Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IRG > SEC Filings for IRG > Form 8-K on 30-Oct-2012All Recent SEC Filings

Show all filings for IGNITE RESTAURANT GROUP, INC.

Form 8-K for IGNITE RESTAURANT GROUP, INC.


30-Oct-2012

Results of Operations and Financial Condition, Other Events, Financ


Item 2.02. Results of Operations and Financial Condition.

On October 30, 2012, the Company issued a press release announcing its financial results for the twelve and twenty-four weeks ended June 18, 2012 and the twelve and thirty-six weeks ended September 10, 2012. The press release also discloses information regarding the impact of the restatement of previously issued financial statements. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated by reference herein in its entirety. Additional information regarding the restatement is also disclosed below under Item 8.01.

The information in this Item 2.02, including the accompanying Exhibit 99.1, shall not be deemed to be "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934 (the "Exchange Act"), or otherwise subject to the liability of such section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of the general incorporation language of such filing, except as shall be expressly set forth by specific reference in such filing.

The press release references non-GAAP financial measures, including Adjusted EBITDA, restaurant-level profit, pro forma net income and free cash flow, to supplement the discussion of the Company's results of operations. A discussion of these non-GAAP financial measures, including a discussion of the usefulness and purpose of each measure, is included below. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is set forth in Exhibit 99.1.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization and further adjustments for deferred rent, restaurant impairments and closures, gains and losses on disposal of property and equipment, gains on insurance settlements, pre-opening costs and other expenses and items. Adjusted EBITDA is a supplemental measure of operating performance that does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by U.S. generally accepted accounting principles ("GAAP") and our calculation thereof may not be comparable to that reported by other companies. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, Adjusted EBITDA does not reflect any cash requirements for such replacements; and

other companies in the restaurant industry may calculate Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. We further believe that our presentation of these U.S. GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the strength of our operations and the performance of our core business.


As described above, Adjusted EBITDA includes adjustments for deferred rent, restaurant impairments and closures, gains and losses on disposal of property and equipment, sponsor management fees, gains on insurance settlements, pre-opening costs and other expenses. It is reasonable to expect that these items, with the exception of sponsor management fees, will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of these adjustments helps management with a measure of our core operating performance over time by removing items that are not related to day-to-day restaurant-level operations.

Management uses Adjusted EBITDA:

as a measurement of operating performance because it assists us in comparing the operating performance of our restaurants on a consistent basis, as it removes the impact of items not directly resulting from our core operations;

for planning purposes, including the preparation of our internal annual operating budget and financial projections;

to evaluate the performance and effectiveness of our operational strategies;

to evaluate our capacity to fund capital expenditures and expand our business;

to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan; and

to calculate financial ratios in material debt covenants in our senior secured credit facility.

In addition, this measurement is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back events that are not part of normal day-to-day operations of our business. By providing this non-GAAP financial measure, together with reconciliations, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.

Restaurant-level profit. Restaurant-level profit represents revenues (x) less
(i) licensing revenue not attributable to core restaurant operations, (ii) cost of sales, (iii) labor and benefits, (iv) occupancy expenses, and (v) other operating expenses (y) plus non-cash rent. Restaurant-level profit margin is calculated as restaurant-level profit divided by restaurant sales. Restaurant-level profit and restaurant-level profit margin are a supplemental measure of operating performance of our restaurants that do not represent and should not be considered as an alternative to net income or revenues as determined by U.S. generally accepted accounting principles, or U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. Restaurant-level profit and restaurant-level profit margin have limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Management believes restaurant-level profit and restaurant-level profit margin are an important component of financial results because they are a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant-level profit and restaurant-level profit margin as key metrics to evaluate our financial performance compared with our competitors, to evaluate the profitability of incremental sales and to evaluate our performance across periods.

Pro forma net income. Pro forma net income is net income adjusted for (i) costs related to the termination of the management agreement, (ii) expenses directly associated with our initial public offering ("IPO"), (iii) the estimated incremental costs of being a public company, (iv) estimated interest expense adjustments to reflect our capitalization subsequent to the IPO and (v) the estimated income tax effect


resulting from the adjustments. Pro forma net income is a supplemental measure of our financial performance that does not represent and should not be considered an alternative to net income as determined by U.S. GAAP and our calculation thereof may not be comparable to that reported by other companies. Pro forma net income has not been prepared on a pro forma basis in accordance with Article 11 of Regulation S-X. Management believes pro forma net income is a useful measure to describe the Company's core operating results as it reflects add-backs for expenses related to items that will not occur following our IPO, changes in our capital structure following our IPO, additional general and . . .



