12. Commitments and Contingencies

Commitments

As of December 30, 2014, we are committed under lease agreements expiring through 2024 for occupancy of our retail restaurants and for office space at the following minimum annual rentals:

Fiscal Year	Amount
	(in thousands)
2015		10,777
2016		8,626
2017		5,956
2018		4,521
2019		3,861
Thereafter		18,359
	$	52,100

Amounts shown are net of approximately $0.1 million of sublease rental income under non-cancelable subleases. Rental expense for fiscal years 2014, 2013, and 2012, totaled $11.6, $12.6, $ 13.1 million, respectively. Certain lease agreements have renewal options ranging from 3 years to 5 years. In addition, certain leases obligate us to pay additional rent if restaurant sales reach certain minimum levels (percentage rent). Amounts incurred under these additional rent provisions and agreements were approximately $0.2 million in each of the fiscal years 2014, 2013, and 2012.

Certain of our lease agreements provide for scheduled rent increases during the lease term or for rental payments to commence at a date other than the date of initial occupancy. Rent expense is recognized on a straight-line basis over the term of the respective leases from the date we take possession. Our obligation with respect to these scheduled rent increases has been presented as a long-term liability in other liabilities in the accompanying consolidated balance sheets and totaled $1.1 million, $1.7 million, and $2.1 million, as of the end of fiscal years 2014, 2013, and 2012, respectively.

Certain of our leases also provide for landlord contributions to offset a portion of the cost of our leasehold improvements. These allowances are recorded as deferred liabilities and amortized on a straight-line basis as a reduction to rent expense over the term of the related leases. Included in other long-term liabilities in the accompanying consolidated balance sheets for fiscal years 2014, 2013, and 2012, were landlord allowances of $0.1 million, $0.2 million, and $0.5 million, respectively.

As of December 29, 2014, the Company had outstanding approximately $.2 million in standby letters of credit, which were provided as security deposits for certain of the lease obligations. The letters of credit are fully secured by cash deposits or marketable securities held in accounts at the issuing banks and are not available for withdrawal by the Company. These amounts are included as a component of “Other Assets” in the accompanying consolidated balance sheets.

As of December 29, 2014, future minimum lease payments related to restaurants that have been closed or locations with subleased spaces are approximately $0.3 million, before expected sublease payments, with remaining lease terms ranging from one to three years. For each of these locations, a lease termination reserve has been established based upon management’s estimate of the cost to exit the lease or the time it would take to enter into a new sublease. The accompanying consolidated balance sheet includes a liability of $ 0.4 million in accrued lease termination costs with a current portion of $0.1 million as of the end of fiscal year 2014.

Purchase Commitments

We have agreements with some of the nation’s largest food, paper, and beverage manufacturers in the industry. This enables us to provide our restaurants with high quality proprietary food products and non-food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through a national network that consists of some of the nation’s largest independent distributors. These primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain. We do not utilize a commissary system. Our inventory control system allows each restaurant to place orders electronically with our master distributor and then transmits the invoices electronically to our accounts payable system.

We have an agreement with Distribution Market Advantage, Inc. (“Distribution Marketing Advantage”) that provides us access to a national network of independent distributors. Under this agreement, the independent distributors supply us with approximately 76% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers. This agreement will expire on December 30, 2015.

We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a marketing allowance under this agreement, which is being recognized as a reduction to expense ratably based on actual products purchased. Effective January 1, 2011, the beverage marketing agreement with the Coca-Cola Company was amended to provide for additional products as well as higher marketing allowances based on purchases.

In April 2015, we will enter into an agreement to purchase all contracted coffee products through a single supplier, Coffee Bean International (a division of Farmer Brothers). This is a three year agreement, expiring in 2018.

Our primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain.

Self-Insurance

We have a self-insured group health insurance plan. We are responsible for all covered claims to a maximum limit of $100,000 per participant and an additional aggregating maximum limit of $50,000 for the plan year. Benefits paid in excess of these limits are reimbursed to the plan under our stop-loss policy. In addition, we have an aggregate stop-loss policy whereby our liability for total claims submitted cannot exceed a pre-determined dollar factor based upon, among other things, past years’ claims experience, actual claims paid, the number of plan participants and monthly accumulated aggregate deductibles. We did not exceed this pre -determined maximum during fiscal years 2014, 2013, and 2012. For our 2015 plan year, this pre-determined dollar amount is $1.4 million. Health insurance expense for fiscal years 2014, 2013, and 2012 was $0.8 million, $1.5 million, and $1.4 million, respectively. The balance in the self-insurance reserve account was approximately $0.1 million and $0.2 million at December 29, 2014 and December 30, 2013, respectively.

Litigation

From time to time, we are a defendant in litigation arising in the ordinary course of our business. As of the date of this report, there are no legal proceedings that would require accrual or disclosure under ASC 450.

Other events

We are currently in compliance with all covenant requirements under the MILFAM and AB Note Agreements.

Rights Offering

On December 23, 2014, we completed a shareholders’ rights offering to our shareholders of record as of October 31, 2014. We issued a total of 13,333,329 shares of our common stock, $0.01 par value, at a subscription price of $1.50 per share. We received net proceeds of approximately $19.7 million from the rights offering of common stock which the Company intends to use for general corporate purposes, which may include, but are not limited to, funding our growth plan, working capital and capital expenditures, such as initiatives to propel sales growth in our restaurants, investing in technology, including remote ordering, POS system upgrade, and initiatives to increase through-put efficiencies; upgrading equipment and furnishings, and refreshing our restaurants; and, funding our operations. We may also use proceeds from the rights offering to pay down debt. A portion of the funds was used for construction of a new restaurant in Chicago that opened in December of 2014.

Notice of Compliance with Nasdaq Listing Standards

On September 15, 2014, the Company announced that it had received notice from the Listing Qualifications Department of the Nasdaq Capital Market that the Company had regained compliance with the Nasdaq Listing Standards by curing the Company’s deficiency in minimum $2.5 million shareholders’ equity, $35 million market value in listed securities or $500,000 of net income from continuing operations requirements for the Nasdaq Capital Market as set forth in Listing Rules 5550(b). As of September 11, 2014, for the prior 10 consecutive business days, the Company’s market value of listed securities had been $ 35 million or greater. The Company now meets the continued listing standards for the Nasdaq Capital Market and no further action is required.