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3,150,000 Shares
[LOGO]
Rubio's Restaurants, Inc.
Common Stock
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This is an initial public offering of shares of common stock of Rubio's
Restaurants, Inc. We are offering 2,250,000 shares in this offering and the
selling stockholders are selling an additional 900,000 shares. No public market
currently exists for our common stock.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "RUBO."
Investing in our common stock involves a high degree of risk. Please see "Risk
Factors" starting on page 7 to read about risks that you should consider
carefully before buying shares of our common stock.
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Per Share Total
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Public offering price.................................................................. $ 10.50 $ 33,075,000
Underwriting discounts and commissions................................................. $ 0.74 $ 2,315,250
Proceeds to us......................................................................... $ 9.76 $ 21,971,250
Proceeds to selling stockholders....................................................... $ 9.76 $ 8,788,500
</TABLE>
The underwriters have an option to purchase 472,500 additional shares of common
stock from us and from the selling stockholders named under the caption "Selling
Stockholders" at the initial public offering price to cover any over-allotments
of shares. We will not receive any of the proceeds from the sale of shares by
the selling stockholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Thomas Weisel Partners LLC
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
U.S. Bancorp Piper Jaffray
Prospectus dated May 21, 1999
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INSIDE FRONT COVER
Photograph of the exterior of one of our restaurants, along with a map of
the southwestern United States, showing markets in which we do business, as well
as the number of restaurants in each market. Restaurants that we plan to open in
1999 are enclosed in parentheses.
FRONT GATEFOLD:
Photograph of a scene from the Baja peninsula, overlaid with pictures of our
restaurant interiors and exteriors, as well as pictures of a fish taco, shrimp
quesadilla and carne asada burrito and grilled chicken taco combination from our
menu, with captions identifying the name of each product.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THIS SUMMARY, WE URGE YOU TO READ
THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON
STOCK DISCUSSED UNDER "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
BEFORE YOU DECIDE TO BUY OUR COMMON STOCK.
RUBIO'S RESTAURANTS
Rubio's Restaurants, Inc. owns and operates 67 high-quality, quick-service
Mexican restaurants under the name "Rubio's Baja Grill" located principally in
the southwest region of the United States. Our restaurants offer a distinctive
blend of high-quality, traditional Mexican cuisine combined with fresh seafood
fare indicative of the Baja region of Mexico. Our menu contains appealing
Mexican offerings with distinctive taste profiles prepared from fresh
ingredients. Our traditional menu items such as tacos and burritos feature
marinated, chargrilled meats and other high-quality ingredients. Adhering to an
overall emphasis on freshness, we prepare our menu items on-site and
made-to-order, with each location preparing its own chips, salsa and guacamole
fresh every day. Our menu also features our signature Baja-style fish taco, and
is accentuated by seasonal offerings including our lobster burrito and tequila
shrimp burrito. Most of our restaurants also offer a selection of Mexican and
domestic beers. Prices range from $1.79 for a Baja-style fish taco to $5.69 for
a Cabo Combo, which includes a shrimp burrito, fish taco, chips and beans. We
strive to provide superior service in a setting designed to promote a casual,
relaxed and fun experience for our guests. We design our Rubio's restaurant
decor to be reminiscent of an authentic Baja beach setting. Most of our
restaurants feature saltwater aquariums, surfboards and outdoor patio seating
beneath traditional palm-thatched umbrellas, or palapas.
We seek to differentiate our restaurants by combining the high-quality
Mexican food expected in casual sit-down restaurants with the convenient counter
service of quick-service restaurants. In this respect, we believe the "Rubio's
Baja Grill" concept is uniquely positioned between the quick-service and casual
dining segments of the restaurant industry. The critical components of our
concept include:
- providing distinctive, flavorful Mexican cuisine;
- creating a fun and relaxed atmosphere with authentic personality; and
- offering our guests excellent dining value.
We believe that our restaurant concept has broad national appeal and that,
as a result, we have significant opportunities to expand our operations and
generate attractive returns. Our business objective is to become the leading
high-quality, quick-service Mexican restaurant brand nationwide. Key to our
expansion plans and success at the restaurant-level is our business strategy to:
- create a distinctive concept and brand;
- achieve attractive restaurant-level economics;
- execute disciplined expansion; and
- ensure a high-quality guest experience.
We believe that our restaurants provide attractive restaurant-level
economics. In 1998, the 43 units open the entire year generated average sales of
$901,000, average operating income of $148,000, or 16.4% of sales, and average
cash flow of $183,000, or 20.3% of sales. Comparable restaurant sales increased
10.4% in 1998, following an 18.0% increase in 1997. Net income for 1998 was
$915,000, which compares to a net loss for 1997 of $1.0 million. Net income for
fiscal year 1998 was favorably impacted by the reversal of a $452,000 deferred
tax asset allowance that was previously provided for in fiscal year 1997. We
currently have 12 units located outside California. Of these, three units have
over 12 months of operating results. These units generated average sales of
$972,000 for the most recent 12 months, average operating income of $149,000, or
15.0% of sales, and average cash flow of $200,000, or
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20.5% of sales. We opened eight stores in 1996, 12 in 1997 and 16 in 1998. Our
current expansion plan calls for us to open 28 restaurants in 1999, of which
eight have opened to date, and 36 restaurants in 2000. Seven of the 20 units we
plan to open in the balance of 1999 are currently under construction, and the
remaining 13 have signed leases. We intend to continue to develop restaurants
that will require, on average, a total cash investment of approximately
$380,000, including pre-opening expenses of $20,000.
The Rubio's Baja Grill concept successfully 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 opened the first Rubio's restaurant with his
father, Rafael, over 16 years ago in the Mission Bay area of San Diego.
We were incorporated in California in May 1985, and reincorporated in
Delaware in October 1997. We have a wholly owned subsidiary, Rubio's Restaurants
of Nevada, Inc., which was incorporated in Nevada in 1997. Our principal
executive offices are located at 1902 Wright Place, Suite 300, Carlsbad,
California 92008. Our telephone number at that location is (760) 929-8226.
Information contained on our Web site, www.rubios.com, does not constitute part
of this prospectus.
THE OFFERING
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Common stock offered by us.............................. 2,250,000 shares
Common stock offered by selling stockholders............ 900,000 shares
Common stock outstanding after this offering............ 8,605,622 shares
Use of proceeds......................................... For development of new
restaurants, repayment of term
loan debt and working capital and
other general corporate purposes.
Please see "Use of Proceeds" for
more information regarding our
planned use of the proceeds from
this offering.
Proposed Nasdaq National Market symbol.................. RUBO
</TABLE>
In addition to the 8,605,622 shares of common stock to be outstanding after
this offering, there are:
- 561,712 shares issuable upon the exercise of options outstanding at a
weighted average exercise price of $5.97 per share;
- 45,000 shares issuable upon the exercise of an outstanding warrant at an
exercise price of $7.20 per share; and
- 60,106 shares available for issuance under our stock option plans. For a
description of our stock option plans, please see "Management--Benefit
Plans."
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND SELECTED OPERATING DATA)
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THREE MONTHS ENDED
FISCAL --------------------------
---------------------------------------------------------- MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales......................... $ 11,837 $ 14,811 $ 19,523 $ 29,704 $ 44,699 $ 9,217 $ 14,383
Operating income (loss)....... (108) 9 85 (764) 596 (254) 72
Total other income
(expense)................... (146) 55 16 (137) 253 87 3
Income (loss) before income
taxes....................... (254) 64 101 (901) 849 (167) 75
Net income (loss)............. (155) 16 72 (1,000) 915 (180) 45
Net income (loss) attributable
to common stockholders...... $ (155) $ (39) $ 3 $ (1,095) $ 568 $ (267) $ (41)
Net income (loss) per share
Basic....................... $ (0.15) $ (0.04) $ -- $ (1.08) $ 0.55 $ (0.26) $ (0.04)
Diluted..................... (0.15) (0.04) -- (1.08) 0.14 (0.26) (0.04)
Shares used in computing net
income (loss) per share
Basic....................... 1,000 1,000 1,008 1,010 1,033 1,013 1,050
Diluted..................... 1,000 1,000 1,026 1,010 6,418 1,013 1,050
Pro forma net income per
share, basic and diluted.... $ 0.14 $ 0.01
Shares used in computing pro
forma net income per share
Basic....................... 6,336 6,352
Diluted..................... 6,457 6,618
SELECTED OPERATING DATA:
Number of restaurants at end
of period................... 17 23 31 43 59 46 67
Comparable restaurant sales
increase (decrease)......... 11.0% 5.3% (3.6)% 18.0% 10.4% 7.6% 13.7%
Average restaurant volume of
units open for entire
period...................... $ 767,695 $ 786,489 $ 728,234 $ 825,741 $ 900,870
</TABLE>
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MARCH 28, 1999
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ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 1,124 $ 20,700
Total assets...................................................... 25,435 45,010
Long-term debt, including current portion......................... 1,671 --
Redeemable convertible preferred stock............................ 17,782 --
Total stockholders' equity........................................ 141 39,169
</TABLE>
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Please see note 1 to the consolidated financial statements for an
explanation of the determination of the number of shares used in computing pro
forma net income per share.
Comparable restaurant sales are determined based on sales for stores which
were in operation for the previous 15 months.
The as adjusted balance sheet data listed above reflects the sale of
2,250,000 shares of common stock offered at an initial public offering price of
$10.50 per share after deducting the estimated underwriting discount and
estimated offering expenses payable by us. Please see "Use of Proceeds" for
information regarding our anticipated use of the proceeds of this offering and
"Capitalization" for information regarding our capitalization following this
offering.
Fiscal years 1994 and 1995 ended on December 31. In 1996, we began using a
52- or 53-week fiscal year ending on the Sunday nearest December 31. Fiscal
years 1996, 1997 and 1998 each consisted of 52 weeks. The three-month periods
each consisted of 13 weeks.
Net income (loss) attributable to common stockholders includes the effect of
the accretion on the redeemable convertible preferred stock which reduces net
income (loss) attributable to common stockholders for the related periods. Net
income attributable to common stockholders for the fiscal 1998 diluted earnings
per share calculation is $915,000. The difference from the basic calculation is
due to the reversal of the accretion on the redeemable convertible preferred
stock as such stock is assumed to be converted to common stock for purposes of
the diluted calculation.
Net income for fiscal year 1998 was favorably impacted by the reversal of a
$452,000 deferred tax asset allowance that was previously provided for in fiscal
year 1997. We eliminated the valuation allowance in 1998 due to our belief that
current year activity made realization of such benefit more likely than not.
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RISK FACTORS
AN 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 PROSPECTUS, BEFORE YOU DECIDE WHETHER TO
BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. IN
ANY SUCH CASE, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL
MAY ALSO IMPAIR OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
RISKS RELATED TO OUR BUSINESS
OUR PLANNED EXPANSION INTO NEW GEOGRAPHIC AREAS INVOLVES A NUMBER OF RISKS
WHICH COULD DELAY OR PREVENT THE OPENING OF PLANNED NEW RESTAURANTS.
Almost all of our current restaurants are located in the southwest region of
the United States. Our planned expansion into geographic areas outside the
Southwest involves a number of risks, including:
- uncertainties related to local demographics, tastes and preferences;
- local custom, wages, costs and other legal and economic conditions
particular to new regions;
- the need to develop relationships with local distributors and suppliers
for fresh produce, fresh tortillas and other ingredients;
- potential difficulties related to management of operations located in a
number of broadly dispersed locations; and
- lack of market awareness or acceptance of our restaurant concept in new
geographic areas.
We may not be successful in addressing these risks. We also may not be able
to open our planned new operations on a timely basis, or at all in these new
areas. Delays in opening or failure to open planned new restaurants outside the
Southwest could have a material adverse effect on our business and results of
operations. We currently anticipate that our new restaurants will take several
months to reach planned operating levels due to inefficiencies typically
associated with expanding into new regions, such as lack of market awareness,
acceptance of our restaurant concept and inability to hire sufficient staff.
IF WE ARE NOT ABLE TO SUCCESSFULLY PURSUE OUR RAPID EXPANSION STRATEGY, OUR
BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY IMPACTED.
We intend to continue to pursue a rapid expansion strategy. Since 1996, we
have opened 36 restaurants, 12 of which were opened outside of Southern
California. We intend to open an additional 28 restaurants in 1999, eight of
which have been opened to date. Approximately 13 of those additional restaurants
are outside Southern California. We intend to open an additional 36 restaurants
in 2000. 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:
- our ability to locate suitable 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, 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;
- our ability to operate our restaurants profitably;
- our need for additional capital and our ability to obtain such capital on
favorable terms or at all;
- our ability to respond effectively to the intense competition in the
quick-service restaurant industry; and
- general economic conditions.
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If we are not able to successfully address these factors, we may not be able
to expand at a rate currently contemplated by our strategy, and our business and
results of operations may be adversely impacted.
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 expect our highest earnings to occur in the
second and third quarters of each fiscal year.
In addition to seasonality, our quarterly and annual operating results and
comparable unit sales may fluctuate significantly as a result of a variety of
factors, including:
- labor costs for our hourly and management personnel, including increases
in federal or state minimum wage requirements;
- fluctuations in food costs, particularly the cost of chicken, beef, fish,
cheese and produce;
- the 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;
- consumer confidence;
- changes in consumer preferences;
- the level of competition from existing or new competitors in the
quick-service restaurant industry;
- factors associated with closing a unit, including payment of the base rent
for the balance of the lease term;
- impact of weather on revenues and costs of food; and
- general economic conditions.
Accordingly, results for any one quarter are not necessarily indicative of
results to be expected for any other quarter or for any year. Comparable unit
sales for any particular future period may decrease. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of factors which have historically affected our operating 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, quick-service Mexican food segment of the industry. In this
segment, our direct competitors include Baja Fresh, La Salsa and Chipotle. We
also compete indirectly with full-service Mexican restaurants including Chevy's,
Chi Chi's and El Torito, and fast food restaurants, particularly those focused
on Mexican food such as Taco Bell and Del Taco. Competition in our industry
segment is based primarily upon food quality, price, restaurant ambiance,
service and location. 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 than we do. We also
compete with many other retail establishments for site locations.
The performance of individual units may also be affected by factors such as
traffic patterns, demographic considerations and the type, number and proximity
of competing restaurants. In addition, factors such as inflation, increased
food, labor and employee benefit costs and the availability of experienced
management and hourly employees may also adversely affect the restaurant
industry in general and our units in particular.
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THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO OPERATE AND
MANAGE 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 other 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 inability 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, finance, purchasing, expansion,
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
currently do not have employment agreements with any of our employees.
OUR RESOURCES MAY BE STRAINED IN IMPLEMENTING OUR BUSINESS STRATEGY.
Our growth strategy will place a strain on our management, financial and
other resources. To manage our growth effectively, we must maintain the level of
quality and service at our existing and future restaurants. We must also
continue to enhance our operational, financial and management systems and
locate, hire, train and retain experienced and dedicated operating personnel,
particularly managers. We may not be able to effectively manage any one or more
of these or other aspects of our expansion. Failure to do so could have a
material adverse effect on our business and results of operations.
WE MAY BE UNABLE TO FUND OUR SUBSTANTIAL WORKING CAPITAL REQUIREMENTS AND
MAY NEED ADDITIONAL FUNDING SOONER THAN WE ANTICIPATE.
We believe that the proceeds from this offering, together with anticipated
cash flow from operations and funds anticipated to be available from a credit
facility, will be sufficient to satisfy our working capital requirements for at
least the next 12 months. We plan to incur substantial costs over the near-term
in connection with our expansion plans. We may need to seek additional financing
sooner than we anticipate as a result of the following factors:
- changes in our operating plans;
- acceleration of our expansion plans;
- lower than anticipated sales of our menu offerings;
- increased food and/or labor costs; and
- potential acquisitions.
Additional financing may not be available on acceptable terms, or at all. If
we fail to get additional financing as needed, our business and results of
operations would likely suffer. Please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of our
expected capital needs and current resources available.
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UNANTICIPATED COSTS OR DELAYS IN THE DEVELOPMENT OR CONSTRUCTION OF OUR
RESTAURANTS COULD PREVENT OUR TIMELY AND COST-EFFECTIVE OPENING OF NEW
RESTAURANTS.
We depend on contractors and real estate developers to construct our
restaurants. Many factors may adversely affect the cost and time associated with
the development and construction of our restaurants, including:
- labor disputes;
- shortages of materials and skilled labor;
- adverse weather;
- unforeseen engineering problems;
- environmental problems;
- construction or zoning problems;
- local government regulations;
- modifications in design; and
- other unanticipated increases in costs.
Any of these factors could give rise to delays or cost overruns which may
prevent us from developing additional restaurants within our anticipated budgets
or time periods. Any such failure could have a material adverse effect on our
business and results of operations.
OUR RESTAURANTS ARE CONCENTRATED IN THE SOUTHWEST REGION OF THE UNITED
STATES, AND THEREFORE, OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IF ADVERSE
BUSINESS CONDITIONS OCCUR IN THAT REGION.
All but two of our existing restaurants are located in the southwest 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 or other disasters. 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.
OUR FAILURE OR INABILITY TO ENFORCE OUR 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 trademarks, service
marks, trade dress and other proprietary intellectual property, including our
name and logos. We currently hold three trademarks and have seven service marks
relating to our brand. 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. Claims from prior users
could limit our operations and possibly cause us to pay damages or licensing
fees to a prior user or registrant of similar intellectual property.
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IF WE ARE NOT ABLE TO ANTICIPATE AND REACT TO 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 food and labor costs. Various factors beyond our control, including adverse
weather conditions and governmental regulation, may affect our food costs. We
may not be able to anticipate and react to changing food costs, whether through
our purchasing practices, menu composition or menu price adjustments in the
future. In the event that food or labor price increases cause us to increase our
menu prices, we face the risk that our guests will choose to patronize
lower-cost restaurants. Failure to react to changing food 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. For more information regarding
our food supply sources and buying practices, please see "Business--Purchasing."
A substantial number of our employees are subject to various 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. Effective March 1, 1998, the minimum wage in California increased to $5.75
per hour from $5.15. Similar proposals may come before legislators or voters in
other jurisdictions in which we operate or seek to operate. Such minimum wage
increases could have a material adverse effect on our business and results of
operations. Please see "Business--Operations" for more information on the number
of and the benefits we provide to our employees.
AS A RESTAURANT SERVICE PROVIDER, WE COULD BE SUBJECT TO ADVERSE PUBLICITY
OR CLAIMS FROM OUR GUESTS.
We may be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. Adverse publicity resulting from such
allegations may materially adversely affect us and our restaurants, regardless
of whether such allegations are true or whether we are ultimately held liable.
We may also be the subject of complaints or allegations from current, former or
prospective employees from time to time. 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.
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN STATE AND LOCAL PERMITS NECESSARY
TO OPERATE OUR UNITS.
The failure to maintain necessary licenses, permits or approvals, including
food and alcoholic beverage licenses, or to comply with other government
regulations could have a material adverse effect on our business and results of
operations. In addition, difficulties or failures in obtaining required licenses
and approvals will result in delays in, or cancellation of, the opening of new
units. Restaurants are subject to licensing and regulation by state and local
health, environmental, labor relations, sanitation, building, zoning, safety,
fire and other departments. Our activities are also subject to the Federal
Americans With Disabilities Act and related regulations, which prohibit
discrimination on the basis of disability in public accommodations and
employment. We are also subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. Given the location of many of our restaurants, even if our
operation of those restaurants is in strict compliance with the requirements of
the Immigration and Naturalization Service, our employees may not all meet
federal citizenship or residency requirements, which could lead to disruptions
in our work force. If we are not in compliance with these requirements, we could
be subject to financial penalties. In addition, we could be forced to terminate
employees who do not meet these requirements. These consequences could adversely
affect our business. The development and construction of additional units will
also be subject to compliance with applicable zoning, land use and environmental
regulations. There can be no assurance that we will be able to obtain necessary
variances or other approvals on a cost-effective and timely basis in order to
construct and develop units in the future. Changes in any or all of these laws
or regulations, such as government-imposed paid leaves of absence or mandated
health benefits, could have a material adverse effect on our business and
results of operations. For a more complete description of the governmental
regulations to which our business is subject, please see "Business--Government
Regulation."
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OUR CURRENT INSURANCE MAY NOT PROVIDE ADEQUATE LEVELS OF COVERAGE AGAINST
CLAIMS.
There are types of losses we may incur that may be 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. In the event of an earthquake or other natural
disaster affecting the geographic area of our operations, we could suffer a loss
of the capital invested in, as well as anticipated earnings from, the damaged or
destroyed properties. Further, we do not currently maintain any insurance
coverage for employee-related litigation or the effects of adverse publicity. 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.
WE MAY FAIL TO BE YEAR 2000 COMPLIANT.
We have not fully completed tests to assure that our systems will function
properly in the year 2000. Our restaurant information systems may need to be
upgraded in order to prevent system failure or miscalculation resulting from the
year 2000 that could disrupt our normal business activities.
We estimate that we have incurred costs of less than $25,000 to date in
connection with our year 2000 plan. We currently estimate the total costs of
completing our year 2000 plan, including costs incurred to date, to be less than
$50,000. Until our testing is complete and our vendors and providers are
contacted, we will not be able to completely evaluate whether our information
technology systems or non-information technology systems will need to be revised
or replaced. If our efforts to address year 2000 risks are not successful, or if
suppliers or other third parties with whom we conduct business do not
successfully address such risks, it could have a material adverse effect on our
business and results of operations. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness
Disclosure" for detailed information on our state of readiness, potential risks
and contingency plans regarding the year 2000 issue.
IF WE ADOPT A FRANCHISING STRATEGY, WE MAY BE UNSUCCESSFUL IN EXECUTING A
FRANCHISING PROGRAM.
We may use a franchise strategy in selected markets. If we adopt a
franchising strategy, our failure to successfully execute a franchising program
could adversely affect our business and results of operations. We have not used
franchising to date and may not be successful in implementing a franchise
program in the future. We have not yet established any criteria to evaluate
prospective franchisees. We may be unable to identify and attract franchisees
that have 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.
RISKS RELATED TO THIS OFFERING
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING
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 after this offering 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. Please see "Shares
Eligible for Future Sale" for a description of sales that may occur in the
future.
12
<PAGE>
OUR COMMON STOCK MAY NOT DEVELOP AN ACTIVE, LIQUID TRADING MARKET.
We cannot predict the extent to which investor interest in us will lead to
the development of an active trading market or the level of trading volume that
will exist for our common stock after the offering. Low trading volumes may
adversely affect your ability to sell your shares quickly at the current market
price. The initial public offering price for the shares will be determined by
negotiations among us, the selling stockholders and the representatives of the
underwriters. This initial price may not be indicative of prices that will
prevail in the trading market. Please see "Underwriting" for more information
regarding our arrangement with the underwriters and the factors considered in
setting the initial public offering price.
THE MARKET PRICE OF OUR STOCK MAY BE ADVERSELY AFFECTED BY MARKET
VOLATILITY.
The stock market has experienced extreme price and volume fluctuations. The
trading price of our common stock could be subject to wide fluctuations in
response to a number of factors, including:
- fluctuations in our quarterly or annual results of operations;
- changes in published earnings estimates by analysts and whether our
earnings meet or exceed such estimates;
- additions or departures of key personnel; and
- changes in overall stock market conditions, including the stock prices of
other restaurant companies.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were subject to securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH YOUR
INTERESTS.
We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 55.9% of our
outstanding common stock following the completion of this offering. These
stockholders will be able to exercise control over all matters requiring
approval by our stockholders, 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.
Please see "Management" and "Principal Stockholders" for detailed information on
the beneficial ownership of our executive officers, directors and their
affiliates.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.
The anti-takeover provisions in our certificate of incorporation, our bylaws
and Delaware law could make it more difficult for a third party to acquire us.
As a result of these provisions, we could delay, deter or prevent a takeover
attempt or third party acquisition that our stockholders consider to be in their
best interest, including a takeover attempt that results in a premium over the
market price for the shares held by our stockholders. Please see "Description of
Securities" for more information on these anti-takeover provisions.
FORWARD-LOOKING STATEMENTS
This prospectus may contain forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of factors more fully described in the "Risk Factors"
section and elsewhere in this prospectus. We are not obligated to update or
revise these forward-looking statements to reflect new events or circumstances.