Item 8.01. Other Events.

Restatement of Financial Statements

The Company has completed its internal assessment of its lease accounting policies and the review of the Company's historical accounting for fixed assets and related depreciation and certain other accounting areas. Accordingly, the Company has restated its previously issued financial statements as of January 3, 2011 and January 2, 2012 and for the years ended December 28, 2009, January 3, 2011 and January 2, 2012 and as of March 26, 2012 and for the twelve week periods ended March 28, 2011 and March 26, 2012. The restatement also includes the correction of errors in fiscal years prior to fiscal year 2009 and accordingly the Company recognized a cumulative adjustment to beginning retained earnings as of December 29, 2008. We have also provided supplemental financial data for fiscal years prior to fiscal year 2009. In connection with the restatement, PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has reissued its audit report covering the periods as of January 3, 2011 and January 2, 2012, and the fiscal years ended December 28, 2009, January 3, 2011, and January 2, 2012.

Lease Accounting

As previously reported in the Company's July 18, 2012 press release, when accounting for leases that included stated fixed rent increases, the Company historically recognized rent expense on a straight line basis over the current lease term with the term primarily commencing when actual rent payments began. Additionally, the Company did not record straight line rent on leases which contained CPI adjustments that also were subject to stated minimum rent increases. Following an internal assessment, the Company deemed it necessary to correct errors related to its accounting treatment of certain leases. The Company has corrected the treatment of these leases to recognize rent expense on a straight line basis over the effective lease term, including cancelable option periods where failure to exercise the options would result in an economic penalty. The effective lease term commences on the date when the Company establishes effective control over the property. Furthermore, the Company now calculates straight line rent on properties with CPI adjustments that are subject to a stated minimum required rent increase. The changes to the recognition of rent expense are timing in nature and do not change the total cash payments or aggregate rent expense over the effective life of the lease term. The total amount of the increases to historical rent expense will be offset by the same aggregate amount of the adjustments in the form of lower rent expense in the future years of the effective lives of the impacted leases.

The lease accounting errors date back to 2006, the year of the Company's origination. The aggregate effect of the lease accounting related restatement items for the five and one-quarter year plus


period from 2006 (inception) through the first quarter of 2012 is a $3.6 million reduction in income before income taxes. The non-cash charges impact deferred rent expense, which is primarily included in occupancy expenses, and pre-opening expense (the deferred rent portion only). The cumulative impact of these expenses from 2006 through 2009 is a reduction of income before income taxes of $572 thousand. The impact is higher from 2010 through the first quarter of 2012, when the Company opened 24 new or converted units. The lease accounting restatement adjustments reduce pre-tax income by $1.1 million in 2010, $1.3 million in 2011 and $547 thousand in the first quarter of 2012. The increases in deferred rent expense and preopening expense resulted in a corresponding increase in deferred rent liability.

The lease accounting related restatement items do not impact the Company's historical cash flows, revenues or comparable restaurant sales. Additionally, these lease accounting restatement items do not impact historical restaurant-level profit or Adjusted EBITDA.

Fixed Asset Review

Also, as previously reported, as a follow-up to the lease accounting review, the Company undertook a detailed review of its historical accounting for fixed assets and related depreciation expense, including a review of fixed asset additions from the Company's inception, a restaurant-level inventory of fixed assets at all 144 restaurant locations, a detailed roll-forward of fixed assets to identify appropriate disposals, a reassessment of useful lives for all assets and the recalculation of depreciation as necessary. As a result, the Company deemed it necessary to correct its accounting related to fixed asset capitalization, useful lives and disposals, including demolition expenses in certain locations unrelated to new store development.

Capitalization. During the review the Company identified that it had incorrectly capitalized certain asset additions rather than expensing them as repairs and maintenance. Through an extensive review and reassessment of fixed asset additions from 2006 through the first quarter of 2012 the Company has identified items that were incorrectly capitalized and expensed them as repairs and maintenance to the appropriate period and corrected the associated asset balance, historical depreciation expense and accumulated depreciation.

