2014 ANNUAL REPORT
Cover image: Del Frisco’s Double Eagle Steak House, Washington, DC
DEL FRISCO’S
SULLIVAN’S
DEL FRISCO’S GRILLE
DEL FRISCO’S
GRILLE
DEL FRISCO’S
SULLIVAN’S
Unit Growth
30
2
9
19
34
5
10
19
40
11
10
19
46
16
11
19
2011
2012
2013
2014
50
40
30
20
10
-
Revenue Growth
(in millions)
$301.8
$271.8
$232.4
$44.1
$69.8
$350.0
$300.0
$250.0
$198.6
$24.0
$200.0
$4.5
Comparable Sales Growth
$150.0
$111.4
$124.7
$144.6
$151.1
2014
2013
2012
2011
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
1.2%
8.7%
-3.0%
-0.7%
5.5%
4.4%
6.6%
13.3%
1.9%
1.3%
4.2%
11.2%
$100.0
$50.0
$82.8
$83.8
$83.0
$80.9
$-
2011
2012
2013
2014
Sullivan’s
Steak House
Blended
Del Frisco’s
Double Eagle
DEL FRISCO’S GRILLE
DEL FRISCO’S
SULLIVAN’S
A(cid:3)Note(cid:3)to(cid:3)Our(cid:3)Stockholders(cid:3)
(cid:3)
Del(cid:3)Frisco’s(cid:3)Restaurant(cid:3)Group(cid:3)is(cid:3)synonymous(cid:3)with(cid:3)‘next(cid:3)generation’(cid:3)hospitality.(cid:3)(cid:3)Our(cid:3)Del(cid:3)Frisco’s(cid:3)
Double(cid:3)Eagle(cid:3)Steak(cid:3)House,(cid:3)Sullivan’s(cid:3)Steakhouse(cid:3)and(cid:3)Del(cid:3)Frisco’s(cid:3)Grille(cid:3)brands(cid:3)are(cid:3)recognized(cid:3)
among(cid:3) our(cid:3) upscale(cid:3) dining(cid:3) clientele(cid:3) for(cid:3) providing(cid:3) quality(cid:3) experiences(cid:3) (cid:882)(cid:882)(cid:3) from(cid:3) flawless(cid:3) service(cid:3)
that(cid:3)reminds(cid:3)them(cid:3)that(cid:3)they(cid:3)are(cid:3)the(cid:3)boss(cid:3)to(cid:3)exceptional(cid:3)food(cid:3)that(cid:3)is(cid:3)bold(cid:3)and(cid:3)delicious.(cid:3)
(cid:3)
Del(cid:3)Frisco’s(cid:3)Double(cid:3)Eagle(cid:3)Steak(cid:3)House(cid:3)has(cid:3)earned(cid:3)its(cid:3)positioning(cid:3)as(cid:3)the(cid:3)‘go(cid:882)to’(cid:3)destination(cid:3)for(cid:3)
prime(cid:3)aged(cid:3)steaks,(cid:3)fresh(cid:3)seafood,(cid:3)award(cid:3)winning(cid:3)wines,(cid:3)a(cid:3)lively(cid:3)bar(cid:3)and(cid:3)an(cid:3)energetic(cid:3)ambiance.(cid:3)(cid:3)
Our(cid:3)flagship(cid:3)brand’s(cid:3)strength(cid:3)is(cid:3)best(cid:3)exhibited(cid:3)by(cid:3)an(cid:3)enviable(cid:3)track(cid:3)record(cid:3)of(cid:3)five(cid:3)consecutive(cid:3)
years(cid:3)of(cid:3)positive(cid:3)comparable(cid:3)sales(cid:3)and(cid:3)by(cid:3)our(cid:3)guests’(cid:3)eagerness(cid:3)to(cid:3)experience(cid:3)the(cid:3)entirety(cid:3)of(cid:3)
our(cid:3)offering.(cid:3)(cid:3)We(cid:3)opened(cid:3)a(cid:3)landmark(cid:3)Double(cid:3)Eagle(cid:3)in(cid:3)City(cid:3)Center(cid:3)Washington,(cid:3)DC(cid:3)in(cid:3)September(cid:3)
which(cid:3)was(cid:3)quickly(cid:3)named(cid:3)to(cid:3)both(cid:3)OpenTable’s(cid:3)Top(cid:3)100(cid:3)Best(cid:3)Restaurant(cid:3)List(cid:3)and(cid:3)Top(cid:3)100(cid:3)Best(cid:3)
Steakhouses(cid:3)List(cid:3)for(cid:3)2014.(cid:3)(cid:3)This(cid:3)brand(cid:3)continues(cid:3)to(cid:3)prove(cid:3)itself(cid:3)‘best(cid:3)in(cid:3)class’(cid:3)for(cid:3)a(cid:3)white(cid:3)table(cid:3)
cloth(cid:3)steakhouse(cid:3)experience.(cid:3)
(cid:3)
Sullivan’s(cid:3) Steakhouse(cid:3) is(cid:3) regaining(cid:3) traction(cid:3) from(cid:3) our(cid:3) ongoing(cid:3) revitalization(cid:3) efforts.(cid:3) (cid:3) We(cid:3) have(cid:3)
raised(cid:3) the(cid:3) brand’s(cid:3) profile(cid:3) by(cid:3) showcasing(cid:3) it(cid:3) as(cid:3) an(cid:3) exceptional(cid:3) upscale(cid:3) steakhouse(cid:3) at(cid:3) a(cid:3) great(cid:3)
value(cid:3)and(cid:3)have(cid:3)built(cid:3)momentum(cid:3)through(cid:3)our(cid:3)focus(cid:3)on(cid:3)dedicated(cid:3)leadership,(cid:3)training(cid:3)and(cid:3)staff(cid:3)
development,(cid:3) menu(cid:3) and(cid:3) bar(cid:3) enhancements,(cid:3) fine(cid:882)tuned(cid:3) messaging(cid:3) and(cid:3) updated(cid:3) facilities.(cid:3)(cid:3)
Although(cid:3)we(cid:3)are(cid:3)already(cid:3)past(cid:3)the(cid:3)point(cid:3)of(cid:3)brand(cid:3)stabilization,(cid:3)we(cid:3)are(cid:3)still(cid:3)not(cid:3)ready(cid:3)to(cid:3)declare(cid:3)
victory(cid:3)just(cid:3)yet(cid:3)but(cid:3)Sullivan’s(cid:3)future(cid:3)is(cid:3)bright.(cid:3)
(cid:3)
Del(cid:3) Frisco’s(cid:3) Grille(cid:3) appeals(cid:3) to(cid:3) an(cid:3) upwardly(cid:3) mobile(cid:3) demographic(cid:3) where(cid:3) they(cid:3) work(cid:3) and(cid:3) where(cid:3)
they(cid:3) live.(cid:3) (cid:3) The(cid:3) variety(cid:3) of(cid:3) prime(cid:3) aged(cid:3) steaks,(cid:3) top(cid:3) selling(cid:3) signature(cid:3) items(cid:3) and(cid:3) assortment(cid:3) of(cid:3)
relatively(cid:3) less(cid:3) expensive(cid:3) entrees(cid:3) is(cid:3) enabling(cid:3) us(cid:3) to(cid:3) capitalize(cid:3) on(cid:3) lunch,(cid:3) dinner(cid:3) and(cid:3) social(cid:3)
opportunities(cid:3)in(cid:3)a(cid:3)variety(cid:3)of(cid:3)urban(cid:3)and(cid:3)suburban(cid:3)settings.(cid:3)(cid:3)As(cid:3)a(cid:3)young(cid:3)brand,(cid:3)we(cid:3)continue(cid:3)to(cid:3)
evolve(cid:3) the(cid:3) concept(cid:3) refining(cid:3) the(cid:3) menu(cid:3) and(cid:3) gaining(cid:3) a(cid:3) deeper(cid:3) understanding(cid:3) of(cid:3) our(cid:3) guests’(cid:3)
expectations.(cid:3) (cid:3) We(cid:3) are(cid:3) also(cid:3) working(cid:3) on(cid:3) operational(cid:3) initiatives(cid:3) that(cid:3) will(cid:3) increase(cid:3) service(cid:3) speed(cid:3)
and(cid:3) improve(cid:3) efficiencies.(cid:3) (cid:3) We(cid:3) are(cid:3) highly(cid:3) confident(cid:3) in(cid:3) the(cid:3) Grille’s(cid:3) long(cid:882)term(cid:3) potential(cid:3) and(cid:3)
believe(cid:3)that(cid:3)we(cid:3)can(cid:3)build(cid:3)more(cid:3)than(cid:3)170(cid:3)locations(cid:3)over(cid:3)time.(cid:3)(cid:3)Having(cid:3)achieved(cid:3)merely(cid:3)a(cid:3)fraction(cid:3)
of(cid:3)that(cid:3)potential(cid:3)to(cid:3)date,(cid:3)we(cid:3)clearly(cid:3)have(cid:3)a(cid:3)long(cid:3)runway(cid:3)ahead(cid:3)of(cid:3)us(cid:3)for(cid:3)this(cid:3)exciting(cid:3)concept.(cid:3)
(cid:3)
For(cid:3) the(cid:3) full(cid:3) year,(cid:3) consolidated(cid:3) revenues(cid:3) increased(cid:3) 11.0%(cid:3) to(cid:3) $301.8(cid:3) million(cid:3) while(cid:3) blended(cid:3)
comparable(cid:3) restaurant(cid:3) sales(cid:3) (on(cid:3) a(cid:3) 52(cid:882)week(cid:3) comparable(cid:3) basis)(cid:3) rose(cid:3) 2.4%.(cid:3) (cid:3) Restaurant(cid:882)Level(cid:3)
EBITDA(cid:3)expanded(cid:3)7.8%(cid:3)to(cid:3)$67.0(cid:3)million(cid:3)(with(cid:3)one(cid:3)less(cid:3)fiscal(cid:3)operating(cid:3)week(cid:3)in(cid:3)2014)(cid:3)although(cid:3)
adjusted(cid:3) net(cid:3) income(cid:3) fell(cid:3) slightly(cid:3) to(cid:3) $19.5(cid:3) million1(cid:3) as(cid:3) we(cid:3) invested(cid:3) in(cid:3) our(cid:3) human(cid:3) capital.(cid:3) (cid:3) We(cid:3)
added(cid:3) six(cid:3) new(cid:3) restaurants(cid:3) in(cid:3) 2014:(cid:3) the(cid:3) aforementioned(cid:3) Double(cid:3) Eagle(cid:3) in(cid:3) Washington,(cid:3) DC(cid:3) and(cid:3)
five(cid:3)Del(cid:3)Frisco’s(cid:3)Grilles(cid:3)in(cid:3)Burlington,(cid:3)MA;(cid:3)Irvine(cid:3)and(cid:3)Pasadena,(cid:3)CA;(cid:3)North(cid:3)Bethesda,(cid:3)MD;(cid:3)and(cid:3)
Tampa,(cid:3)FL.(cid:3)
(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
1(cid:3)Adjusted(cid:3)Net(cid:3)Income(cid:3)excludes(cid:3)non(cid:882)cash(cid:3)impairment(cid:3)charges(cid:3)of(cid:3)$3.5(cid:3)million(cid:3)and(cid:3)applies(cid:3)an(cid:3)income(cid:3)tax(cid:3)rate(cid:3)of(cid:3)
30%.(cid:3)
(cid:3)
We(cid:3) are(cid:3) delighted(cid:3) to(cid:3) be(cid:3) one(cid:3) of(cid:3) the(cid:3) more(cid:3) compelling(cid:3) growth(cid:3) stories(cid:3) within(cid:3) the(cid:3) upscale(cid:3) dining(cid:3)
industry.(cid:3) (cid:3) After(cid:3) expanding(cid:3) our(cid:3) portfolio(cid:3) by(cid:3) 15%(cid:3) in(cid:3) 2014,(cid:3) we(cid:3) are(cid:3) targeting(cid:3) an(cid:3) additional(cid:3) 15%(cid:3)
growth(cid:3) in(cid:3) 2015(cid:3) based(cid:3) upon(cid:3) seven(cid:3) restaurant(cid:3) openings.(cid:3) (cid:3) New(cid:3) development(cid:3) is(cid:3) certainly(cid:3)
important(cid:3) to(cid:3) us,(cid:3) but(cid:3) we(cid:3) are(cid:3) also(cid:3) constantly(cid:3) working(cid:3) to(cid:3) ensure(cid:3) that(cid:3) our(cid:3) existing(cid:3) properties(cid:3)
uphold(cid:3)all(cid:3)that(cid:3)being(cid:3)‘next(cid:3)generation’(cid:3)entails,(cid:3)providing(cid:3)a(cid:3)vibrant(cid:3)and(cid:3)inviting(cid:3)atmosphere(cid:3)for(cid:3)
each(cid:3)and(cid:3)every(cid:3)occasion.(cid:3)
(cid:3)
Our(cid:3)ability(cid:3)to(cid:3)realize(cid:3)our(cid:3)strategic(cid:3)goals(cid:3)is(cid:3)deeply(cid:3)rooted(cid:3)in(cid:3)our(cid:3)most(cid:3)important(cid:3)resource(cid:3)(cid:882)(cid:882)(cid:3)our(cid:3)
people.(cid:3)(cid:3)We(cid:3)are(cid:3)truly(cid:3)fortunate(cid:3)to(cid:3)work(cid:3)with(cid:3)our(cid:3)incredible(cid:3)teammates(cid:3)and(cid:3)continue(cid:3)to(cid:3)offer(cid:3)
industry(cid:882)leading(cid:3)benefits(cid:3)and(cid:3)a(cid:3)‘best(cid:3)in(cid:3)class’(cid:3)work(cid:3)environment(cid:3)that(cid:3)enables(cid:3)us(cid:3)to(cid:3)attract(cid:3)and(cid:3)
retain(cid:3)talented(cid:3)individuals(cid:3)who(cid:3)make(cid:3)our(cid:3)success(cid:3)possible.(cid:3)(cid:3)
(cid:3)
In(cid:3) closing,(cid:3) with(cid:3) three(cid:3) dynamic(cid:3) brands,(cid:3) significant(cid:3) white(cid:3) space(cid:3) potential(cid:3) and(cid:3) an(cid:3) incredibly(cid:3)
passionate(cid:3) team,(cid:3) our(cid:3) future(cid:3) is(cid:3) bright(cid:3) and(cid:3) we(cid:3) are(cid:3) optimistic(cid:3) about(cid:3) what(cid:3) 2015(cid:3) holds(cid:3) for(cid:3) our(cid:3)
business.(cid:3)(cid:3)Thank(cid:3)you(cid:3)for(cid:3)your(cid:3)continued(cid:3)support(cid:3)of(cid:3)our(cid:3)Company.(cid:3)
(cid:3)
Sincerely,(cid:3)
Mark(cid:3)S.(cid:3)Mednansky(cid:3)
Chief(cid:3)Executive(cid:3)Officer(cid:3)
(cid:3)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)(cid:3)(cid:3)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2014
OR
(cid:133)(cid:3)(cid:3)TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-35611
Del Frisco’s Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
920 S. Kimball Ave., Suite 100,
Southlake, TX
(Address of principal executive offices)
20-8453116
(I.R.S. Employer
Identification No.)