13
<PAGE>
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
This offering is for 3,150,000 shares; however, the underwriters have a
30-day option to purchase up to 472,500 additional shares from us and from the
selling stockholders to cover over-allotments. Some of the disclosures in this
prospectus would be different if the underwriters exercise the option. Unless we
tell you otherwise, the information in this prospectus assumes that the
underwriters will not exercise the option.
Unless we tell you otherwise, all information in this prospectus relating to
our capitalization presented on an as adjusted or pro forma basis reflects:
- the automatic conversion of each share of our preferred stock into one
share of our common stock upon the closing of this offering;
- an increase in our authorized common stock to 75,000,000 shares and an
increase in our undesignated preferred stock to 5,000,000 shares effective
immediately prior to the closing of this offering; and
- the issuance of 39,555 shares of common stock upon the exercise of
warrants which terminate immediately upon this offering.
Our registered trademarks and service marks include
Rubio's-Registered Trademark-, Baja Grill-Registered Trademark-, Home of the
Fish Taco-Registered Trademark-, HealthMex-Registered Trademark- and
Pesky-Registered Trademark-. Each other trademark, trade name or service mark
appearing in this prospectus belongs to its holder.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 2,250,000 shares
offered by us will be approximately $21.2 million, after deducting the
underwriting discounts and commissions and offering expenses payable by us. If
our portion of the underwriters' over-allotment option is exercised in full, we
estimate that such net proceeds will be approximately $23.6 million.
We intend to use approximately $19.2 million of the net proceeds of this
offering for development of new restaurants, approximately $1.5 million for
repayment of term loan debt and the remainder for working capital and other
general corporate purposes. Our term loan agreement with BankBoston, N.A. was
amended on April 1, 1999, and now bears interest at the lesser of (1) the London
InterBank Offered Rate, also known as LIBOR, adjusted by the statutory reserve
rate plus 3.0%, or (2) the greater of the bank's base rate plus 0.75% or the
Federal Funds Effective Rate plus 1.5%. Pending any such use, as described
above, we intend to invest the net proceeds in interest-bearing instruments. We
will not receive any proceeds from the sale of shares by the selling
stockholders. Please see "Selling Stockholders" for a description of the number
of shares which may be sold by selling stockholders in this offering.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. Our
term loan agreement with BankBoston requires us to obtain the bank's consent
prior to making any distribution or declaring any dividends. We do not expect to
pay any cash dividends for the foreseeable future. We currently intend to retain
future earnings, if any, to finance the expansion of our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent on financial condition, operating results,
capital requirements and other factors that our board deems relevant.
14
<PAGE>
DILUTION
Our net tangible book value as of March 28, 1999, after giving effect to the
automatic conversion of all outstanding shares of preferred stock into common
stock, was $17,922,782, or $2.82 per share of common stock. Net tangible book
value per share is equal to the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding as of
March 28, 1999. Assuming the sale by us of the 2,250,000 shares offered at an
initial public offering price of $10.50 per share and after deducting
underwriting discounts and estimated offering expenses, and the application of
the estimated net proceeds therefrom, our pro forma net tangible book value as
of March 28, 1999 would have been $39,169,032, or $4.55 per share of common
stock. This represents an immediate increase in net tangible book value of $1.73
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $5.95 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 10.50
---------
Net tangible book value per share before this offering............ $ 2.82
---------
Increase attributable to new investors............................ 1.73
---------
Pro forma net tangible book value per share after this offering..... 4.55
---------
Pro forma dilution per share to new investors....................... $ 5.95
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 28, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 6,353,502 73.8% $ 18,304,015 43.7% $ 2.88
New investors................................... 2,250,000 26.2 23,625,000 56.3 10.50
---------- ----- ------------- -----
Total......................................... 8,603,502 100.0% $ 41,929,015 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The tables and calculations above assume no exercise of outstanding options
or warrants unless otherwise set forth in this prospectus. On March 28, 1999,
there were:
- 379,376 shares issuable upon the exercise of options outstanding at a
weighted average exercise price of $3.89 per share;
- 45,000 shares issuable upon the exercise of an outstanding warrant at an
exercise price of $7.20 per share; and
- 244,562 shares available for issuance under our stock option plans. Since
March 28, 1999, we have granted options exercisable into 192,000 shares at
a weighted average exercise price of $10.00 per share and 7,544 shares
became available for issuance upon employee forfeitures. In addition,
2,120 shares were issued upon exercise of options subsequent to March 28,
1999.
To the extent that these options or warrants are exercised, there will be
further dilution to new investors. Please see "Management--Benefit Plans" for a
discussion of our stock option plans.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 28, 1999 on an
actual basis and as adjusted to give effect to the receipt by us of the
estimated net proceeds from the sale of 2,250,000 shares offered at an initial
public offering price of $10.50 per share. This information should be read in
conjunction with our consolidated financial statements and the notes relating to
such statements appearing elsewhere in this prospectus. This information is
based on the number of shares of common stock outstanding on March 28, 1999. It
excludes:
- 379,376 shares of common stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $3.89 per share;
- 45,000 shares of common stock issuable upon the exercise of an outstanding
warrant at an exercise price of $7.20 per share; and
- 244,562 shares available for issuance under our stock option plans.
- Since March 28, 1999, we have granted options exercisable into 192,000
shares at a weighted average exercise price of $10.00 per share and 7,544
shares became available for issuance upon employee forfeitures. In
addition, 2,120 shares were issued upon exercise of options subsequent to
March 28, 1999.
<TABLE>
<CAPTION>
MARCH 28, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion.................................... $ 928 $ --
--------- -----------
Redeemable convertible preferred stock:
$0.001 par value, 3,410,242 shares authorized on an actual basis;
3,338,138 shares issued and outstanding on an actual basis; and no
shares authorized, issued and outstanding on an as adjusted basis... 17,782 --
Stockholders' equity:
Convertible preferred stock, $0.001 par value, 1,973,395 shares
authorized on an actual basis; 1,924,747 shares issued and
outstanding on an actual basis; no shares authorized, issued and
outstanding on an as adjusted basis................................. 2 --
Preferred stock, $0.001 par value, no shares authorized, issued and
outstanding on an actual basis; 5,000,000 shares authorized on an as
adjusted basis; no shares issued and outstanding on an as adjusted
basis............................................................... -- --
Common stock, $0.001 par value, 7,298,725 shares authorized on an
actual basis; 1,051,062 shares issued and outstanding on an actual
basis; 75,000,000 shares authorized on as adjusted basis; 8,603,502
shares issued and outstanding on an as adjusted basis............... 1 9
Additional paid-in capital............................................ 3 39,025
Deferred compensation................................................. 39 39
Accumulated other comprehensive income................................ 11 11
Retained earnings..................................................... 85 85
--------- -----------
Total stockholders' equity.......................................... 141 39,169
--------- -----------
--------- -----------
Total capitalization................................................ $ 18,851 $ 39,169
--------- -----------
--------- -----------
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to such
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data for the years ended December 29, 1996, December 28, 1997 and
December 27, 1998, and the consolidated balance sheet data at December 28, 1997
and December 27, 1998 are derived from our consolidated financial statements
which have been audited by Deloitte & Touche LLP, independent auditors, and are
included elsewhere in this prospectus. The statement of operations data for the
two years ended December 31, 1994 and 1995, and the consolidated balance sheet
data at December 31, 1994 and 1995 and December 29, 1996 are derived from
audited consolidated financial statements not included in this prospectus. The
consolidated statement of operations data for the three months ended March 29,
1998 and March 28, 1999 and the consolidated balance sheet data at March 28,
1999 have been derived from the unaudited financial statements included
elsewhere in this prospectus that have been prepared on the same basis as the
audited consolidated financial statements and, in our opinion, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for such
periods. Historical results are not necessarily indicative of the results to be
expected in the future and results for interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL --------------------------
------------------------------------------------------------ MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Sales.................................. $ 11,837 $ 14,811 $ 19,523 $ 29,704 $ 44,699 $ 9,217 $ 14,383
Costs and expenses:
Cost of sales........................ 2,988 3,587 5,068 8,659 13,074 2,671 4,247
Restaurant labor, occupancy and
other.............................. 6,535 8,141 10,441 15,639 22,616 4,895 7,254
General and administrative
expenses........................... 2,073 2,596 3,176 4,253 6,148 1,428 2,075
Depreciation and amortization........ 349 478 735 1,259 1,946 426 641
Pre-opening expenses................. -- -- 18 271 319 51 94
Loss on asset impairment............. -- -- -- 387 -- -- --
---------- ---------- ---------- --------- ---------- ------------ ------------
Operating income (loss)................ (108) 9 85 (764) 596 (254) 72
Other income (expense):
Interest income (expense), net....... (109) (58) 17 (75) 268 79 7
Miscellaneous income (expense)....... 63 111 1 (6) (10) 2 --
Gain (loss) on disposal/sale of
property........................... (100) 2 (2) (56) (5) 6 (4)
---------- ---------- ---------- --------- ---------- ------------ ------------
Total other income (expense)....... (146) 55 16 (137) 253 87 3
---------- ---------- ---------- --------- ---------- ------------ ------------
Income (loss) before income taxes...... (254) 64 101 (901) 849 (167) 75
Income tax benefit (expense)........... 99 (48) (29) (99) 66 (13) (30)
---------- ---------- ---------- --------- ---------- ------------ ------------
Net income (loss)...................... $ (155) $ 16 $ 72 $ (1,000) $ 915 $ (180) $ 45
---------- ---------- ---------- --------- ---------- ------------ ------------
---------- ---------- ---------- --------- ---------- ------------ ------------
Net income (loss) attributable to
common stockholders.................. $ (155) $ (39) $ 3 $ (1,095) $ 568 $ (267) $ (41)
---------- ---------- ---------- --------- ---------- ------------ ------------
---------- ---------- ---------- --------- ---------- ------------ ------------
Net income (loss) per share
Basic................................ $ (0.15) $ (0.04) $ -- $ (1.08) $ 0.55 $ (0.26) $ (0.04)
Diluted.............................. (0.15) (0.04) -- (1.08) 0.14 (0.26) (0.04)
Shares used in computing net income
(loss) per share
Basic................................ 1,000 1,000 1,008 1,010 1,033 1,013 1,050
Diluted.............................. 1,000 1,000 1,026 1,010 6,418 1,013 1,050
Pro forma net income per share, basic
and diluted.......................... $ 0.14 $ 0.01
Shares used in computing pro forma net
income per share
Basic................................ 6,336 6,352
Diluted.............................. 6,457 6,618
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL ------------
------------------------------------------------------------ MARCH 28,
1994 1995 1996 1997 1998 1999
---------- ---------- ---------- --------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 53 $ 1,004 $ 633 $ 866 $ 786 $ 1,124
Total assets........................................... 3,799 7,813 13,375 23,054 25,752 25,435
Long-term debt, including current portion.............. 1,285 1,923 2,483 2,562 1,856 1,671
Redeemable convertible preferred stock................. -- 3,171 7,550 17,003 17,695 17,782
Total stockholders' equity (deficit)................... 1,130 4,317 8,474 (141) 196 141
</TABLE>
- ------------------------
Please see the consolidated financial statements and related notes appearing
elsewhere in this prospectus for the determination of number of shares used in
computing basic and diluted net income (loss) per share.
Net income (loss) attributable to common stockholders includes the effect of
the accretion on the redeemable convertible preferred stock which reduces net
income (loss) attributable to common stockholders for the related periods. Net
income attributable to common stockholders for the fiscal 1998 diluted earnings
per share calculation is $915,000. The difference from the basic calculation is
due to the reversal of the accretion on the redeemable convertible preferred
stock as such stock is assumed to be converted to common stock for purposes of
the diluted calculation.
Net income for fiscal year 1998 was favorably impacted by the reversal of a
$452,000 deferred tax asset allowance that was previously provided for in fiscal
year 1997. We eliminated the valuation allowance in 1998 due to our belief that
current year activity made realization of such benefit more likely than not.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We opened our first high-quality, quick-service Mexican restaurant in 1983,
and grew steadily through 1994, at which time we operated 17 units. We
accelerated the number of restaurant openings in recent years, going from six
new restaurants opened in 1995 to 16 in 1998. We continue to accelerate the
number of restaurant openings, with 20 additional units to be opened in 1999 and
36 new units planned in 2000. We have opened eight new restaurants so far in
1999.
As a result of our rapid expansion, period to period comparisons of our
financial results may not be meaningful. When a new unit opens, it will
typically incur higher than normal levels of food and labor costs until new
personnel gain experience. Hourly labor schedules are gradually adjusted
downward during the first three months of a restaurant opening, in order to
reach operating efficiencies similar to those at established units. In
calculating comparable restaurant sales, we introduce a restaurant into our
comparable restaurant base once it has been in operation for 15 calendar months.
Throughout our history, we have sought to evolve our concept and menu in
order to meet the changing needs and taste preferences of our guests. From
January through April 1997, we modified our restaurant concept to include a
broader menu selection and updated our restaurant decor. To reflect these
additions and improvements in our concept, we changed our name to "Rubio's Baja
Grill, Home of the Fish Taco" from "Rubio's, Home of the Fish Taco." During this
time we added and deleted various menu items, upgraded other menu items and
increased prices on selected items. We believe that this concept modification
was a critical factor influencing the comparable restaurant sales increases of
18.0% reported in 1997 and 10.4% reported in 1998. Since the spring of 1997, our
sales and costs reflect these higher quality, higher cost and higher priced menu
items and may not be comparable to historical comparable period results.
In conjunction with the modification of our restaurant concept, we increased
our marketing expenditures from $515,000 in 1996 to $1.1 million in 1997 and
$1.4 million in 1998. In particular, we increased media spending and, we
believe, used this medium more efficiently to augment growth in our sales base.
We believe our restaurant sales are favorably impacted by radio and television
advertising and that this advertising helped to contribute to the comparable
restaurant sales increases in both 1997 and 1998.
Sales represents gross sales less sales taxes, coupons and other discounts.
Cost of sales is composed of food, beverage and paper supply expenses.
Components of restaurant labor, occupancy and other expenses include direct
hourly and management wages, bonuses, fringe benefit costs, rent and other
occupancy costs, advertising and promotion, operating supplies, utilities,
maintenance and repairs and other operating expenses.
General and administrative expenses include all corporate and administrative
functions that support existing operations and provide infrastructure to
facilitate our future growth. Components of this category include management,
supervisory and staff salaries and employee benefits, travel, information
systems, training, corporate rent and professional and consulting fees.
Pre-opening costs, which are expensed as incurred, consist of the costs of
hiring and training the initial workforce, travel, the cost of food used in
training, the cost of the initial stocking of operating supplies and other
direct costs related to the opening.
19
<PAGE>
We have leased all of our facilities, except for one building, in order to
minimize the cash investment associated with each unit. The majority of our
leases are for 10-year terms and include options to extend the terms. The
majority of our leases also include both fixed rate and percentage-of-sales rent
provisions.
We use a 52- or 53-week fiscal year ending on the Sunday nearest December
31. Fiscal years 1996, 1997 and 1998 each consisted of 52 weeks. The three-month
periods ended March 29, 1998 and March 28, 1999 each consisted of 13 weeks.
RESULTS OF OPERATIONS
Our operating results, expressed as a percentage of sales, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL ------------------------
------------------------------- MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales............................................ 26.0 29.2 29.2 29.0 29.5
Restaurant labor, occupancy and other.................... 53.5 52.6 50.6 53.1 50.4
General and administrative expenses...................... 16.3 14.3 13.8 15.5 14.4
Depreciation and amortization............................ 3.8 4.2 4.4 4.6 4.5
Pre-opening expenses..................................... 0.1 0.9 0.7 0.6 0.7
Loss on asset impairment................................. -- 1.3 -- -- --
--------- --------- --------- ----- -----
Operating income (loss).................................... 0.3 (2.5) 1.3 (2.8) 0.5
Other income (expense):
Interest income (expense), net........................... 0.1 (0.3) 0.6 0.9 --
Miscellaneous income (expense)........................... -- -- -- -- --
Gain (loss) on disposal/sale of property................. -- (0.2) -- 0.1 --
--------- --------- --------- ----- -----
Total other income (expense)........................... 0.1 (0.5) 0.6 1.0 --
--------- --------- --------- ----- -----
Income (loss) before income taxes.......................... 0.4 (3.0) 1.9 (1.8) 0.5
Income tax (expense) benefit............................... -- (0.3) 0.1 (0.1) (0.2)
--------- --------- --------- ----- -----
Net income (loss).......................................... 0.4% (3.3)% 2.0% (1.9 )% 0.3%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
QUARTER ENDED MARCH 28, 1999 COMPARED TO THE QUARTER ENDED MARCH 29, 1998
Results of operations reflect a full quarter of operations for 59
restaurants and 43 restaurants for the quarters ended March 28, 1999 and March
29, 1998, respectively. Results of operations also reflect a partial quarter of
operations for five and three restaurants for the quarters ended March 28, 1999
and March 29, 1998, respectively. Net income for the three months ended March
31, 1999 was $45,000 as compared to a net loss of $180,000 in the same period in
1998. Net loss attributable to common stockholders for the first quarter of 1999
was $41,000 as compared to a net loss of $267,000 in the same period during
1998. The factors contributing to these results are discussed below.
SALES. Sales increased $5.2 million, or 56.5%, to $14.4 million in the
first quarter of 1999 from $9.2 million in the first quarter of 1998. This
increase was principally due to the realization of a full quarter of operations
from the 16 units opened in 1998 resulting in sales of $3.5 million in the first
quarter of 1999 and $608,000 in sales derived from the five units opened in
1999, along with a comparable unit sales increase of $1.1 million, or 13.7%. The
comparable unit sales increase was driven by the success of a 99-cent fish taco
radio promotion in the first quarter of 1999, combined with slightly
20
<PAGE>
weaker sales in 1998 as a result of poor weather related to El Nino. We also
introduced a price increase of approximately 1.5% at the beginning of 1999.
COST OF SALES. Cost of sales as a percentage of sales increased to 29.5% in
1999 from 29.0% in 1998 primarily due to increases in the cost of food items.
RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy and
other decreased as a percentage of sales to 50.4% in 1999 from 53.1% in 1998.
This reduction was due primarily to lower labor, minimum rent and other fixed
unit operating expenses as a result of the efficiencies associated with
increased unit sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.1 million in the first quarter of 1999 from $1.4 million in the
first quarter of 1998. The increase is principally due to $182,000 in accrued
executive bonus expense resulting from our strong first quarter performance,
$131,000 in salaries and benefits related to the hiring of additional corporate
employees and field management personnel required to support and manage unit
expansion, $93,000 in management recruiting costs, and $242,000 in other
corporate level expenses related to our business growth. General and
administrative expenses decreased as a percentage of sales to 14.4% in the first
quarter of 1999 from 15.5% in the first quarter of 1998 primarily due to our
expanding revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$641,000 in the first quarter of 1999 from $426,000 in 1998. The increase was
primarily due to the additional depreciation on the new units opened during 1998
and during the first quarter of 1999.
PRE-OPENING EXPENSES. Pre-opening expenses increased to $94,000 in the
first quarter of 1999 from $51,000 in the first quarter of 1998 primarily due to
the increase in unit openings to five in the first quarter of 1999 compared to
three in the first quarter of 1998.
INTEREST INCOME (EXPENSE), NET. Net interest income decreased to $7,000 in
the first quarter of 1999 from $79,000 in net interest income in the first
quarter of 1998. This decrease is primarily due to a decrease in cash available
for investing, which resulted in a decline of interest income to $63,000 in the
first quarter of 1999 from $137,000 in the first quarter of 1998. The decrease
in cash available to generate interest income resulted from the use of these
funds for the development of new restaurants.
INCOME TAXES. The provision for income taxes in the first quarter of 1999
and 1998 is based on the annual effective tax rate applied to the respective
quarter's pretax book income (loss). The 40% tax rate applied in the first
quarter of 1999 comprises the federal and state statutory rates based on the
estimated annual effective rate for 1999. The 7.8% tax rate applied in the first
quarter of 1998 is primarily a result of the recognition of 1997 net deferred
tax assets previously valued, due to fiscal 1998 net income and the future
realizability of such net deferred tax assets.
YEAR ENDED DECEMBER 27, 1998 COMPARED TO YEAR ENDED DECEMBER 28, 1997
Results of operations reflect a full year of operations of 43 restaurants
and 31 restaurants for the years ended December 27, 1998 and December 28, 1997,
respectively. Results of operations also reflect partial year of operations of
16 restaurants and 12 restaurants for the years ended December 27, 1998 and
December 28, 1997, respectively. Net income in 1998 was $915,000 as compared to
a net loss of $1,000,000 in 1997. Net income attributable to common stockholders
for 1998 was $568,000 as compared to a net loss of $1,095,000 in 1997. Net
income for fiscal year 1998 was favorably impacted by the reversal of a $452,000
deferred tax asset allowance that was previously provided for in fiscal year
1997. The factors contributing to these results are discussed below.
SALES. Sales increased $15.0 million, or 50.5%, to $44.7 million in 1998
from $29.7 million in 1997. This increase was principally due to $6.4 million in
sales generated by a full year of operations from 12
21
<PAGE>
units opened in 1997 and $5.7 million in sales derived from the 16 units opened
in 1998, along with a comparable unit sales increase of $2.8 million, or 10.4%.
The comparable unit sales increase was driven both by the momentum generated by
the Baja Grill concept, as well as the success of the lobster burrito promotion,
which took place from June through September 1998. We also introduced a price
increase of approximately 1.5% at the beginning of 1998.
COST OF SALES. Cost of sales as a percentage of sales remained constant at
29.2% in 1998 and 1997.
RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy and
other decreased as a percentage of sales to 50.6% in 1998 from 52.6% in 1997.
This reduction was due primarily to lower labor, minimum rent and other fixed
unit operating expenses as a percentage of sales as a result of the efficiencies
associated with increased unit sales. In addition, there were non-recurring
expenses incurred in 1997, related to the modification of our restaurant
concept. These one-time expenses included higher levels of hourly employee
training and operating supplies, resulting in higher 1997 total expenses in this
category.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $6.1 million in 1998 from $4.3 million in 1997, primarily due to
$1.0 million in salary and benefits related to the hiring of additional
corporate employees and field management required to support and manage unit
expansion, $296,000 related to a senior management bonus expense incurred in
1998 which was not incurred in 1997, and $586,000 in other corporate level
expenses related to our business growth. General and administrative expenses
decreased as a percentage of sales to 13.8% in 1998 from 14.3% in 1997 primarily
due to our expanding revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1.9 million in 1998 from $1.3 million in 1997. The increase was primarily due
to the additional depreciation on the 16 new units opened during 1998.
PRE-OPENING EXPENSES. Pre-opening expenses increased to $319,000 in 1998
from $271,000 in 1997 primarily due to the increase in unit openings in 1998 to
16 from 12 in the prior period.
LOSS ON ASSET IMPAIRMENT. There was no loss on asset impairment in 1998.
Loss on asset impairment of $387,000 in 1997 reflects the difference between the
carrying value and the estimated fair value of the assets of one restaurant
location.
INTEREST INCOME (EXPENSE), NET. Net interest income increased to $268,000
in 1998 from $75,000 in net interest expense in 1997. This increase was
primarily due to an increase in interest income from $188,000 in 1997 to
$521,000 in 1998 resulting from interest and other investment income associated
with the investment of the net proceeds from our $10.1 million preferred stock
private placement in November 1997.
INCOME TAXES. The provision (benefit) for income taxes in 1998 and 1997 is
based on the approximate tax rate applied to the respective year's pre-tax book
income (loss). The 7.8% tax benefit applied in 1998 is primarily a result of the
recognition of prior year net deferred tax assets previously valued, due to the
current year net income and the future realizability of such net deferred tax
assets.
YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996
Results of operations reflect a full year of operations of 31 restaurants
and 23 restaurants for the years ended December 28, 1997 and December 29, 1996,
respectively. Results of operations also reflect a partial year of operations of
12 restaurants and eight restaurants for the years ended December 28, 1997 and
December 29, 1996, respectively. Net loss in 1997 was $1,000,000 as compared to
net income
22
<PAGE>
of $72,000 in 1996. Net loss attributable to common stockholders for 1997 was
$1,095,000 as compared to net income of $3,000 in 1996. The factors contributing
to these results are discussed below.
