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FORWARD-LOOKING STATEMENTS

This report includes statements of our expectations, intentions, plans, and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements are principally contained in the section captioned “Business” under Item 1 below and the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential and continue, or the negative of these terms or other comparable terminology. These forward-looking statements involve a number of risks and uncertainties, including but not limited to, those factors discussed under “Risk Factors” under Item 1A below and those discussed in other documents we file with the Securities and Exchange Commission. As a result of these risks and uncertainties, our actual results or performance may differ materially from any future results or performance expressed or implied by the forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this annual report. Except as required by applicable law, we undertake no obligation to release publicly the results of any revisions or updates to these forward-looking statements to reflect events or circumstances arising after the date of this annual report.

Company-Owned and Operated Locations		Opened
Los Angeles Area			76
San Diego Area			48
Phoenix/Tucson Area			29
Denver Area			4
San Francisco Area			15
Sacramento Area			11
Las Vegas Area			5
Salt Lake City Area			7
Total Company-Owned Locations			195
Franchise and Licensed Locations
San Diego Area			1
Las Vegas Area			3
Total Franchised and Licensed Locations			4

 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 high-traffic retail centers where purchasing the building is not an option.

Historically, our restaurants have ranged from 1,800 to 3,300 square feet, excluding our smaller, food court locations. We expect the size of our future sites to range from 2,000 to 2,800 square feet. We intend to continue to develop restaurants that will require, on average, a total cash investment of approximately $500,000 to $600,000, net of any tenant improvement allowances and excluding estimated pre-opening expenses of approximately $50,000 to $60,000 per unit, which includes approximately $15,000 to $25,000 of non-cash rent expense during the build-out period.

EXPANSION AND SITE SELECTION

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 medium to high family incomes, high education levels and high density of both daytime employment and residential developments, limited competition 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 guests. In response to the current economic downturn, our current focus is on sites located exclusively in mature trade areas.

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 new sites and markets, personally visiting all new markets and all sites prior to final approval. Each new market and site must be approved by our Real Estate Site Approval 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, such as marketing, personnel, food service and supply chain dynamics.

Our three-year expansion plan includes an annual unit growth rate of approximately 10% compounded annually beginning in 2010. We currently plan to open 20 company-owned restaurants in fiscal 2010 in our existing geographic markets. The current slow down in housing, combined with the general economic climate, has caused us to focus almost exclusively on sites located in mature trade areas. The uncertain economy could limit our growth potential in 2010 and 2011. In addition, we secured a line of credit in 2008 to support our planned restaurant growth. We intend to tailor our expansion plan during fiscal 2010 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility, we will slow or curtail our expansion plan.

In connection with our strategy to expand into selected markets, we have and will continue to consider franchising our restaurant concept. We currently have a limited franchising program. As of March 22, 2010, we have one signed franchise development agreement. This agreement represents a commitment to open five restaurants in five years. The franchisee under this agreement opened its first restaurant in April 2006, its second restaurant in August 2007 and its third restaurant in November 2008. We are currently evaluating our options with respect to the franchising program, and the management and financial resources that will be required to build the operational infrastructure needed to support the franchising of our restaurants.

 

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MENU

  

Our made-to-order menu – including our signature World Famous Fish Tacos® – features burritos, soft-shell tacos, Grilled Gourmet Tacos™, enchiladas, quesadillas, nachos and salads. All our products are made with high-quality ingredients including marinated, chargrilled chicken breast and carne asada steak as well as seafood such as chargrilled mahi mahi and salmon, sautéed shrimp, and Alaska Pollock, all inspired by the Baja, California region of Mexico. Complete meals of two tacos, “no-fried” pinto beans, and tortillas chips are featured. Through our menu variety, we strive to maintain our heritage of offering distinctive fish and seafood items, while also including a wide selection of chicken, pork and beef items. Accompaniments including guacamole, tortilla chips, “no-fried” pinto beans, black beans and rice are all made fresh daily in our restaurants. Each of our restaurants also provides self-serve salsa bars where guests may choose from four different salsas freshly-made in every restaurant. Our prices - targeted at the consumer willing to spend $5.00 to $10.00 for a meal - range from about $1.69 for our snack-size Street Tacos to $8.99 for a Cabo Plate – a Shrimp Burrito, Fish Taco and a side of “no-fried” pinto beans and tortilla chips. Most of our restaurants offer a selection of imported Mexican and domestic beers.