76092
(Zip code)
(817) 601-3421
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each Exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:133) Yes (cid:95) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:133) Yes (cid:95) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. (cid:95) Yes (cid:133) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). (cid:95) Yes (cid:133) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in
Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer
(cid:133)(cid:3)
Accelerated filer
(cid:95)(cid:3)
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:133) Yes (cid:95) No
As of June 17, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock,
$0.001 par value per share, held by non-affiliates was approximately $617,723,000.
Smaller reporting company
(cid:133)(cid:3)
(cid:133)(cid:3)
As of February 27, 2015, 23,443,046 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
Documents Incorporated by Reference: Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than
120 days after the end of the registrant’s fiscal year ended December 30, 2014, are incorporated by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Page
3
10
19
20
21
21
22
24
28
43
43
43
43
44
44
44
44
44
44
45
2
FORWARD LOOKING STATEMENTS
Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission,
in our press releases and in statements made by or with the approval of authorized personnel constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations,
estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting
us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these
words or similar expressions are intended to identify forward- looking statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward- looking
statements. Although we believe the expectations reflected in any forward looking statements are reasonable, such statements are not
guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore,
our actual results could differ materially and adversely from those expressed in any forward- looking statements as a result of various
factors. These differences can arise as a result of the risks described in this Annual Report on Form 10-K, including under Item 1A, Risk
Factors, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in
this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the
date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward
looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot
assure you that the forward looking statements contained in this report will, in fact, transpire.
Item 1.
Business
PART I
We were initially organized as a Delaware limited liability company on June 30, 2006 in connection with the acquisition by our former
principal stockholder, which we refer to along with its affiliates and associates (excluding us and other companies that it or they own as
a result of their investment activities) as Lone Star Fund, of Lone Star Steakhouse & Saloon, Inc., which owned the Del Frisco’s and
Sullivan’s restaurant concepts. Following the acquisition, which we refer to as the Acquisition, Lone Star Fund restructured the company
to separate certain other Lone Star Steakhouse & Saloon concepts by, among other things, spinning off the subsidiaries that owned and
operated those concepts. We converted from a Delaware limited liability company to a Delaware corporation in July 2012 in connection
with our initial public offering. During 2013, we completed three separate secondary offerings on behalf of Lone Star Fund in March,
July and December, which fully liquidated the remaining outstanding shares owned by Lone Star Fund. Unless the context otherwise
indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.
Our Company
We develop, own and operate three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del
Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille. We are a leader in the full-service steakhouse
industry based on average unit volume, or AUV and EBITDA margin. We currently operate 46 restaurants in 20 states and the District of
Columbia. Each of our three restaurant concepts offers steaks as well as other menu selections, such as chops and fresh seafood. These
menu selections are complemented by an extensive, award-winning wine list. Del Frisco’s, Sullivan’s and the Grille are positioned
within the fine dining segment and are designed to appeal to both business and local dining customers. Our Del Frisco’s restaurants are
sited in urban locations to target customers seeking a “destination dining” experience while our Sullivan’s and Grille restaurants are
intended to appeal to a broader demographic, allowing them to be located either in urban areas or in close proximity to affluent
residential neighborhoods. We believe our success reflects consistent execution across all aspects of the dining experience, from the
formulation of proprietary recipes to the procurement and presentation of high quality menu items and delivery of a positive customer
experience.
Del Frisco’s Double Eagle Steak House
We believe Del Frisco’s is one of the premier steakhouse concepts in the United States. The Del Frisco’s brand is defined by its menu,
which includes USDA Prime grade, wet-aged steaks hand-cut at the time of order and a range of other high-quality offerings, including
prime lamb, fresh seafood, and signature side dishes and desserts. It is also distinguished by its “swarming service,” whereby customers
are served simultaneously by multiple servers. Each restaurant has a sommelier to guide diners through an extensive, award-winning
wine list and our bartenders specialize in hand-shaken martinis and crafted cocktails. Del Frisco’s restaurants target customers seeking a
full-service, fine dining steakhouse experience. We believe the décor and ambiance, with both contemporary and classic designs,
enhance our customers’ experience and differentiate Del Frisco’s from other upscale steakhouse concepts. We currently operate 11 Del
Frisco’s steakhouses in eight states and the District of Columbia. These restaurants range in size from 11,000 to 24,000 square feet with
seating capacity for at least 300 people. Annual AUVs per Del Frisco’s restaurant were $14.9 million for the fiscal year ended
December 30, 2014. During the same period, the average check at Del Frisco’s was $110.
3
Sullivan’s Steakhouse
Sullivan’s was created in the mid-1990’s as a complementary concept to Del Frisco’s. The Sullivan’s brand is defined by a fine dining
experience at a more accessible price point, along with a vibrant atmosphere created by an open kitchen, live music and a bar area
designed to be a center for social gathering and entertainment. Each Sullivan’s features fine hand-selected aged steaks, fresh seafood and
a broad list of custom cocktails, along with an extensive selection of award-winning wines. We currently operate 19 Sullivan’s
steakhouses in 15 states. These restaurants range in size from 7,000 to 11,000 square feet with seating capacity for at least 250 people.
Annual AUVs per Sullivan’s restaurant were $4.3 million for the fiscal year ended December 30, 2014. During the same period, the
average check at Sullivan’s was $62.
Del Frisco’s Grille
We developed the Grille, our newest concept, to take advantage of the positioning of the Del Frisco’s brand and to provide greater
potential for expansion due to its smaller size, lower build out cost and more diverse menu. The Grille is an upscale casual concept with
a menu designed to appeal more broadly to both business and casual diners that features a variety of Del Frisco’s prime aged steaks, top
selling signature menu items and a broad selection of the same quality wines. The Grille also offers an assortment of relatively less
expensive entrees, such as flatbread pizzas, sandwiches and salads, all prepared with the same signature flavors, high quality ingredients
and presentation associated with the Del Frisco’s brand. We believe the ambiance of the concept appeals to a wide range of customers
seeking a less formal atmosphere for their dining occasions. We currently operate 16 Grilles in eight states and the District of Columbia.
Additional Grille openings are planned over the next year and we anticipate they will, like existing Grille locations, range in size from
6,500 to 8,500 square feet with seating capacity for at least 200 people. Annual AUVs per Grille restaurant were $5.7 million for the
fiscal year ended December 30, 2014. During the same period, the average check at the Grille’s was $51.We are continuing to target
annual AUVs per Grille restaurant of between $4.5 million and $6.0 million with an average check of between $45 and $55.
Restaurant Industry Overview
According to the National Restaurant Association, U.S. restaurant industry sales in 2014 were $683 billion, an increase of 3.6% over
2013 sales of $659 billion, and were projected to grow to $709 billion in 2015, representing an increase of 3.8%. We compete in the
full-service steak industry, or the FSR Steak category as defined by Technomic, Inc., a research and consulting firm serving the food and
foodservice industries. Each of our concepts fall into the FSR Steak category, which includes fine dining, and is defined as
establishments with a relatively broad menu along with table, counter, and/or booth service and a waitstaff. At the conclusion of 2013,
the FSR Steak category included 8,341 units. The FSR Steak category achieved $16.8 billion in sales in 2013, representing a 6.5%
growth rate over 2012. Restaurants within the FSR Steak category within Technomic’s ranking of the top 500 restaurant chains (as
ranked by U.S. system-wide sales) reported sales growth of 6.2% in 2013 and out-performed the overall Full Service Restaurant
category, which reported sales growth of 2.4% in 2013.
Site Selection and Development
We believe site selection is critical for the potential success of our restaurants. We carefully consider growth opportunities for each of
our restaurant concepts and utilize a customized approach for each concept when selecting and prioritizing markets for expansion. We
perform comprehensive demographic and customer profile studies to evaluate and rationalize the trade areas and sites within each
desired market. We leverage a significant number of sources to produce extensive research and analysis on the dynamics of the local
area, the specific attributes of each site considered and the unit economics we believe we can realize.
For the Del Frisco’s brand, we focus on sites in urban locations that allow us to easily access business clientele and customers seeking a
premium dining experience. Many of our Del Frisco’s restaurants are in marquee locations, including waterfront property, popular
shopping districts and active business centers. We believe the broader appeal of the Sullivan’s and Grille concepts allows us to target
sites in both urban locations as well as more suburban locations in close proximity to affluent residential areas. Our site assessment
analysis includes three primary components: customer profiling (demographics, lifestyle segmentation, spend metrics), trade area and
site evaluation (physical inspection, competitive benchmarking, analysis of business generators/traffic patterns), and financial modeling
(square footage and seat count analysis, predictive sales and margin evaluations, investment cost and return metrics). Understanding our
customers is an essential element of our market planning and site selection processes. We’ve developed a customer profile for each of
our concepts to help guide our development efforts and educate our development partners. We look for the following minimum criteria
in our site trade areas:
4
Population(a)
Population(a)
Daytime
Average HH
Income
Median
Age
Priority Age
Blocks(b)
Traffic
Counts(c)
100,000+
150,000+
$
100,000+
40+
35-44; 45-54;
55-64
40,000+
75,000+
100,000+
$
75,000+
35+
35-44; 45-54
25,000+
75,000+
100,000+
$
75,000+
35+
25-34; 35-44;
45-54
25,000+
(a) Represents the population within a customized target area generally with less than a 20-minute drive time.
