Citing “progressive wage laws,” Sun Capital partners-owned Restaurants Unlimited Inc. filed for bankruptcy protection July 6 in the U.S. Bankruptcy Court in the District of Delaware. The multi-brand operator, which runs 35 locations across six states, including Kincaid’s and Henry’s Tavern, said rising wages pushed up its annual wage costs by $10.6 million.
“The math is both simple and brutal,” the company’s chief restructuring officer, David Bagley, said in filings, “$10.6 million divided by 1,886 part-time hourly employees equals $5,623 per part-time employee.”
This at a business with 2018 revenues of $176 million, down 1 percent from the prior year, Bagley continued. Additionally, Restaurants Unlimited made an “ill-advised decision” to open two new restaurants in the second half of 2017 at a cost of $10 million, in Bellevue and Seattle, Washington. It spent the discretionary capital after the company was in default of a prepetition credit agreement and already “reeling from changes to minimum wage laws,” Bagley said. These new restaurants experienced significant operating losses from the outset, and Restaurants Unlimited was forced to close six unprofitable restaurants.
“Over the past several years, certain changes to wage laws in the debtors’ primary geographic locations coupled with two expansion decisions that utilized cash flow from operations resulted in increased use of cash flow from operations and borrowings and restricted liquidity,” filings said. “These challenges coupled with additional state-mandates that will result in an additional extraordinary wage hike in [fiscal year] 2020 in certain locations before all further wage increases are subject to increases in the CPI and the general national trend away from casual dining, led to the need to commence these chapter 11 cases.”
Restaurants Unlimited, founded in 1968 and sold to Sun Capital 12 years ago, broke down some of the minimum wage hits over the past three years: Seattle $9.47 to $16 (a jump of 69 percent; San Francisco $11.05 to $15.59 (41 percent); and Portland $9.25 to $12.50 (35 percent).
The company said, as a large employer in the Seattle metro market, it was one of the first forced to institute wage hikes. In Seattle, smaller employers appreciate a statutory advantage of a lesser minimum wage of $1 or more through 2021. This isn’t available to Restaurants Unlimited, and it led to the aforementioned annual wage expense bump of an aggregate $10.6 million through fiscal year 2019.
The company’s lead petitioned noted between 200–1,000 creditors, estimated assets between $50 million and $100 million, and estimated liabilities between $50 million and $100 million.
Included among the largest unsecured creditors is Pacific Seafood Co. of Washington ($935,000 trade debt); Sysco Food Service Portland ($707,000 trade debt); and Sysco Seattle ($606,000 trade debut). Three of the top five unsecured creditors, and six of the top 15, are Sysco affiliates.
Restaurants Unlimited said it hopes to sell the company as part of the bankruptcy filing. It’s been looking for a buyer since the fall of 2016 when it engaged investment bankers. “Notwithstanding the debtors’ almost constant efforts and management attention devoted to several processes over the last three years to seek to locate either a party to provide an equity infusion to offset amounts owed to the prepetition lenders or to locate a purchaser for some or all of the assets of the debtors, the debtors were unable to consummate a transaction,” the company said.
Restaurants Unlimited believes it will be more attractive to potential owners when it pares down debt. To date, the company contacted about 69 potential strategic buyers and 213 financial buyers. Of those, 45 executed confidentially agreements and received information.
The company negotiated up to $10 million debtor-in-possession financing from existing secured lenders NXT Capital LLC and Fortress Investment Group LLC’s Drawbridge Special Opportunities Funds to operate as normal during the process.
The company is seeking court approval to maintain customer programs and pay part-time and full-time employees. It also has about $4.2 million of outstanding gift cards.
As of the petition date, about $37.7 million (plus accrued and unpaid interest of $1.7 million) is outstanding under the prepetition credit agreement. Restaurants Unlimited also owes “various vendors, suppliers, and other unsecured trade creditors,” roughly $7.6 million.
Sun Capital’s investments include Boston Market, Friendly’s, and Johnny Rockets.
Restaurants Unlimited’s full portfolio features: Clinkerdagger, Cutters Crabhouse, Fondi Pizzeria, Henry’s Tavern, Horatio’s; Kincaid’s, Maggie Bluffs, Manzana, Newport Seafood Grill, Palisade, Palomino, Portland City Grill, Portland Seafood Company, Scott’s Bar & Grill, Simon & Seafort’s, Skate’s on the Bay, Stanford’s, and Stanley & Seafort’s.