Our HealthMex® menu items, designed to have less than 30% calories from fat, include burritos served on whole-wheat tortillas, and tacos made with chargrilled chicken or mahi mahi.

While not a primary focus for Rubio’s, our Kid’s Meals combine an entrée – choice of Chicken Taquitos, Cheese Quesadilla or Bean & Cheese Burrito – with a side of “no-fried” pinto beans, rice, or tortilla chips, a drink, and a churro.

From time to time, we introduce limited-time-only products and promotions to provide added variety and encourage guest frequency. These products and promotions include, but are not limited to, Langostino lobster tacos and burritos, grilled chile-lime salmon tacos and burritos, and crispy shrimp tacos and burritos.

DECOR AND ATMOSPHERE

We believe that the decor and ambience of our restaurants are critical factors in our guests’ overall dining experience and that our restaurant interiors and exteriors display distinctive designs that match our high-quality, fresh food.

  

MARKETING

Our marketing mix includes a combination of regional radio advertising, in-store merchandising, public relations, neighborhood marketing, e-marketing and print media tactics. Where efficient, we use radio advertising as a marketing tool to increase brand awareness, attract new guests, and encourage existing guests to visit more frequently. Our advertising is designed to increase sales and transactions by conveying our brand positioning and creating awareness of new or limited-time products or promotions.

Local store marketing, public relations, and e-marketing are used to increase community awareness and generate traffic on a local level. A variety of programs are available for our restaurant general managers to target various business-building opportunities within the local community and trade area surrounding each restaurant. We believe word-of-mouth advertising is also a key component in attracting and retaining guests.

As part of our expansion strategy, we select markets that we believe will support multiple restaurants and the efficient use of advertising. We sometimes utilize local public relations initiatives to help establish brand awareness for new restaurants as we build toward media efficiency. We expect our marketing expenditures to increase as we add new restaurants and focus on building awareness to drive new guests to our restaurants and increase repeat visits by existing customers.

OPERATIONS

UNIT MANAGEMENT AND EMPLOYEES

We currently have approximately 3,800 employees. Our typical restaurant employs one general manager, one or two assistant managers, and 18 to 25 hourly employees, approximately 40% of whom are full-time employees and approximately 60% of whom are part-time employees. The general manager is responsible for the day-to-day operations of the restaurant, including food quality, service, staffing and product ordering. We seek to train and develop from within, or 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 and profitability. All hourly employees in our restaurants are eligible for self-funded health benefits 60 days after they are hired. All full-time restaurant management employees are eligible for health benefits the first day of the month following their hire date. Full-time corporate employees are eligible for health benefits on their hire date. Employees over 21 years of age who have worked for us for more than one year are eligible to participate in our 401(k) plan. Because the members of our executive leadership team are typically not eligible to participate in our 401(k) plan, we adopted a non-qualified, unfunded retirement savings plan effective December 1, 2007.

 

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We currently employ one district general manager and 17 district managers, each of whom reports to one of two regional directors. These two regional directors in turn report to a Chief Operating Officer. These district managers oversee restaurant management in all phases of operation, as well as assist in opening new restaurants. These district managers are eligible to participate in our cash bonus plan, and the two regional directors are eligible to participate in our cash bonus and stock incentive plans.

TRAINING

We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of personnel and the establishment of, and adherence to, high standards of personnel performance, food and beverage preparation, guest service, and maintenance of facilities. We have 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 of our restaurants. They are also required to study our operations manuals and to view videotapes relating to food and beverage handling (particularly food safety and sanitation), preparation and service. In addition, we maintain a continuing education program to provide our restaurant managers with ongoing training and support. We strive to maintain a team-oriented atmosphere and attempt to instill enthusiasm and dedication in our employees. We regularly solicit employee suggestions concerning how we can improve our operations in order to be responsive to both them and our guests. 

