Restaurant Chapter 11 Filings Increase in Short Order in ’03

Longevity isn’t a hallmark of the restaurant trade. But even some veteran industry executives are startled by a recent surfeit of bankruptcy filings.

Six California-based restaurant companies, operating some well-known chains in 450 locations, have filed for Chapter 11 bankruptcy protection in recent months. The casualties include Mexican eateries Chevys Inc.; Chi-Chi’s Inc.; Hamlet Inc., operator of the Hamburger Hamlet chain; and rotisserie and sandwich vendor Koo Koo Roo Inc.

“Bankruptcies do occur,” said Fred LeFranc, president of Newport Beach-based Ruby’s Restaurant Group and a 27-year industry veteran. “But in California specifically, I can’t remember a series of chains of this size going bankrupt ... in such a compressed period of time.”

LeFranc knows something about the perils of Chapter 11. In the late ‘90s he was chief executive of the Southland Italian restaurant chain Louise’s Trattoria and helped shepherd it out of bankruptcy protection.

Each of the current list of troubled restaurant firms took different paths to Bankruptcy Court.

Their problems included rapid expansion, changes in ownership and heavy debts. In some cases, there was insufficient cash to update tired menus and restaurant decor. Add to that California’s relatively high energy costs and rising workers’ compensation insurance rates, and Chapter 11 was the logical next step.

In August, Spectrum Restaurant Group Inc., the Newport Beach-based operator of Spoons Restaurant, National Sports Grill and several other chains, filed for Chapter 11, citing a long slide in business dating to the Sept. 11, 2001, terrorist attacks.

The next month, Constellation Concepts Inc. in Emeryville, Calif., which operates 20 restaurants including the California Cafe chain in the Bay Area, filed for Chapter 11, citing heavy debts. Ten days ago, a Florida firm took over Constellation for an undisclosed amount.

In September, Emeryville-based Chevy’s thought it had struck a deal to sell to Consolidated Restaurant Operations Inc. of Dallas. But the Texas firm backed out, citing among other reasons California’s growing health insurance costs. Two weeks later, Chevy’s filed for Chapter 11 too.

Three of the chains that have filed for Chapter 11 protection -- Chi-Chi’s, Koo Koo Roo and Hamlet Group -- are owned by the same Irvine company, Prandium Inc.

Since filing for bankruptcy protection in October, Chi-Chi’s has run into potentially costly legal problems.

More than 530 diners contracted hepatitis A after eating dishes prepared with green onions at a Chi-Chi’s restaurant in Pennsylvania. Three of the patrons died, and at least two lawsuits have been filed against Chi-Chi’s.

The company dates to 1976, when a sports bar in Minneapolis was converted into a Mexican eatery.

Rapid expansion took the chain from four full-service restaurants in 1977 to 92 spots a few years later. Enough patrons were attracted to Chi-Chi’s menu items -- fare such as Flaming Fajitas and Mexican Fried Ice Cream -- that its revenue climbed steadily to about $200 million in 2000.

Chi-Chi’s was sold twice, including in 1994 to Family Restaurants Inc., owner of the El Torito chain. The parent company later changed its name to Prandium, and when debts started piling up it began selling assets, including El Torito.

By 2000, Chi-Chi’s represented 70% of Prandium’s sales, but the Mexican chain’s sales kept slipping.

“They became tired and worn, with nothing new on the menu,” said restaurant consultant Dick Wray. “They have no money to put back into the concept for marketing and repositioning the brand.”

Executives at Prandium and Chi-Chi’s declined to comment.

In February, Prandium hired turnaround expert Alvarez & Marsal Inc. Alvarez executive Hugh G. Hilton was installed as Prandium’s interim chief executive.

In October, Chi-Chi’s, Koo Koo Roo and Hamburger Hamlet filed for bankruptcy protection.

In its filing, Chi-Chi’s listed assets of $50 million to $100 million and debts of more than $100 million, while Koo Koo Roo said both its assets and liabilities were less than $10 million.

Amid all the wreckage, Bryce King, CEO of Austin, Texas-based Fuddruckers Restaurants sees opportunity.

He plans to buy the remaining 19 Koo Koo Roo restaurants in Southern California for about $4 million. The poultry restaurants each averaged about $1 million in sales in 2002, consultants say.

“Sometimes,” said King, “a little bit of investment, hope, new management and a new organization not tired of the challenge makes a good partnership.”