisee under this agreement opened its first restaurant in April 2006, its second restaurant in August 2007 and its third restaurant in November 2008. We are currently evaluating our options with respect to the franchising program, and the management and financial resources that will be required to build the operational infrastructure needed to support the franchising of our restaurants.
MENU
Our made-to-order menu - including our signature World Famous Fish Tacos® - features burritos, soft-shell tacos, Grilled Gourmet Tacos™, enchiladas, quesadillas, nachos and salads. All our products are made with high-quality ingredients including marinated, chargrilled chicken breast and carne asada steak as well as seafood such as chargrilled mahi mahi and salmon, sautéed shrimp, and Alaska Pollock, all inspired by the Baja, California region of Mexico. Complete meals of two tacos, “no-fried” pinto beans, and tortillas chips are featured. Through our menu variety, we strive to maintain our heritage of offering distinctive fish and seafood items, while also including a wide selection of chicken, pork and beef items. Accompaniments including guacamole, tortilla chips, “no-fried” pinto beans, black beans and rice are all made fresh daily in our restaurants. Each of our restaurants also provides self-serve salsa bars where guests may choose from four different salsas freshly-made in every restaurant. Our prices - targeted at the consumer willing to spend $5.00 to $10.00 for a meal - range from about $1.69 for our snack-size Street Tacos to $8.99 for a Cabo Plate - a Shrimp Burrito, Fish Taco and a side of “no-fried” pinto beans and tortilla chips. Most of our restaurants offer a selection of imported Mexican and domestic beers.
Our HealthMex® menu items, designed to have less than 30% calories from fat, include burritos served on whole-wheat tortillas, and tacos made with chargrilled chicken or mahi mahi.
While not a primary focus for Rubio’s, our Kid’s Meals combine an entrée - choice of Chicken Taquitos, Cheese Quesadilla or Bean & Cheese Burrito - with a side of “no-fried” pinto beans, rice, or tortilla chips, a drink, and a churro.
From time to time, we introduce limited-time-only products and promotions to provide added variety and encourage guest frequency. These products and promotions include, but are not limited to, Langostino lobster tacos and burritos, grilled chile-lime salmon tacos and burritos, and crispy shrimp tacos and burritos.
DECOR AND ATMOSPHERE
We believe that the decor and ambience of our restaurants are critical factors in our guests’ overall dining experience and that our restaurant interiors and exteriors display distinctive designs that match our high-quality, fresh food.
MARKETING
Our marketing mix includes a combination of regional radio advertising, in-store merchandising, public relations, neighborhood marketing, e-marketing and print media tactics. Where efficient, we use radio advertising as a marketing tool to increase brand awareness, attract new guests, and encourage existing guests to visit more frequently. Our advertising is designed to increase sales and transactions by conveying our brand positioning and creating awareness of new or limited-time products or promotions.
Local store marketing, public relations, and e-marketing are used to increase community awareness and generate traffic on a local level. A variety of programs are available for our restaurant general managers to target various business-building opportunities within the local community and trade area surrounding each restaurant. We believe word-of-mouth advertising is also a key component in attracting and retaining guests.
As part of our expansion strategy, we select markets that we believe will support multiple restaurants and the efficient use of advertising. We sometimes utilize local public relations initiatives to help establish brand awareness for new restaurants as we build toward media efficiency. We expect our marketing expenditures to increase as we add new restaurants and focus on building awareness to drive new guests to our restaurants and increase repeat visits by existing customers.
OPERATIONS
UNIT MANAGEMENT AND EMPLOYEES
We currently have approximately 3,800 employees. Our typical restaurant employs one general manager, one or two assistant managers, and 18 to 25 hourly employees, approximately 40% of whom are full-time employees and approximately 60% of whom are part-time employees. The general manager is responsible for the day-to-day operations of the restaurant, including food quality, service, staffing and product ordering. We seek to train and develop from within, or hire experienced general managers and staff and to motivate and retain them by providing opportunities for increased responsibilities and advancement, as well as performance-based cash incentives. These performance incentives are tied to sales and profitability. All hourly employees in our restaurants are eligible for self-funded health benefits 60 days after they are hired. All full-time restaurant management employees are eligible for health benefits the first day of the month following their hire date. Full-time corporate employees are eligible for health benefits on their hire date. Employees over 21 years of age who have worked for us for more than one year are eligible to participate in our 401(k) plan. Because the members of our executive leadership team are typically not eligible to participate in our 401(k) plan, we adopted a non-qualified, unfunded retirement savings plan effective December 1, 2007.
We currently employ one district general manager and 17 district managers, each of whom reports to one of two regional directors. These two regional directors in turn report to a Chief Operating Officer. These district managers oversee restaurant management in all phases of operation, as well as assist in opening new restaurants. These district managers are eligible to participate in our cash bonus plan, and the two regional directors are eligible to participate in our cash bonus and stock incentive plans.
TRAINING
We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of personnel and the establishment of, and adherence to, high standards of personnel performance, food and beverage preparation, guest service, and maintenance of facilities. We have implemented a training program that is designed to teach new managers the technical and supervisory skills necessary to direct the operations of our restaurants in a professional and profitable manner. Each manager must successfully complete a five-week training course, which includes hands-on experience in both the kitchen and dining areas of our restaurants. They are also required to study our operations manuals and to view videotapes relating to food and beverage handling (particularly food safety and sanitation), preparation and service. In addition, we maintain a continuing education program to provide our restaurant managers with ongoing training and support. We strive to maintain a team-oriented atmosphere and attempt to instill enthusiasm and dedication in our employees. We regularly solicit employee suggestions concerning how we can improve our operations in order to be responsive to both them and our guests.
QUALITY CONTROLS
Our emphasis on superior guest service is complemented by our Total Quality Control programs. We utilize an IVR and Web-based guest feedback program to continually monitor our performance against guest expectations. We also seek out and respond to direct comments and questions from guests who utilize our toll-free guest comment line and the “contact us” page on our Web-site. District managers are directly responsible for ensuring that guest comments are addressed appropriately to achieve a high level of guest satisfaction. Our Director of Total Quality Management is responsible for ensuring product consistency, quality and safety among our restaurants and suppliers.
HOURS OF OPERATION
Our restaurants are generally open Sunday through Thursday from 10:00 a.m. until 9:00 p.m., and on Friday and Saturday from 10:00 a.m. to 10:00 p.m.
MANAGEMENT INFORMATION SYSTEMS
All of our restaurants use computerized point-of-sale systems, which are designed to improve operating efficiency, provide corporate management timely access to financial and marketing data and reduce restaurant and corporate administrative time and expense. These systems record each order and display the food requests on monitors in the kitchen for the cooks to prepare. The data captured for use by operations and corporate management includes gross and net sales amounts, cash and credit card receipts and quantities of each menu item sold. Sales and receipt information is transmitted to the corporate office daily, where it is reviewed and reconciled by the accounting department before being recorded in the accounting system. The daily sales information is transmitted nightly to the corporate office and distributed to management via an intranet Web page each morning. A Windows-based back office system is used in all restaurants to manage food cost, labor cost and sales reporting. On a weekly basis, a report of actual food cost compared with ideal food cost is also generated.
Our corporate systems provide management with operating reports that show restaurant performance comparisons with budget and prior-year results both for the current accounting period and year-to-date, as well as trend formats by both dollars and percentage of sales. These systems allow us to closely monitor restaurant sales, cost of sales, labor expense and other restaurant trends on a daily, weekly and monthly basis. We believe these systems enable both restaurant and corporate management to supervise the operational and financial performance of our restaurants on a real-time basis, and will accommodate future expansion.
PURCHASING
We strive to obtain consistent high-quality ingredients at competitive prices from reliable sources. To attain operating efficiencies and to provide fresh ingredients for our food products while obtaining the lowest possible ingredient prices for the required quality, employees at the corporate office control the purchase of food items from a variety of international, national, regional and local suppliers at negotiated prices. Most food, produce and other products are shipped from a central distributor directly to the restaurants two to three times per week. We do not maintain a central food product warehouse or commissary. Except for our contract with our central distributor, our contract with Coca-Cola North America FoodService, and several contracts ranging from 6 to 12 months for seafood, chicken and some beef, we do not have any long-term contracts with our food suppliers. In the past, we have not experienced significant delays in receiving our food and beverage inventories, restaurant supplies or equipment.
COMPETITION
The restaurant industry is intensely competitive. There are many different segments within the restaurant industry that are distinguished by types of service, food types and price/value relationships. We position our restaurants in the high-quality, fresh and distinctive, fast-casual Mexican cuisine segment of the industry. In this segment, our direct competitors include, among others, Baja Fresh Mexican Grill, Bajio Mexican Grill, Café Rio Mexican Grill, Chipotle Mexican Grill, La Salsa Fresh Mexican Grill, and Qdoba Mexican Grill. We also compete indirectly with full-service Mexican restaurants including Chevy’s Fresh Mex, On The Border Mexican Grill & Cantina, and El Torito as well as other fast-casual restaurants including Corner Bakery Café, Jason’s Deli, Noodles & Company, Panera Bread, Paradise Bakery & Café, and Pei Wei Asian Diner. Competition in the fast-casual Mexican cuisine segment is based primarily upon food quality, taste, service, location, restaurant ambiance and price. Although we believe we compete favorably with respect to each of these factors, many of our direct and indirect competitors are well-established national, regional or local chains and have substantially greater financial, marketing, personnel and other resources. We also compete with many other retail establishments for site locations.
TRADEMARKS AND SERVICE MARKS
We have maintained registrations for various trademarks and service marks including, but not limited to, “Rubio’s,” “Rubio’s Fresh Mexican Grill,” “Rubio’s Baja Grill, Home of the Fish Taco,” “Home of the Fish Taco,” “World Famous Fish Taco,” “HealthMex,” “Fish (Pesky) Caricature,” “Baja Grill,” “Best of Baja,” “Rubio’s Crispy Shrimp,” “Rubio’s Street Tacos,” “Wrapsaladas,” “Beach Mex,” “Rubio’s a-Go-Go,” “Tacos a-Go-Go,” “Burritos a-Go-Go,” “Wrapsaladas a-Go-Go,” “Beach Mex Buffet,” “Baja Box,” and “Fiesta Kit” with the United States Patents and Trademark Office. In addition, we have filed “Cerveza Time,” “Rubio’s Street Burritos,” “Big Burrito Especial,” “Rubio’s Fish Taco Tuesdays,” “Taquitos a-Go-Go,” “Quesadillas a-Go-Go,” “Chopped Salad a-Go-Go,” “Sweet Treats a-Go-Go,” “Long Board Sampler,” and “Grilled Gourmet Tacos.” We believe that our trademarks, service marks and other proprietary rights have significant value and are important to the marketing of our restaurant concept.
SEASONALITY
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and third quarters of each fiscal year, during the warmer spring and summer months, particularly because most of our restaurants offer patio seating. As a result, our highest earnings generally occur in the second and third quarters of each fiscal year.
GOVERNMENT REGULATION
Our restaurants are subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing and permit requirements for the sale of alcoholic beverages and food. To date, we have not experienced an inability to obtain or maintain any necessary licenses, permits or approvals. In addition, the development and construction of additional restaurants are also subject to compliance with applicable zoning, land use and environmental regulations.
SEC FILINGS; INTERNET ADDRESS
Our Internet address is www.rubios.com. We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports with the SEC and make such filings available, free of charge, on www.rubios.com , as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our Web-site shall not be deemed incorporated by reference by any general statement incorporating by reference this report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate the information found on our Web-site by reference, and shall not otherwise be deemed filed under such Acts.
Our filings are also available through the SEC Web-site, www.sec.gov, and at the SEC Public Reference Room at 100 F Street, NE Washington DC 20549. For more information about the SEC Public Reference Room, you can call the SEC at 1-800-SEC-0330.
MANAGEMENT
OUR EXECUTIVE OFFICERS
As of March 22, 2010, our executive officers are as follows:
Name
Age
Position with the Company
Dan Pittard
President and Chief Executive Officer
Frank Henigman
Senior Vice President and Chief Financial Officer
Marc Simon
Chief Operating Officer
Lawrence Rusinko
Senior Vice President of Marketing
Gerry Leneweaver
Senior Vice President of People Services
Ken Hull
Senior Vice President of Development
DAN PITTARD has been President and Chief Executive Officer and a member of our Board of Directors since August 2006. Mr. Pittard’s diverse background brings unique qualifications for leadership at Rubio’s. He has served in key executive positions at companies including McKinsey & Company, PepsiCo, Inc. and Amoco Corp. (now part of BP p.l.c.). Mr. Pittard served a wide range of clients as a partner at McKinsey & Company from 1980 to 1992, including consumer companies for whom he helped develop profitable growth strategies and build new organizational capabilities. During his tenure at PepsiCo, Inc. from 1992 to 1995, he held several senior executive positions including Senior Vice President, Operations for PepsiCo Foods International, and Senior Vice President and General Manager, New Ventures for Frito-Lay. In this latter position, he worked with Taco Bell Corp. to create retail products and introduce them into supermarkets. At Amoco Corp. from 1995 to 1998, he served as Group Vice President. As Group Vice President, he had responsibility for several businesses with over $8 billion in revenues, including Amoco Corp.’s retail business that had 8,000 locations. During his tenure, he entered into a strategic alliance with McDonald’s Corporation to build joint locations. From 1998 to 1999, Mr. Pittard served as Senior Vice President, Strategy and Business Development for Gateway, Inc. In 1999, Mr. Pittard formed Pittard Investments LLC, and in 2004, he formed Pittard Partners LLC. Through these entities, Mr. Pittard has invested in and consulted for private companies. He served on the Board of Novatel Wireless, a publicly traded company, from 2002 to 2004. Mr. Pittard graduated from the Georgia Institute of Technology with a Bachelor of Science degree in Industrial Management and received an MBA from the Harvard Graduate School of Business Administration.
FRANK HENIGMAN has been Chief Financial Officer since June 2007, and Senior Vice President and Chief Financial Officer since November 2007. Prior to joining Rubio’s in 2006, Mr. Henigman served as Director of Accounting and Risk Control for Sumitomo Corporation of America/Pacific Summit Energy LLC located in Newport Beach, California from January 2005 to April 2006. Prior to Sumitomo, Mr. Henigman served as Director of Finance at Shell Trading Gas & Power Co. from 1998 to 2004. Mr. Henigman holds a Bachelor of Science, Business Administration and Marketing degree from California State University, Northridge and an MBA, Finance, from University of Southern California. Mr. Henigman has earned the designation of a Certified Management Accountant, a globally recognized certification for managerial accounting and finance professionals.