(b) Represents the targeted age demographics for a prospective site.
(c) Represents the targeted average daily vehicle traffic for a prospective site.
We expect the size of new Del Frisco’s restaurants to range from 12,000 to 16,000 square feet, new Sullivan’s restaurants to range from
8,000 to 9,000 square feet and new Grille restaurants to range from 6,500 to 8,500 square feet. For the opening of a new restaurant, we
measure our cash investment costs net of landlord contributions and equipment financing, but including pre-opening costs. We target
average cash investment costs of $7.0 million to $9.0 million for a new Del Frisco’s and $3.0 million to $4.5 million for a new Sullivan’s
or Grille. We target a cash-on-cash return of at least 25% beginning in the third operating year across our concepts, consistent with the
average of restaurant openings in recent years. To achieve this return we target a ratio of third year restaurant revenues to net
development costs in the range of approximately 1.25:1 to 1.50:1. We target restaurant-level EBITDA margins of between 20% and 25%
for each of our three concepts.
We believe there are opportunities to open six to eight new restaurants annually, generally composed of one Del Frisco’s and five to
seven Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the
near term. It generally takes nine to 12 months after the signing of a lease or the closing of a purchase to complete construction and open
a new restaurant. Additional time is sometimes required to obtain certain government approvals, permits and licenses, such as liquor
licenses.
Restaurant Operations and Management
Our restaurants have a distinctive combination of food, atmosphere and service in an upscale environment. We believe that our success
reflects the consistency of our execution across all aspects of the dining experience, from the formulation of proprietary recipes, to the
procurement and presentation of high quality menu items and the delivery of a positive customer experience. We strive to provide
quality through a carefully controlled and established supply chain and proven preparation techniques.
Depending on the volume of each restaurant, our typical restaurant-level management team consists of one general manager, two to four
assistant managers, one executive chef and two sous chefs. We also have an experienced team of regional managers to oversee
operations at multiple restaurants. Each of our regional and general managers is broadly trained across Del Frisco’s, Sullivan’s and the
Grille allowing us the flexibility to move appropriate managers into various positions within the organization. To ensure that each
restaurant and its employees meet our demanding performance requirements, we have developed a set of strict operational standards that
are followed in all facets of our operations. For example, these standards are used to develop corporate recipes, many of which are
proprietary, that are adhered to across all of our restaurants. These standards also mandate a quality control process for the menu items in
each of our restaurants our chefs and managers oversee before each shift. This quality control process includes the full preparation of
each item on our menu, other than our steaks, and the testing of each of these items for presentation, taste, portion size and temperature
before they are prepared for our customers. Items that do not meet our rigorous standards are re-made until they do. We believe this
process of full preparation for testing differentiates us from our competition.
The consistent execution at our restaurants is a result of the extensive training and supervision of our employees. Our general managers
are required to undergo eight to 10 weeks of initial training in food quality, customer service, alcohol beverage service, liquor liability
avoidance and employee retention programs. Each of our new hourly employees also typically participates in a training program during
which the employee works under the close supervision of his or her general manager. Our chefs and their assistants receive extensive
training in food quality, food supply management and kitchen maintenance. All of our employees are trained to uphold each concept’s
distinct characteristics and our overall values and operating philosophy.
5
Our training programs are administered by the general manager at each restaurant and supervised by our vice president of people and
education, director of new restaurant openings and a dedicated training director for each concept. This training team ensures that all new
general managers have developed a comprehensive set of tools that they can use to manage their restaurant, including employee
selection, performance management and wage and hourly compliance. We also require each general manager to obtain a mandatory
internal certification in areas of the kitchen, dining room and bar area. Our training team also supports new restaurant openings. Del
Frisco’s, Sullivan’s and the Grille have developed a streamlined training program that ensures employees opening a new restaurant
function as a cohesive team and maintain our high operational and food preparation standards. As a result our corporate and
concept-level infrastructure supports our growth strategy, allowing us to successfully replicate our standards in new restaurants.
Sourcing and Supply Chain
Our ability to maintain the consistent quality of our restaurants depends in part on our ability to procure food and other supplies from
reliable sources in accordance with the specifications for all food products established by our corporate executive chef. We continually
research and evaluate products and supplies to ensure high quality meat, seafood and other menu ingredients. Our executive corporate
chef and director of purchasing work with U.S. Foodservice, our beef distributor, for all beef purchases on a national level. Our director
of purchasing negotiates directly with suppliers of meat, seafood and certain other food and beverage products to ensure consistent
quality and freshness and to obtain competitive prices for items purchased nationally for each concept. Our strong relationships with
national and regional foodservice distributors ensure that our restaurants receive a constant supply of products. Products are shipped
directly to the restaurants, and we do not maintain a central product warehouse or commissary.
Our corporate chef and our director of purchasing also establish strict product specifications for those items purchased at the local level.
We ensure competitive pricing for such supplies by requiring each restaurant’s chef to obtain at least three prices for each locally sourced
product from suppliers approved by the director of purchasing and submit these bids to their regional chef on a weekly basis. Pricing is
then compared weekly on a national basis to ensure management for each restaurant has the most up-to-date information to help with
procurement. Purchasing at each restaurant is directed primarily by each restaurant’s chef, who is trained in our purchasing philosophy
and specifications, and who works with regional and corporate managers to ensure consistent products. Each of our restaurants also has
an in-house sommelier responsible for purchasing wines based on customer preferences, market availability and menu content.
We have not experienced any significant delays in receiving restaurant supplies and equipment. Although we currently do not engage in
futures contracts or other financial risk management strategies with respect to potential price fluctuations, from time to time, we may
opportunistically enter into fixed price beef supply contracts or contracts for other food products or consider other risk management
strategies with regard to our meat and other food costs to minimize the impact of potential price fluctuations. This practice could help
stabilize our food costs during times of fluctuating prices, although there can be no assurances that this will occur.
Marketing and Advertising
We believe that our commitment to providing quality food, hospitality, service and a high level of value for each price point is an
effective approach to attracting customers and maintaining their loyalty. We use a variety of national, regional and local marketing and
public relations techniques intended to maintain and build our customer traffic, maintain and enhance our concepts’ images and
continually improve and refine our upscale experience. For example, in 2010, we initiated a loyalty program that provides credit and
other rewards to our customers based on dollars spent at our restaurants. In addition, local restaurant marketing is important to the
success of our concepts. For example, each restaurant’s general manager cultivates relationships with local businesses and luxury hotels
that drive the restaurant’s business, in particular its private dining business. We also work with a national public relations firm that
coordinates local firms in connection with new restaurant openings. Del Frisco’s, Sullivan’s and the Grille each use specific marketing
and advertising initiatives to position the concepts in the applicable segment of our industry, including ad placement in magazines
targeting the affluent segment of the population.
Competition
The full-service steak industry and general upscale restaurant businesses are highly competitive and fragmented, and the number, size
and strength of competitors vary widely by region, especially within the general upscale restaurant segment. We believe restaurant
competition is based on quality of food products, customer service, reputation, restaurant décor, location, name recognition and price.
Depending on the specific concept, our restaurants compete with a number of restaurants within their markets, both locally-owned
restaurants and restaurants that are part of regional or national chains. The principal competitors for our Del Frisco’s and Sullivan’s
concepts are other upscale steakhouse chains such as Fleming’s Prime Steakhouse and Wine Bar, The Capital Grille, Smith &
Wollensky, The Palm, Ruth’s Chris Steak House and Morton’s The Steakhouse. The principal competitors for our Grille concept also
include other upscale chains such as Hillstone and Seasons 52. Our concepts also compete with additional restaurants in the broader
upscale dining segment.
Seasonality
Our business is subject to seasonal fluctuations comparable to most restaurants. Historically, like other restaurants in our segment, the
percentage of our annual revenues earned during the first and fourth fiscal quarters has been typically higher due to holiday traffic,
increased gift card purchases and redemptions and increased private dining during the year-end holiday season. In addition, we operate
6
on a 52 or 53 week fiscal year ending the last Tuesday of each December, and our first, second and third quarters each contain 12
operating weeks with the fourth quarter containing 16 or 17 operating weeks. The fiscal year ended December 25, 2012 and December
30, 2014 had 52 weeks, while the fiscal year ended December 31, 2013 had 53 weeks.
Intellectual Property
We have registered the names Del Frisco’s, Double Eagle Steak House, Sullivan’s, and Del Frisco’s Grille and have applications
pending to register certain other names and logos as trade names, trademarks or service marks with the United States Patent and
Trademark Office and in certain foreign countries. We have the exclusive right for use of these trademarks throughout the United States,
other than with respect to the following. An unrelated third party that operates a restaurant in Louisville, Kentucky has an indefinite right
to use a specific registration of the Del Frisco’s name in Jefferson and Fayette Counties in Kentucky, Marion County in Indiana and
Hamilton County in Ohio pursuant to a concurrent use agreement. We also agreed not to use the specific registration of the Del Frisco’s
name or grant others the right to use it within 50 miles of any restaurant operated by the third party in the territory. The third party has
paid us aggregate fees of $52,500. A separate, unrelated third party that operates a restaurant in Orlando, Florida had an exclusive license
to use the Del Frisco’s name in Orange, Seminole and Ocala Counties through June 1, 2013 pursuant to a license agreement with no
option to renew. We also agreed not to open a Del Frisco’s, Sullivan’s or Grille before January 1, 2015 in Orange, Seminole and Ocala
Counties. The licensee paid us a one-time fee of $38,000 upon the execution of the agreement in 1993 and a monthly fee of 3% of its total
gross sales less any sales tax through December 31, 2011. We do not have any right to any future or recurring payments from or have any
affirmative payment obligations to either third party. Each third party is responsible for all costs associated with running its respective
location, including all commodity and labor costs and any risks related thereto. We are also aware of names similar to those of our
restaurants used by various third parties in certain limited geographical areas. We believe that our trade names, trademarks and service
marks are valuable to the operation of our restaurants and are important to our marketing strategy.
Government Regulation
Our restaurants are subject to licensing and regulation by state and local health, safety, fire and other authorities, including licensing and
regulation requirements for the sale of alcoholic beverages and food. We maintain the necessary restaurant, alcoholic beverage and retail
licenses, permits and approvals. The development and construction of additional restaurants will also be subject to compliance with
applicable zoning, land use and environmental regulations. Federal and state labor laws govern our relationship with our employees and
affect operating costs. These laws regulate, among other things, minimum wage, overtime, tips, tip credits, unemployment tax rates,
workers’ compensation rates, health insurance, citizenship requirements and other working conditions. Our restaurants are subject in
each state in which we operate to “dram shop” laws, which allow, in general, a person to sue us if that person was injured by an
intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A judgment against us under a dram shop
law could exceed our liability insurance coverage policy limits and could result in substantial liability for us and have a material adverse
effect on our results of operations. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a
material adverse effect on us. We are also subject to the Federal Americans with Disabilities Act, which prohibits discrimination on the
basis of disability in public accommodations and employment.
Employees
As of December 30, 2014, we had 4,745 employees. Many of our hourly employees are employed on a part-time basis to provide
services necessary during peak periods of restaurant operations. None of our employees is covered by a collective bargaining agreement.
We believe that we have good relations with our employees.
7
Executive Officers and Key Employees
The following table sets forth certain information regarding our executive officers and certain of our key employees.
Name
Mark S. Mednansky
Thomas J. Pennison, Jr.
