Flat Out Crazy, LLC and a group of affiliated companies voluntarily filed for chapter 11 bankruptcy protection on Friday in the bankruptcy court located in White Plains, New York. The companies, headquartered in Chicago, operate 26 restaurants, split among two Asian-inspired chains: Flat Top Grill, which currently has 15 locations, and Stir Crazy Fresh Asian Grill, which currently has 11 locations. As of January 16th, they had approximately 1,200 employees. Within the last month, the companies closed three Stir Crazy restaurants located in Greenwood, Indiana; Indianapolis, Indiana; and Warrenville, Illinois; three Flat Top restaurants located in Birmingham, Alabama; Rochester Hills, Michigan; and Wauwatosa, Wisconsin; and the sole SC Asian restaurant located in San Francisco, California. In court filings, the restaurant chains are described as follows:
- “Flat Top is a full-service fast-casual create-your-own stir-fry concept that combines the comforts of a full-service restaurant with an interactive dining experience. The first Flat Top opened in Chicago in 1995 with a vision to bring fresh, Asian-style cooking to the United States. Diners at Flat Top pay a value-oriented price, entitling them to take a trip through ‘The Fresh Food Line’ to create a unique dish.”
- “Stir Crazy is a full-service casual Asian restaurant offering the flavors of Chinese, Japanese, Thai and Vietnamese food. Like Flat Top, the first Stir Crazy also opened in suburban Chicago in 1995. Stir Crazy prepares everything from scratch daily. The focal point of each Stir Crazy is an open-kitchen that allows diners to watch skilled chefs use woks to prepare ingredients chosen by diners selecting the ‘Market Bar’ menu option. Its menu also offers more than 50 other dishes ranging from traditional Chinese favorites to innovative specialties from across Asia.”
- “SC Asian was a single-location, full-service fast-casual restaurant where guests order and pay for Asian cuisine at the counter and then sit down to be served food and drinks by service staff who take additional orders tableside. SC Asian opened its first and only location in November 2011 inside Macy’s flagship department store in San Francisco, California.”
We have included links to free copies of key court filings at the end of this article. Copies of all of the bankruptcy court filings in the case can be found by clicking here. Below are some quotes from those court filings highlighting some of the most important information contained therein.
At their peak in early 2012, the Debtors operated 37 total Restaurants – 18 Stir Crazy locations, 18 Flat Top locations and the SC Asian location. During 2012, the Debtors’ net sales peaked at approximately $59.0 million, representing an increase of approximately $2.4 million over 2011 net sales and approximately $6.7 million over 2010 net sales. Despite the growth trend in Restaurant sales, the company as a whole was not profitable.
The extended lull in the U.S. economy, unsuccessful new Restaurant openings and unprofitable menu changes led to poorer-than-expected results, particularly in 2011 and 2012. During 2012, the Debtors sustained a preliminary unaudited net loss of approximately $11.5 million. The Debtors also sustained net losses of approximately $12.2 million in 2011 and $3.6 million in 2010.
Long Term Debt. [Flat Out Crazy], as Borrower, and U.S. Bank National Association, as Lender, are parties to that certain Loan Agreement dated as of April 21, 2010, pursuant to which FOC entered into a 3-year revolving credit facility with the ability to borrow funds and issue letters of credit in an aggregate amount of up to $3 million. The loan is evidenced by that certain Revolving Credit Note in the face amount of $3,000,000 dated as of April 21, 2010. . . . The Borrower’s obligations under the Senior Prepetition Facility are guaranteed by each of the other Debtors and are secured by first priority senior liens on and security interests in substantially all of the assets of the Debtors, subject to certain exceptions. The Pre-Petition Senior Collateral does not include certain specified equipment that is the subject of separate financing provided by Vogen Funding, L.P. (an affiliate of CapX Partners) pursuant to that certain Master Lease Agreement dated as of December 14, 2007 and various subsequent lease supplements.
The Debtors and U.S. Bank have amended the Senior Prepetition Loan Documents from time to time. The Third Amendment to the Senior Prepetition Loan Agreement, executed on June 28, 2011, increased the maximum borrowings under the facility to $6 million and removed many financial covenants, leaving only a fixed charge coverage ratio and a maximum consolidated total leverage ratio. Pursuant to the Third Amendment, the maturity date of the Senior Prepetition Facility was also extended to June 28, 2014.
Payments on the Senior Prepetition Facility are interest only, due monthly in arrears, and based on LIBOR plus 2.00% plus the applicable LIBOR margin. As of January 18, 2013, the outstanding principal amount of loans under the Senior Prepetition Facility totaled approximately $5.9 million. As discussed below, on January 18, 2013 U.S. Bank sold and assigned all of its rights, title, and interest with respect to the Senior Prepetition Facility to the Debtors’ second lien lender, The HillStreet Fund IV, L.P., and HillStreet agreed to reduce the principal amount of the Senior Prepetition Facility.