MARC SIMON joined Rubio’s in November 2007 as Senior Vice President of Operations and was promoted to Chief Operating Officer in September 2009. Mr. Simon brings an extensive business and operations background to the Company. Most recently, he served as Chief Executive Officer for America’s Incredible Pizza Company in Tulsa, Oklahoma from October 2006 to August 2007. From 1994 to 1998, Mr. Simon worked for McDonald’s Corporation as Vice President for Corporate Development. He led the team that brought Chipotle Mexican Grill into McDonald’s and later served as Regional Director for Chipotle from 1998 to 2006. Mr. Simon has a master’s degree in Fine Arts and a master’s degree in Library and Informational Science from Case Western Reserve University and a Bachelor of Arts degree from Ohio University.
LAWRENCE RUSINKO has been Vice President of Marketing since October 2005, and Senior Vice President of Marketing since November 2007. Prior to joining Rubio’s in 2005, Mr. Rusinko served as Senior Vice President of Marketing at Friendly’s, a family dining and ice cream concept, from July 2003 until May 2005. Prior to that, Mr. Rusinko served for over eight years at Panera Bread as Director of Marketing from May 1995 until March 1997 and as Vice President of Marketing from April 1997 until July 2003, and spent six and one-half years in various marketing positions of progressive responsibility at Taco Bell. Mr. Rusinko holds a Bachelor of Science degree in Industrial Engineering from Northwestern University and an MBA from the J.L. Kellogg Graduate School of Management at Northwestern University.
GERRY LENEWEAVER has been Vice President of People Services since June 2005, and Senior Vice President of People Services since November 2007. Prior to joining Rubio’s, Mr. Leneweaver led his own human resources consulting firm, AGL Associates, in Boston, from February 2004 to May 2005. Prior to that, Mr. Leneweaver served as Senior Vice President of Human Resources at American Hospitality Concepts, Inc. (The Ground Round, Inc.) from May 1999 to February 2004. He has also been in senior management roles at TGI Friday’s, Inc., The Limited, Inc., Atari, Inc., and PepsiCo, Inc. (Pizza Hut and Frito-Lay). He holds a Bachelor of Science degree in Industrial Relations from LaSalle University in Philadelphia.
KEN HULL joined Rubio’s in December 2007 as Senior Vice President of Development. Most recently, Mr. Hull was Vice President of Development and Franchising for Frisch’s Restaurants, Inc. in Cincinnati, Ohio from 1999 to 2007. Frisch’s is an operator of Big Boy and Golden Corral restaurants. Prior to joining Frisch’s in 1999, Mr. Hull served as Director of International Development and Director of International Real Estate for McDonald’s Corporation. Earlier in his career, Mr. Hull worked for Hardee’s and KFC in Real Estate management positions. Mr. Hull has a Bachelor of Science degree in Landscape Architecture and Urban Planning from Iowa State University.
Item 1A.
Item 1A. RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this annual report, before you decide to buy our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of the following risks actually occur, our business would likely suffer and our results could differ materially from those expressed in any forward-looking statements contained in this annual report including those contained in the section captioned “Business” under Item 1 above and the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock
WE MAY NOT ACHIEVE OUR EXPECTED REVENUES, COMPARABLE STORE SALES AND OVERALL FINANCIAL RESULTS DUE TO VARIOUS RISKS THAT AFFECT THE FOOD SERVICE INDUSTRY.
We and other companies in the restaurant industry face a variety of risks that may impact our business and results of operations. Our expected sales levels and financial results rely heavily on the acceptability and quality of the products we serve. In addition, our financial results have been and will continue to be affected by macro economic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. The current significant downturn in the overall economy and financial markets has reduced consumer confidence in the economy and negatively affected consumer spending and dining out frequency, which has had a negative effect on our sales. If any variances are experienced with respect to the recognition of our brand, the acceptance of our promotions in the market, the effectiveness of our advertising campaigns or our ability to manage our ongoing operations in light of the current adverse economic conditions, including the ability to control and reduce costs, our revenue and financial results would be adversely affected. Factors that could have a significant impact on our financial results include:
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the adverse economic conditions in our geographic markets continue for a prolonged period or become more severe;
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labor costs for our hourly and management personnel, including increases in federal or state minimum wage requirements;
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the cost, availability and quality of foods and beverages and other commodities, particularly chicken, beef, fish, cheese and produce;
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the requirement to record impairment charges for stores with poor sales performance;
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costs related to our leases;
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impact of weather and national disasters on revenues and commodity costs;
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impact of increased fuel and energy costs;
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timing of new restaurant openings and related expenses;
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the cost of store closings;
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the amount of sales contributed by new and existing restaurants;
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the ability of our marketing initiatives and operating improvement initiatives to increase sales;
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negative publicity relating to food quality, illness, obesity, injury or other health concerns related to certain foods;
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changes in consumer preferences, traffic patterns and demographics;
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the type, number and location of existing or new competitors in the fast-casual restaurant industry; and
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insurance and utility costs.
One of the most important financial measures to investors in restaurant businesses such as ours is comparable store sales. Investors use this measure to track our historic performance as well as to compare our trend results against other restaurant businesses. We expect that our comparable store sales (which include company-operated restaurants only and represent the change in period-over-period sales for restaurants that have had at least 15 full months of operations) in fiscal 2010 may continue to be adversely impacted by weak consumer spending resulting from the current adverse economic conditions. If our comparable store sales are lower than expected by investors or are otherwise disappointing, our stock price may be adversely affected.
CHANGES IN GENERAL ECONOMIC AND POLITICAL CONDITIONS AFFECT CONSUMER SPENDING AND MAY HARM OUR REVENUES, OPERATING RESULTS OR LIQUIDITY.
Our country is currently experiencing a significant economic downturn. The ongoing impacts of the housing crisis, rising unemployment and financial market weakness may further exacerbate current economic conditions. As the economy struggles, our customers may become more apprehensive about the economy and reduce their level of discretionary spending. A decrease in spending due to lower consumer discretionary income or consumer confidence in the economy could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues and negatively affecting our operating results. Additionally, we believe there is a risk that if the current negative economic conditions persist for a long period of time and become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis. Additionally, many of the effects and consequences of the current economic crisis on our commercial partners are currently unknown. The adverse economic conditions may cause one or more of our commercial partners to close their businesses or to refuse or be unable to perform in accordance with our contracts or past practices with these third parties. If our bank or any of our suppliers, distributors or warehouse providers do not perform adequately or if any one or more of such entities seeks to terminate their agreement or fail to perform as anticipated, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
OUR ANALYSIS OF OUR STRATEGIC ALTERNATIVES MAY NOT RESULT IN A TRANSACTION ON FAVORABLE TERMS, OR AT ALL.
On October 29, 2009, we announced that our Board of Directors had unanimously rejected an unsolicited proposal from a group consisting of Alex Meruelo and his affiliates and Levine Leichtman Capital Partners IV, L.P. to acquire all of our outstanding common stock for $8.00 per share. The Board, after a thorough review with our management, a Special Committee of the Board and its financial and legal advisors, determined that the proposal was not in the best interests of the Company’s stockholders. At the same time, the Board announced that it had commenced a process to evaluate the Company’s strategic alternatives to enhance stockholder value, including an evaluation of the expressions of interest received by the Company. Following the unsolicited proposal, our stock price increased significantly. There can be no assurance that the analysis of the Company’s strategic alternatives will result in a transaction on favorable terms, or at all. If we decide not to pursue a strategic alternative, our stock price may decrease to the trade levels we experienced before we received the unsolicited proposal in October 2009.
IF WE ARE NOT ABLE TO SUCCESSFULLY PURSUE OUR EXPANSION STRATEGY, OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY IMPACTED.
Our three-year expansion plan includes an annual unit growth rate of approximately 10% compounded annually beginning in 2010. We currently plan to open 20 company-owned restaurants in fiscal 2010 in our existing geographic markets. The current slow down in housing, combined with the adverse economic climate, has caused us to focus almost exclusively on sites located in mature trade areas. This narrower focus could limit our growth potential in 2010 and 2011. In addition, we secured a credit facility in 2008 to support our planned restaurant growth plan. We intend to tailor our expansion plan during 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility as a result of the factors discussed in these risk factors, including the current adverse economic environment, we will slow or curtail our expansion plan.
In addition, the success of our expansion strategy will depend on a variety of factors, many of which are beyond our control. These factors include, among others:
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our ability to operate our new restaurants profitably;
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our ability to respond effectively to the intense competition in the restaurant industry generally, and in the fast-casual restaurant industry segment;
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our ability to locate suitable high-quality restaurant sites or negotiate acceptable lease terms;
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our ability to obtain required local, state and federal governmental approvals and permits related to construction of the sites, and the sale of food and alcoholic beverages;
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our dependence on contractors to construct new restaurants in a timely manner;
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our ability to attract, train and retain qualified and experienced restaurant personnel and management; and
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our ability to control the construction and other costs associated with opening new restaurants.
If we are not able to successfully address these factors, we may not be able to expand at the rate contemplated and may have to adjust our expansion strategy, and our business and results of operations may be adversely impacted.
WE MAY NOT PREVAIL IN OUR CURRENT LITIGATION MATTERS.
From time to time, we have been involved in litigation matters related to the operation of our restaurants. As discussed in Item 3, Legal Proceedings, we are involved in two litigation matters arising out of California employment law. The Company has and intends to continue to vigorously defend itself in each of these actions, but we cannot assure you of the eventual outcome. In addition to these actions, we may also be subject to other employee-related claims or claims by our customers and commercial partners from time to time. Regardless of merit or eventual outcome, these matters may cause a diversion of our management’s time and attention, significant damage awards and the expenditure of legal fees and expenses. In addition, claims asserted against us may result in adverse publicity. An unfavorable outcome in one or more of these matters or any future actions brought against the Company could have a material impact on our financial position and results of operations.
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.
Our business, like other restaurant businesses, is affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, consumer confidence in the economy and discretionary spending priorities. The current significant downturn in the overall economy has reduced consumer confidence and negatively affected consumer spending and dining out frequency, which has had a negative impact on our sales. 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 and sales 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.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY FOOD-BORNE ILLNESS INCIDENTS, NEGATIVE PUBLICITY OR CLAIMS FROM OUR GUESTS.
We cannot guarantee that our internal controls and training at our restaurants will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third party suppliers, distributors and warehouse providers makes it difficult to monitor food safety compliance and increases the risk that food-borne illness would affect multiple locations rather than a single restaurant. Third party food suppliers, distributors and warehouse providers 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 from guests alleging food-related illness, injuries suffered on our premises or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially affect us and our restaurants, regardless of whether such allegations are true or whether we are ultimately held liable.
WE DEPEND UPON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS, DISTRIBUTORS AND WAREHOUSE PROVIDERS.
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 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 affect the availability, quality and cost of ingredients, which could adversely affect our business, financial condition, results of operations and cash flows. We have contracts with a limited number of suppliers, distributors and warehouse providers for our food, beverages and other supplies for our restaurants. In addition, the adverse economic conditions may cause one or more of our suppliers, distributors or warehouse providers to close their businesses or to refuse or be unable to perform in accordance with our contracts or past practices with these third parties. If any of our suppliers, distributors or warehouse providers do not perform adequately or if any one or more of such entities seeks to terminate its agreement or fails to perform as anticipated, or if there is any disruption in any of our supply relationships or distribution operations for any reason, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our inability to replace our distribution operations and our suppliers in a short period of time on acceptable terms could increase our costs and could cause shortages at our restaurants of food and other items that may cause our restaurants to remove certain items from a restaurant’s menu or temporarily close a restaurant. If we temporarily close a restaurant or remove popular items from a restaurant’s menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage.
IF WE ARE NOT ABLE TO ANTICIPATE AND REACT TO INCREASES IN OUR FOOD AND LABOR COSTS, OUR FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED.
Our restaurant operating costs principally consist of food and labor costs. Our financial results are dependent on our ability to anticipate and react to changes in these costs. Various factors beyond our control, including increased food and energy costs, adverse weather conditions, short supply and natural disasters may affect our food costs. Changes in government regulations could also affect both our food costs and labor costs. We may be unable to anticipate and react to changing costs, whether through our purchasing practices, menu composition or menu price adjustments in the future. In the event that cost increases cause us to increase our menu prices, we face the risk that our guests will choose to patronize lower-priced restaurants. Failure to react in a timely manner to changing food and labor costs, or to retain guests if we are forced to raise menu prices, could have a material adverse effect on our business and results of operations.
OUR RESTAURANTS ARE CONCENTRATED IN THE WESTERN REGION OF THE UNITED STATES, AND THEREFORE, OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IF ADVERSE CONDITIONS OCCUR IN THAT REGION.
As of March 22, 2010, all but 11 of our existing restaurants are located in the western region of the United States. Accordingly, we are susceptible to fluctuations in our business caused by adverse economic or other conditions in this region, including natural disasters, terrorist activities or similar events. Our significant investment in, and long-term commitment to, each of our restaurants limits our ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect our operations. In addition, some of our competitors have many more units than we do. Consequently, adverse economic or other conditions in a region, a decline in the profitability of several existing restaurants or the introduction of several unsuccessful new restaurants in a geographic area, could have a more significant effect on our results of operations than would be the case for a company with a larger number of restaurants or with more geographically dispersed restaurants.
LABOR AND EMPLOYMENT LAWS AND REGULATIONS, PARTICULARLY STATE MINIMUM WAGE LAWS, MAY IMPACT OUR BUSINESS.
A substantial number of our employees are subject to various federal and state minimum wage requirements. Many of our employees work in restaurants located in California and receive salaries equal to or slightly greater than the California minimum wage. California’s current hourly minimum wage is $8.00. Any increases in the hourly minimum wage in California or other states or jurisdictions where we do business may increase the cost of labor and adversely impact our financial results. Additionally, various federal and state laws govern the relationship with our employees and affect our operating costs. In addition to minimum wage laws discussed above, these laws include:
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overtime;
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paid leaves of absence;
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mandatory employee health insurance;
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tax reporting;
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unemployment tax rates;
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workers’ compensation rates; and
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citizenship requirements.
Significant additional governmental imposed increases in any of these areas could materially affect our business, financial condition and operating results.
IF THE AMOUNTS THAT WE HAVE ACCRUED IN CONNECTION WITH THE CLOSURE OF SELECTED STORES ARE INADEQUATE OR WE CLOSE MORE STORES THAN ANTICIPATED OR WE ARE REQUIRED TO TAKE IMPAIRMENT CHARGES FOR UNDERPERFORMING STORES, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED
Our accruals for expenses related to store closures are estimates. Estimates are inherently uncertain, and actual results may deviate, perhaps substantially, from our estimates as a result of the many risks and uncertainties affecting our business, including, but not limited to, those set forth in these risk factors. The amounts we have recorded for store closures are based on our current assessments of the conditions of these locations. The market for, and physical condition of, these locations may change in the future and materially affect our future financial results. We review these accruals on a quarterly basis and may make adjustments that have a material positive or negative impact on our future financial results. In addition, we may be required to record impairment charges for store locations that are not performing at adequate levels to support the operating costs of these stores, and any such impairment charges would have an adverse impact on our financial results.
