Johnny Carino’s Restaurants files for Chapter 11 Bankruptcy | March 28, 2014.
Johnny Carino’s Restaurants (Fired Up, Inc. et al) filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Texas Austin Division on March 28, 2014 under Case No. 14-10447-TMD-11
Creed Ford, III is the CEO and Chairman of the Board of Fired Up, Inc. (“Fired Up”) and discusses the bankruptcy filing:
Background
Overview of the Debtor and Its Business
“Fired Up is a corporation based in Austin, Texas, which has been involved in the hospitality industry since 1 997. It currently owns and operates forty-six (46) company-owned stores (“Company Stores”) known as Johnny Carino’s Italian (“Carino’s”) in seven states (Texas, Arkansas, Colorado, Louisiana, Idaho, Kansas and Missouri) and fifty-one (61) franchised or licensed locations in seventeen (17) states (California, Florida, Georgia, Indiana, Kentucky, Michigan, Montana, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Utah and Washington) and four other countries (Bahrain, Dubai, Egypt and Kuwait) (“Franchisees” or “Franchised Stores”). Carino’s focuses on providing high quality, classic but contemporary, innovative Italian cuisine at an exceptional value in an authentic Italian atmosphere to a broad demographic from intimate “date nights” for young singles to large family gatherings.
“Prior to 2014, the business was operated through three entities with the Debtor, Fired Up, Inc., being the parent company. Ownership of Fired Up, Inc. as of the Petition Date was: 74.77% by Creed Ford III, his wife and other immediate family, 13.60% by Abdulghani Al- Ghunaim and Al-Ghunaim Trading Co., Ltd., and the remaining 1 1 .63% percent by approximately 1 80 other shareholders. Kona Restaurant Group, Inc. (“Kona”) was wholly owned by Fired Up, Inc. and was franchisor for the Debtor’s franchises and the lessee for most of the Company Store locations. Carino’s Italian Kitchen, Inc. (“CIK”), also solely owned by Fired Up, Inc., operated the Company Stores. On February 26, 2014, after extensive consultation with its accountants, tax advisors and corporate attorneys, the three companies were merged into the Debtor, Fired Up.
“Fired Up currently employs approximately 2,900 persons in its restaurants and corporate headquarters. I am the majority shareholder in Fired Up and also sit on its Board of Directors in addition to serving as President and as sole Chief Executive Officer since 2008.
Company History
“Norman J. Abdallah and I fonned Fired Up in 1997 for the purpose of acquiring the Kona Restaurant Group from Brinker International, Inc. (“Brinker”). At that time, Kona operated the six-uni t Johnny Carino’s Italian Kitchen chain and one Kona Ranch Steakhouse. By 2006, Fired Up had expanded the concept to 1 73 company-owned and franchised locations in thirty states and four (4) foreign countries.
“By 2007, however, revenues had begun slipping and guest counts were down. The Company’s initial business strategy was to rebrand and fine tune its concept. It began recreating itself as Carino’s Italian and moving away from the old Johnny Carino’s brands. However, before the success of this strategy could be determined, the 2008 recession created significant additional challenges for the company. In the fiscal year ending June 25, 2008, the Company reported a net loss of $15.9 million.
“I sold the Chili’s franchises which another of my businesses owned and operated in order to devote my full attention to the Carino’s Italian brand. In 2008, I assumed the position of CEO in addi tion to being chairman of the board. In December of 20 I 0, I arranged the redemption for $16 million of preferred shares of the Debtor held by Rosewood Capital, which had been an investor in the company since 2002. The redemption was financed with a loan from FRG Capital, LLC, a company owned by my Ford family. As the largest and majority shareholder, I did not receive any consideration for the loan to Fired Up, Inc. to redeem the Rosewood preferred shares.
“As a result of changes instituted by management, the company subsequently experienced several profitable years. However, by the end of the fiscal year ending June 26, 2013, the company reported a net loss of $5.9 million. It appeared that, while a majority of the Company’s stores were profitable, a minority of locations were consistently losing significant amounts of money. I instituted a comprehensive review of Fired Up’s sixty-five (65) company-owned stores. From October 2013 through March 201 4, the company closed a total of nineteen (19) locations which it had determined were unprofitable and likely to remain so.