Lease lives. Additionally, during the review of asset additions and the initial work performed around the proper determination of effective lease lives, the Company identified that it had not consistently considered the impact of the economic life or the effective lease term on the depreciable life of certain assets. As a result, the Company has reassessed the depreciable lives of its assets, made changes where necessary and recalculated depreciation accordingly.

Disposals. Finally, during the course of the fixed asset review, the Company concluded that it had not appropriately recognized loss on disposal for the undepreciated balance of assets that had been disposed or for existing store demolition costs not related to new store development, including remodels or catastrophic loss (a portion of which is recognized as reduction of gain on insurance settlements). The Company also determined that it had not removed certain assets and the related accumulated depreciation from the balance sheet upon disposal. Through an extensive asset roll-forward process, the Company identified the items that were retired through replacement, sale, or demolition, recognized the loss on disposal in the appropriate period and corrected the associated asset balance, historical depreciation expense and accumulated depreciation.

The aggregate effect of the related fixed asset accounting restatement items from 2006 through the first quarter of 2012 is a $6.0 million reduction in income before income taxes. These charges include increases in the loss on disposal of assets and other operating expenses and reductions in depreciation expense on the Company's statements of operations and reductions of property and equipment, net and accumulated depreciation on the Company's balance sheet. By year, the fixed asset accounting restatement adjustments reduce income before income taxes by $22 thousand in 2006, $1.7 million in 2007, $1.7 million in 2008, $293 thousand in 2009, $1.0 million in 2010, $1.1 million in 2011 and $198 thousand in the first quarter of fiscal year 2012.


The total fixed asset restatement adjustments discussed above include a loss on disposal related to a sale-leaseback transaction completed in 2008. During the course of the fixed asset review, the Company determined that it had understated the loss on the sale-leaseback in 2008 by $870 thousand. The correction also resulted in a reduction of property and equipment, net and accumulated depreciation. The Company also determined that it incorrectly accounted for certain deferred costs associated with the sale-leaseback transaction. The correction resulted in a reduction of other long-term assets and accumulated depreciation in 2008 and an associated $150 thousand reduction to amortization expense from the date of the transaction through the first quarter of 2012.

Other Items

In conjunction with the lease accounting and fixed asset accounting review, the Company undertook a broader review of its existing accounting policies and concluded it was necessary to make additional adjustments to its historical financial statements.

Advertising production costs. The Company incorrectly recognized production costs related to television commercials in 2011 and 2012 over the time the commercials had run as opposed to expensing them when the commercials first aired. The correction to reflect this change resulted in quarterly adjustments within 2011 and $275 thousand of additional other operating expense in the first quarter of 2012, but will have no effect on total expenses for the full year in either annual period. Going forward, the Company's policy is to expense advertising media costs as incurred, while production costs will be expensed in the period the related advertising first takes place.

Vacation accrual. The Company determined that it had not appropriately recognized an accrual for earned but unpaid vacation in 2011. The correction to reflect this change resulted in quarterly adjustments within 2011, but had no effect on total expenses for the full year.

. . .



Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

23.1   Consent of Independent Registered Public Accounting Firm

99.1   Press release dated October 30, 2012

99.2   Audited restated financial statements as of January 3, 2011 and January 2,
       2012 and for the fiscal years ended December 28, 2009, January 3, 2011 and
       January 2, 2012 and unaudited financial statements as of March 26, 2012
       and for the twelve week periods ended March 28, 2011 and March 26, 2012

99.3   Restated Management's Discussion and Analysis of Financial Condition and
       Results of Operations for the years ended December 28, 2009, January 3,
       2011 and January 2, 2012 and the twelve week periods ended March 28, 2011
       and March 26, 2012

99.4   Restated Selected Historical Consolidated Financial and Operating Data as
       of and for the fiscal years ended December 31, 2007, December 29, 2008,
       December 28, 2009, January 3, 2011 and January 2, 2012 and as of March 26,
       2012 and for the twelve week periods ended March 28, 2011 and March 26,
       2012


  Add IRG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IRG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.