SALES. Sales increased $10.2 million, or 52.1%, to $29.7 million in 1997
from $19.5 million in 1996. This increase was principally due to $3.1 million in
sales generated by a full year of operations from eight units opened in 1996 and
$3.9 million in sales derived from the 12 units opened in 1997, along with a
comparable unit sales increase of $3.2 million or 18.0% driven primarily by the
modification to the Baja Grill concept and related promotional campaigns.
COST OF SALES. Cost of sales as a percentage of sales increased to 29.2% in
1997 from 26.0% in 1996, primarily due to the modification to the Baja Grill
concept. The new menu items offered with the Baja Grill menu, particularly those
containing chargrilled chicken and steak, reflect higher food cost percentages
than items replaced or retained from the previous menu.
RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy and
other decreased as a percentage of sales to 52.6% in 1997 from 53.5% in 1996.
This reduction was due primarily to a decrease in unit minimum rent as a
percentage of sales resulting from our expanding revenue base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.3 million in 1997 from $3.2 million in 1996, primarily due to
$697,000 in salaries and benefits related to the hiring of additional corporate
employees and field management personnel required to support and manage unit
expansion and $384,000 in other corporate level expenses related to our business
growth. General and administrative expenses decreased as a percentage of sales
to 14.3% in 1997 from 16.3% in 1996 due primarily to our expanding revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1.3 million in 1997 from $735,000 in 1996. This $524,000 increase was primarily
due to the additional depreciation on the 12 new units opened during 1997 as
well as the depreciation of the fixed assets purchased in conjunction with the
modification to the Baja Grill concept.
PRE-OPENING EXPENSES. Pre-opening expenses increased to $271,000 in 1997
from $18,000 in 1996 primarily due to the increase in unit openings in 1997 to
12 from eight in the prior period. Prior to the third quarter of 1996, we did
not report pre-opening expenses separately from recurring restaurant expense
categories on our income statement.
LOSS ON ASSET IMPAIRMENT. Loss on asset impairment of $387,000 in 1997
reflects the difference between the carrying value and the estimated fair value
of the assets of one restaurant location.
GAIN (LOSS) ON DISPOSAL/SALE OF PROPERTY. The $56,000 loss on the sale of
property in 1997 resulted primarily from the disposal of assets in conjunction
with the modification of units to the Baja Grill concept.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased to $75,000
in 1997 from $17,000 in net interest income in 1996. This decrease was primarily
due to less cash invested in short-term instruments. This net reduction in
interest was offset by an increase in borrowing related to the new restaurant
financings.
INCOME TAXES. The provision for income taxes in 1997 and 1996 is based on
the approximate tax rate applied to each year's pretax book income. The 1997
provision for income tax was adjusted by a valuation allowance equal to the net
deferred tax asset due to uncertainty as to its realization.
23
<PAGE>
QUARTERLY RESULTS
The following tables set forth unaudited quarterly information for the last
nine quarters. This quarterly information has been prepared on a basis
consistent with the audited consolidated financial statements and, we believe,
includes all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the information shown. Our quarterly operating
results may fluctuate significantly as a result of a variety of factors and
operating results for any quarter are not necessarily indicative of results for
a full fiscal year.
<TABLE>
<CAPTION>
FISCAL 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF RESTAURANTS)
<S> <C> <C> <C> <C>
Sales................................. $ 6,143 $ 7,449 $ 8,162 $ 7,950
Costs and expenses:
Cost of sales....................... 1,761 2,208 2,341 2,349
Restaurant labor, occupancy and
other............................. 3,361 3,906 4,032 4,340
General and administrative
expenses.......................... 1,003 1,149 1,036 1,065
Depreciation and amortization....... 235 312 332 380
Pre-opening expenses................ 26 40 47 158
Loss on asset impairment............ -- -- -- 387
----------- ----------- ----------- -----------
Operating income (loss)........... (243) (166) 374 (729)
Other income (expense):
Interest income (expense), net...... (1) (31) (42) (1)
Miscellaneous income (expense)...... -- -- (3) (3)
Gain (loss) on disposal/sale of
property.......................... (45) (11) 1 (1)
----------- ----------- ----------- -----------
Total other income (expense)........ (46) (42) (44) (5)
----------- ----------- ----------- -----------
Income (loss) before income taxes..... (289) (208) 330 (734)
Income tax benefit (expense).......... (31) (23) 36 (81)
----------- ----------- ----------- -----------
Net income (loss)................... $ (320) $ (231) $ 366 $ (815)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of restaurants at end of
period.............................. 33 35 38 43
<CAPTION>
FISCAL 1998 FISCAL 1999
----------------------------------------------------- -----------
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................................. $ 9,217 $ 10,907 $ 12,935 $ 11,640 $ 14,383
Costs and expenses:
Cost of sales....................... 2,671 3,180 3,832 3,390 4,247
Restaurant labor, occupancy and
other............................. 4,895 5,433 6,217 6,071 7,254
General and administrative
expenses.......................... 1,428 1,488 1,674 1,558 2,075
Depreciation and amortization....... 426 482 495 543 641
Pre-opening expenses................ 51 42 80 146 94
Loss on asset impairment............ -- -- -- -- --
------ ----------- ----------- ----------- -----------
Operating income (loss)........... (254) 282 637 (68) 72
Other income (expense):
Interest income (expense), net...... 79 51 54 83 7
Miscellaneous income (expense)...... 2 (9) (1) (2) --
Gain (loss) on disposal/sale of
property.......................... 6 (2) (2) (7) (4)
------ ----------- ----------- ----------- -----------
Total other income (expense)........ 87 40 51 74 3
------ ----------- ----------- ----------- -----------
Income (loss) before income taxes..... (167) 322 688 6 75
Income tax benefit (expense).......... (13) 25 54 -- (30)
------ ----------- ----------- ----------- -----------
Net income (loss)................... $ (180) $ 347 $ 742 $ 6 $ 45
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
Number of restaurants at end of
period.............................. 46 49 52 59 64
</TABLE>
Our operating results for the nine fiscal quarters expressed as a percentage
of sales were as follows:
<TABLE>
<CAPTION>
FISCAL 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales....................... 28.7 29.6 28.7 29.5
Restaurant labor, occupancy and
other............................. 54.7 52.4 49.4 54.6
General and administrative
expenses.......................... 16.3 15.4 12.7 13.4
Depreciation and amortization....... 3.8 4.2 4.1 4.8
Pre-opening expenses................ 0.4 0.5 0.6 2.0
Loss on asset impairment............ -- -- -- 4.9
----- ----- ----- -----
Operating income (loss)............. (3.9) (2.1) 4.5 (9.2)
Other income (expense):
Interest income (expense), net...... -- (0.4) (0.5) --
Miscellaneous income (expense)...... -- -- -- --
Gain (loss) on disposal/sale of
property.......................... (0.7) (0.1) -- --
----- ----- ----- -----
Total other income (expense)........ (0.7) (0.5) (0.5) --
----- ----- ----- -----
Income (loss) before income taxes..... (4.6) (2.6) 4.0 (9.2)
Income tax benefit (expense).......... (0.5) (0.3) 0.4 (1.0)
----- ----- ----- -----
Net income (loss)..................... (5.1)% (2.9 )% 4.4% (10.2)%
----- ----- ----- -----
----- ----- ----- -----
<CAPTION>
FISCAL 1998 FISCAL 1999
----------------------------------------------------- -----------
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales....................... 29.0 29.2 29.6 29.1 29.5
Restaurant labor, occupancy and
other............................. 53.1 49.8 48.1 52.2 50.4
General and administrative
expenses.......................... 15.5 13.6 12.9 13.4 14.4
Depreciation and amortization....... 4.6 4.4 3.8 4.7 4.5
Pre-opening expenses................ 0.6 0.4 0.6 1.2 0.7
Loss on asset impairment............ -- -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)............. (2.8) 2.6 5.0 (0.6) 0.5
Other income (expense):
Interest income (expense), net...... 0.9 0.5 0.4 0.7 --
Miscellaneous income (expense)...... -- (0.1) -- -- --
Gain (loss) on disposal/sale of
property.......................... 0.1 -- -- -- --
----- ----- ----- ----- -----
Total other income (expense)........ 1.0 0.4 0.4 0.7 --
----- ----- ----- ----- -----
Income (loss) before income taxes..... (1.8) 3.0 5.4 0.1 0.5
Income tax benefit (expense).......... (0.1) 0.2 0.4 -- (0.2)
----- ----- ----- ----- -----
Net income (loss)..................... (1.9 )% 3.2% 5.8% 0.1% 0.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
24
<PAGE>
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 semi-fixed costs, as well as through increased revenues.
This seasonal impact on our operating results is expected to continue.
INFLATION
Components of our operations subject to inflation include food, beverage,
lease and labor costs. Our leases require us to pay taxes, maintenance, repairs,
insurance and utilities, all of which are subject to inflationary increases. We
believe inflation has not had a material impact on our results of operations in
recent years.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital requirements in recent years through cash flow
from operations, private placements of preferred stock and bank debt. We
generated $4.2 million in cash flow from operating activities in 1998, $2.0
million in 1997 and $1.4 million in 1996. From 1995 through 1997, we raised
approximately $16.8 million, net of financing costs, from the sale of preferred
stock. We have also financed our capital requirements through bank borrowings.
As of March 28, 1999, the balance outstanding under our term loan agreement with
BankBoston, N.A. was approximately $1.7 million. On April 1, 1999 the loan
agreement was amended to provide for the outstanding balance to bear interest at
the lesser of (1) LIBOR adjusted by the statutory reserve rate plus 3.0%, or (2)
the greater of the bank's base rate plus 0.75% or the Federal Funds Effective
Rate plus 1.5%. In addition, we have a $7.5 million line of credit agreement
with BankBoston, which bears interest at the same rate as the term loan. As of
April 9, 1999, there was approximately $1.0 million outstanding under this
agreement.
Our principal financial needs arise from the development and opening of new
units. We incurred capital expenditures of approximately $6.9 million during
1998, of which $6.6 million was for new unit openings. In 1997 we incurred
approximately $6.4 million in capital expenditures, of which $5.0 million was
for new unit openings and $1.0 million for the modification to the Baja Grill
concept. In 1996, we incurred $3.0 million in capital expenditures, of which
$2.6 million was for new unit openings.
Total capital expenditures in 1999 are expected to be approximately $11.7
million, of which approximately $10.0 million is expected to be invested in the
opening of new restaurants. Approximately $2.6 million of this was incurred in
the first quarter. We plan to open 28 units in 1999, and 36 units in 2000. We
expect that future locations will generally cost approximately $360,000 per unit
net of landlord allowances and excluding pre-opening expenses. Pre-opening
expenses are expected to average approximately $20,000 per restaurant.
We lease restaurant and office facilities and real property under operating
leases expiring through 2013. As of the date of this prospectus, our future
minimum lease payments for our headquarters and restaurants are as follows: $4.4
million in 1999, $5.0 million in 2000, $5.0 million in 2001, $4.9 million in
2002, and $4.9 million in 2003 and $19.4 million thereafter.
We believe that the proceeds from this offering, together with anticipated
cash flow from operations and funds anticipated to be available from a credit
facility, will be sufficient to satisfy our working capital and capital
expenditure requirements for at least the next 12 months. We plan to incur
substantial costs over the near term in connection with our expansion program.
Changes in our operating plans, acceleration of our expansion plans, lower than
anticipated sales, increased expenses, potential acquisitions or other events
may cause us to seek additional financing sooner than anticipated. Additional
financing may not be available on acceptable terms, or at all. Failure to obtain
additional financing as needed could have a material adverse effect on our
business and results of operations.
25
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures are related to our cash, cash equivalents and
investments. We invest our excess cash in highly liquid short-term investments
with maturities of less than one year and U.S. Treasury notes and
mortgage-backed securities with maturities in excess of one year. We do not feel
these are a significant market risk.
YEAR 2000 READINESS DISCLOSURE
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data using
only two digits of the year. Most computer programs, computers and embedded
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19," causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20," rather than "19." This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by date
sensitive microprocessors, and is generally referred to as the "year 2000"
issue.
OUR STATE OF YEAR 2000 READINESS
We have reviewed both our information technology and our non-information
technology systems to determine whether they are year 2000 compliant. We have
not identified any material systems which are not year 2000 compliant. We have
initiated formal communications with all significant supplier and service
providers to determine the extent to which we are vulnerable to those third
parties' failures to solve their year 2000 problem. We have received written
assurances of year 2000 compliance from a majority of the third parties with
whom we have relationships, including our point-of-sale, payroll, and credit
card service providers. Testing and replacement of all systems is scheduled to
be completed by July 1, 1999. We intend to continue to make efforts to ensure
that third parties with whom we have relationships are year 2000 compliant.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We estimate that we have incurred costs of less than $25,000 to date in
connection with our year 2000 plan. We currently estimate the total costs of
completing our year 2000 plan, including costs incurred to date, to be less than
$50,000. This estimate is based on currently available information and will be
updated as we continue our assessment of third-party relationships, proceed with
our testing and implementation and design contingency plans.
THE RISKS OF OUR YEAR 2000 ISSUES
If any information technologies or embedded microprocessor technology
systems critical to our operations have been overlooked, there could be a
material adverse effect on our business or results of operations of a magnitude
which we have not yet fully analyzed. If the vendors of most important goods and
services or the suppliers of our necessary energy, telecommunications and
transportation needs, fail to provide us with:
- the materials and services which are necessary to produce, distribute and
sell our products;
- the electrical power and other utilities necessary to sustain our
operations; or
- reliable means of transporting supplies to our restaurants, such failure
could affect our ability to sell product which could have a material
adverse effect on our business or results of operations.
26
<PAGE>
OUR CONTINGENCY PLAN
We are in the initial stages of developing a business contingency plan to
address both unavoided and unavoidable year 2000 risks. This plan currently
includes developing and maintaining relationships with several suppliers of
services and products to mitigate a "worst case" scenario in which one or more
of our suppliers are not year 2000 compliant. Although we expect to have the
plan well-developed and costs of the plan estimated by July 31, 1999,
enhancements and revisions will be continuously considered and implemented as
appropriate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. We have not
yet assessed the effect of this standard on our current reporting and
disclosures.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" was issued by the Accounting Standards Executive Committee.
SOP 98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred, and is effective for fiscal years beginning
after December 15, 1998. We chose to early adopt this SOP for the fiscal year
ended December 28, 1997. The adoption of this SOP did not have a material effect
on our operations.
27
<PAGE>
BUSINESS
THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
We own and operate high-quality, quick-service Mexican restaurants that
offer traditional Mexican cuisine combined with fresh seafood indicative of the
Baja region of Mexico. Our restaurants are located predominately in the
southwest region of the United States.
RUBIO'S BAJA GRILL CONCEPT
The Rubio's Baja Grill concept successfully 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 opened the first Rubio's restaurant with his
father, Rafael, over 16 years ago in the Mission Bay area of San Diego. Building
on the success of our original "fish taco" concept, we later expanded our menu
offerings and upgraded our store layout to appeal to a broader customer base. We
seek to differentiate our restaurants by providing high-quality Mexican food in
a quick-service environment. We believe the "Rubio's Baja Grill" concept is
uniquely positioned between the quick-service and casual dining segments of the
restaurant industry. The critical elements of our market positioning are as
follows:
- DISTINCTIVE, FRESH, HIGH-QUALITY FOOD. We seek to differentiate ourselves
from other quick-service and fast food Mexican restaurants by offering
high-quality products made-to-order using authentic regional Baja Mexican
recipes. We have experienced a high degree of success to date developing
distinctive and flavorful offerings that generate strong customer loyalty
and are often described as "craveable." Our signature items include our
Baja-style fish tacos as well as limited time promotions such as our
lobster burrito and tequila shrimp burrito. Our menu is served at both
lunch and dinner. It features a variety of other freshly prepared items,
including tacos and burritos made with chargrilled chicken, steak, mahi
mahi and shrimp, as well as grilled quesadillas. Freshly prepared salsas
are offered at our complimentary salsa bar. Our menu also includes reduced
fat "Healthmex" offerings and "Kid Pesky" meals designed for children.
- CASUAL, FUN DINING EXPERIENCE. We strive to promote an enjoyable overall
customer experience by creating a fun and relaxed setting in each of our
restaurants. Unlike the generic decor of a typical fast food restaurant,
our restaurants are designed to create an authentic personality capturing
the relaxed, beach-like atmosphere of the Baja region of Mexico. Our
design elements include colorful Mexican tiles, saltwater aquariums with
tropical fish, Baja beach photos and tropical prints, surfboards on the
walls and authentic palm-thatched patio umbrellas, or palapas, in most
existing locations.
- EXCELLENT DINING VALUE. Our restaurants offer guests high-quality food
typically associated with sit-down, casual dining restaurants at
quick-service prices. In addition to favorable prices, we offer the
convenience and rapid delivery of a traditional quick-service format. We
provide guests a clean and comfortable environment in which to enjoy their
meal on site. We also offer guests the convenience of take-out service. We
believe the strong value we deliver to our customers is critical to
building strong repeat business and customer loyalty.
28
<PAGE>
OUR BUSINESS STRATEGIES
Our business objective is to become the leading high-quality, quick-service
Mexican restaurant brand nationwide. In order to achieve our business objective,
we have developed the following strategies:
- CREATE A DISTINCTIVE CONCEPT AND BRAND. Our restaurants provide guests
with a distinctive dining experience which, we believe, helps promote
frequent visiting patterns and strong customer loyalty. We continue to
focus on several key initiatives designed to enhance the performance of
our existing restaurants and strengthen our brand identity. These
initiatives include developing and expanding proprietary menu offerings
such as the Baja-style fish taco, lobster burrito and "Baja Bowl," a
flavorful combination of chargrilled steak or chicken served over rice and
beans with fresh tomatoes, onions and cilantro. In addition, we focus on
securing high-visibility, high-traffic store locations and promoting the
awareness of our brand through comprehensive regional and local media
campaigns. As a result of these initiatives, we experienced comparable
store sales increases of 10.4% in 1998 and 18.0% in 1997.
- ACHIEVE ATTRACTIVE RESTAURANT-LEVEL ECONOMICS. We believe that we have
been able to achieve attractive operating results due to the broad appeal
of our concept, careful site selection and cost-effective development,
consistent application of our management and training programs and
favorable product costs. We utilize centralized information and accounting
systems which allow our management to monitor and control labor, food and
other direct operating expenses, and provide them with timely access to
financial and operating data. We believe we achieve a lower-than-average
product cost compared to our competitors, due to the popularity of our
fish items versus higher-cost items such as chicken and steak. We also
believe that our culture and emphasis on training leads to a lower
employee turnover ratio, and therefore higher productivity, compared to
many of our competitors.
- EXECUTE DISCIPLINED EXPANSION STRATEGY. We believe that our restaurant
concept has broad national appeal and that, as a result, we have
significant opportunities to expand our operations and generate attractive
unit level economics. With the addition of selected senior management in
operations, development, marketing and finance in 1996, we implemented an
accelerated expansion strategy. Our current expansion plan calls for us to
open 28 restaurants in 1999 and 36 restaurants in 2000. Through our
rigorous site selection process and criteria developed by our real estate
committee, we principally target high-traffic, high-visibility locations
in urban and suburban markets with medium to high family income levels.
- ENSURE HIGH-QUALITY GUEST EXPERIENCE. We strive to provide a consistent,
high-quality guest experience in order to generate frequent visiting
patterns and brand loyalty. To achieve this goal, 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 to our guests. Our commitment to making each guest's experience a
consistently positive one is evidenced by Rubio's list of "House Rules",
which is prominently displayed in each restaurant and defines the high
level of quality and service our guests can expect from us. Overall, we
design our concept to appeal to a broad variety of guests, including
families, and believe the cleanliness of our facilities provides an
additional advantage over many of our competitors.
29
<PAGE>
UNIT ECONOMICS
In 1998, the 43 units open the entire year generated on a per unit basis
average sales of $901,000, average operating income of $148,000, or 16.4% of
sales, and average cash flow of $183,000, or 20.3% of sales. Comparable
restaurant sales increased 10.4% in 1998, following an 18.0% increase in 1997.
In addition, comparable restaurant sales increased 13.7% in the first quarter of
1999, as compared to a 7.6% increase in the same period of 1998.
We currently have 12 units open outside California. Of these, three units
have over 12 months of operating results. These units generated average sales of
$972,000 for the most recent 12 months, average operating income of $149,000, or
15.0% of sales, and average cash flow of $200,000 or 20.5% of sales. These
results are not necessarily indicative of the results we will obtain in
connection with the other units currently open, or those we may open in the
future.
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 order to minimize the cash investment associated with
each unit. Our site selection strategy is to locate our restaurants in
high-profile, high-traffic locations, preferably on an end-cap location in line
with other retail properties.
Historically, the size of our restaurants has generally ranged from 1,800 to
3,000 square feet, excluding our smaller, food court locations. We expect the
size of our future sites to range from 2,000 to 2,400 square feet. We intend to
continue to develop restaurants that will require, on average, a total cash
investment of approximately $380,000, including pre-opening expenses of $20,000.
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EXISTING AND PROPOSED LOCATIONS
The following table sets forth information about our existing and proposed
units. We currently operate 27 restaurants in San Diego county, 28 restaurants
in greater Los Angeles, which includes Los Angeles, Orange, San Bernardino and
Riverside counties, six restaurants in Phoenix, Arizona, four restaurants in Las
Vegas, Nevada and two restaurants in Denver, Colorado. In addition, we license
our concept to other restaurant operators for three non-traditional locations at
Qualcomm Stadium, the San Diego International Airport food court and the Del Mar
Thoroughbred Club. Seven of the 20 units we plan to open in the balance of 1999
are under construction. We have signed leases for an additional 17 units. The
majority of our units are in high-traffic retail centers, and are not
stand-alone units.
<TABLE>
<CAPTION>
SQUARE
LOCATIONS DATE OPENED FOOTAGE
- ------------------------- ----------------- -----------
<S> <C> <C>
SAN DIEGO AREA
Mission Bay............ January 1983 1,800
San Diego State
University........... March 1986 1,300
Pacific Beach.......... August 1987 1,800
Point Loma............. March 1988 2,995
San Marcos............. July 1988 1,900
Chula Vista............ October 1988 2,262
Encinitas.............. October 1989 3,250
El Cajon............... July 1990 3,000
Kearny Mesa............ October 1990 2,900
University Towne
Centre............... April 1991 1,992
Solana Beach........... May 1992 2,207
Downtown San Diego..... August 1992 2,100
Carmel Mountain Ranch.. December 1993 2,262
Mission Valley......... August 1995 2,658
Grossmont.............. December 1995 2,914
La Jolla............... February 1996 2,350
San Diego Hall of
Justice (Food
Court)............... June 1996 619
Carlsbad............... October 1996 2,450
Hillcrest.............. December 1996 2,650
Vista.................. October 1997 2,000
Mission Gorge.......... December 1997 2,352
Rancho Bernardo........ March 1998 2,270
Fashion Valley Food
Court................ April 1998 870
Rancho Del Rey......... October 1998 2,000
Rancho San Diego....... January 1999 2,038
Parkway Plaza.......... February 1999 2,685
Del Mar................ April 1999 2,000
Under
Oceanside.............. construction 2,480
Under
Scripps Ranch.......... construction 2,000
San Marcos (Restaurant
Row)................. Lease signed 1,700
Ramona................. Lease signed 2,000
LOS ANGELES AREA
Tustin................. June 1991 2,397
Irvine................. August 1991 2,448
Temecula............... November 1994 2,916
Costa Mesa............. December 1994 2,201
Laguna Niguel.......... May 1995 2,418
Anaheim................ July 1995 2,985
Encino................. September 1995 2,673
Irvine Spectrum (Food
Court)............... December 1995 1,350
Manhattan Beach........ January 1996 3,600
Santa Ana.............. February 1996 2,400
Marina del Rey......... October 1996 2,027
La Habra............... December 1996 2,000
Cypress................ March 1997 2,070
Belmont Shore.......... March 1997 2,114
Mission Viejo.......... April 1997 2,322
Cerritos............... August 1997 1,752
<CAPTION>
SQUARE
LOCATIONS DATE OPENED FOOTAGE
- ------------------------- ----------------- -----------
<S> <C> <C>
LOS ANGELES AREA
(CONTINUED)
Torrance............... September 1997 2,500
Ontario................ October 1997 2,160
Rancho Cucamonga....... November 1997 2,235
San Clemente........... February 1998 2,154
Northridge............. March 1998 2,180
Villa Park............. April 1998 2,120
University of
California Los
Angeles (Food
Court)............... September 1998 960
Yorba Linda............ November 1998 1,996
The Block, Orange...... November 1998 2,000
Riverside.............. December 1998 2,000
Chino Hills............ December 1998 2,045
Monrovia............... April 1999 2,500
Under
Long Beach............. construction 1,372
Under
Oxnard................. construction 2,000
Upland................. Lease signed 1,879
Brentwood.............. Lease signed 2,000
Placentia.............. Lease signed 2,100
West Covina............ Lease signed 2,000
Fountain Valley........ Lease signed 2,272
Foothill Ranch Lease signed 2,008
PHOENIX AREA
Ahwatukee.............. April 1997 2,000
North Scottsdale....... September 1997 2,400
Gilbert................ May 1998 2,400
North Phoenix.......... August 1998 2,435
Agua Fria.............. November 1998 2,150
Chandler............... March 1999 2,100
Under
Tucson (Ina)........... construction 2,400
Tucson (Campbell and Under
Glen)................ construction 2,000
Tempe.................. Lease signed 2,000
Peoria................. Lease signed 2,000
Mesa................... Lease signed 2,200
LAS VEGAS AREA
Henderson.............. December 1997 2,400
Summerlin.............. August 1998 2,100
The Lakes.............. December 1998 2,100
Tenaya................. January 1999 2,278
DENVER AREA
Lone Tree.............. March 1999 2,200
Belcaro................ April 1999 2,223
Northglenn............. Lease signed 2,300
Highlands Ranch Lease signed 2,300
SACRAMENTO, CALIFORNIA
Sacramento (Natomas)... Lease signed 2,000
Rocklin Lease signed 2,100
SALT LAKE CITY, UTAH
Under
Sugarhouse............. construction 2,500
Provo.................. Lease signed 2,236
Taylorsville........... Lease signed 2,700
</TABLE>
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<PAGE>
EXPANSION AND SITE SELECTION
We plan to open 28 units during 1999, eight of which have opened to date,
and 36 units in 2000. Leases for 10 of the 36 units to be opened in 2000 have
been signed. We opened our first unit outside of California in Phoenix, Arizona
in April 1997. We currently operate a total of 12 units outside of California,
including six in Arizona, four in Las Vegas and two in Denver. We are
negotiating new leases in all of our current markets, in addition to Salt Lake
City, Sacramento and Minneapolis.