THE RESTAURANT INDUSTRY IS INTENSELY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE ADEQUATELY.
The restaurant industry is intensely competitive. There are many different segments within the restaurant industry that are distinguished by types of service, food types and price/value relationships. We position our restaurants in the high-quality, fresh and distinctive, fast-casual Mexican restaurant segment of the industry. In this segment, our direct competitors include, among others, Baja Fresh, La Salsa, Chipotle and Qdoba. We also compete indirectly with full-service Mexican restaurants including Chevy’s, On The Border, Chi Chi’s and El Torito and fast food restaurants, particularly those focused on Mexican food such as El Pollo Loco, Taco Bell and Del Taco. Competition in our industry segment is based primarily upon food quality, price, restaurant ambiance, service and location. Many of our direct and indirect competitors are well-established national, regional or local chains and have substantially greater financial, marketing, personnel and other resources than we do. We also compete with many other retail establishments for site locations. If we are unable to compete effectively in our industry segment, our business and operations would be adversely affected.
OUR FAILURE OR INABILITY TO ENFORCE OUR CURRENT AND FUTURE TRADEMARKS AND TRADE NAMES COULD ADVERSELY AFFECT OUR EFFORTS TO ESTABLISH BRAND EQUITY.
Our ability to successfully expand our concept will depend on our ability to establish and maintain "brand equity" through the use of our current and future trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos. We currently hold two registered trademarks and have nine service marks relating to our brand and we have filed applications for 12 additional marks. Some or all of the rights in our intellectual property may not be enforceable, even if registered against any prior users of similar intellectual property or our competitors who seek to utilize similar intellectual property in areas where we operate or intend to conduct operations. If we fail to enforce any of our intellectual property rights, we may be unable to capitalize on our efforts to establish brand equity. It is also possible that we will encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations, which could result in additional expenditures and divert management’s time and attention from our operations.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING AND EXECUTING A FRANCHISE PROGRAM.
In connection with our strategy to expand into selected markets, we have and will continue to consider franchising our restaurant concept. We currently have a limited franchising program. We started a franchise program by entering into agreements with three franchisee groups between 2001 and 2002. In April 2003, our relationship with one of the franchisee groups was terminated when the group defaulted on its franchise agreement and closed its franchised location. We re-opened this unit as a company-owned restaurant in May 2003, but subsequently closed it in December 2005. In September 2003, we agreed to acquire a franchisee’s location and then in December 2006 acquired their other restaurant and development territory. In addition, in June 2006, we acquired all four restaurants owned by the third original franchise group. Currently, we have one franchisee that has a five-year, five-unit development agreement for which they opened their first restaurant in 2006, their second restaurant in August 2007 and their third restaurant in November 2008. Restaurant companies typically rely on franchise revenues as a significant source of revenues and potential for growth. The opening and success of our franchised restaurants depend on a number of factors, including availability of suitable sites, our ability to obtain acceptable lease or purchase terms for new locations, permitting and government regulatory compliance and our ability to meet construction schedules. The franchisees may not have all of the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in their franchise areas in a manner consistent with our standards. Our inability to successfully execute a franchising program could adversely affect our business 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 an initial term of 10 years and one or more renewal terms of five 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.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER FACTORS, WHICH COULD HAVE A NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and third quarters of each fiscal year. As a result, we generally find our highest sales occur in the second and third quarters of each fiscal year. Accordingly, results for any one quarter or for any year are not necessarily indicative of results to be expected for any other quarter or for any other year and should not be relied upon as the sole measure of our future performance. Comparable store sales for any particular future period may increase or decrease versus our previous performance.
THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO OPERATE, MANAGE AND SUPPORT OUR RESTAURANTS IS EXTREMELY IMPORTANT AND OUR FAILURE TO DO SO COULD ADVERSELY AFFECT US.
Our success and the success of our individual restaurants depend upon our ability to attract and retain highly motivated, well-qualified restaurant operators and management personnel, as well as a sufficient number of qualified employees, including guest service and kitchen staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in some geographic areas. Our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business or results of operations. We also face significant competition in the recruitment of qualified employees. In addition, we are heavily dependent upon the services of our officers and key management involved in restaurant operations, marketing, product development, finance, purchasing, real estate development, information technologies, human resources and administration. The loss of any of these individuals could have a material adverse effect on our business and results of operations. We generally do not have long-term employment contracts with key personnel.
VARIOUS GOVERNMENT REGULATIONS MAY IMPACT OUR BUSINESS.
The restaurant industry is subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing requirements and regulations related to the preparation and sale of food and the sale of alcoholic beverages, as well as laws governing our relationships with employees. See “Labor and Employment Laws and Regulations, Particularly State Minimum Wage Laws May Impact our Business” above. The inability to obtain or maintain such licenses or to comply with applicable regulations could adversely affect our results of operations. We are also subject to federal regulation and certain state laws, governing the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions concerning the termination or non-renewal of a franchise. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees. Changes in, and the cost of compliance with, government regulations could also have a material adverse effect on our operations.
WE ARE REQUIRED TO EVALUATE OUR INTERNAL CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 AND ANY ADVERSE RESULTS FROM SUCH EVALUATION COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting and audited consolidated financial statements as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. This annual report on Form 10-K does not require an attestation from the Company’s independent registered public accounting firm, but we will be required to obtain that attestation as early as the annual report on Form 10-K for our fiscal year ending December 26, 2010. Performing the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. We have in the past discovered, and may in the future discover, areas of internal controls that need improvement. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated or they are unable to express an unqualified opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
OUR FEDERAL, STATE AND LOCAL TAX RETURNS MAY, FROM TIME TO TIME, BE SELECTED FOR AUDIT BY THE TAXING AUTHORITIES, WHICH MAY RESULT IN TAX ASSESSMENTS OR PENALTIES THAT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION.
We are subject to federal, state and local taxes in the U.S. Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable, if the IRS or other taxing authority disagrees with the positions we have taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.
OUR CURRENT INSURANCE MAY NOT PROVIDE ADEQUATE LEVELS OF COVERAGE AGAINST LOSSES, CLAIMS OR THE EFFECTS OF ADVERSE PUBLICITY.
We may incur certain losses that are uninsurable or that we believe are not economically insurable, such as losses due to earthquakes, floods and other natural disasters. In view of the location of many of our existing and planned restaurants, our operations are particularly susceptible to damage and disruption caused by earthquakes. Further, although we maintain insurance coverage for employee-related litigation, the deductible per incident is high and because of the high cost, we carry only limited insurance for the effects of such claims. In addition, punitive damage awards are generally not covered by insurance. In addition, our insurance does not provide coverage for the type of claims asserted in the two employee actions discussed in Item 3, Legal Proceedings. Any insurance we maintain may not be sufficient to provide coverage against any asserted claims. We also may be unable to maintain our insurance or obtain insurance in the future on acceptable terms, or at all.
WE MAY INCUR SIGNIFICANT REAL ESTATE RELATED COSTS AND LIABILITIES THAT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The majority of our restaurants are leased locations in multi-unit retail centers. The age and condition of the real estate we occupy vary. Some of our locations may require significant repairs due to normal deterioration or due to sudden and unanticipated incidents, such as plumbing failures. It is difficult to predict how many of our restaurant locations will require major repairs or refurbishment and it is also difficult to predict what portion of these potential costs would be covered by insurance. Also, as a lessee of real estate, we are subject to and have received claims that our operations at these locations may have caused property damage or personal injury to others. The fact that the majority of our restaurants are located in multi-unit retail buildings means that if there is a plumbing failure or other event in one of our restaurants, neighboring tenants may be affected, which can subject us to liability for property damage and personal injuries. If we were to incur increased real estate costs and liabilities, it could adversely affect our financial condition and results of operations.
SALES BY OUR EXISTING STOCKHOLDERS OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The Company has a limited number of institutional stockholders, each of whom holds more than 5% of the Company’s outstanding stock. The market price of our common stock could decline as a result of sales by one of these stockholders of a large number of shares of our common stock in the market or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH YOUR INTERESTS.
As of March 22, 2010, our executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 31.3% of our outstanding common stock. These stockholders may be able to influence the outcome of matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company and could also depress our stock price.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
Our corporate headquarters and the principal executive offices of our two wholly owned subsidiaries, consisting of approximately 16,500 square feet, are located in Carlsbad, California. We occupy our headquarters under a lease that was extended until March 31, 2011, with options to extend the lease for an additional eight years. As of March 22, 2010, we owned and operated 195 restaurants. These restaurants are located in California, Arizona, Nevada, Colorado and Utah as described in Item 1. “Business - Existing Locations” above. We lease each of our restaurant facilities with the exception of one restaurant in El Cajon, California, where we own the building but lease the land. The majority of our leases are for 10-year terms and include options to extend the terms. The majority of the leases also include both fixed rate and percentage-of-sales rent provisions.
Item 3.
Item 3. LEGAL PROCEEDINGS
In March 2007, the Company reached an agreement to settle a class action lawsuit related to how it classified certain employees under California overtime laws. The lawsuit was similar to numerous lawsuits filed against restaurant operators, retailers and others with operations in California. The settlement agreement, which was approved by the court in June 2007, provides for a settlement payment of $7.5 million payable in three installments. The first $2.5 million installment was distributed on August 31, 2007 and the second $2.5 million installment was paid into a qualified settlement fund on December 29, 2008. The third and final installment of $2.5 million is due on or before June 28, 2010. As of December 27, 2009, the remaining balance of $2.5 million, plus accrued interest of $274,000, was accrued in “Accrued expenses and other liabilities”. The Company learned that 140 current and former employees who qualified to participate as class members in this class action settlement were not included in the settlement list approved by the court. The Company filed a motion requesting the court to include these individuals in the approved settlement and to provide that their claims are payable out of the aggregate settlement payment, as the Company believes the parties intended when they reached a settlement. The plaintiffs are opposing this motion. The matter has not yet been finally resolved and there is no assurance that the Company will be successful. At this time, it is not possible to reasonably estimate the outcome of or any additional liability from this case.
On March 24, 2005, a former employee of the Company filed a California state court action alleging that the Company failed to provide the former employee with certain meal and rest period breaks and overtime pay. The parties moved the matter into arbitration, and the former employee amended the complaint to claim that the former employee represents a class of potential plaintiffs. The amended complaint alleges that current and former shift leaders who worked in the Company's California restaurants during specified time periods worked off the clock and missed meal and rest breaks. This case is still in the pre-class certification discovery and briefing stage, and no class has been certified. Holden, a former employee, seeks penalties under California's Private Attorney General Act of 2004, separate and apart from her certification of a class of shift leaders. The Company denies the former employee’s claims, and intends to continue to vigorously defend this action. A recent decision by the California Court of Appeals in Brinker Restaurant Corporation v. Superior Court (Hohnbaum) last year held that employers do not need to affirmatively ensure employees actually take their meal and rest breaks but need only make meal and rest breaks “available” to employees. The Brinker case was recently taken up for review by the California Supreme Court. At this time, the Company has no assurances of how the California Supreme Court will rule in the Brinker case. Regardless of merit or eventual outcome, this arbitration may cause a diversion of the Company’s management’s time and attention and the expenditure of legal fees and expenses.
Item 4.
Item 4. RESERVED
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION FOR COMMON STOCK
Our common stock is listed on the NASDAQ Global Market under the symbol “RUBO.” Our common stock began trading on May 21, 1999. The closing sales price of our common stock as reported on NASDAQ on March 22, 2009 was $7.97. As of March 22, 2010, there were approximately 3,844 beneficial holders of our common stock, including 283 holders of record.
The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock for each quarter of our two most recent fiscal years, as regularly reported on NASDAQ.
DIVIDEND POLICY
Since our initial public offering in May 1999, we have not declared or paid any cash dividends on our common stock. We currently intend to retain all earnings for the operation and expansion of our business and do not intend to pay any cash dividends in the foreseeable future. In addition, our credit facility limits the payment of cash dividends subject to specified exceptions.
Item 6.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our fiscal year is 52 or 53 weeks, ending the last Sunday in December. Fiscal 2006 included 53 weeks. All other fiscal years presented include 52 weeks.
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.
OVERVIEW
We opened our first restaurant under the name “Rubio’s, Home of the Fish Taco” in 1983. As of March 22, 2010, we have grown to 199 restaurants, including 195 company-operated, one licensed and three franchised locations. We position our restaurants in the high-quality, fresh and distinctive fast-casual Mexican cuisine segment of the restaurant industry. Our business strategy is to become a leading brand in this industry segment.
Highlights
During 2009, we continued to focus on ways to improve our economic model. Fiscal 2009 was impacted by the overall challenging macroeconomic environment in the areas we operate our restaurants, and in particular, rising unemployment and the weak housing markets in Arizona, Nevada and parts of California. In addition, the current significant downturn in the overall economy has reduced consumer confidence in the economy and negatively affected consumer spending and dining out frequency. Over the past several months, we have undergone a vigorous assessment of the opportunities to better leverage our resources and gain efficiencies in our cost structure, while continuing to focus on delivering unique products and an unsurpassed guest experience.
Revenue Growth. Total revenues were $188.9 million, $179.3 million and $169.7 million in fiscal 2009, 2008 and 2007, respectively. The increase in revenues in fiscal 2009 as compared with fiscal 2008 resulted from sales for new stores opened in fiscal 2008 and 2009, which contributed sales of $12.2 million, offset by stores closed during fiscal 2009 which decreased sales by $1.3 million and a decrease in comparable store sales of $1.3 million. Our 2009 average unit volume, which includes restaurants open for at least 12 months, decreased from $1,008,000 to $996,000 primarily due to a decrease in comparable store sales of 0.7%.
Restaurant Development. We opened 10 company-owned restaurants in fiscal 2009 and had two more under construction at the end of the year. We currently plan to open 20 company-owned restaurants in fiscal 2010 in our existing geographic markets. The current slow down in housing, combined with the weak economy, has caused us to focus almost exclusively on sites located in mature trade areas, where we will look for attractive long-term opportunities in the softening real estate market. This narrower focus could limit our growth potential in 2010 and 2011. Our three-year expansion plan includes an annual unit growth rate of approximately 10% compounded annually beginning in 2010. We intend to tailor our expansion plan during 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility, we will slow or curtail our expansion plan.