Jeff Carcara
Thomas G. Dritsas
James W. Kirkpatrick
Lisa H. Kislak
William S. Martens
Ray D. Risley
April L. Scopa
Age
57
47
44
43
61
55
42
49
47
Position
Chief Executive Officer; Director; Acting Chairman of the Board
Chief Financial Officer
Chief Operating Officer
Vice President of Culinary & Corporate Executive Chef
Vice President of Real Estate
Vice President of Brand Marketing
Vice President of Development & Construction
Vice President of Operations, Sullivan’s
Vice President of People and Education
Mark S. Mednansky has served as Chief Executive Officer since March 2007, as a member of our board of directors since July 2012 and
as Acting Chairman of the Board since January 2014. Prior to becoming our Chief Executive Officer in connection with the Acquisition,
Mr. Mednansky served in senior management roles with Lone Star Steakhouse & Saloon, Inc. From 2005 until March 2007,
Mr. Mednansky was the Chief Operating Officer of several Lone Star Steakhouse & Saloon restaurant concepts, including Del Frisco’s
and Sullivan’s. Mr. Mednansky also served as Vice President of Operations of the Del Frisco’s and Sullivan’s concepts from 2000 to
2005 and President of the Texas Land & Cattle concept from 2003 to 2006. Mr. Mednansky has over 35 years of restaurant industry
experience and 25 years of experience as a senior operations manager. Prior to joining Lone Star Steakhouse & Saloon, Inc., he was
Director of Operations for Big Four Restaurants from 1997 to 1998, Director of Culinary Services for Dial Corp. from 1990 to 1997 and
Area Manager for Big Four Restaurants from 1985 to 1990.
Thomas J. Pennison, Jr. has served as Chief Financial Officer since November 2011. Prior to joining our company Mr. Pennison served
as Chief Financial Officer for iSeatz Inc., a customized software technology company primarily serving the travel and leisure industry,
from 2009 to 2011. Mr. Pennison also operated his own financial consulting firm in Louisiana from 2008 to 2009 where he provided
financial and business consulting services to clients in the hospitality and other consumer and retail related industries. Prior to that,
Mr. Pennison spent 12 years at Ruth’s Hospitality Group, Inc., a restaurant company focused exclusively on the upscale dining segment,
formerly known as Ruth’s Chris Steak House, Inc., from 1996 to 2008 serving in various capacities, including Senior Vice President and
Chief Financial Officer. Additionally, from 1994 to 1996, Mr. Pennison served as Assistant Corporate Controller of Casino Magic
Corp., with primary responsibilities for corporate finance and SEC reporting, and from 1991 to 1994, Mr. Pennison was at the public
accounting firm KPMG LLP. Mr. Pennison is a member of the Financial Executive Institute and the Louisiana Society of Certified
Public Accountants.
Jeff Carcara has served as Chief Operating Officer since November 2012. Prior to joining our company Mr. Carcara served as senior
director of operations for Seasons 52 , a restaurant concept within Darden’s Specialty Restaurant Group, from 2004 to November, 2012.
While at Darden, Mr. Carcara was responsible for the operations and financial results of the Seasons 52 concept, lead a team of direct
reports including five regional directors, designed an opening and training process, and created a talent management program. From
2003 to 2004, Mr. Carcara served as corporate director of food and beverage for the Kessler Collection Hotels where he led
implementation of department upgrades, re-branded and created several hotel restaurants, and implemented a nationwide purchasing
program. Earlier in his career, Mr. Carcara served in various positions with Houston’s, part of the Hillstone Restaurant Group, and
Darden’s Bahama Breeze restaurant concept.
Thomas G. Dritsas has served as Vice President of Culinary & Corporate Executive Chef since December 2006 and oversees the day to
day culinary operations of Del Frisco’s, Sullivan’s and the Grille. From 2003 to 2006, Mr. Dritsas served as Corporate Executive Chef
for Lone Star Steakhouse & Saloon, Inc., during which time he oversaw the daily culinary operations for each of its concepts.
Mr. Dritsas joined Lone Star Steakhouse & Saloon, Inc. in 1999 and served in various culinary capacities, including as part of new
opening teams. Prior to joining Lone Star Steakhouse & Saloon, Mr. Dritsas assisted in the opening of numerous independent restaurants
and operated his own restaurant.
James W. Kirkpatrick has served as Vice President of Real Estate since February 2012 and oversees real estate matters for our three
concepts, including strategic development and lease administration. Prior to joining our company, Mr. Kirkpatrick served as the Senior
Vice President of Development for Morton’s Restaurant Group, Inc., an operator of company-owned upscale steakhouses, from 2006 to
2012, where he managed all aspects of development including real-estate strategic development to lease administration. Prior to
Morton’s, Mr. Kirkpatrick worked in several leadership roles with Applebee’s International, Inc. from 1999 to 2006, including Senior
Director of Real Estate and Vice President of Real Estate & Construction. Mr. Kirkpatrick has also held a variety of other positions
focused on real estate development with a number of other companies in the restaurant industry including Houlihan’s Restaurants, Inc.,
TGI Friday’s and Pizza Hut, Inc.
Lisa H. Kislak has served as Vice President of Brand Marketing since February 2012 and is responsible for all aspects of marketing for
Del Frisco’s, Sullivan’s and the Grille. Prior to joining our company, Ms. Kislak was the Vice President of Marketing for The Picture
8
People, a privately held company with more than 170 company-owned portrait studios in 34 states, where she managed the company’s
marketing activities. Before that, Ms. Kislak served as a Principal for Premium Knowledge Group, a firm specializing in luxury lifestyle
marketing, from 2007 to 2010. Ms. Kislak started her career with Four Seasons Hotels and Resorts where she held various marketing
roles over a 13-year period, including Vice President of Brand and Relationship Marketing with Wyndham Hotels, Vice President of
Sales and Marketing for Rosewood Hotels & Resorts and Senior Vice President of Marketing for ClubCorp.
William S. Martens has served as Vice President of Development & Construction since 2011 and is responsible for market planning, site
selection, site acquisition and construction for our three concepts. Mr. Martens also oversees concept design, portfolio management and
facilities operations. Mr. Martens has been with us since 2008, previously serving as our Director of Development where he managed all
facets of new unit development and established the infrastructure to support our growth in new and existing markets. Before joining our
company, Mr. Martens served as Vice President of Portfolio Management with Hudson Americas, LLC, an affiliate of Lone Star Fund,
from 2007 to 2008. Prior to Hudson Americas, Mr. Martens spent nine years with Yum! Brands, where he held multiple leadership roles
in Finance and Development, including the position of Senior Manager of Development. In this role, he worked with senior brand
leadership teams to develop market plans, define asset strategies and make capital appropriations decisions for approximately 350 new
restaurants annually.
Ray D. Risley has served as Vice President of Operations for Sullivan’s Steakhouse since October 2013. Prior to becoming Vice
President of Operations, Mr. Risley served as a Regional Manager for restaurants under all three of the Company’s brands, as well as
oversight of the openings of a number of new restaurants. Prior to becoming a Regional Manager, Mr. Risley served as a Regional
General Manager of Del Frisco's and Sullivan's from 2005 to the end of 2007, during which time he also assumed the role of General
Manager of the Del Frisco's restaurant in New York. From 2003 to 2005, Mr. Risley served as Regional Manager for all 15 Sullivan's
Steakhouse restaurants. From 2000 to 2003, Mr. Risley was District General Manager for four Sullivan's Steakhouse restaurants.
Mr. Risley joined Del Frisco’s Restaurant Group in 1998 as the General Manager of the Sullivan's Steakhouse restaurant in Dallas.
Previously, Mr. Risley held various management positions with the Morton's chain of steakhouse restaurants, including General
Manager of the Beverly Hills location and with the original Spago restaurant as the General Manager.
April L. Scopa has served as Vice President of People and Education since June 2011 and is responsible for recruiting, human resources,
talent development and training strategy. Prior to joining our company, Ms. Scopa worked with Landmark Leisure Group, a national
leader in entertainment development since June 2010 and served as VP of People & Development, beginning in January 2011, where she
led the HR, recruiting, new store opening development, employee relations, talent management and personnel development strategy.
Prior to Landmark, Ms. Scopa spent eight years with The Capital Grille, an upscale steakhouse division of Darden Restaurants, as
Director of Operations and Senior Director of Training, where her responsibilities most recently included quality of operations, people
and P&L results for six locations. Prior to The Capital Grille, Ms. Scopa also worked for C.A. Muer Corporation and LongHorn
Steakhouse, both in a training and operations capacity.
Financial Information
The financial information that is required to be included in this Item 1, Business is set forth in Item 6, Selected Financial Data and in
note 13 in the notes to the consolidated financial statements.
Available Information
Our website address is www.dfrg.com, and we also host www.delfriscos.com, www.sullivanssteakhouse.com and
www.delfriscosgrille.com. Information contained on our websites or connected thereto does not constitute a part of this Annual Report
on Form 10-K or any other filing we make with the Securities and Exchange Commission, or the SEC. We make available free of charge
on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, as soon as reasonably practical after we file such material with, or furnish it to, the SEC. Certain of these documents may also be
obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, and other information
regarding issuers that file electronically with the SEC at www.sec.gov. We also make available free of charge on our website our
Corporate Governance Guidelines, our Code of Business Conduct and Ethics, and the Charters of our Audit Committee, Nominating and
Corporate Governance Committee, and Compensation Committee of our Board of Directors.
9
Item 1A. Risk Factors
Changes in general economic conditions, including economic uncertainty, have adversely impacted our business and results of
operations and may continue to do so.
Purchases at our restaurants are discretionary for consumers and we are therefore susceptible to economic slowdowns. We believe that
consumers generally are more willing to make discretionary purchases, including high-end restaurant meals, during favorable economic
conditions. The recent economic uncertainty, continuing disruptions in the overall economy, including high unemployment and financial
market volatility and unpredictability, and the related reduction in consumer confidence negatively affected customer traffic and sales
throughout our industry, including our segment. If the economy experiences a new downturn or there are continued uncertainties
regarding U.S. budgetary and fiscal policies, our customers, including our business clientele, may further reduce their level of
discretionary spending, impacting the frequency with which they choose to dine out or the amount they spend on meals while dining out.
We believe the majority of our weekday revenues in our Del Frisco’s and Sullivan’s concepts are derived from business customers using
expense accounts and our business therefore may be affected by reduced expense account or other business-related dining by our
business clientele. If business clientele were to dine less frequently at our restaurants, our business and results of operations would be
adversely affected as a result of a reduction in customer traffic or average revenues per customer.
There is also a risk that if uncertain economic conditions persist for an extended period of time or worsen, consumers might make
long-lasting changes to their discretionary spending behavior, including dining out less frequently. The ability of the U.S. economy to
handle this uncertainty is likely to be affected by many national and international factors that are beyond our control. These factors,
including national, regional and local politics and economic conditions, disposable consumer income and consumer confidence, also
affect discretionary consumer spending. Continued uncertainty in or a worsening of the economy, generally or in a number of our
markets, and our customers’ reactions to these trends could adversely affect our business and cause us to, among other things, reduce the
number and frequency of new restaurant openings, close restaurants and delay our re-modeling of existing locations.
If our restaurants are not able to compete successfully with other restaurants, our business and results of operations may be
adversely affected.
Our industry is intensely competitive with respect to price, quality of service, restaurant location, ambiance of facilities and type and
quality of food. A substantial number of national and regional restaurant chains and independently owned restaurants compete with us
for customers, restaurant locations and qualified management and other restaurant staff. The principal competitors for our Del Frisco’s
and Sullivan’s concepts are other upscale steakhouse chains such as Fleming’s Prime Steakhouse and Wine Bar, The Capital Grille,
Smith & Wollensky, The Palm, Ruth’s Chris Steak House and Morton’s The Steakhouse. The principal competitors for our Grille
concept also include other upscale chains such as Hillstone and Seasons 52. Our concepts also compete with additional restaurants in the
broader upscale dining segment. Some of our competitors have greater financial and other resources, have been in business longer, have
greater name recognition and are better established in the markets where our restaurants are located or where we may expand. Our
inability to compete successfully with other restaurants may harm our ability to maintain acceptable levels of revenue growth, limit or
otherwise inhibit our ability to grow one or more of our concepts, or force us to close one or more of our restaurants. We may also need
to evolve our concepts in order to compete with popular new restaurant formats or concepts that emerge from time to time, and we
cannot provide any assurance that we will be successful in doing so or that any changes we make to any of our concepts in response will
be successful or not adversely affect our profitability. In addition, with improving product offerings at fast casual restaurants and
quick-service restaurants combined with the effects of uncertain economic conditions and other factors, consumers may choose less
expensive alternatives, which could also negatively affect customer traffic at our restaurants. Any unanticipated slowdown in demand at
any of our restaurants due to industry competition may adversely affect our business and results of operations.