 

QUALITY CONTROLS

Our emphasis on superior guest service is complemented by our Total Quality Control programs. We utilize an IVR and Web-based guest feedback program to continually monitor our performance against guest expectations. We also seek out and respond to direct comments and questions from guests who utilize our toll-free guest comment line and the “contact us” page on our Web-site. District managers are directly responsible for ensuring that guest comments are addressed appropriately to achieve a high level of guest satisfaction. Our Director of Total Quality Management is responsible for ensuring product consistency, quality and safety among our restaurants and suppliers.

 

HOURS OF OPERATION

Our restaurants are generally open Sunday through Thursday from 10:00 a.m. until 9:00 p.m., and on Friday and Saturday from 10:00 a.m. to 10:00 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 display the food requests on monitors in the kitchen for the cooks to prepare. The data captured for use by operations and corporate management includes gross and net sales amounts, cash and credit card receipts and quantities of each menu item sold. Sales and receipt information is 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 transmitted nightly to the corporate office and distributed to management via an intranet Web page each morning. A Windows-based back office system is used in all restaurants to manage food cost, labor cost and sales reporting. On a weekly basis, a report of actual food cost compared with ideal food cost is also generated.

Our corporate systems provide management with operating reports that show restaurant performance comparisons with budget and prior-year results both for the current accounting period and year-to-date, as well as trend formats by both dollars and percentage of sales. These systems allow us to closely monitor restaurant sales, cost of sales, labor expense and other restaurant trends on a daily, weekly and monthly basis. We believe these systems enable both restaurant and corporate management to supervise the operational and financial performance of our restaurants on a real-time basis, and will accommodate future expansion.

PURCHASING

We strive to obtain consistent 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 ingredient prices for the required quality, employees at the corporate office control the purchase of food items from a variety of international, national, regional and local suppliers at negotiated prices. Most food, produce and other products are shipped from a central distributor directly to the restaurants two to three times per week. We do not maintain a central food product warehouse or commissary. Except for our contract with our central distributor, our contract with Coca-Cola North America FoodService, and several contracts ranging from 6 to 12 months for seafood, chicken and some beef, we do not have any long-term contracts with our food suppliers. In the past, we have not experienced significant delays in receiving our food and beverage inventories, restaurant supplies or equipment.

 

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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, fresh and distinctive, fast-casual Mexican cuisine segment of the industry. In this segment, our direct competitors include, among others, Baja Fresh Mexican Grill, Bajio Mexican Grill, Café Rio Mexican Grill, Chipotle Mexican Grill, La Salsa Fresh Mexican Grill, and Qdoba Mexican Grill. We also compete indirectly with full-service Mexican restaurants including Chevy’s Fresh Mex, On The Border Mexican Grill & Cantina, and El Torito as well as other fast-casual restaurants including Corner Bakery Café, Jason’s Deli, Noodles & Company, Panera Bread, Paradise Bakery & Café, and Pei Wei Asian Diner. Competition in the fast-casual Mexican cuisine segment is based primarily upon food quality, taste, service, location, restaurant ambiance and price. 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. We also compete with many other retail establishments for site locations.

  

TRADEMARKS AND SERVICE MARKS

We have maintained registrations for various trademarks and service marks including, but not limited to, “Rubio’s,” “Rubio’s Fresh Mexican Grill,” “Rubio’s Baja Grill, Home of the Fish Taco,” “Home of the Fish Taco,” “World Famous Fish Taco,” “HealthMex,” “Fish (Pesky) Caricature,” “Baja Grill,” “Best of Baja,” “Rubio’s Crispy Shrimp,” “Rubio’s Street Tacos,” “Wrapsaladas,” “Beach Mex,” “Rubio’s a-Go-Go,” “Tacos a-Go-Go,” “Burritos a-Go-Go,” “Wrapsaladas a-Go-Go,” “Beach Mex Buffet,” “Baja Box,” and “Fiesta Kit” with the United States Patents and Trademark Office. In addition, we have filed “Cerveza Time,” “Rubio’s Street Burritos,” “Big Burrito Especial,” “Rubio’s Fish Taco Tuesdays,” “Taquitos a-Go-Go,” “Quesadillas a-Go-Go,” “Chopped Salad a-Go-Go,” “Sweet Treats a-Go-Go,” “Long Board Sampler,” and “Grilled Gourmet Tacos.” We believe that our trademarks, service marks and other proprietary rights have significant value and are important to the marketing of our restaurant concept.