Restaurant Profitability. Cost of sales decreased to $49.7 million in fiscal 2009, from $51.3 million in fiscal 2008 and $48.4 million in fiscal 2007, due primarily to lower costs partially offset by an increase in the number of company-operated restaurants. As a percentage of restaurant sales, cost of sales decreased to 26.3% in fiscal 2009, as compared with 28.7% in fiscal 2008 and 28.5% in 2007. Fiscal 2009 was not impacted by the food cost inflation experienced in 2008 and 2007. As a result, the menu price increases we implemented in July 2008 and January 2009 drove average check increases and lower cost of sales as a percentage of sales. In addition, favorable supply agreements and menu engineering efforts allowed us to reduce food costs while maintaining quality and flavor profiles. Restaurant labor costs increased to $61.2 million in fiscal 2009, from $56.6 million in fiscal 2008 and $54.4 million in fiscal 2007. As a percentage of restaurant sales, these costs increased to 32.4% in fiscal 2009 compared with 31.6% in fiscal 2008 and 32.1% in fiscal 2007. The increase in restaurant labor in fiscal 2009 was primarily attributable to increased bonus expense associated with our short and long term incentive plans. In order to retain the most talented people, we provide our restaurant managers with a combination of short term and long term incentives that are based on improvement in restaurant profitability. Restaurant occupancy and other costs increased to $46.9 million in fiscal 2009, from $42.6 million in fiscal 2008 and $39.2 million in fiscal 2007. As a percentage of restaurant sales, these costs increased to 24.8% in fiscal 2009, from 23.8% in fiscal 2008 and 23.1% in fiscal 2007. The increase in restaurant occupancy and other costs in dollars and as a percentage of restaurant sales during fiscal 2009 compared to fiscal 2008 is due to higher advertising expenditures, including the cost of a segmentation study designed to help us better understand our target guests, as well as higher repair and service contracts expense associated with a preventative maintenance program implemented during the fourth quarter of 2008 that focused on better maintaining restaurant equipment.
General and Administrative Expenses. General and administrative costs increased in 2009 primarily due to an increase in wages and wage-related expenses, offset by a decrease in non-cash share-based compensation costs, legal and professional fees. As we continue to add new restaurants, we expect to be able to leverage our general and administrative costs at a better rate than we have historically.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.
Management evaluates these estimates and assumptions on an ongoing basis including those relating to impairment of assets, restructuring charges, contingencies and litigation. Our estimates and assumptions have been prepared on the basis of the most current information available, and actual results could differ from these estimates under different assumptions and conditions.
We have identified the following critical accounting policies that are most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a review of the more critical accounting policies and methods used by us.
REVENUE RECOGNITION - Revenues from the operation of company-owned restaurants are recognized when sales occur. Franchise revenue is comprised of royalties from franchised restaurants and is recorded as revenue as earned. We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants. The portion of the gift cards that is not expected to be redeemed (breakage) is recognized ratably over three years based on historical and expected redemption trends. This adjustment is classified as revenues in our consolidated statement of operations.
PROPERTY - Property is stated at cost. A variety of costs are incurred in the leasing and construction of restaurant facilities. The costs of buildings under development include specifically identifiable costs. The capitalized costs include development costs, construction costs, salaries and related costs, and other costs incurred during the acquisition or construction stage. Salaries and related costs capitalized totaled $258,000, $334,000 and $323,000 for fiscal years 2009, 2008 and 2007, respectively. Depreciation and amortization of buildings, leasehold improvements, and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the initial lease term for certain leased properties (buildings and improvements range from 1 to 20 years and equipment 3 to 7 years). For leases with renewal periods at the Company’s option, the Company generally uses the original lease term, excluding renewal option periods to determine useful lives; if failure to exercise a renewal option imposes an economic penalty to the Company, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of appropriate estimated useful lives. The Company’s policy requires lease-term consistency when calculating the depreciation period, in classifying the lease, and in computing straight-line rent expense.
IMPAIRMENT OF GOODWILL - Goodwill, which represents the excess of the cost of acquired businesses over the fair value of amounts assigned to assets acquired and liabilities assumed, is not amortized. Instead, goodwill is assessed for impairment annually at the same time every year, and when an event occurs or circumstances change, such that it is reasonably possible that an impairment may exist. We selected our fiscal year-end as our annual date. As a result of our assessment at December 27, 2009 and December 28, 2008, no impairment of goodwill was indicated.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets, such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques which may include discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Long-lived asset impairment amounts are estimates that we have recorded based on reasonable assumptions related to our restaurant locations at this point in time. The conditions regarding these locations may change in the future and could be materially affected by factors such as our ability to maintain or improve sales levels, our ability to secure subleases, our success at negotiating early termination agreements with lessors, the general health of the economy and resultant demand for commercial property. Because the factors used to estimate impairment expenses are subject to change, amounts recorded may not be sufficient, and adjustments may be necessary.
SHARE-BASED PAYMENT - Employee stock-based compensation is recognized as a cost in the financial statements over the requisite service period. Cost is measured using the grant date fair value of the award. We estimate grant date fair value using the Black-Scholes-Merton option-pricing model.
SELF-INSURANCE LIABILITIES - We are self-insured for a portion of our workers’ compensation insurance program. Maximum self-insured retention, including defense costs per occurrence is $150,000 for the claim years ended October 31, 2010 and October 31, 2009, and $350,000 for the claim year ended October 31, 2008. We account for insurance liabilities based on independent actuarial estimates of the amount of ultimate losses incurred. These estimates rely on actuarial observations of industry-wide and Rubio’s specific historical claim loss development. Our actual loss development may be better or worse than the development estimated by the actuary. In that event, we will modify the accrual, and our operating expenses will increase or decrease accordingly.
INCOME TAXES - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax positions in income tax expense.
RESULTS OF OPERATIONS
All comparisons under this heading between fiscal 2009, 2008 and 2007 refer to the 52-week periods ended December 27, 2009, December 28, 2008 and December 30, 2007, respectively.
The following table sets forth our operating results, expressed as a percentage of total revenues, with respect to certain items included in our consolidated statements of operations.
(1) As a percentage of restaurant sales.
The following table summarizes the number of restaurants:
Revenues
Total revenues were $188.9 million, $179.3 million and $169.7 million in fiscal 2009, 2008 and 2007, respectively. The increase in revenues in fiscal 2009 as compared with fiscal 2008 resulted from the following factors: first, we opened 10 new stores in fiscal 2009, which contributed sales of $5.5 million; second, stores opened before fiscal 2009 but not yet in our comparable store base contributed sales of $3.9 million; and third, an increase in sales for stores that entered the comparable store base during 2009 of $2.7 million; offset by stores closed during fiscal 2009 which decreased sales by $1.3 million and a decrease in comparable store sales of $1.2 million. The 0.7% decrease in comparable store sales in fiscal 2009 compared to fiscal 2008 was primarily due to a decrease in transactions of 5.8%, which was partially offset by an increase in average check amount of 5.4%. In calculating comparable store sales, we include a store in the comparable base once it has been open for 15 months. The increase in revenues in fiscal 2008 as compared with fiscal 2007 resulted from the following factors: first, we opened 17 new stores in fiscal 2008, which contributed sales of $8.3 million and second, stores opened before fiscal 2008 but not yet in our comparable store base contributed sales of $5.2 million; offset by a decrease in comparable store sales of $3.9 million. The 2.4% decrease in comparable store sales in fiscal 2008 compared to fiscal 2007 was primarily due to a decrease in transactions of 5.7%, which was partially offset by an increase in average check amount of 3.5%. Our average unit volume was $996,000 in fiscal 2009 as compared with $1,008,000 in fiscal 2008 and $1,034,000 in fiscal 2007.
Costs and Expenses
Cost of sales decreased to $49.7 million in fiscal 2009, from $51.3 million in fiscal 2008 and $48.4 million in fiscal 2007, due primarily to lower costs partially offset by an increase in the number of company-operated restaurants. As a percentage of restaurant sales, cost of sales decreased to 26.3% in fiscal 2009, as compared with 28.7% in fiscal 2008 and 28.5% in 2007. Fiscal 2009 was not impacted by the food cost inflation experienced in 2008 and 2007. As a result, the menu price increases we implemented in July 2008 and January 2009 drove average check increases and lower cost of sales as a percentage of sales. In addition, favorable supply agreements and menu engineering efforts allowed us to reduce food costs while maintaining quality and flavor profiles. Increases in the cost of fish, tortillas, avocados, cheese and beverage syrup, as well as cost increases related to our transition to the use of zero trans fat oil during the third quarter of 2007 contributed to the increase in cost of sales as a percentage of restaurant sales during fiscal 2007 and fiscal 2008. Our distribution costs also increased during fiscal 2008 compared to fiscal 2007, driven largely by higher fuel costs.
Restaurant labor costs increased to $61.2 million in fiscal 2009, from $56.6 million in fiscal 2008 and $54.4 million in fiscal 2007. As a percentage of restaurant sales, these costs increased to 32.4% in fiscal 2009 compared with 31.6% in fiscal 2008 and 32.1% in fiscal 2007. The increase in restaurant labor in fiscal 2009 was primarily attributable to increased bonus expense associated with our short and long term incentive plans. In order to retain the most talented people, we provide our restaurant managers with a combination of short term and long term incentives that are based on improvement in restaurant profitability. The decrease in labor cost as a percentage of sales during fiscal 2008 was due to continued favorable adjustments to our worker’s compensation reserves that resulted primarily from the closure of a large number of cases during the year and our continued focus on safety in our restaurants, as well as from improvements in labor management driven by our new labor scheduling system. These favorable drivers were partially offset by de-leveraging of the fixed component of labor due to lower comparable store sales and the increase in the minimum wage rate in the State of California, which occurred during January 2008.
Restaurant occupancy and other costs increased to $46.9 million in fiscal 2009, from $42.6 million in fiscal 2008 and $39.2 million in fiscal 2007. As a percentage of restaurant sales, these costs increased to 24.8% in fiscal 2009, from 23.8% in fiscal 2008 and 23.1% in fiscal 2007. The increase in restaurant occupancy and other costs in dollars and as a percentage of restaurant sales during fiscal 2009 compared to fiscal 2008 is due to higher advertising expenditures, including the cost of a segmentation study designed to help us better understand our target guests, as well as higher repair and service contracts expense associated with a preventative maintenance program implemented during the fourth quarter of 2008 that focused on better maintaining restaurant equipment. The increase during fiscal 2008 compared to fiscal 2007 is primarily a result of lower average unit volumes on a partially fixed cost base.
General and administrative expenses increased to $18.8 million in fiscal 2009, from $17.9 million in fiscal 2008, and increased from $16.2 million in fiscal 2007. As a percentage of revenue, these costs were 10.0% in fiscal 2009, 10.0% in fiscal 2008 and 9.6% in fiscal 2007. The increase in general administrative expenses in dollars, although a decrease as a percentage of revenue, in fiscal 2009 compared to fiscal 2008 is primarily due to an increase in wages and wage-related expenses in addition to costs incurred in conjunction with the evaluation of strategic alternatives for the Company, offset by a decrease in non-cash share-based compensation costs, legal and professional fees. The increase in general administrative expenses in fiscal 2008 compared to fiscal 2007 is due to an increase in non-cash share based compensation, higher legal costs, the addition of senior executives in the fourth quarter of 2007, and professional fees associated with an income tax method change study that allowed us to immediately expense for tax purposes previously capitalized repairs and remodeling expenses.
Depreciation and amortization increased to $9.9 million in fiscal 2009, from $9.7 million in fiscal 2008 and $8.8 million in fiscal 2007. The increase is due to our continued expansion efforts, which included the addition of 10 new restaurants throughout 2009 and 17 throughout 2008.
Pre-opening expenses decreased to $353,000 in fiscal 2009, from $689,000 in fiscal 2008 and $572,000 in fiscal 2007. During fiscal 2009, we opened 10 restaurants compared with 17 during fiscal 2008 and 10 during fiscal 2007. The increase in pre-opening expenses in fiscal 2008 compared to fiscal 2007 is due to an increase in the number of restaurants opened during the fiscal year. The decline in pre-opening expenses in fiscal 2009 includes an overall decline in pre-opening expenditures on a per store basis. This per store reduction is primarily due to the shifting of certain marketing related costs to post-opening. Pre-opening costs include non-cash rent expense during the build-out period of $15,000 to $25,000 per location and compensation expense of approximately $15,000 to $20,000 per location.
Asset impairment and store closure (reversal) expense comprised a $1,068,000 impairment charge in fiscal 2009, compared to a net $46,000 store closure reversal in fiscal 2008, and a $274,000 charge in fiscal 2007. The $1,068,000 impairment charge in fiscal 2009 is related to the carrying amount of certain long-lived assets exceeding the fair value of the assets at eleven under-performing stores. A store closure reversal of $91,000 was recorded in the first quarter of fiscal 2008 due to our decision to re-brand a location in the Fort Collins, Colorado area that was closed in 2001 and was offset by a $45,000 store closure expense related to the closure of our Beverly Center location in Los Angeles, California during the second quarter of fiscal 2008. The $274,000 charge in fiscal 2007 was the net effect of a decrease to store closure reserve of $19,000 for the sublease income for a Salt Lake City, Utah location, which closed in 2001, combined with a charge to impairment of $229,000 for the closure of our Beverly Center location in Los Angeles, California and a $64,000 decrease to anticipated sublease income for a restaurant in the Denver, Colorado area that closed in 2001.
Other (expense) income, net, primarily interest, decreased to expense of $129,000 in fiscal 2009, compared with expense of $133,000 in fiscal 2008 and income of $302,000 in fiscal 2007. The interest expense in fiscal 2009 and fiscal 2008 consisted of interest accruals related to our class action settlement in addition to the amortization of debt issuance costs incurred in conjunction with the new credit facility we secured during fiscal 2008.
In calculating the income tax expense or benefit for fiscal 2009, 2008 and 2007 we apply our statutory blended federal and state income tax rate against our pre-tax book income or loss and increase or decrease the those tax rates for the impact of various items. Our fiscal 2009 effective tax rate of 14.0% reflected a decrease from the statutory rate primarily as the result of improved efforts to generate additional federal employment tax credits. Our fiscal 2008 effective tax rate reflected an income tax benefit rate of 6.3%. This was primarily a result of additional federal employment credits and the reversal of approximately $105,000 of accrued interest expense due to a favorable ruling from the IRS on our tax accounting method change request. The impact of these favorable items on our effective tax rate was significantly increased as a result of our pre-tax book income being so close to zero. Our fiscal 2007 effective tax rate of 43.0% reflected a net increase from the statutory rate that included a decrease of 2.5% for federal tax credits, an increase of 1.3% for accrued interest, and a one-time increase of 3.2% related to the revaluation of the state deferred tax asset to reflect a revised statutory state tax rate.
SEASONALITY
Historically, we have experienced seasonal variability in our quarterly operating results with higher sales per restaurant in the second and third quarters than in the first and fourth quarters. The higher sales in the second and third quarters affect profitability by reducing the impact of our restaurants’ fixed and partially fixed costs, as a percentage of sales. This seasonal impact on our operating results is expected to continue.
