| RUBIOS RESTAURANTS INC 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 EARNINGS PER SHARE DUE TO VARIOUS RISKS THAT AFFECT THE FOOD SERVICE INDUSTRY We and other companies in the food service industry face a variety of risks that may impact our business and results of operations |
| Our expected sales levels and earnings rely heavily on the acceptability and quality of the products we serve |
| 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 the ability to manage our ongoing operations, including the ability to absorb unexpected costs, we could fall short of our revenue and earnings expectations |
| Factors that could have a significant impact on earnings include: · labor costs for our hourly and management personnel, including increases in federal or state minimum wage requirements; · the cost, availability and quality of foods and beverages, particularly chicken, beef, fish, cheese and produce; · costs related to our leases; · impact of weather on revenues and costs of food; · timing of new restaurant openings and related expenses; · the amount of sales contributed by new and existing restaurants; · our ability to achieve and sustain profitability on a quarterly or annual basis; · the ability of our marketing initiatives and operating improvement initiatives to increase sales; · negative publicity relating to food quality, illness, obesity, injury or other health concerns related to certain foods; · changes in consumer preferences, traffic patterns and demographics; · the type, number and location of existing or new competitors in the affordable, fast-casual restaurant industry; · insurance and utility costs; and · general economic conditions |
| -9- _________________________________________________________________ [64]Back to Table of Contents [65]Index to Financial Statements OUR CURRENT PLANS TO INCREASE OUR BRAND RECOGNITION COULD HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY We are working on a number of projects designed to improve the strength of our brand and increase sales |
| These projects include a 3-5 year restaurant re-image program for existing restaurants, signage changes, and new menu items |
| The implementation of these projects has capital costs and expenses associated with it |
| There is a risk that if these changes do not result in further increased sales, either through increased transactions or higher average check or both, there could be a material adverse impact on our company’s earnings |
| Also, the capital requirements of these projects could have an adverse material impact on our cash balances and long-term liquidity |
| 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 "e brand equity "e 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 twelve 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 |
| 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, with the stipulation that this franchisee would build a new location in a separate area |
| As of March 15, 2006, this new location has not been completed |
| We currently have three franchise agreements representing five franchised restaurants |
| 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 our franchising program could adversely affect our business and results of operations |
| None of the planned 2006 openings are outside California or Arizona |
| In addition, our 3-5 year expansion plan target is an annual growth rate of 10prca to 15prca, beginning in 2007 |
| Our ability to successfully achieve our expansion strategy will depend on a variety of factors, many of which are beyond our control |
| These factors include, among others: · our ability to operate our restaurants profitably; · our ability to respond effectively to the intense competition in the restaurant industry generally, and in the affordable, fast-casual restaurant industry segment; · our ability to locate suitable high-quality restaurant sites or negotiate acceptable lease terms; · 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; · our dependence on contractors to construct new restaurants in a timely manner; · our ability to attract, train and retain qualified and experienced restaurant personnel and management; and · our need for additional capital and our ability to obtain such capital on favorable terms or at all |
| -10- _________________________________________________________________ [66]Back to Table of Contents [67]Index to Financial Statements 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 |
| IF THE AMOUNTS THAT WE HAVE ACCRUED IN CONNECTION WITH THE CLOSURE OF SELECTED STORES ARE INADEQUATE, WE MAY EXPERIENCE ADVERSE EFFECTS ON OUR EARNINGS EXPECTATIONS 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 earnings |
| We will review these accruals on a quarterly basis and may make adjustments that have a material positive or negative impact on our future earnings |
| 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 earnings 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 unit sales for any particular future period may increase or decrease versus our previous performance |
| 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 also compete indirectly with full-service Mexican restaurants and fast food restaurants, particularly those focused on Mexican food |
| 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 |
| If we are unable to compete effectively in our industry segment, our business and operations will be adversely affected |
| 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 |
| -11- _________________________________________________________________ [68]Back to Table of Contents [69]Index to Financial Statements 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 |
| 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 noncompetition provisions and on provisions concerning the termination or nonrenewal 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, beginning as early as with the annual report on Form 10-K for our fiscal year ending December 30, 2007, we will be 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 |
| Each year we must perform the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging |
| 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 auditors are unable to attest that our managementapstas 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 |
| Furthermore, our independent registered public accounting firm will be required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects, and separately report on whether it believes we maintained effective internal control over financial reporting |
| We have in the past discovered, and may in the future discover, areas of internal controls that need improvement |
| LABOR AND EMPLOYMENT LAWS AND REGULATIONS 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 dlra6dtta75 |
| Any increase in the hourly minimum wage in California or other states or jurisdictions where we do business may increase the cost of labor and reduce our profitability |
| Additionally, the State of California has increased benefits required to be provided to employees covered under workers’ compensation insurance |
| Federal and state laws may also require us to provide paid and unpaid leave to our employees, which could result in significant additional expense to us |
| IF WE ARE NOT ABLE TO ANTICIPATE AND REACT TO INCREASES IN OUR FOOD AND LABOR COSTS, OUR PROFITABILITY COULD BE ADVERSELY AFFECTED Our restaurant operating costs principally consist of food and labor costs |