SEASONALITY

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, during the warmer spring and summer months, particularly because most of our restaurants offer patio seating. As a result, our highest earnings generally occur in the second and third quarters of each fiscal year.

GOVERNMENT REGULATION

Our restaurants are subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing and permit 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. In addition, the development and construction of additional restaurants are also subject to compliance with applicable zoning, land use and environmental regulations.

SEC FILINGS; INTERNET ADDRESS

Our Internet address is www.rubios.com. We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports with the SEC and make such filings available, free of charge, on www.rubios.com , as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our Web-site shall not be deemed incorporated by reference by any general statement incorporating by reference this report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate the information found on our Web-site by reference, and shall not otherwise be deemed filed under such Acts.

Our filings are also available through the SEC Web-site, www.sec.gov, and at the SEC Public Reference Room at 100 F Street, NE Washington DC 20549. For more information about the SEC Public Reference Room, you can call the SEC at 1-800-SEC-0330.

 

	·	overtime;
	·	paid leaves of absence;
	·	mandatory employee health insurance;
	·	tax reporting;
	·	unemployment tax rates;
	·	workers’ compensation rates; and
	·	citizenship requirements.

Significant additional governmental imposed increases in any of these areas could materially affect our business, financial condition and operating results.

IF THE AMOUNTS THAT WE HAVE ACCRUED IN CONNECTION WITH THE CLOSURE OF SELECTED STORES ARE INADEQUATE OR WE CLOSE MORE STORES THAN ANTICIPATED OR WE ARE REQUIRED TO TAKE IMPAIRMENT CHARGES FOR UNDERPERFORMING STORES, OUR FINANCIAL RESULTS WOULD BE ADVERSELY AFFECTED

Our accruals for expenses related to store closures are estimates. Estimates are inherently uncertain, and actual results may deviate, perhaps substantially, from our estimates as a result of the many risks and uncertainties affecting our business, including, but not limited to, those set forth in these risk factors. The amounts we have recorded for store closures are based on our current assessments of the conditions of these locations. The market for, and physical condition of, these locations may change in the future and materially affect our future financial results. We review these accruals on a quarterly basis and may make adjustments that have a material positive or negative impact on our future financial results. In addition, we may be required to record impairment charges for store locations that are not performing at adequate levels to support the operating costs of these stores, and any such impairment charges would have an adverse impact on our financial 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, fresh and distinctive, fast-casual Mexican restaurant segment of the industry. In this segment, our direct competitors include, among others, Baja Fresh, La Salsa, Chipotle and Qdoba. We also compete indirectly with full-service Mexican restaurants including Chevy’s, On The Border, Chi Chi’s and El Torito and fast food restaurants, particularly those focused on Mexican food such as El Pollo Loco, Taco Bell and Del Taco. Competition in our industry segment is based primarily upon food quality, price, restaurant ambiance, service and location. Many of our direct and indirect competitors are well-established national, regional or local chains and have substantially greater financial, marketing, personnel and other resources than we do. We also compete with many other retail establishments for site locations. If we are unable to compete effectively in our industry segment, our business and operations would be adversely affected.

OUR FAILURE OR INABILITY TO ENFORCE OUR CURRENT AND FUTURE TRADEMARKS AND TRADE NAMES COULD ADVERSELY AFFECT OUR EFFORTS TO ESTABLISH BRAND EQUITY.

Our ability to successfully expand our concept will depend on our ability to establish and maintain "brand equity" through the use of our current and future trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos. We currently hold two registered trademarks and have nine service marks relating to our brand and we have filed applications for 12 additional marks. Some or all of the rights in our intellectual property may not be enforceable, even if registered against any prior users of similar intellectual property or our competitors who seek to utilize similar intellectual property in areas where we operate or intend to conduct operations. If we fail to enforce any of our intellectual property rights, we may be unable to capitalize on our efforts to establish brand equity. It is also possible that we will encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations, which could result in additional expenditures and divert management’s time and attention from our operations.