INFLATION
The primary areas of our operations affected by inflation are food, supply, labor, fuel, lease, utility, insurance costs and materials used in the construction of our restaurants. Substantial increases in costs and expenses, particularly food, supply, labor, fuel and operating expenses could have a significant impact on our operating results to the extent that such increases cannot be passed through to our guests. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are subject to inflationary increases. We believe inflation with respect to food, labor, insurance and utility expenses has had a material impact on our results of operations in 2008 and 2007.
LIQUIDITY AND CAPITAL RESOURCES
Since we became public in 1999, we have funded our capital requirements through bank debt and cash flows from operations. We generated $11.3 million in cash flows from operating activities in fiscal 2009, $12.8 million in fiscal 2008, and $4.2 million in fiscal 2007. The decrease in cash flows from operating activities during fiscal 2009 is due to the second of three $2.5 million installment payments associated with the 2007 settlement of a class action lawsuit, changes in operating assets and liabilities, and non-cash expenses, including depreciation, amortization and non-cash share-based compensation, offset by higher net income. The increase in cash flow from operating activities during fiscal 2008 is primarily due to the following: first, $2.3 million in tax refunds resulting primarily from the previously mentioned income tax method change study that allowed us to immediately expense for tax purposes previously capitalized repairs and remodeling expenses; second, the initial payment of $2.5 million related to a previously settled class action lawsuit at the end of fiscal 2007 and the payment of $1.5 million in prepaid rent at the end of the fourth quarter of fiscal 2007; third, other changes in operating assets and liabilities, and non-cash expenses, including depreciation, amortization and share-based compensation, partially offset by decreased net income.
Net cash used in investing activities was $7.9 million in fiscal 2009, compared with $10.3 million in fiscal 2008 and $12.1 million in fiscal 2007. Net cash used in investing activities in fiscal 2009 was comprised of $7.9 million in capital expenditures. Net cash used in investing activities in fiscal 2008 was comprised primarily of $13.4 million in capital expenditures and $100,000 in purchases of investments offset by $3.2 million in proceeds from the sale of investments. Net cash used in investing activities in fiscal 2007 was comprised primarily of $12.1 million in capital expenditures. The decrease in cash used in investing activities in 2009 was driven by decreased new store development activity offset by proceeds from the release of restricted cash that was collateralizing standby letters of credit during 2008. The increase in cash used in investing activities for fiscal 2008 for capital expenditures was driven by increased new store development activity, offset by proceeds from the release of restricted cash that was collateralizing standby letters of credit.
Net cash provided by (used in) financing activities was net cash provided of $323,000 in fiscal 2009 compared with net cash used of $243,000 in fiscal 2008 and net cash provided of $1.5 million in fiscal 2007. Net cash provided by financing activities during fiscal 2009 consisted of proceeds from the exercise of common stock options in addition to excess tax benefits from share-based compensation. Net cash used in financing activities during fiscal 2008 consisted primarily of $246,000 in the payment of debt issuance costs. Net cash provided by financing activities during fiscal 2007 consisted of proceeds received from exercises of common stock options of $1.2 million and excess tax benefits from share-based compensation of $284,000.
On May 13, 2008, we entered into a $5.0 million revolving line of credit and a $15.0 million non-revolving line of credit (the “Credit Facility”) with Pacific Western Bank (the “Bank”). The revolving line of credit calls for monthly interest payments, which began June 5, 2008 at a variable interest rate based on the prime rate plus 0.25%. All outstanding principal plus accrued unpaid interest on the revolving line of credit is due May 13, 2010. The non-revolving line of credit calls for each advance to be evidenced by a separate note. Each advance shall have a maximum term of 57 months with an interest rate based on the prime rate plus 0.25%. Payments on advances shall be interest only for the first nine months, then principal and interest payments monthly. Both lines are collateralized by all of our assets and guaranteed by our subsidiaries. In addition, both lines require us to maintain our primary depository relationship with the Bank and the related accounts are subject to the right of offset for amounts due under the lines. Both lines are subject to certain financial and non-financial debt covenants and include a restriction on the payment of dividends without prior consent of the Bank. As of December 27, 2009, we were in compliance with all debt covenants. At December 27, 2009, we had $4.9 million of availability under the revolving line of credit, net of $99,000 of outstanding letters of credit, and $15.0 million of availability under the non-revolving line of credit.
In 2003, we obtained a letter of credit in the amount of $2.0 million related to our workers’ compensation insurance policy. The letter of credit was subject to automatic one-year extensions from the expiration date and thereafter, unless notification was made prior to the expiration date. In December 2004, this letter of credit was increased to $2.9 million. The letter of credit was extended in October 2006. We were also required, under the terms of the letters of credit, to pledge collateral of $3.0 million in 2006. During the second quarter of 2008, we issued a standby letter of credit under the Credit Facility we obtained during the second quarter. We were not required to pledge collateral for this standby letter of credit and, as a result, as of the second quarter of fiscal 2008, we included the $3.1 million in cash and cash equivalents. In December 2009, our workers’ compensation insurance company notified us that our current letter of credit in the amount of $2.5 million was no longer acceptable. As a result of this, in December 2009, we entered into an agreement with our workers’ compensation insurance company to replace the letter of credit with cash collateral in the amount of $1.8 million. At December 27, 2009, the $1.8 million is included in other assets.
We currently expect total capital expenditures in 2010 to be approximately $9.0 million to $15.0 million for restaurant openings, restaurant re-imaging, maintenance, and for corporate and information technology. We currently expect that future locations will generally cost approximately $500,000 to $600,000 per unit, net of any tenant improvement allowance and excluding pre-opening expenses. Some units may exceed this range due to the area in which they are built and the specific requirements of the project. Pre-opening expenses are expected to average between $50,000 and $60,000 per restaurant, which includes approximately $15,000 to $25,000 of non-cash rent expense during the build-out period.
We believe that the anticipated cash flows from operations and the availability on our credit facilities, combined with our cash and cash equivalents of $9.5 million as of December 27, 2009 will be sufficient to satisfy our working capital needs, required capital expenditures and class action settlement obligations for the next 12 months. We intend to tailor our expansion plan during 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in the Credit Facility. If our financial results drop below our expectations or we are unable to comply with the covenants in the Credit Facility, we will slow or curtail our expansion plan. Nevertheless, changes in our operating plans, lower than anticipated sales, increased expenses, potential acquisitions or other events may cause us to seek additional or alternative financing sooner than anticipated. Additional or alternative financing may not be available on acceptable terms, or at all. Failure to obtain additional or alternative financing as needed could have a material adverse effect on our business and results of operations.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following represents a comprehensive list of our contractual obligations and commitments as of December 27, 2009:
(1)
includes interest at 3% per annum.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the “Codification” or “ASC”) and the hierarchy of U.S. generally accepted accounting principles (GAAP), which establishes the Codification (ASC Subtopic 105-10) as the sole source of authoritative guidance recognized by the FASB to be applied by nongovernmental entities. All existing accounting standard literature, promulgated by the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other authoritative sources, excluding guidance from the Securities and Exchange Commission (“SEC”), will be superseded by the Codification. All non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification became effective for interim and annual periods ending after September 15, 2009. There is no change to the content of our consolidated financial statements or disclosures as a result of implementing the Codification. However, as a result of implementation of the Codification, previous references to new accounting standards and literature are no longer applicable. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification. All future references to authoritative accounting literature in our consolidated financial statements will be referenced in accordance with the Codification.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures are related to our cash and cash equivalents. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. The portfolio consists primarily of money market instruments. As of December 27, 2009, we had no investments with maturities in excess of one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. Due to the types of our investments and debt instruments, a 10% change in period-end interest rates or a hypothetical 100-basis-point adverse change in interest rates would not have a significant negative effect on our financial results.
We are exposed to market risk from changes in interest rates on debt. Our exposure to interest rate fluctuations is limited to our outstanding bank debt. At December 27, 2009, there were no amounts outstanding under our revolving or non-revolving lines of credit. The revolving line of credit calls for monthly interest payments beginning June 5, 2008 at a variable interest rate based on the prime rate plus 0.25%, resulting in an initial rate of 5.25%. All outstanding principal plus accrued unpaid interest on the revolving line of credit is due May 13, 2010. The non-revolving line calls for each advance to be evidenced by a separate note. Each advance shall have a maximum term of 57 months with an interest rate based on the prime rate plus 0.25%. Interest expense incurred during the 52 weeks ended December 27, 2009 was primarily due to interest accruals related to our class action settlement in addition to the amortization of debt issuance costs incurred in conjunction with the new credit facility we secured during fiscal 2008.
Many of the prices of food products purchased by us are affected by changes in weather, production, availability, seasonality, fuel and energy costs, and other factors outside our control. In an effort to control some of this risk, we have entered into some fixed price purchase commitments with terms of one year or less. We do not believe that these purchase commitments are material to our operations as a whole. In addition, we believe that almost all of our food and supplies are available from several sources.
Impact of Inflation
The primary areas of our operations affected by inflation are food, supplies, labor, fuel, lease, utility, insurance costs and materials used in the construction of our restaurants. Substantial increases in costs and expenses, particularly food, supplies, labor, fuel and operating expenses could have a significant impact on our operating results to the extent that such increases cannot be passed through to our guests. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are subject to inflationary increases. We believe inflation with respect to food, labor, insurance and utility expense has had a material impact on our results of operations in 2009, 2008, and
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of December 27, 2009 and December 28, 2008 and for each of the three fiscal years in the period ended December 27, 2009 and the report of our independent registered public accounting firm thereon are included elsewhere in this report. Supplementary unaudited quarterly financial data for fiscal 2009 and 2008 are included in this report in Note 14 to the consolidated financial statements.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Item 9T. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures:
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s fiscal year ended December 27 2009, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 27, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Management has concluded that, as of December 27, 2009, the Company’s internal control over financial reporting was effective based on these criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting:
There have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 27, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls:
Our management, including our chief executive officer and our chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Item 9B.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item relating to our directors and our corporate governance is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 annual meeting of stockholders. The information required by this item relating to our executive officers is included in Item 1, “Our Executive Officers.” The information required by this item relating to our executive officers is included in Item 1, “Our Executive Officers.” We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer, and/or persons performing similar functions.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 annual meeting of stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 annual meeting of stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 annual meeting of stockholders.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 annual meeting of stockholders.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements and Financial Statement Schedules:
The following documents are filed as part of the report:
(1)
See the index to our consolidated financial statements on page for a list of the financial statements being filed herein.
(2)
All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or other notes thereto.
(3)
See the Exhibits under Item 15(b) below for all Exhibits being filed or incorporated by reference herein.
(b)
Exhibits:
Number
Description
3.1(7)
Third Amended and Restated Certificate of Incorporation.
3.2(1)
Restated Bylaws (Exhibit 3.4).
3.4(3)
Certificate of Amendment of the Bylaws (Exhibit 3.4).
3.5(14)
Certificate of Amendment of the Bylaws
4.1(1)
Specimen common stock certificate (Exhibit 4.1).
10.1(1)
Amended and Restated Investors’ Rights Agreement, dated November 19, 1997 (Exhibit 10.7).
10.2(1)
Amendment No. 1 to the Amended and Restated Investors’ Rights Agreement, dated December 31, 1997 (Exhibit 10.8).
10.3(1)
Amendment No. 2 to the Amended and Restated Investor’s Rights Agreement, dated May 1998 (Exhibit 10.9).
10.4 (7)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P. dated March 12, 2004 (Exhibit 10.4).
10.5 (6)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated April 29, 2004 (Exhibit 10.1).
10.6 (8)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P. dated July 28, 2005 (Exhibit 10.1).
10.7 (8)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated July 28, 2005 (Exhibit 10.2).
10.8(1)
Lease Agreement between us and Macro Plaza Enterprises, dated October 27, 1997 (Exhibit 10.15).
10.9(1)
First Amendment to Lease Agreement between us and Cornerstone Corporate Centre, LLC, dated October 16, 1998 (Exhibit 10.16).
10.17(1)(2)
Form of Indemnification Agreement between us and each of our directors (Exhibit 10.25).
10.18(1)(2)
Form of Indemnification Agreement between us and each of our officers (Exhibit 10.26).
10.38(1)(2)
Employee Stock Purchase Plan (Exhibit 10.46).
10.42(4)†
Form of Franchise Agreement as of March 15, 2001.
10.51(5)(2)
Rubio’s Restaurants, Inc. Deferred Compensation Plan for Non-Employee Directors (Exhibit 10.51).
10.54(5)(2)
Stock Incentive Plan, as amended through March 6, 2003 (Exhibit 10.54).
10.56(7)(2)
Stock Incentive Plan Form of Stock Option Agreement.
10.57(7)(2)
Stock Incentive Plan Form of Addendum to Stock Option Agreement.
10.60(7)(2)
Stock Incentive Plan Form of Stock Issuance Agreement.
10.62(9)(2)
Letter Agreement between Gerry Leneweaver and the Company, dated June 1, 2005 (Exhibit 10.2).
10.63(10)(2)
Letter Agreement between Lawrence Rusinko and the Company, dated October 7, 2005 (Exhibit 10.1).
10.64(11)(2)
Letter Agreement between Daniel E. Pittard and the Company, dated August 21, 2006 (as corrected).
10.65(12)(2)
Form of Restricted Stock Unit Agreement under the Rubio’s Restaurants, Inc. 1999 Stock Incentive Plan.
10.66(12)(2)
Rubio’s Restaurants, Inc. Severance Pay Plan.
10.67(13)(2)
Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan.
10.68(12)(2)
Form of Restricted Stock Unit Agreement under the Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan.
10.69(2)
Rubio’s Restaurants, Inc. Deferred Compensation Plan, effective December 1, 2007.
10.70(14)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P., dated May 7, 2007 (Exhibit 10.8)
10.71(14)
Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated May 7, 2007 (Exhibit 10.9)
10.72(15)†
Sponsorship Agreement between us and the Mighty Ducks Hockey Club, LLC, dated February 28, 2006.
10.73(15)†
Beverage Marketing Agreement between us and The Coca-Cola Company, dated September 20, 2007.
10.74(15)†
Master Distributor Agreement between us and U.S. Foodservice, Inc., dated January 28, 2008.
10.75(15)†
Sponsorship Agreement between us and San Diego Ballpark Funding LLC, dated March 21, 2008.
10.76(2)(16)
Rubio’s Restaurants, Inc. 2008 Equity Incentive Plan.
10.77†(17)
Business Loan Agreement, dated May 13, 2008, by and between the Company and Pacific Western Bank ($15 million guidance line) (Exhibit 10.76).
10.78†(17)
Business Loan Agreement, dated May 13, 2008, by and between the Company and Pacific Western Bank ($5 million revolving line) (Exhibit 10.77)
10.79(18)
Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated September 11, 2008, between Rubio’s Restaurants, Inc. and Rosewood Capital, L.P. (Exhibit 10.1).
10.80(18)
Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated September 11, 2008, between Rubio’s Restaurants, Inc. and Ralph Rubio (Exhibit 10.2).
