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Z’Tejas files for bankruptcy

Z’Tejas files for bankruptcy

Struggling nine-unit chain has a potential buyer

Z’Tejas Southwestern Grill, the Scottsdale, Ariz.-based chain of casual-dining restaurants, filed for bankruptcy this month and put its business up for sale, with at least one buyer willing to pay $3.7 million, according to court filings.

The nine-unit chain has reportedly been on the block for a year amid deteriorating financial results. The company had more than $9.3 million in debt and as of the filing last week had just $300,000 in cash on hand.

According to bankruptcy documents, the company pointed to an “overleveraged balance sheet” for its financial problems and said a “competitive industry” led to declining sales.

The company said that the difficult environment for casual dining restaurants also contributed to sales declines in recent years.

“Consumers’ discretionary spending has dropped significantly, leading to reduced consumer traffic and sales,” the filing states. “Within the restaurant industry, the mid-scale sector suffered sales declines.”

In a statement, Z’Tejas CEO Steven Micheletti said that it will be “business as usual” at the chain during bankruptcy.
 
“Z’Tejas filed for bankruptcy to restructure its long-term debt and other financial obligations,” he said. “It was an extremely difficult decision, but it was the best way to preserve our brand so we can continue to serve great food and beverages. A successful restructuring will also allow us to preserve the jobs of our team members, maintain our vendor relationships and maximize value for our stakeholders.”

Yet Z’Tejas has a history of challenges. The chain was founded in 1989, when it opened in an old Victorian house in Austin. Its menu included Spanish and Mexican cuisine, “with inspirations from Arizona, Louisiana, California, New Mexico and Texas,” filings state.

At one point, the chain had 14 restaurants, mainly in Arizona and Texas, but had closed four by 2007, when it was sold to a group led by Paul Fleming, the creator of Fleming’s Prime Steakhouse, and some private investors. Those private investors included the private equity firm KarpReilly.

The high-powered group had plans to reinvigorate the chain and return it to growth. Yet the chain’s sales struggled. According to bankruptcy filings, many of the chain’s locations are in areas with “historically high unemployment.” Rising commodity costs for key food items also hurt the chain’s finances.

Over the years, the company launched new ad campaigns, marketing, menu efforts and cost cutting plans to improve sales and finances, according to bankruptcy filings.

Revenues actually increased 5.2 percent last year, yet corporate cash flow plunged. In 2012, the company had $2.7 million in cash. By last year it was down to $515,042 and now it is $300,000. Same-store sales fell 2.9 percent in 2013 and 4.8 percent in 2014. Over the past six months, same-store sales were down 5.5 percent, the company said.

With its finances deteriorating, Z'Tejas struggled to make debt payments last year and defaulted on some of its loans.

A year ago, the chain started looking at restructuring alternatives and searched for an additional investor to improve its liquidity position. Z’Tejas also implemented operational changes. The company ultimately decided to file for bankruptcy and sell the business through an auction process.

Z'Tejas hired investment banker Mastodon Ventures Inc. to handle the sale. Mastodon has been marketing Z’Tejas for a year, according to filings.

As part of that process, Z’Tejas reached a deal with an entity called Cornbread Ventures, LP, whose backers couldn't all be confirmed, but whose registered agent traces to a commercial real estate firm in Austin, Texas.

Cornbread is a “stalking horse bidder” that has agreed to pay $2.3 million in cash and assume $1.4 million in debt. Z’Tejas will go up for auction, and any bidder would have to exceed that amount.

This story has been changed from its original version.

Update, July 31, 2015: This story has been updated to include a statement from Z’Tejas.

Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze

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