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
high density of white collar families, medium to high family incomes, high
education levels, and density of both daytime employment and residential
developments, limited competition within the trade area 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 customers.
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 each new market and specific site, personally
visiting all new markets and most sites or conducting a video site tour of all
sites prior to granting final approval. Each new market and site must be
approved by our Real Estate Site Acquisition 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.
In connection with our strategy to rapidly expand into selected markets, we
expect to evaluate the merits of initiating a franchising program. We are not
sure when or if we will decide to franchise our concept or how extensively we
will pursue such a strategy. Adopting a franchising strategy would require us to
devote management and financial resources to build the operational
infrastructure needed to support the franchise of our restaurants. If we
implemented a franchising program, we would earn revenue through initial
franchise fees payable to us by franchisees and through royalty income based on
a percentage of restaurant sales. Franchising programs typically involve
substantially lower initial cash investments compared to unit expansion
strategies where company-owned units are developed and leased. Franchising
programs involve risks. Please see "Risk Factors--If we adopt a franchising
strategy, we may be unsuccessful in executing a franchising program" for a
description of the risks associated with franchising programs.
MENU
Our menu features made-to-order burritos, soft-shell tacos, and quesadillas
made with marinated, chargrilled chicken breast and lean steak, as well as
seafood indicative of the Baja region of Mexico, such as chargrilled mahi mahi,
sauteed shrimp and our signature Baja-style fish taco. Side items including our
chips, beans and rice are all made fresh daily. Other ingredients, such as our
fresh, handmade guacamole, shredded natural cheeses and our zesty chipotle
sauce, also contribute to our quality image and distinctive flavor profiles. We
also offer a self-serve salsa bar where guests can choose from three different
salsas made fresh every day at each restaurant. Our prices range from $1.79 for
a Baja-style fish taco to $5.69 for a Cabo Combo, which includes a shrimp
burrito, fish taco, chips and beans. Most units also offer a selection of
imported Mexican and domestic beers.
To provide added variety, from time to time we introduce limited time
offerings such as our lobster burrito, tequila shrimp burrito, "killer" shark
tacos and Baja Bowls. Some of these items have been permanently added to the
menu, such as the Baja Bowl. Other items, such as the lobster burrito, are
offered seasonally due to limited availability.
Substantially all of our units include a HealthMex section on their menu and
Kid Pesky meals designed for children. Our HealthMex items are designed to have
less than 22% of their calories from
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fat, and include a chargrilled mahi mahi taco or a chargrilled chicken burrito
served on a whole wheat tortilla. The Kid Pesky meals consist of a choice of a
fish taco, chicken taquitos, quesadilla or a bean and cheese burrito, along with
a side dish, drink, churro dessert and toy surprise.
DECOR AND ATMOSPHERE
We believe that the decor and atmosphere of our restaurants is a critical
factor in our guests' overall dining experience. We strive to create the
relaxed, casual environment that is reminiscent of the Baja region of Mexico.
Our design elements include colorful Mexican tiles, saltwater aquariums with
tropical fish, Baja beach photos and tropical prints, surfboards on the walls
and authentic palm-thatched patio umbrellas, or palapas, in most existing
locations. We believe the decor and atmosphere of our restaurants appeal to a
broad variety of consumers, including families.
MARKETING
We utilize broadcast advertising as a marketing tool to increase our brand
awareness, attract new guests and build customer loyalty. Our advertising is
designed to portray ourselves as a high-quality, quick-service Mexican food
restaurant and to promote special offers to increase sales. Examples of these
offers include limited-time-only product introductions, such as our lobster
burrito or tequila shrimp burrito, as well as price promotions, such as our
99-cent fish taco special. Media used for these promotions include television,
radio, coupons and in-store merchandising materials. We believe word-of-mouth
advertising is also a key component in attracting new guests.
As part of our expansion strategy, we select target markets which we believe
will support multiple units and the efficient use of broadcast advertising. Upon
entry into each new market, we also hire local public relations firms to help
establish brand awareness for our restaurants as we build toward media
efficiency. In 1998, we spent approximately $1.4 million on marketing. We expect
our marketing expenditures to increase as we add new restaurants and expand into
new markets.
OPERATIONS
UNIT MANAGEMENT AND EMPLOYEES
Our typical restaurant employs one general manager, one to two assistant
managers and 22 to 25 hourly employees, approximately 60% of which are full-time
employees and approximately 40% of which are part-time employees. The general
manager is responsible for the day-to-day operations of the restaurant,
including food quality, service, staffing and purchasing. We seek to 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, profitability and qualitative measures such as mystery shoppers, who
anonymously evaluate individual restaurants. We also grant general managers
options to purchase shares of our common stock when hired or promoted. All
employees working more than 20 hours per week are eligible for health benefits
and participation in our 401(k) plan.
We currently employ 11 district managers, each of whom reports either to a
regional manager or to the director of operations. These district managers
direct unit management in all phases of restaurant operations, as well as assist
in opening new units. We also grant district managers options to purchase shares
of our common stock when hired or promoted.
TRAINING
We strive to maintain quality and consistency in each of our units through
the careful training and supervision of personnel and the establishment of, and
adherence to, high standards relating to personnel performance, food and
beverage preparation and maintenance of facilities. We have
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<PAGE>
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. We have also prepared
operations manuals and videotapes relating to food and beverage handling,
preparation and service. In addition, we maintain a continuing education program
to provide our unit managers with ongoing training and support. We strive to
maintain a team-oriented atmosphere and instill enthusiasm and dedication in our
employees. We regularly solicit employee suggestions concerning the improvement
of our operations in order to be responsive to both them and our guests.
QUALITY CONTROLS
Our emphasis on excellent customer service is enhanced by our quality
control programs. We welcome comments on the quality of service and food at our
restaurants by maintaining a toll-free customer hotline and distributing
customer surveys. District managers are directly responsible for ensuring that
these comments are addressed to achieve a high level of customer satisfaction.
Our Director of Food and Beverage is also responsible for ensuring product
consistency and quality among our restaurants. Furthermore, we engage a
third-party service whereby an anonymous customer or mystery shopper evaluates
and reports to management key elements of the Rubio's experience, including
product quality, cleanliness and customer service.
HOURS OF OPERATIONS
Our units are generally open Sunday through Thursday from 10:30 a.m. until
10:00 p.m., and on Friday and Saturday from 10:30 a.m. until 11:00 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 print the
food requests in the kitchen for the cooks to prepare. The data captured for use
by operations and corporate management include gross and sales amounts, cash and
credit card receipts, and quantities of each menu item sold. Sales and receipts
information is generally 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 polled nightly to the
corporate office and distributed to management via electronic mail each morning.
The point-of-sale system also calculates daily ideal usage and cost for the top
10 food items which make up approximately 85% of total food cost. A monthly
trend report of actual food cost compared to ideal food cost is also prepared.
We are currently installing a back office system, including personal computers
in each of our restaurants, which will allow managers to compare actual food
cost to ideal food costs on a daily basis. As of the date of this prospectus,
this system is currently operational in over half of our restaurants, and is
expected to be installed in all of our restaurants by the end of 1999.
Our corporate systems provide management with operating reports that show
restaurant performance comparisons with budget and prior year results both for
the accounting period and year-to-date, as well as trend formats by both dollars
and percents of sales. These systems allow us to closely monitor restaurant
sales, cost of sales, labor expense and other restaurant trends on a daily,
34
<PAGE>
weekly, and monthly basis. We believe these systems will enable both unit and
corporate management to adequately manage the operational and financial
performance of the restaurants in support of our planned expansion.
PURCHASING
We strive to obtain consistently 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
prices for the required quality, purchasing employees at the corporate office
control the purchasing of food items through buying from a variety of national,
regional and local suppliers at negotiated prices. Most food and other products
are shipped from a central distributor directly to the units two to four times
per week. Produce and tortillas are delivered daily from local suppliers to
ensure product freshness. We do not maintain a central food product warehouse or
commissary. As is typical in our industry, we do not have any long-term
contracts with our food suppliers. 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, quick-service Mexican food segment of the industry. In this
segment, our direct competitors include Baja Fresh, La Salsa and Chipotle. We
also compete indirectly with full-service Mexican restaurants including Chevy's,
Chi Chi's and El Torito and fast food restaurants, particularly those focused on
Mexican food such as Taco Bell and Del Taco. Competition in our industry segment
is based primarily upon food quality, price, restaurant ambiance, service and
location. 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 than we do. We also compete with many
other retail establishments for site locations.
PROPERTIES
Our corporate headquarters are located in Carlsbad, California. We occupy
this facility under a lease which terminates in August 31, 2005, with options to
extend the lease for an additional 13 years. We lease each of our restaurant
facilities with the exception of the El Cajon unit, which is covered by a ground
lease. The majority of our leases are for 10-year terms and include options to
extend the terms. The majority of our leases also include both fixed rate and
percentage-of-sales rent provisions. The landlord of our San Diego State
University unit has the right to terminate the lease, with 60 days notice, in
the event a proposed redevelopment project commences work.
TRADEMARKS
Our registered trademarks and service marks include "Rubio's," "Baja Grill,"
"Home of the Fish Taco," "HealthMex" and "Pesky" with the United States Patents
and Trademark Office. We believe that our trademarks, service marks and other
proprietary rights have significant value and are important to the marketing of
our restaurant concept. We have in the past and expect to continue to vigorously
protect our proprietary rights. We cannot predict, however, whether steps taken
by us to protect our proprietary rights will be adequate to prevent
misappropriation of these rights or the use by others of restaurant features
based upon, or otherwise similar to, our concept. It may be difficult for us to
prevent others from copying elements of our concept and any litigation to
enforce our rights will likely be costly. In addition, other local restaurant
operations with names similar to those we use may try to prevent us from using
our marks in those locales.
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<PAGE>
EMPLOYEES
As of April 21, 1999, we had approximately 1,860 employees, including
approximately 40 employees located at our corporate headquarters.
GOVERNMENT REGULATION
Our restaurants are subject to licensing and regulation by state and local
health, sanitation, safety, fire and other authorities, including licensing and
regulation 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, including restaurant, alcoholic beverage and
retail licensing. The development and construction of additional units will also
be subject to compliance with applicable zoning, land use and environmental
regulations. For a description of risks faced by us related to government
regulation, please see "Risk Factors--We may not be able to obtain and maintain
state and local permits necessary to operate our units."
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not a party to any material
litigation.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors, as of April 29, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---------------------------- --- ------------------------------------------------------------------------------
<S> <C> <C>
Rafael Rubio................ 69 Chairman of the Board and Director
Ralph Rubio................. 43 President, Chief Executive Officer and Director
Stephen J. Sather........... 51 Chief Operating Officer, Vice President of Operations
Joseph N. Stein............. 38 Chief Strategic and Financial Officer
Richard Rubio............... 35 Vice President of Real Estate Development
Bruce Frazer................ 39 Vice President of Marketing
Ted Frumkin................. 37 Director of Real Estate
Kyle A. Anderson(1)(2)...... 42 Director
Michael Dooling............. 54 Director
Jason M. Fish(1)(2)......... 41 Director
Kim Lopdrup(1)(2)........... 40 Director
Robert Rubio................ 37 Director
Timothy J. Ryan............. 59 Director
</TABLE>
- ------------------------
(1) Audit committee member.
(2) Compensation committee member.
RAFAEL RUBIO, a co-founder, has served as a Director and as Chairman of the
Board since our inception in January 1983. Prior to his current position with
Rubio's, Mr. Rubio held the positions of Executive Vice President and Vice
President of Manufacturing of Ornyte Xerxes-Proform Co., a fiberglass and
plastics manufacturer. He continues to serve as an international consultant to
various fiberglass and plastics manufacturers.
RALPH RUBIO, a co-founder, has served as President, Chief Executive Officer
and Director since our inception in January 1983. Prior to founding Rubio's, Mr.
Rubio was employed in restaurant management and in various other positions at
the Old Spaghetti Factory, Hungry Hunter and Harbor House restaurant chains. Mr.
Rubio has more than 20 years of experience in the restaurant industry.
STEPHEN J. SATHER has served as Chief Operating Officer since July 1998. He
has served as Vice President of Operations since February 1996. Prior to joining
us, Mr. Sather served as Vice President of New Concepts for Rally's Hamburgers,
Inc., a publicly held company, from December 1993 to February 1996. Prior to
that, Mr. Sather served as Senior Vice President of Operations for La Salsa
Holding Company, a privately held company, from December 1992 until November
1993. From April 1986 until November 1992, Mr. Sather was employed by Taco Bell
Corporation, a publicly held company, and served as Director of New Concepts
when he left. Mr. Sather has more than 25 years of experience in the restaurant
industry.
JOSEPH N. STEIN was elected Chief Strategic and Financial Officer in April
1999. Prior to joining us, Mr. Stein served as Executive Vice President and
Chief Administrative Officer of Checkers Drive-In Restaurants, Inc., a publicly
held company, from January 1997 to April 1999, and as Executive Vice President
and Chief Financial Officer of Rally's Hamburgers, Inc., a publicly held
company, from December 1997 to April 1999. From May 1995 to January 1997, Mr.
Stein was employed at CKE Restaurants, Inc., a publicly held company, serving as
Senior Vice President and Chief Financial Officer. From April 1990 to May 1995,
Mr. Stein held various executive positions at Fidelity National
37
<PAGE>
Title Insurance Company, a publicly held company, including Senior Vice
President and Director of National Agency Operations. Mr. Stein has more than 13
years of experience in the restaurant industry.
RICHARD RUBIO has served as Vice President of Real Estate Development since
November 1994. From October 1990 until November 1994, Mr. Rubio served as Vice
President of Construction, and has served in various other positions with us
since June 1983.
BRUCE FRAZER has served as Vice President of Marketing since June 1996.
Prior to joining us, Mr. Frazer served as Vice President of Food &
Beverage/Product Marketing at Family Restaurants, Inc. from May 1994 until May
1996. From December 1984 until April 1994, Mr. Frazer was employed at Foodmaker,
Inc., a publicly held company, serving as Vice President of Product Marketing
when he left. Mr. Frazer has more than 15 years of experience in the restaurant
industry.
TED FRUMKIN has served as Director of Real Estate since May 1996. Prior to
joining us, Mr. Frumkin served as Real Estate Manager at Office Depot Inc., a
publicly held company, from December 1994 until May 1996. From July 1991 until
December 1994, Mr. Frumkin served as Real Estate Manager at Wal-Mart Stores
Inc., a publicly held company. Prior to that, Mr. Frumkin served as Real Estate
Manager at Taco Bell Corporation, a publicly held company, from December 1985
until July 1991.
KYLE A. ANDERSON has served as a Director since January 1995. Mr. Anderson
is a founding member of Rosewood Capital Associates, LLC, the general partner of
Rosewood Capital, L.P., a consumer oriented private equity investment fund.
Prior to joining Rosewood in 1988, Mr. Anderson was a Vice President in the
mergers and acquisitions department at The First Boston Corporation. Mr.
Anderson serves on the board of directors of Gardenburger, Inc., a publicly held
company, and on a number of privately held companies.
MICHAEL DOOLING has served as a Director since April 1999. Mr. Dooling has
been a general partner of Jacaranda Partners, an investment partnership, since
1987. From August 1987 to November 1997, Mr. Dooling served as a member of the
board of directors of Mailboxes Etc., including as Vice Chairman from August
1988 to May 1990 and as Chairman of the Board from May 1990 to November 1997.
From November 1997 to June 1998, Mr. Dooling served as a director of U.S. Office
Products, a publicly held company, following its acquisition of Mailboxes Etc.
Mr. Dooling also serves as a director of a privately held company.
JASON M. FISH has served as a Director since December 1997. Mr. Fish has
been a managing member of Farallon Capital Management, L.L.C. and Farallon
Partners, L.L.C., since April 1996, when they were formed to serve as management
companies for funds affiliated with Farallon, and was a managing director of
their predecessor, FCMI, Inc., from January 1993 through April 1996. Mr. Fish
also served as a general partner of funds affiliated with Farallon during that
time period. Mr. Fish joined Farallon in 1990. Mr. Fish serves as a director of
Town Sports International, Inc., a health club management company and
Gardenburger, Inc., a publicly held company.
KIM LOPDRUP has served as a Director since January 1997. Mr. Lopdrup has
served in various positions at Allied Domecq PLC, a publicly held company whose
subsidiaries include Baskin Robbins, Dunkin Donuts and TOGO'S, since May 1985,
and has served in his current position as Chief Executive Officer of Allied
Domecq Retailing International since October 1998. Mr. Lopdrup serves as a
director of Baskin Robbins Japan, a publicly held company listed on the Tokyo
Stock Exchange.
ROBERT RUBIO has served as a Director since 1994. From August 1995 through
September 1998, Mr. Rubio served as Vice President of Market Development, and
from March 1993 until July 1995, he served as Vice President of Operations. Mr.
Rubio has served in various other positions at Rubio's since February 1986.
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<PAGE>
TIMOTHY J. RYAN has served as a Director since April 1999. Mr. Ryan has
served as the President and Chief Executive Officer of Diedrich Coffee, Inc.
since November 1997. From December 1995 until his retirement in December 1996,
Mr. Ryan served as President of Sizzler U.S.A., a division of Sizzler
International, Inc., and as a director, of Sizzler International, Inc., of which
he was also a Senior Vice President. Sizzler International, Inc. filed for
bankruptcy protection in June 1996. From November 1988 to December 1993, Mr.
Ryan served as Senior Vice President of Marketing at Taco Bell Worldwide, and
from December 1993 to December 1995, he served as Senior Vice President of Taco
Bell's Casual Dining Division.
Our executive officers are appointed by the board and serve until their
successors are elected or appointed.
Ralph Rubio, Richard Rubio and Robert Rubio are the sons of Rafael Rubio.
CLASSIFIED BOARD
Our board currently has six members. Under our bylaws, beginning at our next
annual meeting of stockholders, our board will be divided into three classes of
directors serving staggered three-year terms, with one class of directors to be
elected at each annual meeting of stockholders. The first class of directors
whose term will expire in 2000 will include Michael Dooling and Timothy J. Ryan.
The second class of directors whose term will expire in 2001 will include Jason
M. Fish, Kim Lopdrup and Robert Rubio. The third class of directors whose term
will expire in 2002 will include Ralph Rubio, Kyle A. Anderson and Rafael Rubio.
BOARD COMMITTEES
AUDIT COMMITTEE. The audit committee of the board of directors reviews,
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the recommendation of our auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The members of the audit
committee are Messrs. Anderson, Fish and Lopdrup.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors recommends, reviews and oversees the salaries, benefits and stock
option plans for our employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our compensation
plans. The members of the compensation committee are Messrs. Anderson, Fish and
Lopdrup.
DIRECTOR COMPENSATION
Directors do not receive cash compensation for their service on our board of
directors. Non-employee directors are reimbursed for reasonable expenses
incurred in connection with serving as a director. In January 1997, we granted a
non-qualified stock option to purchase 25,000 shares of common stock to Mr.
Lopdrup, a non-employee director. The option granted to Mr. Lopdrup was fully
exercised by Mr. Lopdrup and is subject to a right of repurchase in our favor
which lapses over a period of five years from the date of grant. In April 1999,
we granted options to purchase 25,000 shares of our common stock to each of Mr.
Dooling and Mr. Ryan in connection with their election to our board of
directors. 15,000 shares are immediately vested, with the remaining 10,000
shares vesting over the next two years. Vesting of any options previously
granted to board members will automatically accelerate in the event of a sale,
acquisition or merger of Rubio's. Each individual who first becomes a
non-employee member of the board of directors at any time after the offering
will receive an option to purchase 25,000 shares of common stock on the date
such individual joins the board of directors, provided such individual has not
previously been employed by us or any parent or subsidiary corporation. In
addition, on the date of each annual stockholders' meeting beginning in 2000,
each
39
<PAGE>
non-employee member of the board of directors will automatically be granted an
option to purchase 5,000 shares of common stock, provided such individual has
served as a non-employee member of the board of directors for at least six
months. For a discussion of our automatic option grant program and accelerated
vesting of options under the 1999 Plan, please see "--Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Messrs. Anderson, Fish and
Lopdrup. No member of the compensation committee has been an officer or employee
of us at any time. None of our executive officers serves as a member of the
board of directors or compensation committee of any other company that has one
or more executive officers serving as a member of our board of directors or
compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received during fiscal 1998
by our chief executive officer and four of our other executive officers whose
salary and bonus exceeded $100,000 in such fiscal year. Perquisites and other
personal benefits paid to officers in the table below are less than the minimum
reporting thresholds and are represented in the table below by "--." All other
compensation represents matching payments under our 401(k) plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
SECURITIES
--------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ---------------------------------------------------- ---------- --------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Ralph Rubio......................................... $ 199,836 $ 39,967 -- -- $ --
President and Chief Executive Officer
Rafael Rubio........................................ 199,836 39,967 -- -- --
Chairman of the Board
Stephen J. Sather................................... 169,800 32,760 -- 8,000 340
Vice President of Operations and Chief Operating
Officer
James W. Stryker.................................... 141,500 27,300 -- 6,000 775
Vice President of Finance and Chief Financial
Officer
Bruce Frazer........................................ 135,840 26,208 -- 6,000 815
Vice President of Marketing
</TABLE>
Mr. Stryker served as our Vice President of Finance and Chief Financial
Officer from February 1996 through March 19, 1999.
STOCK OPTION INFORMATION
The following table sets forth information regarding options granted to the
executive officers listed in the Summary Compensation Table during fiscal 1998.
We have not granted any stock appreciation rights.
Each option represents the right to purchase one share of common stock. The
options shown in this table are all incentive stock options granted under our
stock option plans. The options vest on the following schedule: 20% of the
options vest after the completion of one year of service from the grant date and
the remainder of the options vest in equal monthly installments over the next 48
months of
40
<PAGE>
service. To the extent not already exercisable, these options may also
accelerate and become exercisable in the event of a merger in which we are not
the surviving corporation or upon the sale of substantially all of our assets.