 

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WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING AND EXECUTING A FRANCHISE PROGRAM.

In connection with our strategy to expand into selected markets, we have and will continue to consider franchising our restaurant concept. We currently have a limited franchising program. We started a franchise program by entering into agreements with three franchisee groups between 2001 and 2002. In April 2003, our relationship with one of the franchisee groups was terminated when the group defaulted on its franchise agreement and closed its franchised location. We re-opened this unit as a company-owned restaurant in May 2003, but subsequently closed it in December 2005. In September 2003, we agreed to acquire a franchisee’s location and then in December 2006 acquired their other restaurant and development territory. In addition, in June 2006, we acquired all four restaurants owned by the third original franchise group. Currently, we have one franchisee that has a five-year, five-unit development agreement for which they opened their first restaurant in 2006, their second restaurant in August 2007 and their third restaurant in November 2008. Restaurant companies typically rely on franchise revenues as a significant source of revenues and potential for growth. The opening and success of our franchised restaurants depend on a number of factors, including availability of suitable sites, our ability to obtain acceptable lease or purchase terms for new locations, permitting and government regulatory compliance and our ability to meet construction schedules. The franchisees may not have all of the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in their franchise areas in a manner consistent with our standards. Our inability to successfully execute a franchising program could adversely affect our business and results of operations.

WE MAY BE LOCKED INTO LONG-TERM AND NON-CANCELABLE LEASES AND MAY BE UNABLE TO RENEW LEASES AT THE END OF THEIR TERMS.

 

Many of our current leases are non-cancelable and typically have an initial term of 10 years and one or more renewal terms of five years that we may exercise at our option. Leases that we enter into in the future likely will also be long-term and non-cancelable and have similar renewal options. If we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. We may close or relocate the restaurant, which could subject us to construction and other costs and risks, and could have a material adverse effect on our business. Additionally, the revenue and profit, if any, generated at a relocated restaurant, may not equal the revenue and profit generated at the existing restaurant.

 

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER FACTORS, WHICH COULD HAVE A NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.

Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and third quarters of each fiscal year. As a result, we generally find our highest sales occur in the second and third quarters of each fiscal year. Accordingly, results for any one quarter or for any year are not necessarily indicative of results to be expected for any other quarter or for any other year and should not be relied upon as the sole measure of our future performance. Comparable store sales for any particular future period may increase or decrease versus our previous performance.

THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO OPERATE, MANAGE AND SUPPORT OUR RESTAURANTS IS EXTREMELY IMPORTANT AND OUR FAILURE TO DO SO COULD ADVERSELY AFFECT US.

Our success and the success of our individual restaurants depend upon our ability to attract and retain highly motivated, well-qualified restaurant operators and management personnel, as well as a sufficient number of qualified employees, including guest service and kitchen staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in some geographic areas. Our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business or results of operations. We also face significant competition in the recruitment of qualified employees. In addition, we are heavily dependent upon the services of our officers and key management involved in restaurant operations, marketing, product development, finance, purchasing, real estate development, information technologies, human resources and administration. The loss of any of these individuals could have a material adverse effect on our business and results of operations. We generally do not have long-term employment contracts with key personnel.

 

VARIOUS GOVERNMENT REGULATIONS MAY IMPACT OUR BUSINESS.

   

The restaurant industry is subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing requirements and regulations related to the preparation and sale of food and the sale of alcoholic beverages, as well as laws governing our relationships with employees. See “Labor and Employment Laws and Regulations, Particularly State Minimum Wage Laws May Impact our Business” above. The inability to obtain or maintain such licenses or to comply with applicable regulations could adversely affect our results of operations. We are also subject to federal regulation and certain state laws, governing the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions concerning the termination or non-renewal of a franchise. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees. Changes in, and the cost of compliance with, government regulations could also have a material adverse effect on our operations.