Our future growth depends in part on our ability to open new restaurants and operate them profitably, and if we are unable to
successfully execute this strategy, our results of operations could be adversely affected.
Our financial success depends in part on management’s ability to execute our growth strategy. One key element of our growth strategy is
opening new restaurants. We believe there are opportunities to open six to eight new restaurants annually, generally composed of one
Del Frisco’s and five to seven Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of
new unit growth in the near term. In 2014, we opened a Del Frisco’s in Washington DC as well as Grilles in Burlington, Massachusetts,
Irvine, California, N. Bethesda, Maryland, Tampa, Florida, and Pasadena, California. For the opening of a new restaurant, we measure
our cash investment costs net of landlord contributions and equipment financing, but including pre-opening costs. We target average
cash investment costs of $7.0 million to $9.0 million for a new Del Frisco’s and $3.0 million to $4.5 million for a new Sullivan’s or
Grille.
Our ability to open new restaurants and operate them profitably is dependent upon a number of factors, many of which are beyond our
control, including:
•
•
finding quality site locations, competing effectively to obtain quality site locations and reaching acceptable agreements to
lease or purchase sites;
complying with applicable zoning, land use and environmental regulations and obtaining, for an acceptable cost, required
permits and approvals;
10
•
•
•
•
•
having adequate capital for construction and opening costs and efficiently managing the time and resources committed to
building and opening each new restaurant;
timely hiring and training and retaining the skilled management and other employees necessary to meet staffing needs;
successfully promoting our new locations and competing in their markets;
acquiring food and other supplies for new restaurants from local suppliers; and
addressing unanticipated problems or risks that may arise during the development or opening of a new restaurant or entering
a new market.
A new restaurant typically experiences a “ramp-up” period of approximately 18 months before it achieves our targeted level of
performance. This is due to the costs associated with opening a new restaurant, as well as higher operating costs caused by start-up and
other temporary inefficiencies associated with opening new restaurants. For example, there are a number of factors which may impact
the amount of time and money we commit to the construction and development of new restaurants, including landlord delays, shortages
of skilled labor, labor disputes, shortages of materials, delays in obtaining necessary permits, local government regulations and weather
interference. Once the restaurant is open, how quickly it achieves a desired level of profitability is impacted by many factors, including
the level of market familiarity and acceptance when we enter new markets, as well as the availability of experienced staff and the time
required to negotiate reasonable prices for services and other supplies from local suppliers. Our business and profitability may be
adversely affected if the “ramp-up” period for a new restaurant lasts longer than we expect.
If we are unable to increase our sales or maintain our margins at existing restaurants, our profitability and overall results of
operations may be adversely affected.
Another key aspect of our growth strategy is increasing comparable restaurant sales and maintaining restaurant-level margins.
Improving comparable restaurant sales and maintaining restaurant-level margins depends in part on whether we achieve revenue growth
through increases in the average check and further expand our private dining business at each restaurant. We believe there are
opportunities to increase the average check at our restaurants through, for example, selective introduction of higher priced items and
increases in menu pricing. We also believe that expanding and enhancing our private dining capacity will also increase our restaurant
sales, as our private dining business typically has a higher average check and higher overall margins than regular dining room business.
However, these strategies may prove unsuccessful, especially in times of economic hardship, as customers may not order or enjoy higher
priced items and discretionary spending on private dining events may decrease. Select price increases have not historically adversely
impacted customer traffic; however, we expect that there is a price level at which point customer traffic would be adversely affected. It
is also possible that these changes could cause our sales volume to decrease. If we are not able to increase our sales at existing restaurants
for any reason, our profitability and results of operations could be adversely affected.
The failure to continue to successfully develop our Grille concept could have a material adverse effect on our financial condition
and results of operations.
We launched our new concept, the Grille, in the third quarter of 2011 with the opening of our New York City location. We opened a
second location in Dallas, Texas in the fourth quarter of 2011, locations in Phoenix, Arizona, Washington D.C. and Atlanta, Georgia in
2012, locations in Houston, Texas, Santa Monica, California, Palm Beach, Florida, Fort Worth, Texas, Chestnut Hill, Massachusetts and
Southlake, Texas in 2013 and locations in Burlington, Massachusetts, Irvine, California, N. Bethesda, Maryland, Tampa, Florida, and
Pasadena, California in 2014. We believe that new openings of the Grille are likely to serve as the primary driver of new unit growth in
the near term. Our ability to continue to succeed with this new concept will require significant capital expenditures and management
attention and is subject to certain risks in addition to those of opening a new restaurant under one of our existing concepts, including
customer acceptance of and competition to that concept. If the “ramp-up” period for our Grille restaurants and for our development of
concepts in general does not meet our expectations, our operating results may be adversely affected. In addition, we are targeting
restaurant-level EBITDA margins of between 20% and 25% for the Grille. However, because we face new challenges at the Grille, we
cannot provide any assurance that our operating margins will achieve these levels. As a result, we may need to adjust our pricing and
menu offering strategies. We may not be successful enough to recoup our investments in the concept. There can be no assurance that we
will be able to successfully develop and grow the Grille or any other new concept to a point where it will become profitable or generate
positive cash flow or that it will prove to be a platform for future expansion. We may not be able to attract enough customers to meet
targeted levels of performance at new restaurants because potential customers may be unfamiliar with our concepts or the atmosphere or
menu might not appeal to them. The Grille may even operate at a loss, which could have a material adverse effect on our overall
operating results. In addition, opening a new restaurant concept such as a Grille in an existing market could reduce the revenue of our
existing restaurants in that market. If we cannot successfully execute our growth strategies for the Grille, or if customer traffic generated
by the Grille results in a decline in customer traffic at one of our other restaurants in the same market, our business and results of
operations may be adversely affected.
11
Our growth, including the continued development of the Grille, may strain our infrastructure and resources, which could delay
the opening of new restaurants and adversely affect our ability to manage our existing restaurants.
We plan to continue our current pace of new restaurant growth, including the continued development and promotion of the Grille. We
believe there are opportunities to open six to eight restaurants annually, generally composed of one Del Frisco’s and five to seven
Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the near
term. We typically target an average cash investment of approximately $7.0 million to $9.0 million per restaurant for a Del Frisco’s
restaurant and $3.0 million to $4.5 million for a Sullivan’s or a Grille, in each case net of landlord contributions and equipment financing
and including pre-opening costs. In addition to new openings, we also may “refresh” a number of our Del Frisco’s and Sullivan’s
locations to, among other things, add additional seating, further grow our private dining business and add patio seating. During 2014, we
completed refreshes, with varying scopes of work, of three Sullivan’s at an average cost of $0.8 million per location. Thereafter, we
expect to complete two to four refreshes each year at an approximate cost of $0.5 million per location. This growth and these investments
will increase our operating complexity and place increased demands on our management as well as our human resources, purchasing and
site management teams. While we have committed significant resources to expanding our current restaurant management systems,
financial and management controls and information systems in connection with our recent growth, if this infrastructure is insufficient to
support this expansion, our ability to open new restaurants, including the continued development and promotion of the Grille, and to
manage our existing restaurants, including the expansion of our private dining business, would be adversely affected. If we fail to
continue to improve our infrastructure or if our improved infrastructure fails, we may be unable to implement our growth strategy or
maintain current levels of operating performance in our existing restaurants.
Our New York Del Frisco’s location represents a significant portion of our revenues, and any significant downturn in its
business or disruption in the operation of this location could harm our business, financial condition and results of operations.
Our New York Del Frisco’s location represented approximately 16%, 14% and 13% of our revenues in 2012, 2013 and 2014,
respectively. Accordingly, we are susceptible to any fluctuations in the business at our New York Del Frisco’s location, whether as a
result of adverse economic conditions, negative publicity, changes in customer preferences or for other reasons. In addition, any natural
disaster, prolonged inclement weather, act of terrorism or national emergency, accident, system failure or other unforeseen event in or
around New York City could result in a temporary or permanent closing of this location, could influence potential customers to avoid
this geographic region or this location in particular or otherwise lead to a decrease in revenues. Any significant interruption in the
operation of this location or other reduction in sales could adversely affect our business and results of operations.
Negative customer experiences or negative publicity surrounding our restaurants or other restaurants could adversely affect
sales in one or more of our restaurants and make our brands less valuable.
The quality of our food and our restaurant facilities are two of our competitive strengths. Therefore, adverse publicity, whether or not
accurate, relating to food quality, public health concerns, illness, safety, injury or government or industry findings concerning our
restaurants, restaurants operated by other foodservice providers or others across the food industry supply chain could affect us more than
it would other restaurants that compete primarily on price or other factors. A restaurant in Louisville, Kentucky has the right to use, and
uses, a specific registration of the Del Frisco’s name pursuant to a concurrent use agreement and we licensed the use of the Del Frisco’s
name to one restaurant in Orlando, Florida through June 1, 2013, as described in greater detail in “Business—Intellectual Property.” We
do not own or control the Louisville restaurant, and we did not own or control the Orlando restaurant, but any adverse publicity relating
to those operations could negatively affect us. In addition, although we would not be legally liable for any such failure, because the
Louisville and Orlando restaurants operate or operated under one of our brand names, we may be subject to litigation as a result of either
restaurant’s failure to comply with food quality, preparation or other applicable rules and regulations. If customers perceive or
experience a reduction in our food quality, service or ambiance or in any way believe we have failed to deliver a consistently positive
experience, the value and popularity of one or more of our concepts could suffer. Any shifts in consumer preferences away from the
kinds of food we offer, particularly beef, whether because of dietary or other health concerns or otherwise, would make our restaurants
less appealing and could reduce customer traffic and/or impose practical limits on pricing.
Negative publicity relating to the consumption of beef, including in connection with food-borne illness, could result in reduced
consumer demand for our menu offerings, which could reduce sales.
Instances of food-borne illness, including Bovine Spongiform Encephalopathy, which is also known as BSE or mad cow disease,
aphthous fever, which is also known as hoof and mouth disease, as well as hepatitis A, lysteria, salmonella and e-coli, whether or not
found in the United States or traced directly to one of our suppliers or our restaurants, could reduce demand for our menu offerings. Any
negative publicity relating to these and other health-related matters, such as the confirmation of a case of mad cow disease in a dairy cow
in California in April 2012, may affect consumers’ perceptions of our restaurants and the food that we offer, reduce customer visits to
our restaurants and negatively impact demand for our menu offerings. Adverse publicity relating to any of these matters, beef in general
or other similar concerns could adversely affect our business and results of operations.
12
Increases in the prices of, and/or reductions in the availability of commodities, primarily beef, could adversely affect our
business and results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in commodity costs, which have a substantial effect on
our total costs. For example, we purchase large quantities of beef, particularly USDA prime beef and premium choice beef. Our beef
costs represented approximately 34%, 33% and 34% of our food and beverage costs during 2012, 2013 and 2014, respectively, and we
currently do not purchase beef pursuant to any long-term contractual arrangements with fixed pricing or use futures contracts or other
financial risk management strategies to reduce our exposure to potential price fluctuations. The market for USDA prime beef and
premium choice beef is particularly volatile and is subject to extreme price fluctuations due to seasonal shifts, climate conditions,
the price of feed, industry demand, energy demand and other factors. For example, during 2011 and 2012, beef costs were impacted by
(i) the summer drought in Texas and Oklahoma, (ii) the price of corn, (iii) the entrance of major supermarkets into the USDA choice
beef market and (iv) new free trade agreements increasing exports. Although we currently do not engage in futures contracts or other
financial risk management strategies with respect to potential price fluctuations, from time to time, we may opportunistically enter into
fixed price beef supply contracts or contracts for other food products or consider other risk management strategies with regard to our
meat and other food costs to minimize the impact of potential price fluctuations. This practice could help stabilize our food costs during
times of fluctuating prices, although there can be no assurances that this will occur. However, because our restaurants feature USDA
prime beef and premium choice beef, we generally expect to purchase these types of beef even if we have not entered into any such
arrangements and the price increased significantly. The prices of other commodities can affect our costs as well, including corn and other
grains, which are ingredients we use regularly and are also used as cattle feed and therefore affect the price of beef. Energy prices can
also affect our bottom line, as increased energy prices may cause increased transportation costs for beef and other supplies, as well as
increased costs for the utilities required to run each restaurant. Historically we have passed increased commodity and other costs on to
our customers by increasing the prices of our menu items. While we believe these price increases did not historically affect our customer
traffic, there can be no assurance additional price increases would not affect future customer traffic. If prices increase in the future and
we are unable to anticipate or mitigate these increases, or if there are shortages for USDA Prime beef and premium choice beef, our
business and results of operations would be adversely affected.