Financial Information
“Fired Up’s real property assets consist of the land and building out of which a Company Store in Abilene, Texas operated and is valued at $1.6 million. The Company Store at this location is no longer open and Fired Up is in the process of negotiating a sale of this property at what it believes to be market price. The remainder of Debtor’s locations are leased. Debtor holds long-term ground leases on eleven ( 1 1) of these locations and owns the buildings located upon each piece ofreal property. The Debtor has valued these buildings at $6.2 million.2 The Debtor estimates the book value of its tangible personal property assets at approximately $6.8 million. Debtor also holds significant intangible property, including trademarks and other intellectual property.
“The Company is still preparing its Schedules for this filing and some of the data is still in flux. However, we estimate that it owes $17.1 million in contractual secured debts, including $13.4 million to FRG Capital, LLC, $1.9 million to GE Capital Corp., $1.2 million to Prosperity Bank and $600,000 to Independent Bank of Waco. We estimate that it owes delinquent ad valorem taxes on its property of $260,000 and current ad valorem property tax obligations, incurred but not due, are approximately $2.2 million. We estimate that the Company has current priority obligations to employees consisting of approximately $950,000 in wages, $400,000 in accrued vacation time and $70,000 in accrued bonuses and a total of $1.9 million in priority tax claims. The Company’s draft schedules reflect unsecured debts of $13.8 million but this amount likely overstates Debtor’s actual liabilities. Major liabilities include $2.8 million owed to AEI Fund Management, Inc. with regard to two shortfall notes, $3.3 million in contingent obligations with regard to leases to be rejected, $2.2 million owed to a former vendor and $620,000 owed to Independent Bank of Waco for a loan on a surrendered ground lease. Much of the remaining amounts scheduled consist of amounts owed to current vendors and estimated tax amounts to be paid under triple net leases in the future. In terms of numbers, only a handful of priority and general unsecured operating debts ( e.g. vendors, utilities, taxes) have not been kept current and were not current at the time of filing.
“For the fiscal year ending June 27, 201 2, the company reported total revenues of $125.7 million and net income of $614,000. Guest counts for this period totaled 8.6 million. For the fiscal year ending June 26, 201 3, the company reported total revenues of $120.8 million and a net loss of $5.9 million. Guest counts equaled 8.5 million. Annualized gross sales for the Company Stores for 2014 are expected to be about approximately $103 million. As of December 31, 2013, Net Operating Cash Flow was ($2.6 million); Net Operating Cash Flow going forward, after the store closings, is estimated to be at least $300,000 per month positive with an increase in the profitability of each of the operating stores of at least six percent (6%). Annualized General and Administrative costs have been reduced approximately $2.5 million from 2013 to 2014.
Reasons for Filing Bankruptcy
“As discussed above, the Company began its own “out of court” reorganization in the last quarter of 2013: it closed unprofitable restaurants, it worked with the landlords of its closed stores to find other tenants or sell particular stores or work out terminations of leases and agreed damages owed. It significantly decreased fixed expenses. It began examining programs and other marketing strategies to increase revenues. However, while most of the Company’s landlords and other creditors continued in these “bad times” with the collegial working relationship they had had with the Company and me over decades, some did not. The actual timing of the filing on March 27, 2014 was influenced by two lawsuits-one by a former vendor which was aggressively seeking unreasonable repayment terms on an outstanding amount owed when that vendor and Debtor ceased doing business and the other by a former Landlord.
“The general motivation behind the filing of the Company’s chapter 1 1 was to try to tie up the “loose ends” of the Company’s self-imposed “reorganization” that did not appear capable of being tied up without litigation. In particular, the provisions of the Bankruptcy Code with respect to the rejection of burdensome leases and the ability to propose and pay out its debts pursuant to a Plan without random uncooperative creditors undermining same were particularly attractive.
Going Forward
“Debtor’s projections when it began analyzing its profitable and non-profitable stores showed its ability to immediately start showing a net operating profit immediately upon the closing of its unprofitable locations with little additional growth in revenues. Its projections have been born out as these stores have been closed. Based on these projections, I am reasonably optimistic that the Company will be able to operate on a profitable basis and to devise a plan of reorganization for repayment of its existing obligations and those created from the lease rejections. I hope that, with the burden of aggressive creditors continuing unrelated collection efforts being removed, I can focus Fired Up on further efforts to better market itself, increase revenues and continue to cut costs.