 

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WE ARE REQUIRED TO EVALUATE OUR INTERNAL CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 AND ANY ADVERSE RESULTS FROM SUCH EVALUATION COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

OUR FEDERAL, STATE AND LOCAL TAX RETURNS MAY, FROM TIME TO TIME, BE SELECTED FOR AUDIT BY THE TAXING AUTHORITIES, WHICH MAY RESULT IN TAX ASSESSMENTS OR PENALTIES THAT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION.

We are subject to federal, state and local taxes in the U.S. Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable, if the IRS or other taxing authority disagrees with the positions we have taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.

OUR CURRENT INSURANCE MAY NOT PROVIDE ADEQUATE LEVELS OF COVERAGE AGAINST LOSSES, CLAIMS OR THE EFFECTS OF ADVERSE PUBLICITY.

We may incur certain losses that are uninsurable or that we believe are not economically insurable, such as losses due to earthquakes, floods and other natural disasters. In view of the location of many of our existing and planned restaurants, our operations are particularly susceptible to damage and disruption caused by earthquakes. Further, although we maintain insurance coverage for employee-related litigation, the deductible per incident is high and because of the high cost, we carry only limited insurance for the effects of such claims. In addition, punitive damage awards are generally not covered by insurance. In addition, our insurance does not provide coverage for the type of claims asserted in the two employee actions discussed in Item 3, Legal Proceedings. Any insurance we maintain may not be sufficient to provide coverage against any asserted claims. We also may be unable to maintain our insurance or obtain insurance in the future on acceptable terms, or at all.

WE MAY INCUR SIGNIFICANT REAL ESTATE RELATED COSTS AND LIABILITIES THAT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.

The majority of our restaurants are leased locations in multi-unit retail centers. The age and condition of the real estate we occupy vary. Some of our locations may require significant repairs due to normal deterioration or due to sudden and unanticipated incidents, such as plumbing failures. It is difficult to predict how many of our restaurant locations will require major repairs or refurbishment and it is also difficult to predict what portion of these potential costs would be covered by insurance. Also, as a lessee of real estate, we are subject to and have received claims that our operations at these locations may have caused property damage or personal injury to others. The fact that the majority of our restaurants are located in multi-unit retail buildings means that if there is a plumbing failure or other event in one of our restaurants, neighboring tenants may be affected, which can subject us to liability for property damage and personal injuries. If we were to incur increased real estate costs and liabilities, it could adversely affect our financial condition and results of operations.

SALES BY OUR EXISTING STOCKHOLDERS OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.

The Company has a limited number of institutional stockholders, each of whom holds more than 5% of the Company’s outstanding stock. The market price of our common stock could decline as a result of sales by one of these stockholders of a large number of shares of our common stock in the market or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

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THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH YOUR INTERESTS.

 

As of March 22, 2010, our executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 31.3% of our outstanding common stock. These stockholders may be able to influence the outcome of matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company and could also depress our stock price.

 

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PART II

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following represents a comprehensive list of our contractual obligations and commitments as of December 27, 2009:

 

		Payments Due by Period (in thousands)
		Total				Less than 1 year				1 - 3 years				3 - 5 years				After 5 years
Company-operated retail locations and other operating leases		$	76,423			$	15,185			$	23,380			$	16,888			$	20,970
Settlement of class action lawsuit (1)			2,811				2,811				—				—				—
		$	79,234			$	17,996			$	23,380			$	16,888			$	20,970

 

(1)

includes interest at 3% per annum.

 

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the “Codification” or “ASC”) and the hierarchy of U.S. generally accepted accounting principles (GAAP), which establishes the Codification (ASC Subtopic 105-10) as the sole source of authoritative guidance recognized by the FASB to be applied by nongovernmental entities. All existing accounting standard literature, promulgated by the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other authoritative sources, excluding guidance from the Securities and Exchange Commission (“SEC”), will be superseded by the Codification. All non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification became effective for interim and annual periods ending after September 15, 2009. There is no change to the content of our consolidated financial statements or disclosures as a result of implementing the Codification. However, as a result of implementation of the Codification, previous references to new accounting standards and literature are no longer applicable. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification. All future references to authoritative accounting literature in our consolidated financial statements will be referenced in accordance with the Codification.