| Our profitability is dependent on our ability to anticipate and react to changes in these costs |
| Various factors beyond our control, including adverse weather conditions and short supply, 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 |
| -12- _________________________________________________________________ [70]Back to Table of Contents [71]Index to Financial Statements 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 15, 2006, all but five 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 units 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 units or the introduction of several unsuccessful new units 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 |
| WE MAY NOT PREVAIL IN OUR DEFENSE OF THE CLASS ACTION CLAIMS RELATED TO CALIFORNIA EXEMPT EMPLOYEE LAWS During 2001, two similar class action claims were filed against us |
| The claims were consolidated into one action |
| The consolidated action involves the issue of whether current and former employees in the general manager and assistant manager positions who worked in our California restaurants during specified time periods were misclassified as exempt and deprived of overtime pay |
| The consolidated complaint also asserts claims for alleged missed meal and rest breaks |
| In addition to unpaid overtime, these cases seek to recover waiting time penalties, interest, attorneys’ fees and other types of relief on behalf of the current and former employees that these former employees purport to represent |
| The Company believes these cases are without merit and intends to vigorously defend against the related claims |
| These cases are in the early stages of discovery |
| On November 9, 2005, the Court certified a class of assistant managers and has not yet ruled on the adequacy of the proposed class representative for the class of general managers |
| The Company is presently unable to predict the probable outcome of this matter or the amounts of any potential damages at issue |
| An unfavorable outcome in this matter or a significant settlement could have a material impact on the Company’s financial position and results of operations |
| AS A RESTAURANT SERVICE PROVIDER, OUR BUSINESS MAY BE ADVERSELY AFFECTED BY NEGATIVE PUBLICITY OR CLAIMS FROM OUR GUESTS We may be the subject of complaints or litigation 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 |
| A lawsuit or claim could result in an adverse decision against us that could have a material adverse effect on our business and results of operations |
| 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 and other natural disasters |
| In view of the location of many of our existing and planned units, 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 |
| We may also be subject to litigation which, regardless of the outcome, could result in adverse publicity and damages |
| Such litigation, adverse publicity or damages could have a material adverse effect on our business and results of operations |
| From time to time, employee related claims are brought against us |
| These claims and expenses related to these claims typically have not been material to our overall financial performance |
| We may, however, experience claims or be the subject of complaints or allegations from former, current or prospective employees from time to time that are material in nature and that may have a material adverse effect on our financial results |
| WE MAY INCUR SIGNIFICANT REAL ESTATE RELATED COSTS AND LIABILITIES WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION The majority of our units are leased locations in multi-unit retail centers |
| The age and condition of the real estate we occupy varies |
| 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 unit 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 units are located in multi-unit retail buildings means that if there is a plumbing failure or other event in one of our units, 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 |
| -13- _________________________________________________________________ [72]Back to Table of Contents [73]Index to Financial Statements SALES BY OUR EXISTING STOCKHOLDERS OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE The market price of our common stock could decline as a result of sales by our existing 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 15, 2006, our executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 34dtta4prca 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 |
| MANAGEMENT OUR EXECUTIVE OFFICERS As of March 15, 2006 our executive officers are as follows: NAME AGE POSITION WITH THE COMPANY Ralph Rubio 50 Chairman of the Board and Chief Executive Officer John Fuller 43 Chief Financial Officer Lawrence Rusinko 45 Vice President of Marketing Carl Arena 52 Vice President of Development Gerry Leneweaver 59 Vice President of People Services RALPH RUBIO, the Company’s co-founder, has been Chairman of the Board of Directors of Rubio’s Restaurants, Inc |
| Rubio also served as our Chief Executive Officer from 1983 to November 2004 and has been our Chief Executive Officer since December 2005 |
| Rubio holds a Bachelor of Arts degree in Liberal Studies from San Diego State University and has more than 30 years of experience in the restaurant industry |
| JOHN FULLER has been Chief Financial Officer since June 2003 |
| Fuller served as Senior Vice President/CFO for Edwards Theaters from October 1998 until October 2001 and as Vice President/Controller of CKE Restaurants, Inc |
| from September 1994 until October 1998 |
| Fuller is a certified public accountant and spent nine years with KPMG in their Orange County audit department |
| Fuller holds a Bachelor of Arts degree in Economics from the University of California, Los Angeles |
| LAWRENCE A RUSINKO has been Vice President of Marketing since October 2005 |
| Rusinko served as Senior Vice President of Marketing at Friendly’s, a family dining and ice cream concept, from July 2003 until May 2005 |
| Rusinko served for over 8 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 6 ½ years in various marketing positions of progressive responsibility at Taco Bell |
| Rusinko holds a Bachelor of Science degree in Industrial Engineering from Northwestern University and an MBA from the JL Kellogg Graduate School of Management at Northwestern University |
| -14- _________________________________________________________________ [74]Back to Table of Contents [75]Index to Financial Statements CARL ARENA has been Vice President of Development since January 2005 |
| Prior to joining Rubio’s, Mr |
| Arena served as Executive Director, Development for Johnny Rockets Group, Inc |
| from May of 2004 to January of 2005 |
| Arena was Managing Member of Arena Realty Advisors, LLC, in Orange County, where he worked with such clients as CKE Restaurants and Yum Brands |
| He also spent 13 years with CKE Restaurants, where he was Vice President of Real Estate |
| Arena holds a Bachelor of Arts degree in History from California State University, Fullerton and a Juris Doctor degree from Western State University School of Law |
| GERRY LENEWEAVER has been Vice President of People Services since June 2005 |
| Leneweaver led his own human resources consulting firm, AGL Associates, in Boston, most recently from February 2004 to May 2005 |
| ) 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 |