Please see "--Benefit Plans" for more details regarding these options. In the
year ended December 27, 1998, we granted options to purchase an aggregate of
137,140 shares of common stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME GRANTED IN 1998 PRICE DATE 5% 10%
- --------------------------------------------- ------------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ralph Rubio.................................. -- -- -- -- -- --
Rafael Rubio................................. -- -- -- -- -- --
Stephen J. Sather............................ 8,000 5.8% $ 2.00 01/30/08 $ 10,062 $ 25,500
James W. Stryker............................. 6,000 4.4 2.00 01/30/08 7,547 19,125
Bruce Frazer................................. 6,000 4.4 2.00 01/30/08 7,547 19,125
</TABLE>
The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by our board after
consideration of a number of factors, including, but not limited to, our
financial performance, market conditions and the price, preferred rights and
privileges of shares of equity securities sold to or purchased by outside
investors.
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the fair market value on the
date of grant. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 27, 1998 AND YEAR-END
OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of the executive officers listed in the
Summary Compensation Table at December 27, 1998. None of these executive
officers exercised options to purchase common stock during fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL 1998 OPTIONS AT FISCAL 1998
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ralph Rubio..................................................... -- -- -- --
Rafael Rubio.................................................... -- -- -- --
Stephen J. Sather............................................... 26,050 26,950 $ 233,717 $ 239,283
James W. Stryker................................................ 13,967 16,033 125,150 141,850
Bruce Frazer.................................................... 11,633 13,367 104,150 117,850
</TABLE>
There was no public trading market for the common stock as of December 27,
1998. Accordingly, the value of unexercised in-the-money options listed above
has been calculated on the basis of the
41
<PAGE>
initial public offering price of $10.50 per share, less the applicable exercise
price per share, multiplied by the number of shares underlying such options.
BENEFIT PLANS
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1998 Stock Option/Stock Issuance Plan, 1995 Stock
Option/Stock Issuance Plan and 1993 Stock Option/Stock Issuance Plan. Our 1999
plan was adopted by our board and stockholders in March 1999. Our 1999 plan will
become effective on the date the underwriting agreement is signed in connection
with this offering of our common stock. All outstanding options under the
predecessor plans will be incorporated into our 1999 plan on the date this plan
is effective, and no further option grants will be made under the predecessor
plans after such date. The incorporated options will continue to be governed by
their existing terms, unless the plan administrator elects to extend one or more
features of our 1999 plan to those options. Except as otherwise noted below, the
incorporated options will have substantially the same terms as in effect for
grants made under the discretionary option grant program of our 1999 plan.
An initial reserve of approximately 1,123,938 shares of common stock has
been authorized for issuance under our 1999 plan. Such share reserve consists of
(1) approximately the number of shares which will remain available for issuance
under the predecessor plans on the date our 1999 plan becomes effective,
including the shares subject to outstanding options thereunder, plus (2) an
additional increase of approximately 500,000 shares. The number of shares of
common stock reserved for issuance under our 1999 plan will automatically
increase on the first trading day in January each calendar year, beginning in
calendar year 2000, by an amount equal to 3% of the total number of shares of
common stock outstanding on the last trading day in December of the preceding
calendar year, but in no event will any such annual increase exceed 450,000
shares. In addition, no participant in our 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.
Our 1999 plan is divided into five separate components:
- the discretionary option grant program, under which eligible individuals
in our employ or service including officers, non-employee board members
and consultants may, at the discretion of the plan administrator, be
granted options to purchase shares of common stock at an exercise price
not less than 100% of the fair market value of those shares on the grant
date;
- the stock issuance program, under which such individuals may, in the plan
administrator's discretion, be issued shares of common stock directly,
through the purchase of such shares at a price not less than 100% of their
fair market value at the time of issuance or as a bonus tied to the
performance of services;
- the salary investment option grant program, which may, at the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
- the director fee option grant program, which may, in the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee board
42
<PAGE>
members the opportunity to apply a portion of the annual retainer fee
otherwise payable to them in cash each year to the acquisition of special
below-market option grants.
The discretionary option grant program and the stock issuance program will
be administered by the compensation committee. The compensation committee as
plan administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. However, the board acting by disinterested majority
will have the exclusive authority to make any discretionary option grants or
stock issuances to members of the compensation committee. The compensation
committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
salary investment option grant program in the event that program is activated
for one or more calendar years. Neither the compensation committee nor the board
will exercise any administrative discretion with respect to option grants under
the salary investment option grant program or under the automatic option grant
or director fee option grant program for the non-employee board members. All
grants under those latter three programs will be made in strict compliance with
the express provisions of each such program.
The exercise price for the shares of common stock subject to option grants
made under our 1999 plan may be paid in cash or in shares of common stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the plan administrator may provide financial assistance to one or more
optionees in the exercise of their outstanding options or the purchase of their
unvested shares by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
The plan administrator will have the authority to cancel outstanding options
under the discretionary option grant program, including options incorporated
from the predecessor plans, in return for the grant of new options for the same
or different number of option shares with an exercise price per share based upon
the fair market value of our common stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
discretionary option grant program. Such rights will provide the holders with
the election to surrender their outstanding options for an appreciation
distribution from us equal to the excess of (1) the fair market value of the
vested shares of common stock subject to the surrendered option over (2) the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of the
incorporated options from the predecessor plans contain any stock appreciation
rights.
In the event that we are acquired by merger or asset sale, each outstanding
option under the discretionary option grant program which is not to be assumed
by the successor corporation will automatically accelerate in full, and all
unvested shares under the discretionary option grant and stock issuance programs
will immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation. The plan
administrator will have complete discretion to grant one or more options under
the discretionary option grant program which will become fully vested for all
the option shares in the event those options are assumed in the acquisition and
the optionee's service with us or the acquiring entity involuntarily terminates
within a designated period following such acquisition, not to exceed 18 months.
The vesting of outstanding shares under the stock issuance program may be
accelerated upon similar terms and conditions. The plan administrator
43
<PAGE>
will also have the authority to grant options which will immediately vest upon
an acquisition of us, whether or not those options are assumed by the successor
corporation.
The plan administrator is also authorized under the discretionary option
grant and stock issuance programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
immediately vest in connection with a change in ownership or control of us,
whether by successful tender offer for more than 50% of the outstanding voting
stock or by a change in the majority of the board by reason of one or more
contested elections for board membership. Such accelerated vesting may occur
either at the time of such change or upon the subsequent involuntary termination
of the individual's service within a designated period following such change in
control, not to exceed 18 months.
The options incorporated from the predecessor plans may, in the plan
administrator's discretion, immediately vest in the event of the following
changes in control (1) our merger or consolidation, or (2) the acquisition by
another corporation or person of (a) all or substantially all of our assets or
(b) 50% or more of our then outstanding voting stock, unless those options are
assumed or substituted in the acquisition of us. Options incorporated from the
predecessor plans are subject to provisions providing for accelerated vesting
upon a change in control. The plan administrator will have the discretion to
extend the acceleration provisions of our 1999 plan to any or all of the options
outstanding under the predecessor plans.
In the event the plan administrator elects to activate the salary investment
option grant program for one or more calendar years, each of our executive
officers and other highly compensated employees selected for participation may
elect, prior to the start of the calendar year, to reduce his or her base salary
for that calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000. Each selected individual who files such a timely election
will automatically be granted, on the first trading day in January of the
calendar year for which that salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of common stock on the grant date. The option will be
exercisable at a price per share equal to one-third of the fair market value of
the option shares on the grant date. As a result, the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares will be equal to the amount of salary invested in that option. The
option will vest and become exercisable in a series of 12 equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting upon changes in the
ownership or control of us, as defined in the 1999 plan.
Under the automatic option grant program, each individual who first becomes
a non-employee board member at any time after the completion of this offering
will automatically receive an option grant for 25,000 shares on the date such
individual joins the board, provided such individual has not been in our prior
employ. In addition, on the date of each annual stockholders meeting held after
the completion of this offering, each non-employee board member who is to
continue to serve as a non-employee board member will automatically be granted
an option to purchase 5,000 shares of common stock, provided such individual has
served on our board for at least six months.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of board service. The option will
be immediately exercisable for all of the option shares and will be immediately
vested.
Should the director fee option grant program be activated in the future,
each non-employee board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the
44
<PAGE>
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of common stock on the
grant date. As a result, the fair market value of the option shares on the grant
date less the aggregate exercise price payable for those shares will be equal to
the portion of the retainer fee invested in that option. The option will vest
and become exercisable for the option shares in a series of 12 equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable and vested for all the
option shares upon:
- changes in the ownership or control of us, as defined in the 1999 plan; or
- the death or disability of the optionee while serving as a board member.
The shares subject to each option under the salary investment option grant
and director fee option grant programs will immediately vest upon:
- an acquisition of us by merger or asset sale; or
- the successful completion of a tender offer for more than 50% of our
outstanding voting stock or a change in the majority of the board effected
through one or more contested elections for board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, salary investment option grant
and director fee option grant programs and may be granted to one or more of our
officers as part of their option grants under the discretionary option grant
program. Options with such a limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the excess of (1) the highest price per share
of common stock paid in connection with the tender offer over (2) the exercise
price payable for such share.
The board may amend or modify our 1999 plan at any time, subject to any
required stockholder approval. Our 1999 plan will terminate on the earliest of:
- March 17, 2009;
- the date on which all shares available for issuance under our 1999 plan
have been issued as fully-vested shares; or
- the termination of all outstanding options in connection with changes in
control or ownership of us, as defined in the 1999 plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by our board and
stockholders in March 1999 and will become effective immediately upon the
execution of the underwriting agreement for this offering. Our employee stock
purchase plan is designed to allow our eligible employees to purchase shares of
common stock, at semi-annual intervals, through their periodic payroll
deductions under our employee stock purchase plan.
An initial reserve of 200,000 shares of common stock has been authorized for
issuance under our employee stock purchase plan. Our employee stock purchase
plan will be implemented in a series of successive offering periods, each with a
maximum duration for 24 months. However, the initial offering period will begin
on the execution date of the underwriting agreement and will end on the last
business day in July 2001. The next offering period will commence on the first
business day in August 2001, and subsequent offering periods will commence as
designated by the plan administrator.
45
<PAGE>
Individuals who are scheduled to work more than 20 hours per week for more
than five calendar months per year on the start date of any offering period may
enter our employee stock purchase plan on that start date or on any subsequent
semi-annual entry date. Entry dates are the first business day of February or
August each year. Individuals who become eligible employees after the start date
of the offering period may join our employee stock purchase plan on any
subsequent semi-annual entry date within that offering period.
Payroll deductions may not exceed 10% of the participant's cash earnings.
The accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on the last business day in January and
July each year at a purchase price per share equal to 85% of the lower of:
- the fair market value of the common stock on the participant's entry date
into the offering period; or
- the fair market value on the semi-annual purchase date.
In no event, however, may any participant purchase more than 1,500 shares on any
semi-annual purchase date nor may all participants in the aggregate purchase
more than 50,000 shares on any such semi-annual purchase date. The plan
administrator may require shares of common stock purchased under our employee
stock purchase plan to be held for one year before they may be sold or otherwise
transferred.
Should the fair market value per share of common stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event we are acquired by merger or asset sale, all outstanding
purchase rights will automatically be exercised immediately prior to the
effective date of such acquisition. The purchase price will be equal to 85% of
the lower of:
- the fair market value per share of common stock on the participant's entry
date into the offering period in which such acquisition occurs; or
- the fair market value per share of common stock immediately prior to such
acquisition.
Our employee stock purchase plan will terminate on the earlier of:
- the last business day of July 2009;
- the date on which all shares available for issuance under our employee
stock purchase plan shall have been sold; or
- the date on which all purchase rights are exercised in connection with an
acquisition of us by merger or asset sale.
The board may at any time alter, suspend or discontinue our employee stock
purchase plan. However, some amendments to our employee stock purchase plan may
require stockholder approval.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALES OF SECURITIES
Since February 1995, we have issued the following securities in private
placement transactions:
- 1,092,007 shares of Series B preferred stock and common stock warrants
exercisable for 50,000 shares for an aggregate price of $3,500,003 in
February 1995;
- 793,640 shares of Series C preferred stock for an aggregate price of
$4,270,783 in March and June 1996;
- 1,403,843 shares of Series D preferred stock for an aggregate price of
$10,100,005 in November and December 1997; and
- an additional 48,648 shares of Series D preferred stock for an aggregate
price of $350,000 in June 1998.
The purchasers of more than $60,000 of such securities in the last four years
include, among others, the following executive officers, directors and holders
of more than 5% of our outstanding stock and their affiliates:
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS ------------------------------- TOTAL
AND 5% STOCKHOLDERS SERIES B SERIES C SERIES D CONSIDERATION
- -------------------------------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Rosewood Capital, L.P................................... 936,005 743,321 347,486 $ 9,500,004
Funds affiliated with Farallon Partners, L.L.C.......... -- -- 952,111 $ 6,850,001
Trust for the benefit of Michael Dooling and his
family................................................ 46,800 -- -- $ 149,999
Bruce Frazer............................................ -- 9,291 6,950 $ 99,999
</TABLE>
For additional information regarding securities held by our executive
officers and directors and by stockholders of more than 5% of our outstanding
common stock and their affiliates, please see "Principal Stockholders."
Holders of 3,342,955 shares of common stock and 45,000 shares of common
stock issuable upon the exercise of warrants are entitled to registration
rights. For a description of these rights, please see "Description of
Securities--Registration Rights" and "Management--Director Compensation."
SERIES A PREFERRED STOCK REPURCHASE
In June 1998, we repurchased from the Rafael R. Rubio and Gloria G. Rubio
Family Trust 48,648 shares of Series A preferred stock for an aggregate
repurchase price of $350,000. Rafael Rubio, our Chairman of the Board and
Director, and his wife are co-trustees and beneficiaries of this trust. We then
issued 48,648 shares of Series D preferred stock to funds affiliated with
Farallon Partners, L.L.C. (Farallon Capital Partners, L.P., Farallon Capital
Institutional Partners, L.P., Farallon Capital Institutional Partners II,
Farallon Capital Institutional Partners III, L.P. and RR Capital Partners, L.P.)
holders of more than 5% of Series D Preferred Stock as of March 28, 1999.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of May 20, 1999, and as adjusted to reflect the
sale of the shares of common stock offered in this offering, by:
- each person or group of affiliated persons who we know owns beneficially
5% or more of our common stock;
- each of our directors;
- our executive officers listed in the Summary Compensation Table; and
- all of our directors and executive officers as a group.
Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). Except as indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to community
property laws. The table below includes the number of shares underlying options
which are exercisable within 60 days from the date of this offering. The address
for those individuals for which an address is not otherwise indicated is 1902
Wright Place, Suite 300, Carlsbad, California 92008.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OWNED AFTER THIS
THIS OFFERING NUMBER OF OFFERING
------------------------------------- SHARES -------------------------------------
NUMBER OF BEING NUMBER OF
NUMBER OF SHARES OFFERED IN NUMBER OF SHARES
SHARES UNDERLYING PERCENT THIS SHARES UNDERLYING PERCENT
BENEFICIAL OWNER OUTSTANDING OPTIONS (%) OFFERING OUTSTANDING OPTIONS (%)
- ---------------------------------------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rosewood Capital, L.P................... 2,026,812 -- 31.9 300,000+ 1,726,812 -- 20.1
One Maritime Plaza, Suite 1330
San Francisco, California 94111
Funds affiliated with Farallon
Partners, L.L.C.(1)................... 952,111 -- 15.0 300,000 652,111 -- 7.6
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Rafael Rubio(2)......................... 1,135,752 -- 17.9 300,000+ 835,752 -- 9.7
Ralph Rubio(3).......................... 1,184,100 -- 18.6 -- 1,184,100 -- 13.8
Kyle A. Anderson(4)..................... 2,026,812 -- 31.9 300,000+ 1,726,812 -- 20.1
Michael Dooling......................... 78,000 25,000 1.6 -- 78,000 25,000 1.2
Jason M. Fish(5)........................ 952,111 -- 15.0 300,000+ 652,111 -- 7.6
Kim Lopdrup............................. 35,000 -- * -- 35,000 -- *
Robert Rubio(3)......................... 150,133 -- 2.4 -- 150,133 -- 1.7
Timothy J. Ryan......................... -- 25,000 * -- -- 25,000 *
Stephen J. Sather....................... -- 100,000 1.5 -- -- 100,000 1.2
James W. Stryker........................ 2,500 10,923 * -- 2,500 10,923 *
Bruce Frazer............................ 16,241 35,000 * -- 16,241 35,000 *
All directors and executive officers as
a group (12 persons).................. 5,580,649 295,923 88.3 900,000 4,680,649 295,923 55.9
</TABLE>
- ------------------------
* Less than 1% of total.
+ Rosewood Capital, L.P. may sell up to 200,000 additional shares and a trust
for the benefit of Mr. Rubio or his family may sell up to 35,752 additional
shares in connection with the exercise of the over-allotment option.
48
<PAGE>
(1) Includes 399,886 shares beneficially owned by Farallon Capital Partners,
L.P., 333,239 shares beneficially owned by Farallon Capital Institutional
Partners, L.P., 142,816 shares beneficially owned by Farallon Capital
Institutional Partners II, L.P., 38,085 shares beneficially owned by
Farallon Capital Institutional Partners III, L.P., and 38,085 shares
beneficially owned by RR Capital Partners, L.P. All of the foregoing
entities disclaim group attribution.
(2) Includes 835,752 shares held by the Rafael R. Rubio and Gloria G. Rubio
Family Trust and 300,000 shares held by the Rafael and Gloria Rubio
Irrevocable Trust. All 300,000 shares held by the Rafael and Gloria Rubio
Irrevocable Trust are being offered in this offering.
(3) All of the shares outstanding held by Ralph Rubio and Robert Rubio are held
in trust for the benefit of these individuals and/or their families.
(4) Includes 2,026,812 shares held by the Rosewood Capital, L.P. Mr. Anderson is
a founding member of Rosewood Capital Associates LLC, the general partner of
Rosewood Capital, L.P. Mr. Anderson disclaims beneficial ownership of such
shares.
(5) Includes 952,111 shares held by the funds affiliated with Farallon Partners,
L.L.C., as described in note (1) above. Mr. Fish is a managing member of
Farallon Partners, L.L.C. Mr. Fish disclaims beneficial ownership of such
shares.
49
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of May 20, 1999, and as adjusted to reflect the
sale of the shares of common stock offered in this offering by us and each
stockholder selling common stock in this offering. Rosewood Capital, L.P., may
sell up to 200,000 additional shares and a trust for the benefit of Mr. Rubio or
his family may sell up to 35,752 additional shares in connection with the
exercise of the over-allotment option. For further information regarding the
selling stockholders' relationship with us during the last three years, please
see "Management--Executive Officers and Directors" and "Certain Relationships
and Related Transactions."
Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). Except as indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to community
property laws. The table below includes the number of shares underlying options
which are exercisable within 60 days from the date of this offering. The address
for those individuals for which an address is not otherwise indicated is 1902
Wright Place, Suite 300, Carlsbad, California 92008.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OWNED AFTER THIS
THIS OFFERING NUMBER OF OFFERING
------------------------------------- SHARES -------------------------------------
NUMBER OF BEING NUMBER OF
NUMBER OF SHARES OFFERED IN NUMBER OF SHARES
SHARES UNDERLYING PERCENT THIS SHARES UNDERLYING PERCENT
BENEFICIAL OWNER OUTSTANDING OPTIONS (%) OFFERING OUTSTANDING OPTIONS (%)
- ---------------------------------------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rosewood Capital, L.P................... 2,026,812 -- 31.9 300,000 1,726,812 -- 20.1
One Maritime Plaza, Suite 1330
San Francisco, California 94111
Funds affiliated with Farallon
Partners, L.L.C.(1)................... 952,111 -- 15.0 300,000 652,111 -- 7.6
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Rafael Rubio(2)......................... 1,135,752 -- 17.9 300,000 835,752 -- 9.7
Kyle A. Anderson(3)..................... 2,026,812 -- 31.9 300,000 1,726,812 -- 20.1
Jason M. Fish(4)........................ 952,111 -- 15.0 300,000 652,111 -- 7.6
</TABLE>
- ------------------------
* Less than 1% of total.
(1) Includes 399,886 shares beneficially owned by Farallon Capital Partners,
L.P., 333,239 shares beneficially owned by Farallon Capital Institutional
Partners, L.P., 142,816 shares beneficially owned by Farallon Capital
Institutional Partners II, L.P., 38,085 shares beneficially owned by
Farallon Capital Institutional Partners III, L.P., and 38,085 shares
beneficially owned by RR Capital Partners, L.P. All of the foregoing
entities disclaim group attribution.
(2) Includes 835,752 shares held by the Rafael R. Rubio and Gloria G. Rubio
Family Trust and 300,000 shares held by the Rafael and Gloria Rubio
Irrevocable Trust. All 300,000 shares held by the Rafael and Gloria Rubio
Irrevocable Trust are being offered in this offering.
(3) Includes 2,026,812 shares held by the Rosewood Capital, L.P. Mr. Anderson is
a founding member of Rosewood Capital Associates LLC, the general partner of
Rosewood Capital, L.P. Mr. Anderson disclaims beneficial ownership of such
shares.
(4) Includes 952,111 shares held by the funds affiliated with Farallon Partners,
L.L.C., as described in note (1) above. Mr. Fish is a managing member of
Farallon Partners, L.L.C. Mr. Fish disclaims beneficial ownership of such
shares.
50
<PAGE>
DESCRIPTION OF SECURITIES
The following information describes our common stock and preferred stock and
provisions of our certificate of incorporation and our bylaws as in effect upon
the closing of this offering. This description is only a summary. You should
also refer to the certificate and bylaws which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering.
Upon the completion of the offering, our authorized capital stock will
consist of 75,000,000 shares of common stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value $0.001 per share.
COMMON STOCK
As of March 28, 1999, there were 1,085,800 shares of common stock
outstanding and held of record by 23 stockholders, assuming the exercise of all
common stock warrants that must be exercised prior to this offering. There will
be 8,605,622 shares of common stock outstanding upon the closing of this
offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption, liquidation or conversion rights. The
shares offered by us in this offering will be, when issued in consideration for
payment thereof, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future. Upon the closing of this
offering, there will be no shares of preferred stock outstanding. With respect
to restrictions on alienability of shares of our common stock held by some of
our stockholders, please see "Shares Eligible for Future Sale."
PREFERRED STOCK
As of March 28, 1999, there were 5,267,702 shares of convertible preferred
stock outstanding, assuming the exercise of all preferred stock warrants that
must be exercised prior to this offering. All outstanding shares of convertible
preferred stock will be converted into an aggregate of 5,267,702 shares of
common stock upon the closing of this offering and such shares of convertible
preferred stock will no longer be authorized, issued or outstanding.
Upon the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5,000,000 shares of preferred stock in one or more series and
to fix or alter the designations, powers, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption including sinking fund provisions, redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. We have no present plans to issue any
shares of preferred stock. Please see "--Anti-Takeover Effects of Provisions of
Delaware Law and our Certificate of Incorporation and Bylaws" for information
regarding the potential anti-takeover effects of authorized but unissued
preferred stock.
51
<PAGE>
OPTIONS
As of March 28, 1999, options to purchase a total of 379,376 shares of
common stock were outstanding and, assuming the effectiveness of the 1999 Stock
Incentive Plan, options to purchase a total of 744,562 shares of common stock
will be available for future issuance under the 1999 Stock Incentive Plan. Since
March 28, 1999, we have granted options exercisable into 192,000 shares at a
weighted average exercise price of $10.00 per share and 7,544 shares became
available for issuance upon employee forfeitures. In addition, 2,120 shares were
isssued upon exercise of options subsequent to March 28, 1999. Please see
"Management--Benefit Plans" for a discussion of the 1999 Stock Incentive Plan
and "Shares Eligible for Future Sale" for information regarding the number of
options available for sale to the public after this offering.
COMMON STOCK WARRANT
We have an outstanding warrant to purchase 45,000 shares of common stock, at
an exercise price of $7.20. The warrant contains an anti-dilution provision
providing for adjustments of the exercise price and the number of shares
underlying the warrant upon the occurrence of events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. This warrant expires on the earlier of the
business day preceding an acquisition or December 31, 2002.