10.81(2)(19)
Amendment to Employment Offer Letter Agreement, dated December 19, 2008, between the Company and Daniel E. Pittard (Exhibit 10.76).
10.82(2)(19)
Form of Change of Control Agreement (Exhibit 10.77).
10.83(2)(19)
Form of Addendum to Stock Option Agreement (Exhibit 10.78).
10.84(20)
Second Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated July 29, 2009, between Rubio’s Restaurants, Inc. and Rosewood Capital, L.P. (Exhibit (10.1).
10.85(20)
Second Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated July 29, 2009, between Rubio’s Restaurants, Inc. and Ralph Rubio (Exhibit 10.2).
10.86(2)(20)
Amendment to 2008 Equity Incentive Plan (Exhibit 10.3).
10.87(2)(21)
Amended and Restated Change of Control Agreement, dated January 8, 2010, by and between the Company and Frank Henigman (Exhibit 10.1).
10.88(2)(21)
Amended and Restated Change of Control Agreement, dated January 8, 2010, by and between the Company and Ken C. Hull (Exhibit 10.2).
10.89(2)(21)
Amended and Restated Change of Control Agreement, dated January 8, 2010, by and between the Company and Marc S. Simon (Exhibit 10.3).
10.90(2)(21)
Form of Restricted Stock Unit Agreement (Exhibit 10.4).
10.91(2)(21)
Form of Notice of Grant of Restricted Stock Units (Exhibit 10.5).
10.92(2)(21)
Form of Performance Based Restricted Stock Unit Agreement (Exhibit 10.6).
10.93(2)(21)
Form of Notice of Grant of Performance Based Restricted Stock Units (Exhibit 10.7).
21.1
Subsidiary List.
23.1
Consent of Independent Registered Public Accounting Firm, KPMG LLP.
24.1
Powers of Attorney (Included under the caption “Signatures”).
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
†
The Commission has granted confidential treatment to us with respect to certain omitted portions of this exhibit (indicated by asterisks). We have filed separately with the Commission an unredacted copy of the exhibit.
(1)
Incorporated by reference to the above noted exhibit to our registration statement on Form S-1 (333-75087) filed with the SEC on March 26, 1999, as amended.
(2)
Management contract or compensation plan.
(3)
Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 2, 2001.
(4)
Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 1, 2002.
(5)
Incorporated by reference to our annual report on Form 10-K filed with the SEC on March 24, 2004 and amended on April 6, 2005.
(6)
Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on May 11, 2004.
(7)
Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 8, 2005.
(8)
Incorporated by reference to our current report on Form 8-K filed with the SEC on August 1, 2005.
(9)
Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on August 5, 2005.
(10)
Incorporated by reference to our current report on Form 8-K filed with the SEC on October 14, 2005.
(11)
Incorporated by reference to our current report on Form 8-K/A filed with the SEC on August 29, 2006.
(12)
Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on November 6, 2006.
(13)
Incorporated by reference to our Definitive Proxy Statement filed with the SEC on June 23, 2006.
(14)
Incorporated by reference to our current report on Form 8-K filed with the SEC on December 19, 2007.
(15)
Incorporated by reference to our annual report on Form 10-K filed with the SEC on March 31, 2008.
(16)
Incorporated by reference to our Definitive Proxy Statement filed with the SEC on August 28, 2008.
(17)
Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on August 8, 2008.
(18)
Incorporated by reference to our current report on Form 8-K filed with the SEC on September 16, 2008.
(19)
Incorporated by reference to our current report on Form 8-K filed with the SEC on December 22, 2008.
(20)
Incorporated by reference to our current report on Form 8-K filed with the SEC on August 3, 2009.
(21)
Incorporated by reference to our current report on Form 8-K filed with the SEC on January 14, 2010.
(c)
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or other notes hereto.
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.
POWER OF ATTORNEY
Know all persons by these present, that each person whose signature appears below constitutes and appoints Dan Pittard or Frank Henigman, his attorney-in-fact, with full power of substitution in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same with exhibits thereto, and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that the attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof.
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/ Dan Pittard
President and Chief Executive Officer
March 26, 2010
Dan Pittard
(Principal Executive Officer)
/s/ Frank Henigman
Chief Financial Officer
March 26, 2010
Frank Henigman
(Principal Financial and Accounting Officer)
/s/ Ralph Rubio
Chairman of the Board of Directors
March 26, 2010
Ralph Rubio
/s/ Kyle A. Anderson
Director
March 26, 2010
Kyle A. Anderson
/s/ Craig S. Andrews
Director
March 26, 2010
Craig S. Andrews
/s/ William R. Bensyl
Director
March 26, 2010
William R. Bensyl
/s/ Loren C. Pannier
Director
March 26, 2010
Loren C. Pannier
/s/ Timothy J. Ryan
Director
March 26, 2010
Timothy J. Ryan
RUBIO’S RESTAURANTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedules not filed: All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Rubio’s Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Rubio’s Restaurants, Inc. and subsidiaries (the Company) as of December 27, 2009 and December 28, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 27, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rubio’s Restaurants, Inc. and subsidiaries as of December 27, 2009 and December 28, 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 27, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
San Diego, California
March 26,
RUBIO’S RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See notes to consolidated financial statements.
RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See notes to consolidated financial statements.
RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See notes to consolidated financial statements.
RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
See notes to consolidated financial statements.
RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 27, 2009, DECEMBER 28, 2008 AND DECEMBER 30, 2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Rubio’s Restaurants, Inc. was incorporated in California in 1985 and reincorporated in Delaware in 1997. Rubio’s Restaurants, Inc. has two wholly owned subsidiaries, Rubio’s Restaurants of Nevada, Inc. and Rubio’s Incentives, LLC (collectively, the Company). As of December 27, 2009, the Company owns and operates a chain of 193 restaurants in California, Arizona, Nevada, Colorado, and Utah, including two licensed and three franchise locations.
The Company’s 193 restaurants are located more specifically as follows: 76 in the greater Los Angeles, California area, 47 in the San Diego, California area, 15 in the San Francisco, California area, 11 in the Sacramento, California area, 29 in Phoenix/Tucson, Arizona, 5 in Las Vegas, Nevada, 4 in the Denver, Colorado area and 6 in Salt Lake City, Utah.
BASIS OF PRESENTATION AND FISCAL YEAR - The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company operates and reports on a 52- or 53-week fiscal year ending on the last Sunday of December. Fiscal years 2009, 2008 and 2007, which ended on December 27, 2009, December 28, 2008 and December 30, 2007, respectively, included 52 weeks.
RECLASSIFICATIONS - The Company has reclassified certain items in the accompanying Consolidated Financial Statements and Notes thereto for prior periods to be comparable with the classification for the fiscal year ended December 27, 2009.
ACCOUNTING ESTIMATES - The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates.
ACCOUNTING STANDARDS CODIFICATION - In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the “Codification” or “ASC”) and the hierarchy of U.S. generally accepted accounting principles (GAAP), which establishes the Codification (ASC Subtopic 105-10) as the sole source of authoritative guidance recognized by the FASB to be applied by nongovernmental entities. All existing accounting standard literature, promulgated by the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other authoritative sources, excluding guidance from the Securities and Exchange Commission (“SEC”), will be superseded by the Codification. All non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification became effective for interim and annual periods ending after September 15, 2009. There is no change to the content of our consolidated financial statements or disclosures as a result of implementing the Codification. However, as a result of implementation of the Codification, previous references to new accounting standards and literature are no longer applicable. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification. All future references to authoritative accounting literature in our consolidated financial statements will be referenced in accordance with the Codification.
CASH EQUIVALENTS - Cash equivalents consist of money market instruments purchased with an original maturity of three months or less.
OTHER RECEIVABLES - Other receivables primarily comprise receivables from tenant improvement allowances due from landlords, delivery companies, income taxes and credit card processors. The allowance for doubtful accounts is based on historical experience, a review of existing receivables and existing economic conditions. The allowance for doubtful accounts at December 27, 2009 and December 28, 2008 was $126,000 and $239,000, respectively. Changes in other receivables are classified as operating activity in the consolidated statements of cash flows.
INVENTORY - Inventory consists of food, beverage, paper and restaurant supplies, and is stated at the lower of cost (first-in, first-out method) or market value. Changes in inventories are classified as operating activities in the consolidated statements of cash flows.
PROPERTY - Property is stated at cost. A variety of costs are incurred in the leasing and construction of restaurant facilities. The costs of buildings under development include specifically identifiable costs. The capitalized costs include development costs, construction costs, salaries and related costs, and other costs incurred during the acquisition or construction stage. Salaries and related costs capitalized totaled $258,000, $334,000 and $323,000 for fiscal years 2009, 2008 and 2007, respectively. Depreciation and amortization of buildings, leasehold improvements and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the initial lease term for certain leased properties (buildings and improvements range from 1 to 20 years and equipment 3 to 7 years). For leases with renewal periods at the Company’s option, the Company generally uses the original lease term, excluding renewal option periods to determine useful lives; if failure to exercise a renewal option imposes an economic penalty to the Company, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of appropriate estimated useful lives. The Company’s policy requires lease-term consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense.
IMPAIRMENT OF GOODWILL - Goodwill, which represents the excess of the cost of acquired businesses over the fair value of amounts assigned to assets acquired and liabilities assumed, is not amortized. Instead, goodwill is assessed for impairment annually at the same time every year, and when an event occurs or circumstances change, such that it is reasonably possible that an impairment may exist. We selected our fiscal year-end as our annual date. As a result of our assessment at December 27, 2009 and December 28, 2008, no impairment of goodwill was indicated.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets, such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques which may include discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Long-lived asset impairment amounts are estimates that we have recorded based on reasonable assumptions related to our restaurant locations at this point in time. The conditions regarding these locations may change in the future and could be materially affected by factors such as our ability to maintain or improve sales levels, our ability to secure subleases, our success at negotiating early termination agreements with lessors, the general health of the economy and resultant demand for commercial property. Because the factors used to estimate impairment expenses are subject to change, amounts recorded may not be sufficient, and adjustments may be necessary.
SELF-INSURANCE LIABILITIES - We are self-insured for a portion of our workers’ compensation insurance program. Maximum self-insured retention, including defense costs per occurrence is $150,000 for the claim years ended October 31, 2010 and October 31, 2009, and $350,000 for the claim year ended October 31, 2008. We account for insurance liabilities based on independent actuarial estimates of the amount of ultimate losses incurred. These estimates rely on actuarial observations of industry-wide and Rubio’s specific historical claim loss development. Our actual loss development may be better or worse than the development estimated by the actuary. In that event, we will modify the accrual, and our operating expenses will increase or decrease accordingly.
DEFERRED RENT AND OTHER LIABILITIES - Rent expense on operating leases with scheduled or minimum rent increases is expensed on the straight-line basis over the initial lease term, which includes the period of time from when the Company takes possession of the leased space until the store opening date (the build-out period). Deferred rent represents the excess of rent charged to expense over rent payable under the lease agreement. In connection with certain of the Company’s leases, the landlord has provided the Company with tenant improvement allowances. These lease incentives, as well as rent holidays, are recorded in “Accrued expenses and other liabilities” and “Deferred rent and other liabilities” and are amortized over the initial lease term as reductions to rent expense.
FINANCIAL INSTRUMENTS - The carrying values of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair values due to the short-term nature of these instruments. At December 27, 2009 and December 28, 2008, the Company had no material financial instruments subject to significant market exposure.
REVENUE RECOGNITION - Revenues from the operation of company-owned restaurants are recognized when sales occur. Franchise revenue is comprised of royalties from franchised restaurants and is recorded as revenue as earned. The Company recognizes a liability upon the sale of its gift cards and recognizes revenue when these gift cards are redeemed in its restaurants. The portion of the gift cards that is not expected to be redeemed (breakage) is recognized ratably over three years based on historical and expected redemption trends. This adjustment is classified as revenues in the Company’s consolidated statements of operations. Revenue recognized on unredeemed gift card balances was $110,000 in fiscal 2009, $106,000 in fiscal 2008, and $382,000 in fiscal 2007.
Sales from Company-owned restaurant revenues are recognized as revenue at the point of the delivery of meals. All sales taxes are presented on a net basis and are excluded from revenue.
STORE PRE-OPENING EXPENSES - Costs incurred in connection with the training of personnel, occupancy during the build-out period, and promotion of new store openings are expensed as incurred.
ADVERTISING - Advertising costs incurred to produce media advertising for new campaigns are expensed in the year in which the advertising first takes place. Other advertising costs are expensed when incurred. Advertising costs are included in restaurant occupancy and other expenses and totaled $5.2 million for the fiscal year 2009, $4.7 million for fiscal year 2008 and $5.0 million for fiscal year 2007.
INCOME TAXES - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax positions in income tax expense.
SHARE-BASED PAYMENT - Employee stock-based compensation is recognized as a cost in the financial statements over the requisite service period. Cost is measured using the grant date fair value of the award. We estimate grant date fair value using the Black-Scholes-Merton option-pricing model.
ASC Topic 718 also requires that excess tax benefits recognized in equity related to stock option exercises are reflected as financing cash inflows. Stock-based compensation cost that has been included in income from continuing operations amounted to $1,159,000, $1,518,000 and $1,243,000 for the fiscal years 2009, 2008 and 2007, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation arrangements was $464,000, $607,000 and $491,000 for the fiscal years 2009, 2008 and 2007, respectively.
Refer to Note 8, Share-Based Compensation Plans, for information regarding the assumptions used by the Company in valuing its stock options.
COMMON STOCK AND EARNINGS PER SHARE - Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share, except that the weighted average number of shares of common stock outstanding is increased to include the effect of potentially dilutive common shares, which are comprised of stock options and restricted stock awards granted to employees under equity-based compensation plans that were outstanding during the period. Potentially dilutive common shares are excluded from the diluted earnings per share computation when their effect would be anti-dilutive (see Note 12).
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money market accounts with third party financial institutions. These balances may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company monitors the cash balances in its operating accounts on a daily basis and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. The Company has not experienced any material losses on its cash or cash equivalent accounts.
FAIR VALUE MEASUREMENT - On January 1, 2008, the Company adopted the authoritative guidance for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
On January 1, 2009, the Company adopted the authoritative guidance for fair value measurements of non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
See Note 10, Fair Value Measurement for additional information.
SUBSEQUENT EVENTS - The Company has evaluated subsequent events through the time of filing this Form 10-K with the SEC, and determined there were no other items to disclose.
