Introduction

Magic Brands, LLC, the owner of food chains “Fuddruckers” and “Koo Koo Roo,”  filed for bankruptcy in Delaware on April 21, 2010.  The company filed a chapter 11 petition for bankruptcy, hoping to reorganize its business and conduct a sale of most of its assets under section 363 of the Bankruptcy Code.  This post will look at the structure of Magic Brands’ business, why it filed for bankruptcy, as well as what it hopes to achieve by filing for bankruptcy.  As is often the case on this blog, the information contained in this post comes primarily from the Declaration filed in support of the Debtor’s first day bankruptcy pleadings.  A copy of the Declaration of Magic Brands’ CFO is available here.

Magic Brands’ Business

Fuddruckers began in 1980 in San Antonio, Texas, selling the “World’s Greatest Hamburger” in a casual restaurant setting.  Since its beginnings, the company grew to 200 restaurants across the United States.  Presently, Magic Brands owns and operates 85 Fuddrucker restaurants plus it has franchise agreements with 135 Fuddrucker restaurants.  In 2003, the Debtor acquired Koo Koo Roo, a fast food chain located in Southern California.  Currently Magic Brands operate 13 restaurants under the Koo Koo Roo name.

Magic Brands derives the majority of its revenue from operations of its corporate owned restaurants.  According to the company’s Declaration, only 6% of Magic Brands’ revenue comes from its franchisees and vending operations.  The company’s revenue for 2009 totaled $144 million, down 5% from 2008.

Events Leading to Bankruptcy

Magic Brands’ problems began before the 2009 recession.  The company’s revenue peaked in 2004 and experienced significant decline in 2006 and 2007.  During this time, several senior managers left the company.  By 2008, Magic Brands had a new president and CFO and quickly began restructuring the company.  It was during Magic Brands’ restructuring, however, when the U.S. went into a recession and consumer spending quickly declined.  Magic Brands’ restructuring included a  “turn around plan” that sought to eliminate unprofitable stores, many of which were under a master lease with Spirit Master Funding, LLC.

Objectives in Bankruptcy

Magic Brands and Spirit Master Funding were in negotiations regarding the master lease up to the filing for bankruptcy.  Now that the company is in bankruptcy, the parties intend to seek bankruptcy court approval of an amended master lease that will allow the Debtor to shed unprofitable leases.  In addition to the lease amendment, Magic Brands also plans to seek court approval of an asset purchase agreement for $40 million.  According to the Debtor, if the asset purchase agreement is approved by the Bankruptcy Court, the proceeds from the sale will be sufficient to pay-off both the company’s pre and post-petition debt and administrative expenses associated with the bankruptcy filing.

Conclusion

It is possible that the bankruptcy sale will not include seven store locations that fall under the proposed amended master lease with Spirit Master Funding.  If these stores are not included in the 363 sale, the sale price for the Debtor drops from $40 million to $31 million.  Going in to bankruptcy, Magic Brands’ prepetition senior secured debt totals approximately $23 million.  Even if the sale price drops to $31 million, the Debtor believes the proceeds will be enough to cover its secured debt and administrative expenses.  However, if the sale includes the seven stores subject to the amended master lease, the Debtor states that the $40 million sale price “should generate sufficient cash to pay unsecured creditors a meaningful dividend.”  At this stage, it is not clear what the Debtor means by “meaningful dividend.”  What is clear, however, is that unsecured creditors stand to make a better recovery if the sale goes forward at $40 million.

This bankruptcy proceeding is before the Honorable Brendan L. Shannon of the United States Bankruptcy Court for the District of DelawareClick here for a copy of Magic Brands’ bankruptcy petition.