We depend upon frequent deliveries of food and other supplies, in most cases from a limited number of suppliers, which
subjects us to the possible risks of shortages, interruptions and price fluctuations.
Our ability to maintain consistent quality throughout our restaurants depends in part upon our ability to acquire fresh products, including
USDA prime beef and premium choice beef, fresh seafood, quality produce and related items from reliable sources in accordance with
our specifications. In addition, we rely on one or a limited number of suppliers for certain ingredients. For example, U.S. Foodservice
supplies all of the beef for our restaurants and has done so since June of 2009. This contract expires in June 2015 and can be terminated
by either party for any reason upon 90 days advanced notice. This dependence on one or a limited number of suppliers, as well as the
limited number of alternative suppliers of USDA prime beef and premium choice beef and quality seafood, subjects us to the possible
risks of shortages, interruptions and price fluctuations in beef and seafood. If any of our suppliers is unable to obtain financing necessary
to operate its business or its business is otherwise adversely affected, does not perform adequately or otherwise fails to distribute
products or supplies to our restaurants, or terminates or refuses to renew any contract with us, particularly with respect to one of the
suppliers on which we rely heavily for specific ingredients, we may be unable to find an alternative supplier in a short period of time or
if we can, it may not be on acceptable terms. Our inability to replace our suppliers in a short period of time on acceptable terms could
increase our costs or cause shortages at our restaurants that may cause us to remove certain items from a menu, increase the price of
certain offerings or temporarily close a restaurant, which could adversely affect our business and results of operations.
We depend on the services of key executives, and our business and growth strategy could be materially harmed if we were to lose
these executives and were unable to replace them with executives of equal experience and capabilities.
Some of our senior executives, such as Mark S. Mednansky, our Chief Executive Officer, are particularly important to our success
because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key
personnel, identifying expansion opportunities and arranging necessary financing. We have employment agreements with all members
of senior management; however, we cannot prevent our executives from terminating their employment with us. Losing the services of
any of these individuals could adversely affect our business until a suitable replacement could be found. We also believe that they could
not quickly be replaced with executives of equal experience and capabilities and their successors may not be as effective. We do not
maintain key person life insurance policies on any of our executives.
Changes in consumer preferences and discretionary spending patterns could adversely impact our business and results of
operations.
The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer
preferences, tastes and eating and purchasing habits. Our success depends in part on our ability to anticipate and respond quickly to
changing consumer preferences, as well as other factors affecting the restaurant industry, including new market entrants and
demographic changes. Shifts in consumer preferences away from upscale steakhouses or beef, which is a significant component of our
Del Frisco’s and Sullivan’s concepts’ menus and appeal, whether as a result of economic, competitive or other factors, could adversely
affect our business and results of operations.
13
Restaurant companies, including ours, have been the target of class action lawsuits and other proceedings alleging, among other
things, violations of federal and state workplace and employment laws. Proceedings of this nature, if successful, could result in
our payment of substantial damages.
In recent years, we and other restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of
federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits
have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging
violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, the sharing of tips
amongst certain employees, overtime eligibility of assistant managers and failure to pay for all hours worked. Although we maintain
what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities
with respect to these matters. Accordingly, if we are required to pay substantial damages and expenses as a result of these types or other
lawsuits our business and results of operations would be adversely affected.
Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they
suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food borne illness and relating to
notices with respect to chemicals contained in food products required under state law. We are also subject to a variety of other claims
from third parties arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging
violations of federal and state laws. In addition, our restaurants are subject to state “dram shop” or similar laws which generally allow a
person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our
restaurants. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains
have led to the obesity of certain of their customers. In addition, we may also be subject to lawsuits from our employees or others
alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number
of these lawsuits have resulted in the payment of substantial damages by the defendants.
Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time
and money away from our operations. In addition, they may generate negative publicity, which could reduce customer traffic and sales.
Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts
to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any
claims or any adverse publicity resulting from claims could adversely affect our business and results of operations.
Our business is subject to substantial government regulation.
Our business is subject to extensive federal, state and local government regulation, including regulations related to the preparation and
sale of food, the sale of alcoholic beverages, the sale and use of tobacco, zoning and building codes, land use and employee, health,
sanitation and safety matters. For example, the preparation, storing and serving of food and the use of certain ingredients is subject to
heavy regulation. Alcoholic beverage control regulations govern various aspects of our restaurants’ daily operations, including the
minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and
storage. Typically our restaurants’ licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at
any time for cause. In addition, because we operate in a number of different states, we are also required to comply with a number of
different laws covering the same topics. The failure of any of our restaurants to timely obtain and maintain necessary governmental
approvals, including liquor or other licenses, permits or approvals required to serve alcoholic beverages or food could delay or prevent
the opening of a new restaurant or prevent regular day-to-day operations, including the sale of alcoholic beverages, at a restaurant that is
already operating, any of which would adversely affect our business and results of operations.
In addition, the costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, working
conditions, overtime and tip credits, health care, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other
laws and regulations such as those governing access for the disabled, including the Americans with Disabilities Act. For example, the
Federal Patient Protection and Affordable Care Act, or PPACA, which was enacted on March 23, 2010, among other things, includes
guaranteed coverage requirements and imposes new taxes on health insurers and health care benefits that could increase the costs of
providing health benefits to employees. In addition, because we have a significant number of restaurants located in certain states,
regulatory changes in these states could have a disproportionate impact on our business. If any of the foregoing increased costs and we
were unable to offset the change by increasing our menu prices or by other means, our business and results of operations could be
adversely affected.
Government regulation can also affect customer traffic at our restaurants. A number of states, counties and cities have enacted menu
labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information. For example, the PPACA establishes a
uniform, federal requirement for restaurant chains with 20 or more locations operating under the same trade name and offering
substantially the same menus to post nutritional information on their menus, including the total number of calories. The law also requires
such restaurants to provide to consumers, upon request, a written summary of detailed nutritional information, including total calories
and calories from fat, total fat, saturated fat, cholesterol, sodium, total carbohydrates, complex carbohydrates, sugars, dietary fiber, and
total protein in each serving size or other unit of measure, for each standard menu item. The FDA is also permitted to require additional
nutrient disclosures, such as trans-fat content. We are not currently subject to requirements to post nutritional information on our menus
or in our restaurants, but because we currently operate 19 Sullivan’s locations, if we open a new Sullivan’s location we would be subject
to the rules established by the FDA under the PPACA once they become effective. The publication of the final rules has been delayed
14
and the FDA has not provided an expected date for their publication. Our compliance with the PPACA or other similar laws to which we
may become subject could reduce demand for our menu offerings, reduce customer traffic and/or reduce average revenue per customer,
which would have an adverse effect on our revenue. Also, further government regulation restricting smoking in restaurants and bars,
may reduce customer traffic. Any reduction in customer traffic related to these or other government regulations could affect revenues
and adversely affect our business and results of operations.
To the extent that governmental regulations impose new or additional obligations on our suppliers, including, without limitation,
regulations relating to the inspection or preparation of meat, food and other products used in our business, product availability could be
limited and the prices that our suppliers charge us could increase. We may not be able to offset these costs through increased menu
prices, which could have a material adverse effect on our business. If any of our restaurants were unable to serve particular food
products, even for a short period of time, or if we are unable to offset increased costs, our business and results of operations could be
adversely affected.
Labor shortages or changes to wage laws could harm our business.
Our success depends on our ability to attract, motivate, and retain employees. If we are unable to continue to recruit and retain qualified
individuals, our business and growth could be adversely affected. In additions, we have a substantial number of hourly employees who
are paid wage rates at or based on the federal or state minimum wage and who rely on tips as a large portion of their income. Any changes
in the city, state, or federal laws affecting the wages we pay our employees, including an increase in the minimum wage, such as the
increase in the minimum wage on July 24, 2009 to $7.25 per hour under the Federal Minimum Wage Act of 2007, could increase our
costs and have a material adverse impact on our results of operations. Certain states in which we operate restaurants have adopted or are
considering adopting minimum wage statutes that exceed the federal minimum wage as well. We may be unable or unwilling to increase
our prices in order to pass these increased labor costs on to our customers, in which case, our business and results of operations could be
adversely affected.
We occupy most of our restaurants under long-term non-cancelable leases for which we may remain obligated to perform under
even after a restaurant closes, and we may be unable to renew leases at the end of their terms. We also guarantee five leases with
third parties for former affiliates of Lone Star Fund.
All but one of our restaurants are located in leased premises. Many of our current leases are non-cancelable and typically have terms
ranging from five to 15 years with renewal options for terms ranging from five to 10 years. We believe that leases that we enter into in the
future will be on substantially similar terms. If we were to close or fail to open a restaurant at a location we lease, we would generally
remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base
rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in respect
of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. 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. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which could subject us to construction
and other costs and risks. We also guarantee five leases entered into by various operating subsidiaries of Lone Star Steakhouse & Saloon
that were entered into by certain of the Casual Dining Companies prior to the acquisition of Lone Star Steakhouse and Saloon by Lone
Star Fund, which is discussed in greater detail in “Business” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” At December 30, 2014, the maximum potential amount of future lease payments we could be required to make as
a result of the guarantees was $0.9 million. The entities that are party to these leases are not controlled or managed by us. See Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations. If we are required to make payments under
one of our leases after a restaurant closes or one of the leases that we guarantee, or if we are unable to renew our restaurant leases, our
business and results of operations could be adversely affected.
The impact of negative economic factors, including the availability of credit, on our landlords and other retail center tenants
could negatively affect our financial results.
Negative effects on our existing and potential landlords due to any inaccessibility of credit and other unfavorable economic factors may,
in turn, adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing
under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to
us. If any landlord files for bankruptcy protection, the landlord may be able to reject our lease in the bankruptcy proceedings. While we
would have the option to retain our rights under the lease, we could not compel the landlord to perform any of its obligations and would
be left with damages as our sole recourse. In addition, if our landlords are unable to obtain sufficient credit to continue to properly
manage their retail sites, we may experience a drop in the level of quality of such retail centers. Our development of new restaurants may
also be adversely affected by the negative financial situations of developers and potential landlords. In recent years, many landlords have
delayed or cancelled development projects (as well as renovations of existing projects) due to the instability in the credit markets and
declines in consumer spending, which has reduced the number of high-quality locations available that we would consider for our new
restaurants. In addition, several other tenants at retail centers in which we are located or where we have executed leases have ceased
operations or, in some cases, have deferred openings or failed to open after committing to do so. These failures may lead to reduced
customer traffic and a general deterioration in the surrounding retail centers in which our restaurants are located and may contribute to
lower customer traffic at our restaurants. If any of the foregoing affect any of our landlords or their other retail tenants our business and
results of operations may be adversely affected.
15
Fixed rental payments account for a significant portion of our operating expenses, which increases our vulnerability to general
adverse economic and industry conditions and could limit our operating and financing flexibility.
Payments under our operating leases account for a significant portion of our operating expenses and we expect the new restaurants we
open in the future will similarly be leased by us. Specifically, payments under our operating leases accounted for 12.8%, 12.8% and
13.4% of our restaurant operating expenses in 2012, 2013 and 2014, respectively. Our substantial operating lease obligations could have
significant negative consequences, including:
•
•
•
•
•
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring a substantial portion of our available cash flow to be applied to our rental obligations, thus reducing cash available
for other purposes;
limiting our flexibility in planning for or reacting to changes in our business or the industry in which we compete; and
placing us at a disadvantage with respect to some of our competitors.
We depend on cash flow from operations to pay our lease obligations and to fulfill our other cash needs. If our business does not generate
sufficient cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under our credit
facility or other sources, we may not be able to meet our operating lease obligations, grow our business, respond to competitive
challenges or fund our other liquidity and capital needs, which could adversely affect our business and results of operations.