2. IMMATERIAL CORRECTION OF AN ERROR IN PRIOR PERIODS
During the second quarter of fiscal 2009 but prior to the filing of the Company’s Form 10-Q for the first quarter, the Company identified errors related to its payroll tax accrual balance. As a result, the Company’s historical payroll tax expense, in addition to penalties and interest, and the related accrued liability balances were misstated. In addition, income tax expense and income tax receivable balances were impacted by these adjustments. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the errors from qualitative and quantitative perspectives, and concluded that the errors were immaterial to the prior periods. Consequently, the Company has revised its historical financial statements for fiscal 2007 and fiscal 2008 within this report. The Company has recognized the cumulative effect of the error on periods prior to those that will be presented by increasing other receivables, increasing other current liabilities and increasing accumulated deficit by $49,000, $263,000 and $214,000, respectively, as of January 1, 2007. The errors had no impact on the consolidated statement of operations for the year ended December 30, 2007. In addition, the Company reclassified store closure accrual of $45,000 into accrued expenses and other current liabilities.
The following table represents a summary of the effects of the immaterial error correction on the condensed consolidated balance sheet for the period indicated (unaudited and in thousands):
The following table represent a summary of the effects of the immaterial error correction on the consolidated statements of operations for the period indicated (in thousands, except per share amounts):
Cash flows from operating, investing and financing activities for the above periods were not impacted by this immaterial correction of an error. However, net income (loss) was revised as shown above with an offset to the other receivables and accrued expenses and other liabilities captions within operating activities on the consolidated statement of cash flows.
3. CONSOLIDATED BALANCE SHEET DETAILS
Consolidated balance sheet details as of December 27, 2009 and December 28, 2008, respectively (in thousands):
4. ASSET IMPAIRMENT AND STORE CLOSURE ACCRUAL
For the fiscal year ended December 27, 2009, the Company recorded impairment charges of $1,068,000 related to eleven under-performing stores.
The Company recorded a net store closure reversal of $46,000 during fiscal 2008. A store closure reversal of $91,000 was recorded in the first quarter of fiscal 2008 due to the Company’s decision to re-brand a location in the Fort Collins, Colorado area that was closed in 2001 and was offset by a $45,000 store closure expense related to the closure of the Beverly Center location in Los Angeles, California during the second quarter of fiscal 2008.
The Company recorded a net asset impairment and store closure accrual of $274,000 during fiscal 2007. This charge was the net effect of a reduction to store closure of $19,000 for the sublease income for a Salt Lake City, Utah location, which closed in 2001, combined with a charge to impairment of $229,000, for the closure of a Los Angeles, California area restaurant and a $64,000 adjustment to anticipated sublease income for a restaurant in the Denver, Colorado area that closed in 2001.
The components of the store closure accrual in fiscal 2007, 2008 and 2009 are as follows (in thousands):
5. CREDIT FACILITIES
LETTER OF CREDIT - On May 13, 2008, the Company entered into a $5.0 million revolving line of credit and a $15.0 million non-revolving line of credit (the “Credit Facility”) with Pacific Western Bank (the “Bank”). The revolving line of credit calls for monthly interest payments beginning June 5, 2008 at a variable interest rate based on the prime rate plus 0.25%, resulting in an initial rate of 5.25%. All outstanding principal plus accrued unpaid interest on the revolving line of credit is due May 13, 2010. The non-revolving line of credit calls for each advance to be evidenced by a separate note. Each advance shall have a maximum term of 57 months with an interest rate based on the prime rate plus 0.25%. Payments on advances shall be interest only for the first nine months, then principal and interest payments monthly. Both lines are collateralized by all assets of the Company and guaranteed by its subsidiaries. In addition, both lines require the Company to maintain its primary depository relationship with the Bank and the related accounts are subject to the right of offset for amounts due under the lines. Both lines are subject to certain financial and non-financial debt covenants and include a restriction on the payment of dividends without prior consent of the Bank. At December 27, 2009, the Company had $4.9 million of availability under the revolving line of credit, net of $99,000 of outstanding letters of credit, and $15.0 million of availability under the non-revolving line of credit. As of December 27, 2009, there were no funded borrowings outstanding under the Credit Facility.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases restaurant and office facilities, land, vehicles and office equipment under various operating leases expiring through 2019. The leases generally provide renewal options of 5 years. Certain leases are subject to scheduled annual increases or minimum annual increases based upon the consumer price index, not to exceed specific maximum amounts. Certain leases require contingent percentage rents based upon sales and other leases pass through common area charges to the Company. Rental expense under these operating leases was $22.0 million, $20.0 million, and $17.8 million for fiscal years 2009, 2008 and 2007, respectively. Contingent percentage rent based on sales included in rental expense was $494,000, $612,000 and $666,000 for fiscal years 2009, 2008 and 2007, respectively.
Future minimum annual lease commitments, including obligations for closed stores and minimum future sublease rentals expected to be received as of December 27, 2009 are as follows (in thousands):
(A)
The Company has subleased buildings to others, primarily as a result of closing certain underperforming company-operated locations. These leases provide for fixed payments with contingent rents when sales exceed certain levels. Sub lessees generally bear the cost of maintenance, insurance, and property taxes. The Company directly pays the rent on these master leases, and then collects associated sublease rent amounts from its sub lessees. These obligations are the responsibility of the Company should the sub lessee not perform under the sublease.
LITIGATION - In March 2007, the Company reached an agreement to settle a class action lawsuit related to how it classified certain employees under California overtime laws. The settlement agreement, which was approved by the court in June 2007, provides for a settlement payment of $7.5 million payable in three installments. The first $2.5 million installment was distributed on August 31, 2007 and the second $2.5 million installment was paid into a qualified settlement fund on December 29, 2008. The third and final installment of $2.5 million is due on or before June 28, 2010. As of December 27, 2009, the remaining balance of $2.5 million, plus accrued interest of $274,000, was accrued in “Accrued expenses and other liabilities”. The Company learned that 140 current and former employees who qualified to participate as class members in this class action settlement were not included in the settlement list approved by the court. The Company filed a motion requesting the court to include these individuals in the approved settlement and to provide that their claims are payable out of the aggregate settlement payment, as the Company believes the parties intended when they reached a settlement. The matter has not yet been finally resolved and there is no assurance that the Company will be successful. At this time, it is not possible to reasonably estimate the outcome of or any additional liability from this case.
On March 24, 2005, a former employee of the Company filed a California state court action alleging that the Company failed to provide the former employee with certain meal and rest period breaks and overtime pay. The parties moved the matter into arbitration, and the former employee amended the complaint to claim that the former employee represents a class of potential plaintiffs. The amended complaint alleges that current and former shift leaders who worked in the Company's California restaurants during specified time periods worked off the clock and missed meal and rest breaks. This case is still in the pre-class certification discovery and briefing stage, and no class has been certified. Holden, a former employee, seeks penalties under California's Private Attorney General Act of 2004, separate and apart from her certification of a class of shift leaders. The Company denies the former employee’s claims, and intends to continue to vigorously defend this action. A recent decision by the California Court of Appeals in Brinker Restaurant Corporation v. Superior Court (Hohnbaum) last year held that employers do not need to affirmatively ensure employees actually take their meal and rest breaks but need only make meal and rest breaks “available” to employees. The Brinker case was recently taken up for review by the California Supreme Court. At this time, the Company has no assurances of how the California Supreme Court will rule in the Brinker case. Regardless of merit or eventual outcome, this arbitration may cause a diversion of the Company’s management’s time and attention and the expenditure of legal fees and expenses.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
7. INCOME TAXES
The components of the income tax expense for fiscal years 2009, 2008 and 2007 are as follows (in thousands):
The income tax expense differs from the federal statutory rate because of the effect of the following items for fiscal years 2009, 2008 and 2007:
In 2007, the Company reduced its statutory state tax rate net of federal benefit from 5.8% to 5.6% to reflect the shifting of operations to jurisdictions with no income tax or low income tax rates. The result of this change was a one-time, unfavorable adjustment of 3.4% to the Company's state tax rate for the revaluation of the Company's state deferred tax asset at the lower effective state tax rate. In 2008, the Company similarly reduced its statutory state tax rate net of federal benefit to 5.5%, where it remained through 2009. Although the dollar amount of the one-time, unfavorable adjustment for the revaluation of the deferred tax asset in 2008 was not significant, the impact of the adjustment to the 2008 state tax rate was 7.9% due to the Company's pre-tax book income being closer to $0 than in other years.
For the years ended December 27, 2009 and December 28, 2008, the Company’s combined federal and state income tax receivables were $486,000 and $967,000, respectively.
Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes, as well as available tax credits. The tax-effected temporary differences comprising the Company’s deferred income taxes as of December 27, 2009 and December 28, 2008 are as follows (in thousands):
The Company has State Enterprise Zone credit carryforwards as of December 27, 2009 and December 28, 2008 of $227,000 and $228,000, respectively. State income tax credits will carry forward indefinitely and may be used to offset future state income tax. The Company also has State net operating loss carryforwards of $3.2 million as of December 27, 2009 and $2.9 million as of December 28, 2008. State net operating losses will carryforward through 2019 and may be used to offset future state taxable income. The Company believes that the remaining deferred tax assets will be realized through future taxable income or alternative tax strategies.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 27, 2009 and December 28, 2008 is as follows (in thousands):
As of December 27, 2009, the unrecognized tax benefits, net of their state tax benefits, that would negatively impact the Company’s effective tax rate if recognized were $6,000.
A significant portion of the Company's beginning balance of unrecognized tax benefits for 2008 related to an uncertain tax position for worker's compensation costs. The Company filed a request to change its accounting method for workers' compensation costs with the IRS and, during the third quarter of 2008, the IRS approved the Company's request. This approval allowed the Company to increase its tax liability for the impact of the change over a four-year period beginning with its 2007 tax return. The Company reduced its balance of unrecognized tax benefits by $953,000 for the impact of the approval on this uncertain tax position.
The IRS is currently examining the Company's 2006 and 2007 tax years. During the second quarter of fiscal 2009, the IRS proposed an adjustment related to inventory capitalization with a tax impact of $837,000. After considering restaurant specific company operations, the IRS issued a revised proposed adjustment with a tax impact of $321,000. The Company subsequently submitted an additional revision to the calculation with a tax impact of $161,000. The IRS reviewed the revised calculation but did not agree with the Company's position. As the Company feels strongly that its position more accurately reflects existing tax law, the Company has filed a formal appeal with the IRS.
The Company has recorded an unrecognized tax benefit of $161,000 related to the IRS proposed adjustment. It has also recorded unrecognized tax benefits for the impact of the uncertain tax position on inventory capitalization on other years following the examination period and on the Company's filings in states where the Company does business.
The Company expects to resolve the uncertain tax position on inventory capitalization with the IRS and other taxing jurisdictions within the next twelve months. The resolution of this matter and others in the next twelve months may result in a reduction of unrecognized tax benefits by up to $247,000. As of the end of 2009, the Company’s 2008 and 2009 federal tax years and 2005 through 2009 state tax years were not under examination but remained open to potential examination by taxing authorities. Based on the status of the Company’s current federal examination and the absence of any other open examinations, the Company is not aware of any other events that might significantly impact the balance of unrecognized tax benefits during the next twelve months.
The Company classifies interest expense and penalties on income tax liabilities and interest income on income tax refunds as additional income tax expense or benefit, respectively. During the 2009 and 2008 years, the Company accrued net interest expense of $15,000 and net interest income of $134,000, respectively. The interest income in 2008 was primarily the result of the Company's reversal of approximately $105,000 of accrued interest expense as a result of the IRS approval of the Company’s request for method change and the lapse of the statute of limitations on the Company’s 2004 Federal tax year. As of December 27, 2009 and December 28, 2008, the Company's balances of accrued interest expense were $69,000 and $55,000, respectively.
8. SHARE-BASED COMPENSATION PLANS
STOCK INCENTIVE PLAN - On March 18, 1999 and March 24, 1999, the Board of Directors and the stockholders, respectively, of the Company approved the 1999 Stock Incentive Plan (the 1999 Plan). All outstanding options under the 1995 Stock Option/Stock Issuance Plan and the 1998 Stock Option/Stock Issuance Plan (collectively, the “predecessor plans”) were incorporated into the 1999 Plan. After the adoption of the 1999 plan, no further grants were made under the predecessor plans. The 1999 Plan is administered by the Company’s Compensation Committee with respect to the officers and directors of the Company and by the Company’s Board of Directors with respect to other eligible employees and consultants of the Company (the Compensation Committee or the Board of Directors, as applicable, the “1999 Plan Administrator”).
The stock issuable under the 1999 Plan consisted of shares of authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. The number of shares of common stock reserved for issuance under the 1999 Plan automatically increased on the first trading day in January each year. The increase was equal to 3% of the total number of shares of common stock outstanding as of the last trading day in December of the preceding year, not to exceed 450,000 shares in any given year. In addition, no participant in the 1999 Plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of common stock in the aggregate per calendar year. Each option has a maximum term of 10 years, or 5 years in the case of any greater than 10% stockholder, and is subject to earlier termination in the event of the optionee’s termination of service.
The 1999 Plan is divided into five separate components: (1) the discretionary option grant program, (2) the stock issuance program, (3) the salary investment option grant program, (4) the automatic option grant program and (5) the director fee option grant program. The salary investment option grant program was never implemented, and the automatic option grant program and the director fee option grant program have been discontinued.
The discretionary option grant and stock issuance programs provide for the issuance of incentive and non-statutory options for eligible employees and service providers, and stock issuances and share right awards, including restricted stock units, for cash or in consideration for services rendered. The option exercise price per share is fixed by the 1999 Plan Administrator in accordance with the following provisions: (1) the exercise price shall not be less than 100% of the fair market value per share of the common stock on the date of grant and (2) if the person to whom the option is granted is a greater-than-10%-stockholder, then the exercise price per share shall not be less than 110% of the fair market value per share of the common stock on the date of grant. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the 1999 Plan Administrator as set forth in the related individual option agreements. Generally, options granted under the 1999 Plan have become exercisable and vest in three equal annual installments over a three-year period. Stock issuances and share right awards, including restricted stock units, may be issued for past services rendered to the Company without any cash payment. In addition, the 1999 Plan Administrator can determine a purchase price to be paid in cash or check that will not be less than the fair market value of the common stock on the issuance date.
On the date of each annual stockholders’ meeting after the 2006 annual stockholders’ meeting, each individual who continues to serve as a non-employee board member will be granted an annual award under the 1999 Plan consisting of restricted stock units for 4,500 shares of our common stock, which will vest upon the earlier of the expiration of 12 months of continuous service as a director or the director’s death, or permanent disability, a change of control or a corporate transaction, as such terms are defined in the 1999 Plan. In fiscal 2009, 2008 and 2007, each non-employee director received restricted stock units for 4,500 shares of our common stock.
The 1999 Plan terminated in accordance with its terms on March 17, 2009. At the time of termination, a total of 4,222,138 shares of common stock were authorized for issuance under the 1999 Plan, which includes the shares subject to outstanding options under the predecessor plans. As discussed below, the Company’s Board of Directors and stockholders approved the 2008 Equity Incentive Plan in connection with the Company’s annual meeting in 2008 to replace the 1999 Plan. No further grants or awards will be made under the 1999 Plan.