Concurrently with entering into the Senior Prepetition Facility with U.S. Bank, the Borrower entered into a certain Loan and Security Agreement dated as of April 21, 2010 with HillStreet, pursuant to which the Borrower obtained a $5 million seven-year term loan maturing on April 21, 2017. The loan is evidenced by a promissory note in the face amount of $5,000,000 dated as of April 21, 2010.
The Borrower’s obligations under the Junior Prepetition Term Loan are guaranteed by each of the Prepetition Guarantors and are secured by second priority liens on and security interests in substantially all of the assets of the Debtors, subject to certain exceptions. The Pre-Petition Junior Collateral does not include the Vogen Equipment.
The Junior Prepetition Term Loan accrues interest at 16%, of which 12% is payable monthly, in arrears, and 4% is deferred and payable on the maturity date of the loan. The principal of the Junior Prepetition Term Loan is payable in full on April 21, 2017. Amendment No. 1 to the Junior Prepetition Term Loan was executed concurrently with the Third Amendment to the Senior Prepetition Loan Agreement on June 28, 2011. Amendment No. 1 was issued to match the new covenants on the Senior Prepetition Facility. The Junior Prepetition Term Loan was amended two other times, on February 21, 2012 in connection with the Debtors’ entry into the First Bridge Loan and on August 31, 2012 in connection with the Debtors’ entry into the Second Bridge Loan. The Junior Prepetition Term Loan is contractually subordinated to the Senior Prepetition Facility. There are various subordination agreements among the Debtors, U.S. Bank and HillStreet that govern the relative rights and interests of the parties.
The interest rate on the Junior Prepetition Term Loan was amended by a forbearance agreement entered into in September 2012, which expired on January 15, 2013. An extra 3% was added to the annual interest rate by this agreement. Also, additional interest of 0.5% per month was added. As of the Petition Date, the outstanding balance of the Junior Prepetition Term Loan, including principal and accrued interest was approximately $6 million.
In order to address cash shortfalls, on February 21, 2012, the Debtors borrowed $1.36 million on a junior, unsecured basis from a group of lenders pursuant to a Bridge Loan Agreement. The First Bridge Loan was evidenced by a series of 15.0% promissory notes executed by FOC in favor of the First Bridge Lenders. The First Bridge Loan was fully drawn. These notes became due and payable upon demand six months after the date of their execution. The First Bridge Lenders are primarily investors in Walnut Group.
On August 31, 2012, again in order to attempt to stem cash shortfalls, the Debtors borrowed $1.705 million on a junior, unsecured basis from a group of lenders, pursuant to a Bridge Loan Agreement dated August 31, 2012 and an Amended and Restated Bridge Loan Agreement dated August 31, 2012. The Second Bridge Loan was evidenced by a series of 15.0% promissory notes executed by FOC in favor of the Second Bridge Lenders. The Second Bridge Loan was fully drawn. The Second Bridge Lenders are primarily investors in Walnut Group, and there is substantial overlap between the members of the First Bridge Lenders and the Second Bridge Lenders. These notes are due and payable upon demand any time after December 31, 2013. As of the Petition Date, the total principal amount of the Bridge Loans was $3.065 million. The Bridge Loans are contractually subordinated in priority to the Senior Prepetition Facility and the Junior Prepetition Term Loan.
On January 18, 2013, U.S. Bank sold and assigned all of its right and interest in the Senior Prepetition Facility and the related loan documents to HillStreet. Also on January 18, 2013, immediately upon closing of the Assignment, HillStreet and FOC entered into that certain Sixth Amendment to Loan Agreement by which, among other things, HillStreet agreed to reduce the maximum principal amount of loans under the Senior Prepetition Loan Agreement to $1,250,000 and HillStreet committed to extend additional loans under the Senior Prepetition Facility up to $250,000. Thus, as of the Petition Date, HillStreet holds all of the secured debt of the Debtors which totaled approximately $6.25 million in principal amount, after the agreed upon principal reduction under the Sixth Amendment.
Trade Debt. The Debtors’ trade debt consists of, among other things, amounts owed to maintenance vendors who repair and maintain HVAC, grease traps, range hoods, and refrigeration units in the Restaurants, food suppliers, utilities, and suppliers of uniforms, plates, silverware, napkins and other nonperishables used in the Debtors’ Restaurants. The majority of the Debtors’ vendors are paid on negotiated terms, which have historically ranged from 30 to 60 days from the date of delivery. Currently, many of the Debtors’ vendors have stated terms of 30 days or less or COD, but the Debtors have stretched many vendors well-beyond 30 days because of their cash situation. As of the Petition Date, the Debtors estimate that approximately $5 million is outstanding to their vendors, much of which relates to goods and services provided to the Debtors in the 20 days prior to the Petition Date.