Any future indebtedness we may incur may limit our operational and financing flexibility and negatively impact our business.
We currently have a credit facility that provides for a revolving loan of up to $25.0 million which we entered into in October 2012. There
were no outstanding borrowings under this facility at December 30, 2014. We may incur substantial additional indebtedness in the
future. Our credit facility, and other debt instruments we may enter into in the future, may have important consequences to us, including
the following:
•
•
•
our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes
may be impaired;
the requirement that we use a significant portion of our cash flows from operations to pay interest on any outstanding
indebtedness, which would reduce the funds available to us for operations and other purposes; and
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited.
We expect that we will depend primarily on cash generated by our operations for funds to pay our expenses and any amounts due under
our credit facility and any other indebtedness we may incur. Our ability to make these payments depends on our future performance,
which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not
generate sufficient cash flows from operations in the future and our currently anticipated growth in revenues and cash flows may not be
realized, either or both of which could result in our being unable to repay indebtedness or to fund other liquidity needs. If we do not have
enough money, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money, in each case on
terms that are not acceptable to us. In addition, the terms of existing or future debt agreements, including our existing credit facility, may
restrict us from adopting any of these alternatives. Our ability to recapitalize and incur additional debt in the future could also delay or
prevent a change in control of our company, make some transactions more difficult and impose additional financial or other covenants
on us. In addition, any significant levels of indebtedness in the future could place us at a competitive disadvantage compared to our
competitors that may have proportionately less debt and could make us more vulnerable to economic downturns and adverse
developments in our business. Our indebtedness and any inability to pay our debt obligations as they come due or inability to incur
additional debt could adversely affect our business and results of operations.
The terms of our credit facility impose operating and financial restrictions on us.
Our credit facility contains a number of significant restrictions and covenants that generally limit our ability to, among other things:
•
•
•
pay dividends or purchase stock or make other restricted payments to our stockholders;
incur additional indebtedness;
issue guarantees;
• make investments;
•
•
use assets as security in other transactions;
sell assets or merge with or into other companies;
• make capital expenditures;
16
•
•
•
enter into transactions with affiliates;
sell equity or other ownership interests in our subsidiaries; and
create or permit restrictions on our subsidiaries’ ability to make payments to us.
Our credit facility limits our ability to engage in these types of transactions even if we believed that a specific transaction would
contribute to our future growth or improve our operating results. Our credit facility also requires us to achieve specified financial and
operating results and maintain compliance with specified financial ratios. Specifically, these covenants require that we have a fixed
charge coverage ratio of greater than 2.00 and a leverage ratio of less than 1.00. As of December 30, 2014, we were in compliance with
these tests. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our ability to comply
with these provisions may be affected by events beyond our control. A breach of any of these provisions or our inability to comply with
required financial ratios in our credit facility could result in a default under the credit facility in which case the lenders will have the right
to declare all borrowings to be immediately due and payable. If we are unable to repay all borrowings when due, whether at maturity or
if declared due and payable following a default, the lenders would have the right to proceed against the collateral granted to secure the
indebtedness. If we breach these covenants or fail to comply with the terms of the credit facility and the lenders accelerate the amounts
outstanding under the credit facility our business and results of operations would be adversely affected.
Our credit facility carries floating interest rates, thereby exposing us to market risk related to changes in interest rates to the extent there
are borrowings outstanding thereunder. Accordingly, our business and results of operations may be adversely affected by changes in
interest rates. Assuming a one percentage point increase on our base interest rate on our credit facility and a full drawdown on the credit
facility, our interest expense would increase by approximately $0.3 million over the course of 12 months.
We could face labor shortages that could slow our growth and adversely impact our ability to operate our restaurants.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including
restaurant managers, kitchen staff and servers, necessary to keep pace with our anticipated expansion schedule and meet the needs of our
existing restaurants. A sufficient number of qualified individuals of the requisite caliber to fill these positions may be in short supply in
some communities. Competition in these communities for qualified staff could require us to pay higher wages and provide greater
benefits. Any inability to recruit and retain qualified individuals may also delay the planned openings of new restaurants and could
adversely impact our existing restaurants. Any such inability to retain or recruit qualified employees, increased costs of attracting
qualified employees or delays in restaurant openings could adversely affect our business and results of operations.
The failure to enforce and maintain our intellectual property rights could enable others to use names confusingly similar to the
names and marks used by our restaurants, which could adversely affect the value of our brands.
We have registered the names Del Frisco’s, Double Eagle Steak House, Sullivan’s, Del Frisco’s Grille and have applications pending to
register certain other names and logos used by our restaurants as trade names, trademarks or service marks with the United States Patent
and Trademark Office and in certain foreign countries. We have the exclusive right to use these trademarks throughout the United States,
other than with respect to one restaurant in Louisville, Kentucky, including the 50 mile surrounding area, where an unrelated third party
has the right to use a specific registration of the Del Frisco’s name in Jefferson and Fayette Counties in Kentucky, Marion County in
Indiana and Hamilton County in Ohio. In addition, one restaurant in Orlando, Florida operated by an unrelated third party had a license
to use the Del Frisco’s name in Orange, Seminole and Ocala counties through June 1, 2013. See Item 1, Business. The success of our
business depends in part on our continued ability to utilize our existing trade names, trademarks and service marks as currently used in
order to increase our brand awareness. In that regard, we believe that our trade names, trademarks and service marks are valuable assets
that are critical to our success. The unauthorized use or other misappropriation of our trade names, trademarks or service marks could
diminish the value of our brands and restaurant concepts and may cause a decline in our revenues and force us to incur costs related to
enforcing our rights. In addition, the use of trade names, trademarks or service marks similar to ours in some markets may keep us from
entering those markets. While we may take protective actions with respect to our intellectual property, these actions may not be
sufficient to prevent, and we may not be aware of all incidents of, unauthorized usage or imitation by others. Any such unauthorized
usage or imitation of our intellectual property, including the costs related to enforcing our rights, could adversely affect our business and
results of operations.
Information technology system failures or breaches of our network security, including with respect to confidential information,
could interrupt our operations and adversely affect our business.
We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants.
Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power
loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and
other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our
operations could subject us to litigation or actions by regulatory authorities. In addition, the majority of our restaurant sales are by credit
or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their
customers has been stolen. If this or another type of breach occurs at one of our restaurants, we may become subject to lawsuits or other
proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card
information. Although we employ both internal resources and external consultants to conduct auditing and testing for weaknesses in our
17
systems, controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to
prevent such damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful.
Any such claim, proceeding or action by a regulatory authority, or any adverse publicity resulting from these allegations, could adversely
affect our business and results of operations.
We expect to issue options, restricted stock and other forms of stock-based compensation in the future, which have the potential
to dilute stockholder value and cause the price of our common stock to decline.
As of December 30, 2014, we had options outstanding to purchase 1,429,000 shares of common stock under our equity incentive plan,
454,750 of which have vested and are currently exercisable. In addition, we expect to offer stock options, restricted stock and other
forms of stock-based compensation to our directors, officers and employees in the future. If the options that we issue are exercised, or
any restricted stock that we may issue vests, and those shares are sold into the public market, the market price of our common stock may
decline. In addition, the availability of shares of common stock for award under our equity incentive plan, or the grant of stock options,
restricted stock or other forms of stock-based compensation, may adversely affect the market price of our common stock.
We are a holding company and depend on the cash flow of our subsidiaries.
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct
substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash flow and our
ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and the
payment of funds by our subsidiaries directly or indirectly to us in the form of dividends, distributions and other payments. Any inability
on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and
results of operations.
Provisions of our charter documents, Delaware law and other documents could discourage, delay or prevent a merger or
acquisition at a premium price.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in
our management. For example, our certificate of incorporation and bylaws include provisions that:
•
•
•
•
•
•
permit us to issue without stockholder approval preferred stock in one or more series and, with respect to each series, fix the
number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series
and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the
series;
prevent stockholders from calling special meetings;
prevent the ability of stockholders to act by written consent;
limit the ability of stockholders to amend our certificate of incorporation and bylaws;
require advance notice for nominations for election to the board of directors and for stockholder proposals; and
establish a classified board of directors with staggered three-year terms.
These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquiror
may offer a premium price for our common stock.
We are also subject to Section 203 of the Delaware General Corporation Law, or the DGCL, which, subject to certain exceptions,
prohibits us from engaging in any business combination with any interested stockholder, as defined in that section, for a period of three
years following the date on which that stockholder became an interested stockholder. In addition, our equity incentive plan permits
vesting of stock options and restricted stock, and payments to be made to the employees thereunder in certain circumstances, in
connection with a change of control of our company, which could discourage, delay or prevent a merger or acquisition at a premium
price.
We are an “emerging growth company” and we cannot be certain if we will be able to maintain such status.
We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, and we have
adopted certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies.” These exemptions include, but are not limited to, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding
executive compensation in our periodic reports, proxy statements and registration statements, and exemptions from the requirements of
holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We
may remain as an “emerging growth company” for up to five full fiscal years following our initial public offering, which occurred July
26, 2012. We would cease to be an “emerging growth company,” and therefore not be able to rely upon the above exemptions, if we have
18
more than $1 billion in annual revenues in a fiscal year, we issue more than $1 billion of non-convertible debt over a three-year period or
we have more than $700 million in market value of our common stock held by non-affiliates as of any June 30 before the end of the five
full fiscal years.
If we are unable to implement and maintain the effectiveness of our internal control over financial reporting, our independent
registered public accounting firm may not be able to provide an unqualified report on our internal controls.
Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting
Oversight Board, our management is required to report on the effectiveness of our internal control over financial reporting. In addition,
once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related
thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal
control over financial reporting under Section 404. We may encounter problems or delays in completing the implementation of any
changes necessary to our internal control over financial reporting to conclude such controls are effective. If we conclude and, once we no
longer qualify as an “emerging growth company” under the JOBS Act, our independent registered public accounting firm concludes, that
our internal control over financial reporting is not effective, investor confidence and our stock price could decline.
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby
subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NASDAQ listing rules, and result in a
breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss
of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also
could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over
financial reporting. This could materially adversely affect us and lead to a decline in the price of our common stock.
As a public company, we incur significant costs and face demands on our management to comply with the SEC and NASDAQ
requirements.
We are required as a public company to comply with an extensive body of regulations, including provisions of the Sarbanes-Oxley Act
as well as rules and regulations promulgated by the SEC and NASDAQ. These rules and regulations could result in substantial legal and
financial compliance costs and make some activities more time-consuming and costly, and these costs and demands may increase after
we are no longer an “emerging growth company.” In addition, we incur costs associated with our public company reporting requirements
and maintaining directors’ and officers’ liability insurance. Furthermore, our management has increased demands on its time in order to
ensure we comply with public company reporting requirements and the compliance requirements of the Sarbanes-Oxley Act, as well as
any rules and requirements subsequently implemented by the SEC and NASDAQ.
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or
FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret
appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial
results, and could affect the reporting of transactions completed before the announcement of a change. For example, the FASB, together
with the International Accounting Standards Board, has proposed a comprehensive set of changes in accounting for leases. While the
Exposure Draft addresses new financial accounting rules for both, lessors and lessees, the primary focus will likely be on changes
affecting lessees. The lease accounting model contemplated by the new standard is a “right of use” model that assumes that each lease
creates an asset (the lessee’s right to use the leased asset) and a liability (the future rent payment obligations) which should be reflected
on a lessee’s balance sheet to fairly represent the lease transaction and the lessee’s related financial obligations. All of our restaurant
leases are accounted for as operating leases, with no related assets and liabilities on our balance sheet. However, changes in lease
accounting rules or their interpretation, or changes in underlying assumptions, estimates or judgments by us could significantly change
our reported or expected financial performance. In addition, the SEC has announced a multi-year plan that could ultimately lead to the
use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect
on our reported financial results.
Item 1B. Unresolved Staff Comments
None.
19
Item 2.