REGISTRATION RIGHTS
As of March 28, 1999, under the terms of an investors' rights agreement
after the closing of this offering the holders of 3,342,955 shares of common
stock and up to 45,000 shares of common stock issuable upon exercise of a
warrant will be entitled to demand registration rights with respect to the
registration of their shares under the Securities Act of 1933. The holders of
50% of shares issued on conversion of the Series B preferred stock and Series C
preferred stock or the holders of 50% of such shares issued on conversion of the
Series D preferred stock have the right to demand that we register their shares
under the Securities Act subject to limitations described in the agreement. We
are not required to file more than two registrations under such demand
registration rights. In addition, after the closing of this offering these
holders will be entitled to piggyback registration rights with respect to the
registration of such shares of common stock under the Securities Act. In the
event that we propose to register any shares of common stock under the
Securities Act either for our account or for the account of other security
holders, the holders of shares having piggyback registration rights are entitled
to receive notice of such registration and to include their shares in any such
registration, subject to limitations described in the agreement. Further, at any
time after we become eligible to file a registration statement on Form S-3, the
holders of 3,342,955 shares of common stock and up to 45,000 shares of common
stock issuable upon exercise of a warrant may require us to file registration
statements under the Securities Act on Form S-3 with respect to their shares of
common stock. These registration rights are subject to conditions and
limitations described in the agreement, among them the right of the underwriters
of an offering to limit the number of shares of common stock held by such
security holders to be included in such registration. We are generally required
to bear all of the expenses of all such registrations, including the reasonable
fees of a single counsel acting on behalf of all selling holders, except
underwriting discounts and selling commissions. Registration of any of the
shares of common stock held by security holders with registration rights would
result in such shares becoming freely tradable without restriction under the
Securities Act immediately upon effectiveness of such registration.
52
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
GENERAL
Provisions of Delaware law and our certificate of incorporation and bylaws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, control of us. Such provisions
could limit the price that investors might be willing to pay in the future for
shares of our common stock. These provisions of Delaware law and the certificate
of incorporation and bylaws may also have the effect of discouraging or
preventing transactions involving an actual or threatened change of control of
us, including unsolicited takeover attempts, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
DELAWARE TAKEOVER STATUTE
We are subject to the "business combination" provisions of Section 203 of
the Delaware General Corporation Law. With limited exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
- the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the stockholder owned at least 85% of
our voting stock outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding
those shares owned by (a) persons who are directors and also officers and
(b) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to the date the business combination is approved by the
board and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to exceptions described in the Delaware code, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. This
statute could prohibit or delay the accomplishment of mergers or other takeover
or change in control attempts with respect to us and, accordingly, may
discourage attempts to acquire us.
In addition, provisions of our certificate of incorporation and bylaws
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
BOARD OF DIRECTORS VACANCIES
Our bylaws authorize the board of directors to fill vacant directorships or
increase the size of the board of directors. This may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by such removal with its own
nominees.
53
<PAGE>
CLASSIFIED BOARD
Our bylaws provide that our board will be classified into three classes of
directors beginning at the next annual meeting of stockholders. Please see
"Management--Classes of the Board" for more information regarding the classified
board.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our certificate of incorporation provides that stockholders may act only at
duly called annual or special meetings of stockholders, not by written consent.
Our bylaws further provide that special meetings of our stockholders may be
called only by the President, Chief Executive Officer or Chairman of the board
of directors or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
Our bylaws provide that stockholders seeking to bring business before our
annual meeting of stockholders, or to nominate candidates for election as
directors at our annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to,
or mailed and received at, our principal executive offices not less than 120
days prior to the first anniversary of the date of notice of annual meeting
provided with respect to the previous year's annual meeting of stockholders;
provided, that if no annual meeting of stockholders was held in the previous
year or the date of the annual meeting of stockholders has been changed to be
more than 30 calendar days earlier than such anniversary, notice by the
stockholder, to be timely, must be received a reasonable time before the
solicitation is made. The bylaws also specify requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES
Our authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval, subject to
limitations imposed by the Nasdaq National Market. These additional shares may
be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an attempt
to obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
prohibited by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as our
directors. Under Delaware law, the directors have a fiduciary duty to us which
is not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or which involve
intentional misconduct, or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision does not affect the
54
<PAGE>
directors' responsibilities under any other laws, such as the Federal securities
laws or state or Federal environmental laws.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director for the following:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock purchases or redemptions;
or
- for any transaction from which the director derived an improper personal
benefit.
Delaware law provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under our bylaws, any agreement, a vote of stockholders
or otherwise. The certificate eliminates the personal liability of directors to
the fullest extent permitted by Delaware law. In addition, the certificate
provides that we may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was one of our
directors or officers or is or was serving at our request as a director of or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses including attorney's fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding.
We have also entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws. We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether
Delaware law would permit indemnification. We have applied for liability
insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering, 8,605,622 shares of common stock
will be outstanding. Of these shares, the 3,150,000 shares being offered in the
offering are freely tradable. This leaves 5,455,622 shares eligible for sale in
the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<S> <C>
35,038 After the date of this prospectus
561,712 Upon the filing of a registration statement to register for resale shares of common stock
issuable upon the exercise of options granted under our stock option plans
5,420,584 At various times after 180 days from the date of this prospectus, subject, in some cases, to
volume limitations
</TABLE>
In general, under Rule 144, as currently in effect, an affiliate of Rubio's
or a person or persons whose shares are required to be aggregated and who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
approximately 86,056 shares immediately after this offering or (2) the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale is filed, subject to restriction
under Rule 144. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
As of the date of this prospectus, options to purchase a total of 561,712
shares of common stock are outstanding, of which 163,962 shares are currently
vested and immediately exercisable. Upon the closing of this offering, we intend
to file a registration statement to register for resale the 1,123,938 shares of
common stock reserved for issuance under our stock option plans. We expect such
registration statement to become effective immediately upon filing. Shares
issued upon the exercise of stock options granted under our stock option plans
will be eligible for resale in the public market from time to time subject to
vesting and, in the case of options held by persons who have signed lock-up
agreements referred to below, the expiration of the lock-up agreements.
Our directors, officers and stockholders who hold 5,413,939 shares in the
aggregate have entered into lock-up agreements under which they have agreed that
they will not sell, directly or indirectly, any shares of common stock without
the prior written consent of Thomas Weisel Partners LLC for a period of 180 days
from the date of this prospectus. In addition, stockholders who hold 6,645
shares in the aggregate have entered into similar lock-up agreements with us.
Holders of approximately 3,342,955 shares of common stock and up to 45,000
shares of common stock issuable upon exercise of a warrant, have the right,
subject to conditions and limitations described in the investors rights
agreement, to include their shares in registration statements relating to our
securities. By exercising their registration rights and causing a large number
of shares to be registered and sold in the public market, these holders may
cause the price of the common stock to fall. In addition, any demand to include
such shares in our registration statements could have an adverse effect on our
ability to raise needed capital. Please see "Description of
Securities--Registration Rights" for a description of the registration rights of
our stockholders and "Risk Factors--The large number of shares eligible for
public sale after this offering could cause our stock price to decline" for a
discussion of the risks associated with a large number of shares being available
for public sale.
56
<PAGE>
UNDERWRITING
GENERAL
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Thomas Weisel Partners LLC, Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated, and U.S. Bancorp Piper Jaffray, has severally
agreed to purchase from us the aggregate number of shares of common stock set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Thomas Weisel Partners LLC................................................. 1,058,405
Dain Rauscher Wessels...................................................... 793,800
U.S. Bancorp Piper Jaffray................................................. 793,800
Bear Stearns & Co. Inc..................................................... 31,500
BT Alex Brown Incorporated................................................. 31,500
Credit Suisse First Boston Corporation..................................... 31,500
Donaldson, Lufkin & Jenrette Securities Corporation........................ 31,500
Hambrecht & Quist LLC...................................................... 31,500
Morgan Stanley Dean Witter................................................. 31,500
Salomon Smith Barney Inc................................................... 31,500
Schroder & Co. Inc......................................................... 31,500
WIT Capital Corporation.................................................... 31,500
Cruttenden Roth Incorporated............................................... 20,045
J.C. Bradford & Co......................................................... 20,045
Johnson Rice & Company L.L.C............................................... 20,045
Josephthal & Co. Inc....................................................... 20,045
Morgan Keegan & Company, Inc............................................... 20,045
Raymond James & Associates Inc............................................. 20,045
The Robinson-Humphrey Company, LLC......................................... 20,045
Stephens Inc............................................................... 20,045
Sutro & Company Inc........................................................ 20,045
Wedbush Morgan Securities.................................................. 20,045
William Blair & Co......................................................... 20,045
-----------------
Total.................................................................... 3,150,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions, such as approval of legal
matters by counsel. The nature of the underwriters' obligations is such that
they are committed to purchase and pay for all of the shares of common stock
listed above if any are purchased.
The underwriting agreement provides that we and the selling stockholders
will indemnify the underwriters against liabilities specified in the
underwriting agreement under the Securities Act or will contribute to payments
that the underwriters may be required to make relating to these liabilities.
OVER-ALLOTMENT OPTION
We and the selling stockholders named under the caption "Selling
Stockholders" have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 472,500 additional shares of our common stock
exercisable at the "public offering price" less the "underwriting discounts and
commissions," each as set forth on the cover page of this prospectus. If the
underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to conditions described in the
underwriting agreement, to purchase the additional shares of our common stock in
proportion to their respective purchase commitments set forth in the table
above.
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<PAGE>
COMMISSIONS AND DISCOUNTS
The underwriters propose to offer the shares of common stock directly to the
public at the "public offering price" set forth on the cover page of this
prospectus, and at such price less a concession not in excess of $0.44 per share
of common stock to other dealers specified in a master agreement among
underwriters who are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and such dealers may reallow, concessions not
in excess of $0.10 per share of common stock to these other dealers. After this
offering, the offering price, concessions and other selling terms may be changed
by the underwriters. Our common stock is offered subject to receipt and
acceptance by the underwriters and to other conditions, including the right to
reject orders in whole or in part.
The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us:
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us...................... $ 0.74 $ 1,653,750 $ 1,827,760
Expenses payable by us................................................. $ 0.23 $ 725,000 $ 725,000
</TABLE>
RESERVED SHARES
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 94,500 shares of common stock to be sold in this
offering for sale to our employees and other persons designated by us. Michael
Dooling, one of our directors, has expressed interest in acquiring, directly or
through affiliates, 100,000 shares of common stock in this offering at the
initial public offering price. The number of shares available for sale to the
general public will be reduced to the extent that any reserved shares are
purchased. Any reserved shares not purchased in this manner will be offered by
the underwriters on the same basis as the other shares offered in the offering.
NO SALES OF SIMILAR SECURITIES
Our directors, officers and stockholders who hold 5,413,939 shares in the
aggregate, have agreed that they will not offer, sell, or agree to sell,
directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Thomas Weisel Partners LLC for a period of
180 days from the date of this prospectus.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell or otherwise dispose of any shares of common stock
except for the shares of common stock offered in the offering, the shares of
common stock issuable upon exercise of outstanding options and warrants.
INFORMATION REGARDING THOMAS WEISEL PARTNERS LLC
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 30
filed public offerings of equity securities, of which 15 have been completed,
and has acted as a syndicate member in an additional 9 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for our common stock was
determined through negotiations between us, the selling stockholders and
representatives of the underwriters. Some of the factors considered in these
negotiations were our results of operations in recent periods, estimates of our
prospects and the
58
<PAGE>
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of this offering and the prices of similar
securities of generally comparable companies. Our common stock has been approved
for quotation on the Nasdaq National Market under the symbol "RUBO." We cannot
assure you, however, that an active or orderly trading market will develop for
our common stock or that our common stock will trade in the public markets
subsequent to this offering at or above the initial offering price. Please see
"Risk Factors--Our common stock may not develop an active, liquid trading
market."
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered under this prospectus.
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In order to facilitate this offering, persons participating in this offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of our common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. Under these penalty bids, selling concessions that are allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased, usually in order to stabilize the market. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. No representation is made
as to the magnitude or effect of any such stabilization or other transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and may be discontinued at any time after they are commenced.
59
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered in the offering will be
passed upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California.
Attorneys associated with Brobeck, Phleger & Harrison LLP own an aggregate of
76,288 shares of common stock. Legal matters in connection with this offering
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements as of December 28, 1997 and December
27, 1998 and for each of the three years in the period ended December 27, 1998
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
the exhibits, schedules and amendments to the registration statement, under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information with respect to our company and
the shares of common stock to be sold in this offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the registration statement or
any other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the Commission's Web site, http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act, and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Upon
approval of the common stock for the quotation on the Nasdaq National Market,
such reports, proxy and information statements and other information may also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
We intend to furnish our stockholders with annual reports containing audited
consolidated financial statements and with quarterly reports for the first three
quarters of each year containing unaudited interim consolidated financial
information.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RUBIO'S RESTAURANTS, INC. PAGE
---------
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 28, 1997 and December 27, 1998............ F-3
Consolidated Statements of Operations for the years ended December 29, 1996, December
28, 1997 and December 27, 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 29, 1996, December 28, 1997 and December 27, 1998......................... F-5
Consolidated Statements of Cash Flows for the years ended December 29, 1996, December
28, 1997 and December 27, 1998..................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Unaudited Consolidated Balance Sheets as of December 27, 1998 and March 28, 1999..... F-24
Unaudited Consolidated Statements of Operations for the three months ended March 29,
1998 and March 28, 1999............................................................ F-25
Unaudited Consolidated Statements of Cash Flows for the three months ended March 29,
1998 and March 28, 1999............................................................ F-26
Notes to Unaudited Consolidated Financial Statements................................. F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Rubio's Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Rubio's
Restaurants, Inc. and subsidiary (the "Company") as of December 28, 1997 and
December 27, 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and of cash flows for each of the three years in
the period ended December 27, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Rubio's Restaurants, Inc. and
subsidiary as of December 28, 1997 and December 27, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 27, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
March 25, 1999
F-2
<PAGE>
RUBIO'S RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 866,160 $ 786,493
Short-term investments.................................................... 4,758,475 2,721,894
Other receivables......................................................... 12,592 169,688
Income taxes receivable................................................... 3,315 99,478
Inventory................................................................. 254,210 359,755
Prepaid expenses.......................................................... 174,108 295,143
Deferred income taxes..................................................... -- 53,485
---------- ----------
Total current assets.................................................... 6,068,860 4,485,936
INVESTMENTS................................................................. 4,617,000 3,391,490
PROPERTY--net............................................................... 12,167,851 17,133,392
OTHER ASSETS................................................................ 200,294 346,765
DEFERRED INCOME TAXES....................................................... -- 393,914
---------- ----------
TOTAL....................................................................... $23,054,005 $25,751,497
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................................... $1,765,720 $2,942,970
Accrued expenses and other liabilities.................................... 1,226,754 2,150,424
Current portion of long-term debt......................................... 808,232 742,573
Income taxes payable...................................................... -- 105,235
---------- ----------
Total current liabilities............................................... 3,800,706 5,941,202
DEFERRED RENT............................................................... 637,579 805,054
LONG-TERM DEBT.............................................................. 1,753,842 1,113,860
---------- ----------
Total liabilities....................................................... 6,192,127 7,860,116
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series B redeemable ($4.04 per share liquidation preference),
actual--$.001 par value, 1,092,007 shares authorized, issued and
outstanding............................................................. 3,348,015 3,408,810
Series C redeemable ($6.27 per share liquidation preference),
actual--$.001 par value, 793,640 shares authorized, issued and
outstanding............................................................. 4,243,570 4,254,450
Series D redeemable ($7.77 per share liquidation preference),
actual--$.001 par value, 1,524,595 shares authorized, 1,403,843 issued
and outstanding in 1997 and 1,452,491 issued and outstanding in 1998.... 9,411,116 10,032,065
---------- ----------
Total redeemable convertible preferred stock............................ 17,002,701 17,695,325
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock Series A ($2.00 per share liquidation
preference), actual--$.001 par value, 1,973,395 shares authorized,
1,973,395 issued and outstanding in 1997 and 1,924,747 issued and
outstanding in 1998..................................................... 1,973 1,925
Common stock, actual--$.001 par value, 7,298,725 shares authorized,
1,010,577 issued and outstanding in 1997 and 1,048,600 issued and
outstanding in 1998..................................................... 1,011 1,049
Paid-in capital........................................................... 28,271 --
Deferred compensation..................................................... -- 22,881
Accumulated other comprehensive income.................................... -- 44,271
Retained earnings (accumulated deficit)................................... (172,078) 125,930
---------- ----------
Total stockholders' equity (deficit).................................... (140,823) 196,056
---------- ----------
---------- ----------
TOTAL....................................................................... $23,054,005 $25,751,497
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RUBIO'S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
SALES............................................................... $ 19,523,064 $ 29,703,726 $ 44,698,531
COSTS AND EXPENSES:
Cost of sales..................................................... 5,068,647 8,658,651 13,073,417
Restaurant labor, occupancy and other............................. 10,440,660 15,639,052 22,616,021
General and administrative expenses............................... 3,175,603 4,253,704 6,148,137
Depreciation and amortization..................................... 735,241 1,259,283 1,945,932
Pre-opening expenses.............................................. 18,298 270,846 318,529
Loss on asset impairment.......................................... -- 386,928 --
------------- ------------- -------------
OPERATING INCOME (LOSS)............................................. 84,615 (764,738) 596,495
OTHER INCOME (EXPENSE):
Interest and investment income.................................... 236,469 188,132 521,110
Interest expense.................................................. (219,307) (262,622) (253,575)
Miscellaneous income (expense).................................... 1,235 (5,321) (9,945)
Loss on disposal/sale of property................................. (1,799) (56,395) (5,073)
------------- ------------- -------------
Total other income (expense).................................... 16,598 (136,206) 252,517
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES................................... 101,213 (900,944) 849,012
INCOME TAX (EXPENSE) BENEFIT........................................ (29,611) (99,522) 66,276
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ 71,602 $ (1,000,466) $ 915,288
------------- ------------- -------------
------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS............... $ 2,644 $ (1,095,105) $ 568,055
------------- ------------- -------------
------------- ------------- -------------
HISTORIC NET INCOME (LOSS) PER SHARE:
Basic............................................................. $ -- $ (1.08) $ .55
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... $ -- $ (1.08) $ .14
------------- ------------- -------------
------------- ------------- -------------
HISTORIC SHARES USED IN CALCULATING HISTORIC NET INCOME (LOSS) PER
SHARE:
Basic............................................................. 1,007,639 1,010,483 1,033,469
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... 1,025,588 1,010,483 6,417,654
------------- ------------- -------------
------------- ------------- -------------
PRO FORMA NET INCOME PER SHARE (UNAUDITED):
Basic............................................................. $ .14
-------------
-------------
Diluted........................................................... $ .14
-------------
-------------
PRO FORMA SHARES USED IN CALCULATING PRO FORMA NET INCOME PER SHARE
(UNAUDITED):
Basic............................................................. 6,335,909
-------------
-------------
Diluted........................................................... 6,457,209
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RUBIO'S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
SERIES A COMMON STOCK
---------------------- ---------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ----------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............................ 2,000,000 $ 2,000 1,000,000 $ 1,000 $ 24,387
Exercise of common stock options.................. -- -- 10,107 10 3,651
Repurchase shares of Series A preferred stock..... (26,605) (27) -- -- (216)
Net income........................................ -- -- -- -- --
Accretion of redemption--preferred stock.......... -- -- -- -- --
--------- ----------- --------- ----------- ---------
BALANCE, DECEMBER 29, 1996.......................... 1,973,395 1,973 1,010,107 1,010 27,822
Exercise of common stock options.................. -- -- 450 1 449
Net loss.......................................... -- -- -- -- --
Accretion of redemption--preferred stock.......... -- -- -- -- --
--------- ----------- --------- ----------- ---------
BALANCE, DECEMBER 28, 1997.......................... 1,973,395 1,973 1,010,557 1,011 28,271
Exercise of common stock options.................. -- -- 38,043 38 51,634
Repurchase shares of Series A preferred stock..... (48,648) (48) -- -- (79,905)
Deferred compensation--stock options.............. -- -- -- -- -- $ 22,881
Accretion of redemption--preferred stock.......... -- -- -- -- -- --
Net income........................................ -- -- -- -- -- --
Other comprehensive income:
Net unrealized gain on available-for-sale
investments, net of $30,765 tax............... -- -- -- -- -- --
Total comprehensive income.................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -------------
BALANCE, DECEMBER 27, 1998.......................... 1,924,747 $ 1,925 1,048,600 $ 1,049 $ -- $ 22,881
--------- ----------- --------- ----------- --------- -------------
--------- ----------- --------- ----------- --------- -------------
<CAPTION>
ACCUMULATED
OTHER RETAINED TOTAL TOTAL
COMPRE- EARNINGS STOCKHOLDERS' COMPRE-
HENSIVE (ACCUMULATED EQUITY HENSIVE
INCOME DEFICIT) (DEFICIT) INCOME
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............................ $1,063,309 $1,090,696
Exercise of common stock options.................. -- 3,661
Repurchase shares of Series A preferred stock..... (142,926) (143,169)
Net income........................................ 71,602 71,602
Accretion of redemption--preferred stock.......... (68,958) (68,958)
------------ ------------
BALANCE, DECEMBER 29, 1996.......................... 923,027 953,832
Exercise of common stock options.................. -- 450
Net loss.......................................... (1,000,466) (1,000,466)
Accretion of redemption--preferred stock.......... (94,639) (94,639)
------------ ------------
BALANCE, DECEMBER 28, 1997.......................... (172,078) (140,823)
Exercise of common stock options.................. -- 51,672
Repurchase shares of Series A preferred stock..... (270,047) (350,000)
Deferred compensation--stock options.............. -- 22,881
Accretion of redemption--preferred stock.......... (347,233) (347,233)
Net income........................................ 915,288 915,288 $ 915,288
Other comprehensive income:
Net unrealized gain on available-for-sale
investments, net of $30,765 tax............... $ 44,271 -- 44,271 44,271
-----------
Total comprehensive income.................... -- -- -- $ 959,559
------------- ------------ ------------ -----------
-----------
BALANCE, DECEMBER 27, 1998.......................... $ 44,271 $ 125,930 $ 196,056
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RUBIO'S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 71,602 $ (1,000,466) $ 915,288
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization....................................... 735,241 1,259,283 1,945,932
Loss on asset impairment............................................ -- 386,928 --
Deferred compensation............................................... -- -- 22,881
Loss on disposal/sale of property................................... 1,799 56,395 5,073
Changes in assets and liabilities:
Other receivables................................................. (24,178) 11,586 (157,096)
Income taxes receivable........................................... 51,060 8,849 (96,163)
Inventory......................................................... (40,880) (80,230) (105,545)
Prepaid expenses.................................................. (179,460) 52,522 (121,035)
Other assets...................................................... (26,122) 55,781 (146,471)
Deferred income taxes............................................. 12,525 33,611 (447,399)
Accounts payable.................................................. 522,001 540,584 1,177,250
Accrued expenses and other liabilities............................ 246,727 535,084 923,670
Income taxes payable.............................................. -- -- 105,235
Deferred rent..................................................... 77,489 135,775 167,475
------------ -------------- --------------
Cash provided by operating activities........................... 1,447,804 1,995,702 4,189,095
INVESTING ACTIVITIES:
Proceeds from sale of property........................................ 2,002 9,330 7,200
Purchase of property.................................................. (2,951,304) (6,423,481) (6,923,746)
Purchases of investments.............................................. (9,119,679) (17,264,580) (29,648,505)
Sales and maturities of investments................................... 5,508,529 12,291,384 32,954,867
------------ -------------- --------------
Cash used for investing activities.............................. (6,560,452) (11,387,347) (3,610,184)
FINANCING ACTIVITIES:
Proceeds from long-term debt.......................................... 1,168,678 836,869 2,227,720
Principal payments on long-term debt.................................. (609,162) (757,418) (2,933,361)
Proceeds from the sale of redeemable preferred stock.................. 4,224,527 9,388,152 350,000
Repurchase of Series A preferred stock................................ (143,169) -- (350,000)
Proceeds from exercise of stock options............................... 3,661 450 51,672
Deferred offering costs............................................... -- -- (4,609)
Transfer of cash from restricted deposit.............................. 97,002 156,624 --
------------ -------------- --------------
Cash provided by (used for) financing activities................ 4,741,537 9,624,677 (658,578)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ (371,111) 233,032 (79,667)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 1,004,239 633,128 866,160
------------ -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 633,128 $ 866,160 $ 786,493
------------ -------------- --------------
------------ -------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 203,716 $ 260,988 $ 219,740
Cash paid (received) related to income taxes--net..................... $ 68,250 $ (61,085) $ 402,818
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Holding gains on available-for-sale investments, before tax........... $ 75,036
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
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 (see Note 7). Rubio's
Restaurants, Inc. has a wholly-owned subsidiary which was incorporated in Nevada
in 1997. Rubio's Restaurants, Inc. and its subsidiary (collectively, the
"Company") own and operate a chain of 59 restaurants and three concessions in
Southern California, Nevada and Arizona.