Lease Obligations. All of the Restaurants are located on leased properties. The Debtors estimate that they will have spent approximately $6.0 million on real property lease expenses during the 2012 fiscal year and that as of the Petition Date, their aggregate total outstanding real property lease obligations are nearly $1.5 million. The Debtors are in default under many of their leases due to late or non-payment and certain landlords have commenced remedial action to enforce the leases. None of these landlord actions has resulted in the termination of leases under which the Debtors are operating Restaurants as of the Petition Date.
Restructuring Efforts and Reasons for Bankruptcy Filing
Throughout 2012, the Debtors engaged in various efforts to restructure their operations and debt, as well as pursue a variety of sale and financing transactions. In that regard, the Debtors hired various brokers and investment bankers to pursue these transactions. None of these efforts resulted in a transaction. Among the investment bankers retained by the Debtors in 2012 was J.H. Chapman Group, LLC, a Chicago based investment banking firm. Chapman has substantial restaurant and foodservice expertise and has made substantial efforts to identify a potential buyer for the Flat Top restaurant business. As described in greater detail below, the Debtors intend to seek approval of the Bankruptcy Court to conduct a sale process and auction for the Flat Top restaurant business and related assets.
In the fourth quarter of 2012, the Debtors hired Squire Sanders (US) LLP as their restructuring attorneys and Getzler Henrich as their financial advisors. As described in greater detail below, both firms are highly-qualified advisors of distressed entities, who possess restructuring skills and experience that is appropriate and needed during the Cases. Since early December 2012, the Debtors attorneys and financial advisors have been generally advising the Debtors in connection with their distressed situation; negotiating with lenders, other creditors and parties in interest; developing budgets and financial projections necessary to obtain additional financing; preparing the filings necessary to commence the Cases; and performing other tasks at the Debtors’ request.
The Debtors are facing a severe liquidity shortfall and were not able to obtain debtor in possession financing on reasonable terms prior the Petition Date. The inability of the Debtors to obtain DIP financing prior to the Petition Date is due in large part to the actions of HillStreet. As described above, HillStreet is the holder of the first and second lien debt to the Debtors. HillStreet, who provided second lien financing to the Debtors in April, 2010, acquired the first lien debt from U.S. Bank pursuant to the HillStreet Assignment on January 18, 2013 and immediately entered into a loan amendment under which the principal amount of the first lien debt was reduced from approximately $6 million to $1.25 million.
In connection with the Debtors’ acknowledgment of the HillStreet Assignment, which was required by U.S. Bank as a condition to closing, HillStreet provided specific oral assurances to the Debtors on January 17, 2013 that it would agree (1) to write down the principal amount of the first lien debt to $1.25 million, (2) to advance an additional $250,000 to the Debtors pre-petition and (3) to provide adequate debtor in possession financing for a consensual chapter 11 filing on certain terms specifically discussed by the parties. On the basis of such assurances, the Debtors ceased their efforts to seek alternative financing and focused all of their attention and resources on documenting debtor in possession financing with HillStreet.
Unfortunately, while HillStreet agreed to write down the first lien debt and fund the additional pre-petition loan, HillStreet failed to live up to its assurances on providing debtor in possession financing on the agreed terms. For example, after committing to provide $1.75 million in financing ($250,000 pre-petition and $1.5 million in debtor in possession financing), HillStreet reneged and demanded a loan amount reduction of $600,000. Similarly, after committing to provide financing both before and after the completion of a section 363 sale process, HillStreet reneged and refused to provide any financing post-sale.
Despite herculean efforts over the course of the last week by the Debtors to overcome numerous new and unreasonable conditions to financing imposed by HillStreet, the Debtors have not been able to reach an agreement with HillStreet on reasonable terms that would allow the Debtors to operate in chapter 11 and pursue its reorganization. The timing of HillStreet’s actions, coupled with the severe liquidity crisis facing the Debtors, has necessitated that the Debtors commence these Cases without debtor in possession financing. However, the Debtors are able to operate for the initial five week period of the Cases on use of cash collateral and without new financing.
The Debtors require relief in the form of a “breathing spell” from their obligations to creditors and an opportunity to reorganize. Accordingly, the Debtors filed the Cases on the Petition Date in an attempt to achieve such relief. Another reason for filing the Cases was to facilitate the sale of certain assets to potential purchasers whom the Debtors expect will require the protections of the Bankruptcy Code in order to enter into transactions with the Debtors. Additionally, the Debtors view the Cases as an opportunity to achieve a capital structure that will be more easily supported by the Debtors’ now-smaller enterprise. These are the primary reasons that the Debtors commenced the Cases.
Links to Free Copies of Bankruptcy Court Filings
We have made free copies of certain key bankruptcy court filings available on this website for you to read or download. Click the following links to view the documents:
- Voluntary Petition
- First Day Declaration of Interim Chief Financial Officer
- Motion to Pay Certain Employee Obligations