EQUITY INCENTIVE PLAN - In connection with the Company’s annual meeting in 2008, the Board of Directors and the stockholders of the Company approved the 2008 Equity Incentive Plan (the “2008 Plan”) to replace the 1999 Plan, which terminated on March 17, 2009. The 2008 Plan permits the Company to issue stock options (both incentive stock options and non-statutory stock options) and stock awards (including stock appreciation rights, stock units, stock grants and other similar equity awards). The 2008 Plan is administered by the Company’s Compensation Committee and the Company’s Board of Directors.
The number of shares of common stock initially reserved for issuance under the 2008 Plan consist of that number of shares that (i) remain available for sale or issuance under the 1999 Plan and (ii) shares subject to outstanding awards issued under the 1999 Plan (including the 2006 Executive Incentive Plan); provided that in the case of (ii) such shares only become available for issuance under the 2008 Plan if and to the extent such outstanding awards are cancelled, expire or are forfeited or such shares are repurchased by the Company. The number of shares available for sale or issuance under the 2008 Plan will automatically increase on the first trading day of January each calendar year during the term of the 2008 Plan, beginning with calendar year 2009, by an amount equal to three percent (3%) of the total number of shares outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 450,000 shares. As of December 27, 2009, a total of 4,222,138 shares of common stock were authorized for issuance under the 2008 Plan, which includes the shares subject to outstanding options under all predecessor plans. During July 2009, the Company’s Board of Directors suspended the Plan’s evergreen feature for the 2010 and 2011 calendar years.
The following is a summary of stock option activity for fiscal years 2007, 2008 and 2009 pursuant to the 1999 Plan and the 2008 Plan:
The following table summarizes information as of December 27, 2009 concerning currently outstanding and exercisable options:
STOCK OPTIONS - The following table summarizes stock option activity for fiscal year 2009:
In 2009, 2008 and 2007, the aggregate intrinsic value of stock options (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) exercised was $218,000, $0 and $900,000, respectively.
Compensation cost, which was determined using the weighted average fair value at the date of grant, was $2.57, $1.96 and $4.61 for options granted during 2009, 2008 and 2007, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. For fiscal 2009, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 53%; a risk-free interest rate of 2% and expected lives of options of 4.6 years. For fiscal 2008, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 49%; a risk-free interest rate of 2% and expected lives of options of 5.0 years. For fiscal 2007, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 45%; a risk-free interest rate of 3.9% and expected lives of options of 6.4 years. As of December 27, 2009, there was $667,945 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 1.39 years. As of December 28, 2008, there was $1,303,503 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 2.1 years. As of December 30, 2007, there was $1,916,452 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 2.4 years.
The estimated fair value of options granted is subject to the assumptions made, and if the assumptions change, the actual fair value amounts could be significantly different.
Included in general and administrative and restaurant labor expenses on the consolidated statements of operations is stock compensation expense measured and recognized at $1,159,000 in 2009, $1,518,000 in 2008, and $1,243,000 in 2007.
EMPLOYEE STOCK PURCHASE PLAN - On March 18, 1999 and March 24, 1999, the board and stockholders, respectively, approved the 1999 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the completion of the Company’s initial public offering. The ESPP allows eligible employees, as specified in the ESPP, to purchase shares of common stock in semi-annual intervals through payroll deductions under this plan. The accumulated payroll deductions will be applied to the purchase of shares on the employee’s behalf at a price per share equal to 85% of the lower of (1) the fair market value of the Company’s common stock at the date of entry into the current offering period or (2) the fair market value on the purchase date. An initial reserve of 200,000 shares of common stock has been authorized for issuance under the ESPP. The board may alter, suspend or discontinue the ESPP. However, certain amendments to the ESPP may require stockholder approval. There has been no activity under the ESPP during 2009. The ESPP terminated pursuant to its terms on July 31, 2009.
EXECUTIVE INCENTIVE PLAN - On July 27, 2006, the stockholders of the Company approved the Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan (the “EIP”). The purpose of the EIP is to motivate executive officers and other members of senior management with the grant of long-term performance based stock or cash awards.
The EIP is administered by the compensation committee of the board, which will select participants eligible to receive awards, usually in the form of restricted stock units, determine the amount of each award and the measurement periods for evaluating participant performance, and establish for each measurement period (i) the performance goals, based on business criteria, and the target levels of performance for each participant and (ii) a payout formula or matrix for calculating a participant’s award based on actual performance. Performance goals may be based on one or more of the following business criteria: return on equity, assets or invested capital; stockholder return, actual or relative to an appropriate index (including share price or market capitalization); actual or growth in revenues, orders, operating income, or net income (with or without regard to amortization/impairment of goodwill); free cash flow generation, operational performance, including asset turns, revenues per employee or per square foot, or comparable store sales; or individually designed goals and objectives that are consistent with the participant’s specific duties and responsibilities and that are designed to improve the financial performance of the Company or a specific division, region or subsidiary.
At the end of each measurement period, the compensation committee will determine the extent to which the performance goals for each participant were achieved. Stock awards and restricted stock units under the EIP are payable from the Company’s 1999 Plan or any stock option, equity incentive or similar plan that may be adopted by the Company in the future, or in cash, at the option of the Company. No participant may receive an award of more than 300,000 shares under the EIP in any one fiscal or calendar year.
The Company granted market performance vested stock awards to certain employees under the EIP in fiscal year 2007. No awards were granted during fiscal 2008 and 2009. The awards granted in fiscal year 2007 represent a right to receive a certain number of shares of common stock upon achievement of share price performance goals at the end of one-year, two-year and three-year periods. The first three performance periods ended on December 20, 2007, 2008 and 2009, respectively. ASC 718, Compensation - Stock Compensation (formerly SFAS No. 123R) requires that the valuation of market condition awards consider the likelihood that the market condition will be satisfied rather than assuming that the award is vested on the award date. Because the share-price compounded annual growth rate targets represent a more difficult threshold to meet before payout, with greater uncertainty that the market condition will be satisfied, these awards have a lower fair value than those that vest based solely on the passage of time. However, compensation expense is required to be recognized under ASC 718 for an award regardless of when, if ever, the market condition is satisfied. The Company determined the fair value on the date of grant of $4.27, $4.48 and $4.78 for the awards with performance periods ending in 2007, 2008 and 2009, respectively. The fair value of each option grant was estimated on the date of grant using a Stochastic model, under the following assumptions: an expected dividend of zero; expected stock price volatility of 25.7%, 32.2% and 37.8% for the awards with performance periods ending in 2007, 2008 and 2009, respectively, and; risk-free interest rate of 4.9%, 4.6% and 4.5% for the awards with performance periods ending in 2007, 2008 and 2009, respectively. The compensation associated with these shares is being expensed over the service period. The amount of compensation expense recorded was $54,000 $86,000 and $173,000 for fiscal 2009, 2008 and 2007, respectively. The expected cost for all awards granted is based on the fair value on the date of grant, as it is the Company’s intent to settle these awards with shares of common stock. These stock awards are payable under the 1999 Plan.
RESTRICTED STOCK UNITS - The following table summarizes restricted stock unit activity during fiscal years 2009, 2008 and 2007:
As of December 27, 2009, there was $74,442 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 0.59 years. For the fiscal year ended December 28, 2008, there was $120,582 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 0.75 years. For the fiscal year ended December 30, 2007, there was $270,015 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 1.16 years.
9. BENEFIT PLANS
EMPLOYEE SAVINGS PLAN - The Company has a defined contribution 401(k) plan. This plan allows eligible employees to contribute a percentage of their salary, subject to annual limits, to the plan. The Company matches 25% of each eligible employee’s contributions up to 6% of gross salary. The Company’s contributions vest over a five-year period. The Company contributed $58,000, $56,000 and $54,000 for fiscal years 2009, 2008 and 2007, respectively.
EXECUTIVE DEFERRED COMPENSATION PLAN - The Company adopted a deferred compensation plan (the Plan), effective on December 1, 2007. Under the Plan, beginning on December 31, 2007, the Company’s management and other highly compensated employees and non-employee members of the board who are not eligible to participate in the Company’s 401(k) plan based on their compensation levels can defer a portion of their compensation and contribute such amounts to one or more investment funds. Funds are invested in a combination of mutual funds and corporate owned life insurance contracts (“COLI”) that are specifically designed to informally fund savings plans of this nature. The Plan is not intended to meet the qualification requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended, but is intended to meet the requirements of Section 409A of the Internal Revenue Code, and to be an unfunded arrangement providing deferred compensation to eligible employees who are part of a select group of management or highly compensated employees within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended. The maximum aggregate amount deferrable under the Plan is 80% of base salary and 100% of cash incentive compensation. The Company makes bi-weekly matching contributions in an amount equal to 25% of the first 6% of employee compensation contributed, with a maximum annual Company contribution of 6% of employee compensation per year (subject to annual dollar maximum limits). The Company’s contributions to the Plan vest at the rate of 25% each year beginning after the employee’s first year of service. For the fiscal years ended December 27, 2009 and December 28, 2008, the Company’s matching contribution expense under the Plan was $32,000 and $33,000, respectively.
Additionally, the Company entered into a rabbi trust agreement to protect the assets of the Plan. Each participant’s account is comprised of their contribution, the Company’s matching contribution and their share of earnings or losses in the Plan. In accordance with ASC 710-10-35, Compensation, (formerly EITF 97-14) (Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested), the accounts of the rabbi trust are reported in the Company’s consolidated financial statements. The Company reports these investments within other assets and the related obligation within other liabilities on the consolidated balance sheet. Such amounts totaled $452,000 and $460,000 at December 27, 2009, respectively, and $201,000 and $180,000 at December 28, 2008, respectively. The investments are reported at fair value with the realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recorded in general and administrative expenses.
NON-EMPLOYEE DEFERRED COMPENSATION PLAN - The Company adopted a non-employee deferred compensation plan on March 6, 2003. Under this plan, non-employee directors can defer fees into either a cash account or into discounted options under the Company’s 1999 Plan. Any deferrals into cash are credited to a cash account that will accrue earnings at an annual rate of 2% above the prime lending rate. At the time of election, a participant must choose the dates on which the cash benefit will be distributed. In October 2004, Congress enacted Internal Revenue Code Section 409A governing deferred compensation. The Company operates this deferred compensation plan in accordance with Section 409A. Because Section 409A restricts the use of discounted stock options, the Company will evaluate the extent to which that portion of the non-employee deferred compensation plan will be implemented in the future. This plan had no impact on the Company’s results of operations for fiscal 2009, 2008, or 2007.
10. FAIR VALUE MEASUREMENT
As of December 27, 2009 and December 28, 2008, the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis are comprised of an Executive Deferred Compensation Plan of Rubio’s Restaurants, Inc., (the “Plan”). The Plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds held in a rabbi trust. The Plan investments are reported at fair value based on third-party broker statements which represents level 2 in the ASC 820 (formerly SFAS 157) fair value hierarchy (see Note 9). The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in general and administrative expense on the consolidated statements of operations.
The Company’s non-financial assets (liabilities) that are measured using fair value techniques on a nonrecurring basis include valuing potential impairment losses related to property and equipment. The Company tests for the impairment of property and equipment when triggering events occur, and such impairment, if any, is measured at fair value. The inputs for fair value of property and equipment would be based on Level 3 inputs as data used for such fair value calculations and would be based on discounted cash flows that are not observable from the market, directly or indirectly.
The following table presents the fair values for those assets and liabilities measured at fair value during fiscal 2009 on a non-recurring basis, and remaining on our Consolidated Balance Sheet as of December 27, 2009. Total losses include losses recognized from all non-recurring fair value measurements during fiscal 2009 (in thousands):
The fair value of long-lived assets held and used, is typically determined using discounted cash flows to estimate the price that a franchisee would be expected to pay for a restaurant and its related assets.
11. RELATED PARTIES
The following is a listing of the Company’s related-party transactions:
Craig Andrews, a Company director, is a partner at the law firm of DLA Piper LLP (US) and was a shareholder of Heller Ehrman, LLP through June 2008. During fiscal 2009 and 2008, the Company paid DLA Piper LLP $406,662 and $182,425, respectively, and during fiscal 2009 and 2008, the Company paid Heller Ehrman, LLP $0 and $150,955, respectively, for rendering general corporate and other legal services.
In July 2005, the Company entered into agreements with Rosewood Capital, L.P. or Rosewood, and Ralph Rubio, who at the time was Chairman of the Board and Chief Executive Officer, to extend the registration rights held by Rosewood and Mr. Rubio under an investor’s rights agreement entered into prior to the Company’s initial public offering. Neither Mr. Rubio nor Mr. Anderson, a Company director, voted on the approval of the transaction with respect to these extension agreements. In May 2007, the Company, Rosewood and Mr. Rubio, who at the time was Chairman of the Board, entered into agreements to further extend the registration rights held by Rosewood and Mr. Rubio from December 31, 2007 to June 30, 2009. As part of these extension agreements, Rosewood and Mr. Rubio agreed that they would not demand that the Company register their stock prior to June 30, 2009. Neither Mr. Rubio nor Mr. Anderson, a Company director and affiliated with Rosewood, voted on the approval of the transaction with respect to these extension agreements. On September 11, 2008, the Company entered into an agreement with each of Rosewood and Mr. Rubio to extend the time period in which Rosewood and Mr. Rubio may exercise their registration rights from June 30, 2009 to December 30, 2010. In consideration for this extension, Rosewood and Mr. Rubio each agreed not submit a request to register their stock until December 31, 2008. Neither Mr. Rubio nor Mr. Anderson voted on the approval of the transaction with respect to these extension agreements. On July 29, 2009, the Company entered into an agreement with each of Rosewood and Mr. Rubio to extend the time period in which Rosewood and Mr. Rubio may exercise their registration rights from December 30, 2010 to December 30, 2011. In consideration for this extension, Rosewood and Mr. Rubio each agreed not submit a request to register their stock until December 31, 2009. Neither Mr. Rubio nor Mr. Anderson voted on the approval of the transaction with respect to these extension agreements.
12. NET INCOME PER SHARE
A reconciliation of basic and diluted net income per share is as follows (in thousands, except per share data):
For the fiscal years ended December 27, 2009, December 28, 2008, and December 30, 2007, common stock options of 1.5 million, 1.7 million, and 511,000 shares, respectively, were excluded in calculating diluted earnings per share as the exercise price exceeded fair market value and inclusion would have been anti-dilutive.
13. SEGMENT INFORMATION
The Company owns and operates high-quality, fast-casual Mexican restaurants under the name “Rubio’s Fresh Mexican Grill,” with restaurants in California, Arizona, Nevada, Colorado and Utah. The Company currently considers its business to consist of one reportable operating segment.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is summarized unaudited quarterly financial data (in thousands, except per share data) for fiscal 2009 and 2008:
Operating income (loss) and net income (loss) per share are computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year.