BASIS OF FINANCIAL STATEMENT PRESENTATION--The Company operates and reports
on a 52-53 week fiscal year ending on the Sunday closest to December 31.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity
with 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 financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
CASH EQUIVALENTS--Cash equivalents consist of money market instruments
purchased with an original maturity date of three months or less.
INVESTMENTS--The Company's investments are composed primarily of government
and mortgage-backed securities. While it is the Company's general intent to hold
such securities until maturity, management will occasionally sell particular
securities for cash flow purposes. Therefore, pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's investments are classified as
available-for-sale based upon the Company's intent, and are accounted for at
fair market value (see Note 2). The fair market value of such investments is
determined based on quoted market prices for those investments, and approximated
cost at December 28, 1997. Holding gains on these investments were $75,036 at
December 27, 1998 and are included as other accumulated comprehensive income in
the statements of stockholders' equity. Short-term investments are investments
with original maturities of greater than three months and remaining maturities
of less than one year, or investments that are reasonably expected to be
realized in cash or consumed in operations over the next year (see Note 2).
INVENTORY--Inventory consists of food, beverage and restaurant supplies and
is stated at the lower of cost (first-in, first-out method) or market.
PROPERTY--Property is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or the remaining lease term, whichever is less. The lives for equipment
are 3 - 7 years and for building and leasehold items, 5 - 20 years.
The Company periodically assesses its ability to recover the carrying value
of its long-lived assets. If management concludes that the carrying value will
not be recovered, an impairment write-down is recorded to reduce the asset to
its estimated fair value.
In 1997, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," the Company recorded a loss of $386,928 on
long-lived assets where circumstances indicated that the assets were impaired
based on the expected future cash flows of one of the restaurant locations.
Impairment is reviewed at the lowest levels for which there are identifiable
cash flows that are independent of the cash flows of other groups of assets. In
the Company's circumstances,
F-7
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such analysis is performed on an individual restaurant basis. The impairment
charge was the difference between the carrying value and the estimated fair
value of the assets. The Company estimated fair values based on sales prices for
comparable assets. The Company will continue to operate this store to the end of
the lease term. The Company did not have any impairment losses in fiscal 1996 or
1998.
DEFERRED RENT--Rent expense on operating leases with scheduled or minimum
rent increases is expensed on the straight-line basis over the lease terms.
Deferred rent represents the excess of rent charged to expense over rent payable
under the lease agreement.
UNEARNED USAGE ALLOWANCE--The Company receives payments from the Company's
beverage suppliers under the suppliers' marketing allowance programs and records
such amounts as an unearned usage allowance. The Company recognizes the usage
allowance as a reduction to cost of sales based on the actual quantity purchased
on a monthly basis.
STORE PRE-OPENING EXPENSES--Costs incurred in connection with start-up and
promotion of new store openings are expensed as incurred.
INCOME TAXES--The Company accounts for income taxes in accordance with SFAS
No. 109 "Accounting for Income Taxes" (see Note 5).
STOCK-BASED COMPENSATION--Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (see Note 7).
CONCENTRATION OF CREDIT RISK--The Company invests its excess cash in money
market accounts and debt securities. The Company has not experienced any
material losses on its cash accounts or other investments.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, "Earnings Per Share" (EPS), effective for
all financial statements issued after December 15, 1997. SFAS No. 128 requires
dual presentation of "Basic" and "Diluted" EPS by entities with complex capital
structures, replacing "Primary" and "Fully Diluted" EPS under APB Opinion No.
15. Basic EPS excludes dilution and is computed by dividing net income or loss
attributable to common stockholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (convertible
preferred stock, warrants to purchase common stock and common stock options
using the treasury stock method) were exercised or converted into common stock.
Potential common shares in the diluted EPS computation are excluded where their
effect would be antidilutive. EPS for all periods have been computed in
accordance with SFAS No. 128 (see Note 8).
PRO FORMA NET INCOME PER SHARE--In accordance with SFAS No. 128, pro forma
basic net income per share is computed based on the weighted average of common
shares outstanding during the year,
F-8
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which includes the conversion of 5,262,885 shares of convertible preferred stock
then outstanding into 5,262,885 shares of common stock, and the issuance of
39,555 shares of common stock upon the exercise of certain outstanding warrants
upon the consummation of the Company's planned initial public offering. Pro
forma diluted earnings per share is computed assuming the potential dilution
upon exercise of potential common shares using the treasury stock method, except
for the years where potential dilution is not assumed as the effect would be
antidilutive (see "Earnings Per Share" and Note 8).
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period, resulting from transactions and
other events and circumstances from nonowner sources. The Company implemented
SFAS No. 130 for fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998. The Company currently operates as one segment
(see Note 9).
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities" was issued by the Accounting Standards Executive
Committee. SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred, and is effective for fiscal years
beginning after December 15, 1998. The Company early adopted this SOP for the
fiscal year ended December 28, 1997. The adoption of this SOP did not have a
material effect on the results of operations.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform with current year presentation.
2. BALANCE SHEET DETAILS as of December 28, 1997 and December 27, 1998,
respectively:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
PROPERTY--at cost:
Building and leasehold improvements.......................... $ 7,884,212 $ 11,209,218
Equipment and furniture...................................... 7,411,138 10,319,498
Construction in process and related costs.................... 468,580 1,059,514
------------- -------------
15,763,930 22,588,230
Less: accumulated depreciation and amortization................ (3,596,079) (5,454,838)
------------- -------------
Total.......................................................... $ 12,167,851 $ 17,133,392
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
2. BALANCE SHEET DETAILS as of December 28, 1997 and December 27, 1998,
respectively: (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
OTHER ASSETS:
Long-term deposits........................................... $ 193,836 $ 268,680
Other........................................................ 6,458 78,085
------------- -------------
Total.......................................................... $ 200,294 $ 346,765
------------- -------------
------------- -------------
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation................................................. $ 531,997 $ 1,069,227
Sales taxes.................................................. 223,129 334,157
Vacation pay................................................. 165,347 248,136
Unearned usage allowance..................................... 114,442 206,316
Other........................................................ 191,839 292,588
------------- -------------
Total.......................................................... $ 1,226,754 $ 2,150,424
------------- -------------
------------- -------------
INVESTMENTS:
U.S. Treasury notes.......................................... $ 9,324,976 $ 4,911,791
Mortgage-backed securities................................... 50,499 1,201,593
------------- -------------
9,375,475 6,113,384
Less current portion......................................... (4,758,475) (2,721,894)
------------- -------------
Non-current.................................................. $ 4,617,000 $ 3,391,490
------------- -------------
------------- -------------
</TABLE>
3. LONG-TERM DEBT AND CREDIT FACILITIES
CAPITAL EXPANSION LINE--In 1997, the Company had a $3,000,000 capital
expansion line (the "Capital line") with a bank which provided for interest at
1.0% over the bank's referenced rate (8.50% at December 28, 1997). The purpose
of the Capital line was to assist the Company in financing leasehold
improvements and equipment in new restaurant locations. Under the Capital line,
the bank would advance 75% of the invoice amounts, not to exceed $200,000 per
location. Once each restaurant was completed the advances were converted to an
individual term loan. Each individual loan had specific monthly payments of both
principal and interest, commencing one month after conversion. The Capital line
was secured by the Company's assets, including a specific collateral assignment
of Rubio's trademarks and Waiver and Consent Agreement on all new locations
financed. Interest expense for the borrowings under the Capital line was
$219,307, $262,622 and $82,081 for the years ended December 29, 1996, December
28, 1997 and December 27, 1998, respectively. The Capital line contained various
covenants including the maintenance of a minimum amount of tangible net worth
and a debt coverage ratio, and placed certain restrictions on fixed asset
purchases. There was $2,562,074 in total borrowings against the Capital line as
of December 28, 1997, and the Company was in compliance with all related
covenants. There were no additional amounts available upon the expiration of the
Capital line on April 30, 1997. The Company refinanced the remaining borrowings
under the Capital line with the Term Loan in May 1998.
F-10
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
3. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
TERM LOAN--In May 1998, the Company entered into a term loan (the "Term
Loan") with another bank to refinance the remaining borrowings under the Capital
line. The Term Loan provides for interest, at the election of the Company at:
(1) adjusted LIBOR plus 4.0% per annum (9.25% at December 27, 1998) or (2) the
greater of the bank reference rate plus 1.5% or the Federal Funds Effective Rate
plus 2.0%. There was $1,856,433 outstanding under the Term Loan as of December
27, 1998. Interest expense was $171,494 under the Term Loan for the year ended
December 27, 1998. There are no additional amounts available to the Company
under the Term Loan. Principal and interest payments are due in quarterly
installments through April 1, 2001 or no later than 90 days after the completion
of an initial public offering, whichever is earlier.
REVOLVING LINE OF CREDIT--In May 1998, the Company entered into a revolving
line of credit (the "Credit line") in conjunction with the Term Loan, which
provides for interest at the election of the Company, at: (1) adjusted LIBOR
plus 4.0% per annum (9.25% at December 27, 1998) or (2) the greater of the bank
reference rate plus 1.5% or the Federal Funds Effective Rate plus 2.0%.
Principal and interest payments due under the Credit line are payable upon or
before maturity at May 12, 2001. There were no borrowings outstanding against
the Credit line at December 27, 1998.
The Term Loan and Credit line contain various covenants including a fixed
charge coverage ratio, minimum interest coverage ratio, and maximum total
leverage ratio, and place certain restrictions on fixed asset purchases. The
Term Loan and Credit line restrict the payment of cash dividends and other stock
redemptions or repurchases, as defined in the agreement, without prior consent
of the lender. Borrowings under the Credit line and the Term Loan are secured by
the Company's assets. The Company was in compliance with all such covenants as
of December 27, 1998.
The following summarizes the balances outstanding as long-term debt as of
December 28, 1997 and December 27, 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Term Loan, total quarterly installment payments of $185,643,
interest payable in arrears ranging from 9.14% to 9.25%......... $ -- $ 1,856,433
Capital line, total monthly installment payments approximating
$89,193 including interest ranging from 8.38% to 10.75%......... 2,562,074 --
Less current portion.............................................. (808,232) (742,573)
------------ ------------
Long-term debt.................................................... $ 1,753,842 $ 1,113,860
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
3. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
Principal payments on total long-term debt at December 27, 1998 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 742,573
2000............................................................................ 742,573
2001............................................................................ 371,287
------------
$ 1,856,433
------------
------------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases restaurant and office facilities, four vehicles, and
office equipment under various operating leases expiring through 2013. The
leases generally provide renewal options from three to ten years. Certain leases
are subject to minimum annual increases based upon the consumer price index not
to exceed specific maximum amounts, certain leases have built-in contingent
percentage rents based upon sales, and other leases pass through common area
charges to the Company. Rental expense under these operating leases was
approximately $1,879,954, $2,495,415 and $3,545,546 for fiscal years 1996, 1997
and 1998, respectively.
Future minimum annual lease commitments, as of December 27, 1998, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 3,808,816
2000........................................................................... 3,761,455
2001........................................................................... 3,782,455
2002........................................................................... 3,683,500
2003........................................................................... 3,687,735
Thereafter..................................................................... 11,873,765
-------------
Total.......................................................................... $ 30,597,726
-------------
-------------
</TABLE>
EMPLOYEE SAVINGS PLAN--On January 31, 1997, the Company adopted a defined
contribution benefit 401(k) plan. This plan allows eligible employees to
contribute a percentage of their salary, subject to annual limits. The Company
matches 25% of each eligible employee's contributions up to 6% of their gross
salary. The contributions vest over a five-year period. The Company contributed
$43,573 to the plan for the year ended December 27, 1998.
5. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the deferred tax (provision)
benefit is determined under the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between the
financial statement and tax basis of assets and liabilities using presently
enacted tax rates.
F-12
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
5. INCOME TAXES (CONTINUED)
The components of the income taxes expense for the years ended December 29,
1996, December 28, 1997 and December 27, 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Federal (expense) benefit:
Current............................................... $ (30,609) $ 42,483 $ (306,652)
Deferred.............................................. 10,120 (127,496) 368,361
State (expense) benefit:
Current............................................... (800) 9,753 (105,236)
Deferred.............................................. (8,322) (24,262) 109,803
---------- ----------- -----------
Total income tax (expense) benefit...................... $ (29,611) $ (99,522) $ 66,276
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The income tax expense differs from the Federal statutory rate because of
the effect of the following items for the years ended December 29, 1996,
December 28, 1997 and December 27, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate..................................................... (34.0)% 34.0% (35.0)%
State income taxes, net of Federal benefit......................... (6.0) (1.1) (5.9)
Non-deductible items............................................... (4.4) (.1) (.9)
Valuation allowance................................................ -- (49.2) 53.2
Other.............................................................. 15.1 5.3 (3.6)
--------- --------- ---------
Effective tax (expense) benefit rate............................... (29.3)% (11.1)% 7.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for reporting and the
amounts used for income tax purposes.
The tax effects of items comprising the Company's net deferred tax assets as
of December 28, 1997 and December 27, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred rent....................................................... $ 273,139 $ 352,936
Differences between book and tax basis of property.................. (351,147) (326,163)
Reserves currently not deductible................................... 227,770 262,464
Net operating losses................................................ 234,737 --
Credits............................................................. 66,089 245,301
Other............................................................... 921 (17,943)
Unrealized gain on investments...................................... -- (30,765)
State taxes......................................................... -- (38,431)
----------- -----------
Net deferred tax assets before valuation allowance.................. 451,509 447,399
Valuation allowance................................................. (451,509) --
----------- -----------
Total............................................................... $ -- $ 447,399
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
5. INCOME TAXES (CONTINUED)
The Company has Federal credit carryforwards available to offset future tax
liabilities of $245,301.
The Company has provided a valuation allowance equal to the net deferred tax
asset as of December 28, 1997. The Company eliminated the valuation allowance in
1998 due to management's belief that current year activity made realization of
such benefit more likely than not.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has three classes of
redeemable convertible preferred stock outstanding, each with voting rights and
each subject to the Stock Restriction Agreement dated February 1, 1995, as
amended and the Amended and Restated Certificate of Incorporation dated November
18, 1997 (the "Certificate of Incorporation").
SERIES B REDEEMABLE--In conjunction with the Certificate of
Incorporation, the Series B Stock Purchase Agreement and Investors'
Rights Agreement as amended and restated on November 19, 1997 provide,
among other things, that the Series B stockholders: (1) are entitled to a
$.26 per share annual dividend (non-cumulative) prior to any declaration
or payment of dividends to any holders of Series A Preferred Stock or
common stock, (2) have a liquidation preference of $3.20511 per share
plus declared but unpaid dividends plus an amount equal to 8% compounded
per annum, (3) may request redemption of their shares, subject to legally
available funds, any time on or after July 1, 2000 at a price equal to
the greater of $3.20511 per share or the fair market value of such
shares, but the Company may elect to defer a portion of the redemption
for up to four years from the date of the redemption request, with such
deferral bearing interest at prime plus 1%, (4) have the right at any
time to convert their shares into common stock on a 1 for 1 basis
(subject to adjustment) as defined in the Certificate of Incorporation,
(5) shall automatically convert their shares to common stock on a 1 for 1
basis upon either (a) the consummation of a public offering with
aggregate net proceeds of $15 million, or (b) the date upon which the
Company obtains the consent of the holders of a majority of the then
outstanding shares of Series B Preferred Stock for such conversion, (6)
have certain registration rights and (7) have the right to approve
certain corporate transactions and the right of first refusal on certain
stock offerings.
SERIES C REDEEMABLE--In conjunction with the Certificate of
Incorporation, the Series C Preferred Stock Purchase Agreement and
Investors' Rights Agreement as amended and restated on November 19, 1997,
provide, among other things, that the Series C stockholders: (1) are
entitled to a $.43 per share annual dividend (non-cumulative) prior to
any declaration or payment of dividends to any holders of Series A
Preferred Stock or common stock, (2) have a liquidation preference of
$5.38126 per share plus declared but unpaid dividends, plus an amount
equal to 8% compounded per annum, (3) may request redemption of their
shares, subject to legally available funds, any time on or after July 1,
2000 at a price equal to the greater of $5.38126 per share or the fair
market value of such shares, but the Company may elect to defer a portion
of the redemption for up to four years from the date of the redemption
request, with such deferral bearing interest at prime plus 1%, (4) have
the right to convert their shares into common stock on a 1 for 1 basis
(subject to adjustment) as defined in the Certificate of Incorporation,
(5) shall automatically convert their shares to common
F-14
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock on a 1 for 1 basis (subject to adjustment) upon either (a) the
consummation of a public offering with aggregate net proceeds of $15
million, or (b) the date upon which the Company obtains the consent of
the holders of a majority of the then outstanding shares of Series C
Preferred Stock for such conversion, (6) have certain registration rights
and (7) have the right to approve certain corporate transactions and the
right of first refusal on certain stock offerings.
SERIES D REDEEMABLE--In conjunction with the Certificate of
Incorporation, the Series D Preferred Stock Purchase Agreement and
Investors' Rights Agreement dated November 19, 1997, provide, among other
things, that the Series D stockholders: (1) are entitled to a $.5756 per
share annual dividend (non-cumulative) prior to any declaration or
payment of dividends to any holders of Series A Preferred Stock or common
stock, (2) have a liquidation preference of $7.19454 per share plus
declared but unpaid dividends, plus an amount equal to 8% compounded per
annum, (3) may request redemption of their shares, subject to legally
available funds, any time on or after July 1, 2000 at a price equal to
the greater of $7.19454 per share or the fair market value of such
shares, but the Company may elect to defer a portion of the redemption
for up to four years from the date of the redemption request, with such
deferral bearing interest at prime plus 1%, (4) have the right to convert
their shares into common stock on a 1 for 1 basis (subject to adjustment)
as defined in the Certificate of Incorporation, (5) shall automatically
convert their shares to common stock on a 1 for 1 basis (subject to
adjustment) upon either (a) the consummation of a public offering with
aggregate net proceeds of $15 million, or (b) the date upon which the
Company obtains the consent of the holders of a majority of the then
outstanding shares of Series D Preferred Stock for such conversion, (6)
have certain registration rights and (7) have the right to approve
certain corporate transactions and the right of first refusal on certain
stock offerings.
PREFERRED STOCK PURCHASE WARRANTS
DEFERRED STOCK ISSUE COSTS--In connection with the Series D redeemable
convertible preferred stock ("Series D Preferred Stock") issuance, the
Company issued a warrant to purchase up to 27,104 shares (subject to
adjustment under a formula defined in the warrant) of the Company's
Series D Preferred Stock. The warrant is exercisable under certain
conditions specified in the warrant. The warrant term extends until the
earlier of December 31, 2002 or the effective date of an initial public
offering of equity securities. The exercise price is $8.63345 per share.
The fair value of the warrants upon date of issuance was not material.
DEBT ISSUE COSTS--In connection with the Term Loan (see Note 3), the
Company issued a warrant to purchase up to 45,000 shares (subject to
adjustment under a formula defined in the warrant) of the Company's
Series D Preferred Stock. The warrant is exercisable under certain
conditions specified in the warrant. The warrant term extends until the
earlier of December 31, 2002 or the business day preceding an
acquisition. The exercise price is $7.19454 per share. The fair value of
the warrant upon date of issuance was not material.
F-15
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT)
REINCORPORATION--In 1997, the Company changed its state of incorporation
from California to Delaware. In connection with this change, the outstanding
shares of the Company's no par value common and convertible preferred stock were
converted into and exchanged for an equal number of shares of $.001 par value
common and convertible preferred stock of the Delaware entity. The financial
statements have been restated for all periods presented to reflect this change.
COMMON STOCK--Holders of common stock are entitled to one vote per share.
The rights of the common stock are subject to prior rights of the preferred
stock.
CONVERTIBLE PREFERRED STOCK--The Company has Series A convertible preferred
stock outstanding with voting rights. The Series A Preferred Stock is subject to
the Stock Restriction Agreement dated February 1, 1995, as amended and the
Amended and Restated Certificate of Incorporation dated November 18, 1997 (the
"Certificate of Incorporation"). The rights of the Series A stockholders are
junior to the Series B, Series C and Series D stockholders. The Series A
stockholders have the right, at any time, to convert their shares into common
stock on a 1 for 1 basis, subject to adjustment as defined in the Certificate of
Incorporation. Should a liquidation take place, preferred stockholders have
preferential rights to distributions equal to $2.00 per share. Conversion
becomes automatic in the event: (1) the Company initiates a public offering with
aggregate net proceeds of $15 million, or (2) the majority of the holders of the
then outstanding preferred stock elect to convert their shares into common
stock. The holders have certain registration rights.
COMMON STOCK WARRANT--In connection with the Series B convertible redeemable
preferred stock issuance (see Note 6), the Company issued a warrant to purchase
up to 50,000 shares (subject to adjustment under a formula defined in the
warrant) of the Company's common stock. The warrant is exercisable under certain
conditions specified in the warrant. The warrant term extends until the earlier
of February 2, 2000 or the effective date of an initial public offering of
equity securities. The exercise price is $3.20511 per share. The total fair
value of the warrant upon date of issuance was not material.
1995 STOCK OPTION/STOCK ISSUANCE PLAN--On May 30, 1996, the stockholders of
the Company approved the 1995 Stock Option/Stock Issuance Plan (the "Plan"). The
Plan supersedes and incorporates all options outstanding under the 1993 Stock
Option Plan. The Plan provides for the issuance of incentive and nonstatutory
options and for the purchase of common stock for eligible individuals. The Board
of Directors administers the Plan. The stock issuable under the Plan is shares
of authorized but unissued or reacquired common stock. The maximum number of
shares of common stock which may be issued over the term of the Plan may not
exceed 306,147 shares. The total number of shares authorized, as well as shares
subject to outstanding options, will be adjusted in the event of certain changes
to the Company's capital structure, such as stock splits or dividends or other
recapitalization. In no event will any adjustment be made in connection with the
conversion of one or more outstanding shares of the Company's preferred stock
into shares of common stock.
The Plan is divided into two separate programs: (1) the option grant program
and (2) the stock issuance program. Participation in the Plan is limited to
employees, non-employee directors and consultants of the Company. The option
exercise price per share is fixed by the Plan administrator in accordance with
the following provisions: (1) the exercise price shall not be less than 85% of
the fair market value per share of the common stock on the date of grant, except
for incentive stock options, where the exercise price shall not be less than
100% of the fair market value of the common stock on
F-16
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
the date of grant, and (2) if the person to whom the option is granted is a 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 option grant date.
The purchase price per share for stock issuances is determined by the Plan
administrator and must be at least 85% of the fair market value of a share of
common stock at the time of issuance.
Each option granted under the Plan has a maximum term of either five or ten
years (depending on stock ownership) and will be subject to earlier termination
in the event of the optionee's termination of service.
1998 STOCK OPTION/STOCK ISSUANCE PLAN--On March 27, 1998, the stockholders
of the Company approved the 1998 Stock Option/Stock Issuance Plan (the "1998
Plan"). The 1998 Plan provides for the issuance of incentive and nonstatutory
options and for the purchase of common stock for eligible individuals. The Board
of Directors administers the 1998 Plan. The stock issuable under the 1998 Plan
is shares of authorized but unissued or reacquired common stock. The number of
shares of common stock which may be issued over the term of the 1998 Plan,
including the authorization of an additional 200,000 shares for issuance on
March 18, 1999, may not exceed 368,853 shares. The total number of shares
authorized, as well as shares subject to outstanding options, will be adjusted
in the event of certain changes to the Company's capital structure, such as
stock splits or dividends or other recapitalization. In no event will any
adjustment be made in connection with the conversion of one or more outstanding
shares of the Company's preferred stock into shares of common stock.
