Unable to keep up with payments on its large debt burden at a time when sales have been falling, Cimm’s Inc., one of the nation’s largest Burger King Corp. franchisees, has filed for Chapter 11 bankruptcy protection.
The Glendale company’s 130 restaurants will remain open while it attempts to work out a plan to reorganize $75 million in secured debt and at least $22 million in unsecured debts, according to Lawrence Cimmarusti, a partner with his brother Ralph in Cimm’s.
The brothers are partners in six affiliated companies that also filed for Chapter 11 protection. The Cimmarustis’ non-Burger King interests including several Tony Roma’s restaurants and local real estate holdings are not part of the Burger King bankruptcy, he said.
Cimm’s operates Burger King outlets in five states and has annual sales of around $100 million, placing it within the top 10 nationally among Burger King franchisees. But the company has suffered recently under the weight of a $75 million loan and declining sales, which over the past several years have taken a toll on all Burger King franchisees. At times, those franchisees appeared to be in open revolt against Burger King’s U.K.-based parent, Diageo Plc.
Safety recalls on promotional toys such as one issued two weeks ago on toys that posed a choking hazard and other marketing blunders have hurt both Burger King’s image and its system-wide sales.
In 2000, same-store sales of Burger King restaurants declined by 7 percent nationwide, and the pattern of negative same-store sales continued into the first part of 2001. In June, Burger King’s largest U.S. franchisee, AmeriKing Inc., defaulted on $100 million of notes but was able to restructure the debt outside of bankruptcy. Diageo recently bowed to franchisee demands and agreed to sell its fast-food unit either in a public offering or to another investor group.
Last week, the Cimmarustis were working on a reorganization plan to be submitted to the bankruptcy court. “We hope to file a plan of reorganization with negotiations with the various creditor constituencies within the first few months of the case,” said Margaret Mann of Luce Forward Hamilton & Scripps LLP, the Cimmarustis’ bankruptcy attorney.
Trimming debt
The Cimmarustis will try to convince creditors that their business is more valuable as a going operation than it would be broken up, Mann said. Cimm’s will try to “trim where they can trim without cutting muscle,” she said.
Such plans typically include the jettisoning of debts owed to unsecured creditors, said Jack Overton, a Phoenix-based franchise consultant and expert on franchise bankruptcy. Other moves are possible anything from store sales to management changes to a new ownership structure, Overton said.
Cimm’s owns 44 restaurants in California, concentrated mostly in Los Angeles and Orange counties. The other restaurants are in Hawaii, Texas, Virginia and Washington.
Burger King, for its part, has thrown its support behind the troubled Cimm’s franchise, apparently reasoning that the maintenance of a $3.5 million to $6 million annual royalty stream is more important than quibbling over the $4.3 million in unpaid royalties and advertising fees owed by the company.
“Given the fundamental strength of their restaurants we do anticipate that (Cimm’s) will emerge from Chapter 11 with a healthy business,” said Kim Miller, a Burger King spokeswoman.
Mann declined to say how the Cimm’s debt or capital structure would be rejiggered. But she said she expected the bankruptcy court’s treatment of a secured, $75 million loan issued by now-inactive Franchise Mortgage Acceptance Corp. to “take into account current market conditions, which may be different from when the loans were made.”
In the mid-1990s, FMAC pioneered the business of lending large sums to franchise operators, who traditionally have had a difficult time securing bank loans. The loans were packaged and sold as securities to investors, often insurance companies.
FMAC reportedly used less-conservative methods of valuing assets than some of its peers did, and has come under fire for generating loans that resulted in extraordinarily high default rates.
Deteriorating cash flows
Delinquency rates on FMAC-originated loans were running near 22 percent in July, for example, compared with an average of just under 13 percent on similar loans from other lenders, said Marielle Jan de Beur, an analyst with Morgan Stanley Dean Witter covering franchise asset-backed securities.
FMAC, once based in Los Angeles, had its lending operation shut down last September by its parent, Bay View Capital Corp. of San Mateo.
Mann says deteriorating cash flows at Burger King stores had more to do with Cimm’s problems than FMAC’s underwriting standards. “The loans were made taking into account market conditions at the time, and now fast forward three years later to 2001 and the Cimm’s entities had difficulty making debt payments at those levels.” she said.
The brothers, who are well known in Glendale’s business and charitable circles, will try to remain in place operating the stores, Mann said. She noted that the Cimmarustis, Burger King franchisees for 28 years, have won numerous operational awards, and their sales are typically higher than Burger King norms in their areas.
“They’re not abandoning ship, they’re reorganizing,” said former Glendale mayor Larry Zarian, who’s known the Cimmarusti brothers for 25 years. “They’re going to come out of it, knowing them.”
And while Cimmarusti supports making the break from the franchiser, now that he’s declared bankruptcy his relations with Burger King one of Cimm’s largest unsecured creditors are rosy. “We absolutely love Burger King. It will come back,” Cimmarusti said. “It’s the best brand out there.”