The 1998 Plan is divided into two separate programs: (1) the option grant
program and (2) the stock issuance program. Participation in the 1998 Plan is
limited to employees, non-employee directors and consultants of the Company. The
option exercise price per share is fixed by the 1998 Plan administrator in
accordance with the following provisions: (1) the exercise price shall not be
less than 85% of the fair market value per share of the common stock on the date
of grant, except for incentive stock options, where the exercise price shall not
be less than 100% of the fair market value of the common stock on the date of
grant, and (2) if the person to whom the option is granted is a 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 option grant date. The purchase price
per share for stock issuances is determined by the 1998 Plan administrator and
must be at least 85% of the fair market value of a share of common stock at the
time of issuance. The purchase price per share for stock issuances to a 10%
stockholder shall not be less than 110% of the fair market at the time of
issuance.
Each option granted under the 1998 Plan has a maximum term of either five or
ten years (depending on stock ownership) and will be subject to earlier
termination in the event of the optionee's termination of service.
1999 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"). The 1999 Plan will be effective
upon the execution of the underwriting agreement and pricing of the common stock
with respect to the Company's initial public offering. All outstanding options
under the 1993 Stock Option Plan, the 1995 Stock Option/Stock Issuance Plan and
the 1998 Stock Option/Stock Issuance Plan (collectively, the "predecessor
plans") will be incorporated into the 1999 Plan upon the effective date, and no
further grants will be made under the predecessor plans. Except as otherwise
F-17
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
noted below, the options previously granted under the predecessor plans will
have substantially the same terms as in effect for new grants made under the
1999 Plan.
The stock issuable under the 1999 Plan shall be shares of authorized but
unissued or reacquired common stock, including shares repurchased by the Company
on the open market. A total of 1,123,938 shares of common stock have been
authorized for issuance under the 1999 Plan, which includes the shares subject
to outstanding options under the predecessor plans. As of December 27, 1998,
145,860 options were available for grant under the predecessor plans. The number
of shares of common stock reserved for issuance under the 1999 Plan will
automatically increase on the first trading day in January each year, beginning
in calendar year 2000. The increase will be 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
shall have a maximum term of either five or ten years, depending on the related
program, and will be 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 discretionary option grant and stock issuance programs provide for the
issuance of incentive and nonstatutory options for eligible employees. 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 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. The
purchase price for stock issuances is determined by the 1999 Plan administrator
and shall not be less than 100% of the fair market value of a share of common
stock at the time of issuance. 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.
The salary investment option grant program, if activated, would be available
to executive officers and other highly compensated eligible employees. The
participants may elect, prior to the start of a calendar year, to reduce their
base salary by a specific dollar amount not less than $10,000 nor more than
$50,000. The options will be exercisable at a price equal to one-third of the
fair market value of the options at grant date. The options will vest monthly
for one year and are subject to full and immediate vesting upon certain changes
in ownership of the Company.
The automatic option grant program is available to non-employee board
members. When the 1999 Plan becomes effective, eligible individuals will
automatically receive an option grant for 15,000 shares on the date of joining
the board provided that they have not been previously employed by the Company.
In addition, at the date of each annual meeting of stockholders, each
non-employee board member will automatically be granted an option to purchase
5,000 shares of common stock, provided that the individual has served on the
board for at least six months. All grants under the automatic
F-18
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
option grant program vest immediately upon issuance. The exercise price per
share shall be equal to 100% of the fair market value of the common stock on the
date of grant.
The director fee option grant program allows, if activated, for non-employee
board members to apply any of their annual retainer fees to the acquisition of a
special option grant. The options will be exercisable at a price equal to
one-third of the fair market value of the options at the grant date. The options
will vest monthly for one year and are subject to full and immediate vesting
upon certain changes in ownership of the Company.
The board may amend or modify the 1999 Plan at any time, subject to any
required stockholder approval. The 1999 Plan will terminate at the earliest of
(1) March 17, 2009, (2) the date on which all shares available for issuance
under our 1999 Plan have been issued as fully-vested shares or (3) the
termination of all outstanding options in connection with certain ownership
changes.
1999 EMPLOYEE STOCK PURCHASE PLAN--On March 18, 1999 and March 24, 1999, the
Board of Directors and stockholders, respectively, approved the 1999 Employee
Stock Purchase Plan ("ESPP"). The ESPP will be effective upon the execution of
the underwriting agreement and pricing of the common stock with respect to 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 of Directors may alter, suspend or discontinue the ESPP. However, certain
amendments to the ESPP may require stockholder approval.
F-19
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following is a summary of stock option activity for fiscal 1996, 1997
and 1998:
<TABLE>
<CAPTION>
SHARES
----------------------- WEIGHTED
OPTIONS AVERAGE EXERCISE
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ----------- -----------------
<S> <C> <C> <C>
Balance at January 1, 1996......................... 161,720 63,280 $ 0.86
Authorized....................................... 100,000 -- --
Granted.......................................... (125,060) 125,060 1.46
Exercised........................................ (10,107) 0.36
Forfeited........................................ 23,863 (23,863) 1.07
---------- -----------
Balance at December 29, 1996....................... 160,523 154,370 1.40
Authorized.......................................
Granted.......................................... (87,930) 87,930 1.54
Exercised........................................ (450) 1.00
Forfeited........................................ 17,200 (17,200) 1.50
---------- -----------
Balance at December 28, 1997....................... 89,793 224,650 1.33
Authorized....................................... 150,000
Granted.......................................... (137,140) 137,140 2.63
Exercised........................................ (38,043) 1.39
Forfeited........................................ 43,207 (43,207) 1.75
---------- -----------
Balance at December 27, 1998....................... 145,860 280,540 1.96
---------- -----------
---------- -----------
Exercisable, December 29, 1996..................... 14,945 1.01
-----------
-----------
Exercisable, December 28, 1997..................... 66,010 1.33
-----------
-----------
Exercisable, December 27, 1998..................... 92,585 1.46
-----------
-----------
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock option plans (see Note 1). Under APB Opinion
No. 25, the Company will record compensation expense resulting from the
difference between the respective grant price per share and the estimated fair
market value of the common stock at the dates of grant. Total deferred
compensation for fiscal 1998 grants was $300,540, and will be recorded ratably
over the vesting period of the respective options. For the year ended December
27, 1998 the Company recorded $22,881 of deferred compensation expense
associated with these option grants.
F-20
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes the impact on the Company's net income (loss)
had compensation cost been determined based upon the fair value at the grant
date for awards under the stock option plans consistent with the methodology
prescribed under SFAS No. 123:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------
1996 1997 1998
---------- ------------- ----------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders:
Basic.............................................. $ 2,644 $ (1,095,105) $ 568,055
Diluted............................................ 2,644 (1,095,105) 915,288
As adjusted under SFAS No. 123:
Net income (loss):
Basic.............................................. $ (19,262) $ (1,127,202) $ 520,283
Diluted............................................ (19,262) (1,127,202) 867,516
Net income (loss) per share:
Basic.............................................. $ (0.02) $ (1.12) $ 0.50
Diluted............................................ (0.02) (1.12) 0.14
</TABLE>
The following table summarizes the weighted average fair value at grant date
for the options granted during fiscal 1996, 1997 and 1998 using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield...................................... None None None
Expected stock price volatility.............................. None None None
Risk-free interest rate...................................... 6.00% 6.00% 5.60%
Assumed forfeiture rate...................................... 0% 20% 10%
Expected lives of options.................................... 10 years 8 years 5 years
Weighted average fair value per share........................ $0.64 $0.58 $0.57
</TABLE>
The estimated fair value of options granted is subject to the assumptions
made and if the assumptions changed, the estimated fair value amounts could be
significantly different.
F-21
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information as of December 27, 1998
concerning currently outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL LIFE AVERAGE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- ----------------------- ----------- ----------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.00--$2.00........... 249,320 3 $ 1.62 92,585 $ 1.46
$4.00--$5.00........... 31,220 5 $ 4.64 -- --
----------- -----------
280,540... $ 1.96 92,585 $ 1.46
----------- -----------
----------- -----------
</TABLE>
8. EARNINGS PER SHARE
Reconciliation of basic and diluted earnings per share in accordance with
SFAS No. 128 (see Note 1) is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR PRO FORMA
----------------------------------------- 1998
1996 1997 1998 (UNAUDITED)
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator
Basic:
Net income (loss)........................................... $ 71,602 $ (1,000,466) $ 915,288 $ 915,288
Accretion on redeemable convertible preferred stock......... (68,958) (94,639) (347,233) --
------------ ------------- ------------ ------------
Net income (loss) attributable to common stockholders..... 2,644 (1,095,105) 568,055 915,288
Diluted:
Reversal of accretion on redeemable convertible preferred
stock..................................................... -- -- 347,233 --
------------ ------------- ------------ ------------
Net income (loss) attributable to common stockholders..... $ 2,644 $ (1,095,105) $ 915,288 $ 915,288
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
F-22
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
8. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR PRO FORMA
----------------------------------------- 1998
1996 1997 1998 (UNAUDITED)
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Denominator
Basic:
Weighted average common shares
outstanding............................................... 1,007,639 1,010,483 1,033,469 1,033,469
Conversion of convertible preferred stock................... -- -- -- 5,262,885
Conversion of warrants into common stock.................... -- -- -- 39,555
------------ ------------- ------------ ------------
Total weighted average common shares outstanding.......... 1,007,639 1,010,483 1,033,469 6,335,909
Diluted:
Effect of dilutive securities:
Common stock options........................................ 17,949 -- 121,300 121,300
Conversion of convertible preferred stock................... -- -- 5,262,885 --
------------ ------------- ------------ ------------
Total weighted average common and potential common shares
outstanding............................................. 1,025,588 1,010,483 6,417,654 6,457,209
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Earnings (loss) per share:
Basic......................................................... $ -- $ (1.08) $ 0.55 $ 0.14
Diluted....................................................... $ -- $ (1.08) $ 0.14 $ 0.14
</TABLE>
9. SEGMENTED INFORMATION
The Company owns and operates high-quality, quick-service Mexican
restaurants under the name "Rubio's Baja Grill," with restaurants primarily in
California, Arizona and Nevada. In accordance with SFAS No. 131, the Company
currently considers its business to consist of one reportable operating segment.
********
F-23
<PAGE>
RUBIO'S RESTAURANTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
MARCH 28, MARCH 28,
1999 1999
DECEMBER 27, ------------- -------------
1998
-------------
(AUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 786,493 $ 1,124,061
Short-term investments............................................ 2,721,894 646,950
Other receivables................................................. 169,688 379,817
Income taxes receivable........................................... 99,478 99,478
Inventory......................................................... 359,755 371,169
Prepaid expenses.................................................. 295,143 446,224
Deferred income taxes............................................. 53,485 53,485
------------- -------------
Total current assets............................................ 4,485,936 3,121,184
INVESTMENTS......................................................... 3,391,490 2,525,880
PROPERTY--net....................................................... 17,133,392 19,052,820
OTHER ASSETS........................................................ 346,765 392,530
DEFERRED INCOME TAXES............................................... 393,914 342,125
------------- -------------
TOTAL........................................................... $ 25,751,497 $ 25,434,539
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 2,942,970 $ 2,708,255
Accrued expenses and other liabilities............................ 2,150,424 2,201,124
Current portion of long-term debt................................. 742,573 742,573
Income taxes payable.............................................. 105,235 40,477
------------- -------------
Total current liabilities....................................... 5,941,202 5,692,429
DEFERRED RENT....................................................... 805,054 891,111
LONG-TERM DEBT...................................................... 1,113,860 928,217
------------- -------------
Total liabilities............................................... 7,860,116 7,511,757
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series B redeemable ($4.12 per share liquidation preference),
actual--$.001 par value, 1,092,007 shares authorized, issued and
outstanding; pro forma--no shares authorized, issued or
outstanding..................................................... 3,408,810 3,424,008
Series C redeemable ($6.40 per share liquidation preference),
actual--$.001 par value, 793,640 shares authorized, issued and
outstanding; pro forma--no shares authorized, issued or
outstanding..................................................... 4,254,450 4,257,171
Series D redeemable ($7.93 per share liquidation preference),
actual--$.001 par value, 1,524,595 shares authorized, 1,452,491
issued and outstanding; pro forma--no shares authorized, issued
or outstanding.................................................. 10,032,065 10,100,954
------------- -------------
Total redeemable convertible preferred stock...................... 17,695,325 17,782,133 $ --
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Convertible preferred stock Series A ($2.00 per share liquidation
preference), acutal--$.001 par value, 1,973,395 shares
authorized, 1,924,747 issued and outstanding; pro forma--no
shares authorized, issued or outstanding........................ 1,925 1,925
Common stock, actual--$.001 par value, 7,298,725 shares
authorized, 1,048,600 issued and outstanding in 1998 and
1,051,062 issued and outstanding in 1999; pro forma-- 6,353,502
shares issued and outstanding................................... 1,049 1,051 6,354
Paid-in capital................................................... -- 2,893 17,781,688
Deferred compensation............................................. 22,881 39,014 39,014
Accumulated other comprehensive income............................ 44,271 11,278 11,278
Retained earnings................................................. 125,930 84,488 84,488
------------- ------------- -------------
Total stockholders' equity...................................... 196,056 140,649 $ 17,922,822
------------- ------------- -------------
-------------
TOTAL........................................................... $ 25,751,497 $ 25,434,539
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-24
<PAGE>
RUBIO'S RESTAURANTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 29, 1998 MARCH 28, 1999
----------------- -----------------
<S> <C> <C>
SALES...................................................................... $ 9,217,238 $ 14,382,898
COSTS AND EXPENSES:
Cost of sales............................................................ 2,671,495 4,246,923
Restaurant labor, occupancy and other.................................... 4,895,311 7,253,498
General and administrative expenses...................................... 1,428,142 2,074,890
Depreciation and amortization............................................ 425,964 640,606
Pre-opening expenses..................................................... 50,732 94,394
----------------- -----------------
OPERATING INCOME (LOSS).................................................... (254,406) 72,587
OTHER INCOME (EXPENSE):
Interest and investment income........................................... 137,236 62,928
Interest expense......................................................... (58,004) (55,517)
Miscellaneous income (expense)........................................... 2,394 (400)
Gain (loss) on disposal/sale of property................................. 5,725 (3,989)
----------------- -----------------
Total other income (expense)........................................... 87,351 3,022
----------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES.......................................... (167,055) 75,609
INCOME TAX EXPENSE......................................................... (12,999) (30,244)
----------------- -----------------
NET INCOME (LOSS).......................................................... $ (180,054) $ 45,365
----------------- -----------------
----------------- -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS............................... $ (266,862) $ (41,443)
----------------- -----------------
----------------- -----------------
HISTORIC NET LOSS PER SHARE:
Basic and diluted........................................................ $ (0.26) $ (0.04)
----------------- -----------------
----------------- -----------------
HISTORIC SHARES USED IN CALCULATING HISTORIC NET LOSS PER SHARE:
Basic and diluted........................................................ 1,012,731 1,049,790
----------------- -----------------
----------------- -----------------
PRO FORMA NET INCOME PER SHARE.............................................
(UNAUDITED):
Basic and diluted........................................................ $ 0.01
-----------------
-----------------
PRO FORMA SHARES USED IN CALCULATING PRO FORMA NET INCOME PER SHARE
(UNAUDITED):
Basic.................................................................... 6,352,230
-----------------
-----------------
Diluted.................................................................. 6,617,939
-----------------
-----------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-25
<PAGE>
RUBIO'S RESTAURANTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------
MARCH 29, 1998 MARCH 28, 1999
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (180,054) $ 45,365
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 425,964 640,606
Deferred compensation..................................................... 7,627 16,133
(Gain) loss on disposal/sale of property.................................. (5,725) 3,989
Changes in assets and liabilities:
Other receivables....................................................... (11,578) (210,129)
Inventory............................................................... 3,663 (11,414)
Prepaid expenses........................................................ (47,329) (151,081)
Other assets............................................................ (20,311) (45,765)
Accounts payable........................................................ (83,809) (234,715)
Accrued expenses and other liabilities.................................. 189,002 50,700
Income taxes payable.................................................... 12,999 (64,758)
Deferred rent........................................................... 42,284 86,057
---------------- ----------------
Cash provided by operating activities................................. 332,733 124,988
---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sale of property.............................................. 7,200 --
Purchase of property........................................................ (1,332,870) (2,564,022)
Purchases of investments.................................................... (3,007,802) (8,969,694)
Sales and maturities of investments......................................... 4,102,130 11,929,044
---------------- ----------------
Cash provided by (used for) investing activities...................... (231,342) 395,328
---------------- ----------------
FINANCING ACTIVITIES:
Principal payments on long-term debt........................................ (205,990) (185,643)
Proceeds from exercise of stock options..................................... -- 2,895
Deferred offering costs..................................................... (4,608) --
---------------- ----------------
Cash used for financing activities.................................... (210,598) (182,748)
---------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (109,207) 337,568
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............................. 866,160 786,493
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 756,953 $ 1,124,061
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 55,630 $ 53,467
Cash paid related to income taxes........................................... $ 95,000
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Holding gains on available-for-sale investments, before tax................. $ 18,796
----------------
----------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-26
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 28, 1999
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared by
Rubio's Restaurants, Inc. and its wholly-owned subsidiary (collectively, the
"Company") without audit, in accordance with the instructions to Form 10-Q and
therefore does not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
accordance with generally accepted accounting principles.
UNAUDITED INTERIM FINANCIAL DATA--In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the financial position and results of operations as
of and for such periods indicated. These consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this prospectus for the year
ended December 27, 1998. Results for the interim periods presented herein are
not necessarily indicative of results which may be reported for any other
interim period or for the entire fiscal year.
PRO FORMA NET INCOME PER SHARE--In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" (EPS), pro forma
basic net income per share is computed based on the weighted average of common
shares outstanding during the year, which includes the conversion of all
convertible preferred stock and the issuance of shares of common stock upon the
exercise of certain outstanding warrants (see "Unaudited Pro Forma Stockholders'
Equity") upon the consummation of the Company's planned initial public offering.
Pro forma diluted earnings per share is computed assuming the potential dilution
upon exercise of potential common shares using the treasury stock method, except
for the years where potential dilution is not assumed as the effect would be
antidilutive (see Note 4).
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY--On March 18, 1999, the Company's
Board of Directors approved an increase in the authorized shares of common stock
to 75,000,000 and authorized 5,000,000 shares of undesignated preferred stock.
The change in authorized shares will be effective upon the closing of the
company's planned initial public offering. Consolidated stockholders' equity as
of March 28, 1999 has been shown on a pro forma basis, assuming conversion of
5,262,885 shares of convertible preferred stock then outstanding into 5,262,885
shares of common stock, and the issuance of 39,555 shares of common stock upon
the exercise of certain outstanding warrants. The unaudited pro forma
consolidated balance sheet as of March 28, 1999 and pro forma net income per
share (see "Pro Forma Net Income Per Share"), reflect this conversion.
F-27
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 28, 1999
2. BALANCE SHEET DETAILS as of December 27, 1998 and March 28, 1999,
respectively:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
PROPERTY--at cost:
Building and leasehold improvements.......................... $ 11,209,218 $ 12,419,980
Equipment and furniture...................................... 10,319,498 12,062,713
Construction in process and related costs.................... 1,059,514 696,110
------------- -------------
22,588,230 25,178,803
Less: accumulated depreciation and amortization.............. (5,454,838) (6,125,983)
------------- -------------
Total........................................................ $ 17,133,392 $ 19,052,820
------------- -------------
------------- -------------
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation................................................. $ 1,069,227 $ 817,744
Sales taxes.................................................. 334,157 422,606
Vacation pay................................................. 248,136 260,556
Unearned usage allowance..................................... 206,316 100,502
Other........................................................ 292,588 599,716
------------- -------------
Total...................................................... $ 2,150,424 $ 2,201,124
------------- -------------
------------- -------------
</TABLE>
3. LONG-TERM DEBT AND CREDIT FACILITIES
TERM LOAN--On April 1, 1999, the Company amended the Revolving Credit and
Term Loan Agreement (the "Term Loan"). The amendment eliminated the provision to
prepay the Term Loan including interest not later than 90 days after the
completion of an initial public offering. The amendment also provides for a
decrease in the interest rate, at the election of the Company, to a bank
reference rate plus 0.75% or an adjusted LIBOR plus 3.0% per annum. There was
$1,670,790 outstanding under the Term Loan as of March 28, 1999. Interest
expense was $55,517 under the Term Loan for the three months ended March 28,
1999. There are no additional amounts available to the Company under the Term
Loan. Principal and interest payments are due in quarterly installments through
April 1, 2001.
REVOLVING LINE OF CREDIT--On April 1, 1999, the Company amended the
Revolving Credit and Term Loan Agreement (the "Credit line"). The amendment
decreased the rate for any unused commitment fees to 0.375%. In addition, the
amendment provides for a decrease in the interest rate, at the election of the
Company, to a bank reference rate plus 0.75% or an adjusted LIBOR plus 3.0% per
annum. Principal and interest payments due under the Credit line are payable
before or upon maturity at May 12, 2001. There were no borrowings outstanding
against the Credit line at March 28, 1999. On April 9, 1999, the Company
borrowed $1.0 million against the Credit line.
F-28
<PAGE>
RUBIO'S RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 28, 1999
4. EARNINGS PER SHARE
Reconciliation of basic and diluted earnings per share in accordance with
SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 29, 1998 MARCH 28,1999
----------------- ----------------- PRO FORMA
MARCH 28,1999
-----------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator
Basic:
Net income (loss).................................... $ (180,054) $ 45,365 $ 45,365
Accretion on redeemable convertible preferred
stock.............................................. (86,808) (86,808) --
----------------- ----------------- -----------------
Net income (loss) attributable to common
stockholders..................................... (266,862) (41,443) 45,365
Diluted:
Reversal of accretion on redeemable convertible
preferred stock -- -- --
----------------- ----------------- -----------------
Net income (loss) attributable to common
stockholders..................................... $ (266,862) $ (41,443) $ 45,365
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Denominator
Basic:
Weighted average common shares outstanding......... 1,012,731 1,049,790 1,049,790
Conversion of convertible preferred stock.......... -- -- 5,262,885
Conversion of warrants into common stock........... -- -- 39,555
----------------- ----------------- -----------------
Total weighted average common shares
outstanding.................................... 1,012,731 1,049,790 6,352,230
Diluted:
Effect of dilutive securities:
Common stock options............................... -- -- 265,709
Conversion of convertible preferred stock.......... -- -- --
----------------- ----------------- -----------------
Total weighted average common and potential
common shares outstanding...................... 1,012,731 1,049,790 6,617,939
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Earnings (loss) per share:
Basic................................................ $ (0.26) $ (0.04) $ 0.01
Diluted.............................................. $ (0.26) $ (0.04) $ 0.01
</TABLE>
F-29
<PAGE>
REAR INSIDE COVER:
Photograph of a scene from the Baja peninsula, overlaid with pictures of our
restaurant interiors, as well as pictures of a Baja Bowl, lobster burrito and
nachos grande from our menu, with captions identifying the name of each product.
A copy of our menu will be attached to the inside back cover.
<PAGE>
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You should rely only on the information contained in this prospectus or to which
we have referred you. Neither we nor any underwriter has authorized anyone to
provide you with information that is different. This prospectus is not an offer
to sell nor is it seeking an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this
prospectus is correct only as of the date of this prospectus, even if this
prospectus is delivered to you after the prospectus date, or you buy our common
stock after the prospectus date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Conventions Which Apply to this Prospectus................................ 14
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 19
Business.................................................................. 28
Management................................................................ 37
Certain Relationships and Related Transactions............................ 47
Principal Stockholders.................................................... 48
Selling Stockholders...................................................... 50
Description of Securities................................................. 51
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 57
Legal Matters............................................................. 60
Experts................................................................... 60
Where You Can Find More Information....................................... 60
Index to Consolidated Financial Statements................................ F-1
</TABLE>
Until June 15, 1999, all dealers selling shares of our common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
[LOGO]
Rubio's Restaurants, Inc.
3,150,000 Shares
Common Stock
---------------------
PROSPECTUS
---------------------
Thomas Weisel Partners LLC
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
U.S. Bancorp Piper Jaffray
May 21, 1999
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