Properties
Properties
We currently operate 46 restaurants across 20 states and the District of Columbia. We currently lease all of our restaurants, except for
one Del Frisco’s restaurant. We have also purchased a land and building site related to a contemplated 2015 opening. The majority of our
leases provide for minimum annual rents with some containing percentage-of-sales rent provisions, against which the minimum rent
may be applied. Typically, our lease terms are five to 15 years at initiation, with two to four five-year extension options. None of our
restaurant leases can be terminated early by the landlord other than as is customary in the context of a breach or default under the
applicable lease.
Opening Date
Del Frisco’s Double Eagle Steak House
September 1995
April 1996
January 1997
March 2000
July 2000
May 2007
November 2007
November 2008
April 2011
December 2012
September 2014
Del Frisco’s Grille
August 2011
November 2011
June 2012
July 2012
October 2012
March 2013
July 2013
September 2013
October 2013
December 2013
December 2013
June 2014
August 2014
September 2014
November 2014
December 2014
Sullivan’s Steakhouse
May 1996
November 1996
October 1997
December 1997
January 1998
July 1998
September 1998
September 1998
December 1998
January 1999
January 1999
June 1999
August 1999
December 2000
July 2007
July 2008
Dallas
Ft. Worth
Denver
New York
Las Vegas
Charlotte
Houston
Philadelphia
Boston
Chicago
Washington D.C.
New York
Dallas
Phoenix
Washington D.C.
Atlanta
Houston
Santa Monica
Palm Beach
Fort Worth
Chestnut Hill
Southlake
Burlington
Irvine
N. Bethesda
Tampa
Pasadena
Austin
Indianapolis
Baton Rouge
Wilmington
Charlotte
Houston
Anchorage
King of Prussia
Naperville
Palm Desert
Denver
Chicago
Raleigh
Tucson
Omaha
Leawood
20
City
State
Lease/Own
Texas
Texas
Colorado
New York
Nevada
North Carolina
Texas
Pennsylvania
Massachusetts
Illinois
New York
Texas
Arizona
Georgia
Texas
California
Florida
Texas
Massachusetts
Texas
Massachusetts
California
Maryland
Florida
California
Own
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Texas
Indiana
Louisiana
Delaware
North Carolina
Texas
Alaska
Pennsylvania
Illinois
California
Colorado
Illinois
North Carolina
Arizona
Nebraska
Kansas
Lease (1)
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Opening Date
Sullivan’s Steakhouse (cont.)
November 2008
February 2009
June 2010
City
State
Lease/Own
Lincolnshire
Baltimore
Seattle
Illinois
Maryland
Washington
Lease
Lease
Lease
(1) Current lease term expires November 30, 2015, but can be renewed at our election for an additional five year term with advance
written notice.
Our corporate headquarters is located in Southlake, Texas. We lease the property for our corporate headquarters.
Item 3.
Legal Proceedings
We are subject to various claims and legal actions, including class actions, arising in the ordinary course of business from time to time,
including claims related to food quality, personal injury, contract matters, health, wage and employment and other issues. While it is
impossible at this time to determine with certainty the ultimate outcome of these proceedings, lawsuits and claims, management believes
that adequate provisions have been made and that the ultimate outcomes will not have a material adverse effect on our financial position.
Item 4. Mine Safety Disclosure
Not applicable.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities
Information Regarding our Common Stock
Our common stock has been listed on the Nasdaq Global Select Market under the symbol “DFRG” and registered under Section 12 of
the Securities and Exchange Act since July 27, 2012, the date of our initial public offering. The following table sets forth, for the periods
indicated, the high and low sales prices per share for our common stock as quoted by the Nasdaq Global Select Market.
2014
First Quarter (January 1, 2014 – March 25, 2014)
Second Quarter (March 26, 2014 – June 17, 2014)
Third Quarter (June 18, 2014 – September 9, 2014)
Fourth Quarter (September 10, 2014 – December 30, 2014)
2013
First Quarter (December 26, 2012 – March 19, 2013)
Second Quarter (March 20, 2013 – June 11, 2013)
Third Quarter (June 12, 2013 – September 3, 2013)
Fourth Quarter (September 4, 2013 – December 31, 2013)
High
Low
$
$
$
$
$
$
$
$
29.22
29.61
28.21
24.69
19.00
20.56
23.34
23.88
$
$
$
$
$
$
$
$
21.56
24.62
20.30
18.81
13.75
15.63
19.04
17.53
The market price of our common stock is subject to fluctuations in response to variations in our quarterly operating results, general
trends in the restaurant industry as well as other factors, many of which are not within our control. In addition, broad market fluctuations,
as well as general economic, business and political conditions may adversely affect the market for our common stock, regardless of our
actual or projected performance.
The closing sale price of a share of our common stock, as reported by the Nasdaq Global Select Market, on February 26, 2015, was
$19.11. As of February 26, 2015, there were two holders of record of our common stock, not including beneficial owners of shares
registered in nominee or street name.
22
Performance Graph
The following table and graph shows the cumulative total stockholder return on the Company’s Common Stock with the S&P 500 Stock
Index, the S&P Small Cap 600 Index and the Dow Jones U.S. Restaurants & Bars Index, in each case assuming an initial investment of
$100 on July 27, 2012 and full dividend reinvestment.
CUMULATIVE TOTAL RETURN
Assuming an investment of $100 and reinvestment of dividends
Del Frisco's Restaurant Group, Inc
S&P 500 Stock Index
S&P SmallCap 600 Index
Dow Jones U.S. Restaurants & Bars Index
7/27/2012
$ 100.00
$ 100.00
$ 100.00
$ 100.00
12/24/2012
$ 117.92
$ 102.94
$ 106.24
$ 101.95
12/31/2013
$ 181.31
$ 133.36
$ 149.12
$ 127.66
12/30/2014
$ 180.38
$ 150.10
$ 156.86
$ 132.15
The stock performance graph should not be deemed filed or incorporated by reference into any other filing made by us under the
Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate the stock performance graph
by reference in another filing.
Information Regarding Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common
stock for the foreseeable future. We anticipate that we will retain all of our future earnings, if any, for use in the development and
expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion
of our board of directors and will depend upon our financial condition, operating results and other factors our board of directors deems
relevant.
Our credit facility contains, and debt instruments that we enter into in the future may contain, covenants that place limitations on the
amount of dividends we may pay. In addition, under Delaware law, our board of directors may declare dividends only to the extent of our
surplus, which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or, if there is no surplus, out of
our net profits for the then current and immediately preceding year.
23
Item 6.
Selected Financial Data
The following table sets forth certain of our historical financial data. We have derived the selected historical consolidated financial
data for fiscal years 2010 through 2014 from our audited financial statements and the related notes. Not all periods shown below are
discussed in this Annual Report on Form 10-K. You should read this information together with Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes to those
statements included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of future
performance.
Income Statement Data:
Revenues
Costs and expenses:
Costs of sales
Restaurant operating expenses
Marketing and advertising costs
Pre-opening costs
General and administrative
Management and accounting fees paid to
related party
Asset advisory agreement termination fee
Secondary public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
Other income (expense), net:
Interest expense-affiliates
Interest expense-other
Write-off of debt issuance costs
Other, net
Income from continuing operations before income
taxes
Income tax expense (benefit)
$
Income from continuing operations
Discontinued operations, net of income tax benefit
Net income
$
Basic net income (loss) per common share (2):
Continuing operations
Discontinued operations
Basic net income per share
Diluted net income (loss) per common share (2):
Continuing operations
Discontinued operations
Diluted net income per share
Weighted average shares used in computing net
income (loss) per common share (2):
$
$
$
$
December 28,
December 27,
December 25,
December 31,
December 30,
2010
2011
2012
2013
2014
Fiscal Year Ended (1)
$
162,855 $
198,625 $
232,435 $
271,806 $
301,805
49,481
71,917
2,744
798
7,512
3,345
—
—
—
—
6,459
20,599
(1,775)
(9,906)
—
(249)
60,743
86,311
4,246
3,018
10,640
3,399
—
—
—
—
6,998
23,270
—
(6,355)
(2,501)
(114)
71,093
100,143
4,682
4,058
13,449
1,252
3,000
—
1,462
—
8,675
24,621
—
(2,920)
(1,649)
113
82,209
121,825
5,663
3,758
17,421
—
—
1,024
8,355
2,360
11,300
17,891
—
(72)
—
(51)
8,669
(88)
8,757 $
(27)
8,730 $
0.49 $
(0.00)
0.49 $
0.49 $
(0.00)
0.49 $
14,300
4,653
9,647 $
(674)
8,973 $
20,165
5,592
14,573 $
(819)
13,754 $
17,768
5,556
12,212 $
—
12,212 $
0.54 $
(0.04)
0.50 $
0.54 $
(0.04)
0.50 $
0.71 $
(0.04)
0.67 $
0.71 $
(0.04)
0.67 $
0.51 $
—
0.51 $
0.51 $
—
0.51 $
90,990
137,695
6,169
4,735
20,537
—
—
5
—
3,536
13,598
24,540
—
(113)
—
(107)
24,320
7,723
16,597
—
16,597
0.71
—
0.71
0.70
—
0.70
Basic
Diluted
17,994,667
17,994,667
17,994,667
17,994,667
20,432,579
20,432,579
23,779,782
23,852,200
23,517,883
23,740,318
24
Balance Sheet Data (at end of period):
Cash and cash equivalents
Working capital (deficit) (3)
Total assets
Total debt
Total stockholders' equity
December 28,
December 27,
December 25,
December 31,
December 30,
2010
2011
2012
2013
2014
$
4,157 $
(232)
217,725
78,922
87,155
14,119 $
2,940
234,274
70,000
95,872
10,763 $
(755)
258,385
—
177,901
13,674 $
8,048
288,651
—
196,783
3,520
(2,106)
319,666
—
210,983
December 28,
December 27,
December 25,
December 31,
December 30,
2010
2011
2012
2013
2014
Fiscal Year Ended (1)
$
Other Financial Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Capital Expenditures
Adjusted EBITDA (4)
Adjusted EBITDA Margin (5)
Restaurant-level EBITDA (4)
Restaurant-level EBITDA Margin (6)
Operating Data:
Total Restaurants (at end of period)
Total comparable restaurants (at end of period) (7)
Average sales per comparable restaurant
$
Percentage change in comparable restaurant sales
11,999 $
(1,210)
(19,889)
5,550
29,926
18.4%
38,713
23.8%
28,503 $
(7,151)
(11,390)
20,063
36,415
18.3%
47,325
23.8%
30,968 $
(32,173)
(2,151)
33,635
43,068
18.5%
56,517
24.3%
29,392 $
(31,462)
4,981
31,326
44,688
16.4%
62,109
22.9%
42,766
(47,956)
(4,964)
47,491
46,414
15.4%
66,951
22.2%
27
26
6,237 $
4.4%
30
26
6,802 $
11.2%
34
28
7,457 $
4.2%
40
30
7,622 $
1.3%
46
35
7,563
1.9%
(1) We utilize a 52- or 53-week accounting period which ends on the last Tuesday of December. The fiscal year ended December 31,
2013 had 53 weeks. The fiscal years ended December 28, 2010, December 27, 2011, December 25, 2012 and December 30, 2014
each had 52 weeks.
(2) Basic and diluted income per share is computed by dividing net income for each period by the shares of common stock issued
following our conversion from a limited liability company to a corporation immediately prior to the effectiveness of our initial
public offering. Such shares are assumed to be outstanding for all periods presented.
(3) Defined as total current assets minus total current liabilities.
(4) Adjusted EBITDA and restaurant-level EBITDA are metrics used by management to measure operating performance. Adjusted
EBITDA represents net income before interest, taxes, and depreciation and amortization, plus the sum of certain non-operating
expenses, including pre-opening costs, management fees and expenses, asset advisory agreement termination fees, non-cash
impairment charges, public offering transaction bonuses and secondary public offering costs. Restaurant-level EBITDA represents
net income before interest, taxes and depreciation and amortization, plus the sum of certain non-operating expenses, including
pre-opening costs, management fees and expenses, asset advisory agreement termination fees, non-cash impairment charges,
public offering transaction bonuses, secondary public offering costs and general and administrative expenses.
25
The following table presents a reconciliation of adjusted EBITDA and restaurant-level EBITDA to net income:
Income from continuing operations
Income tax expense (benefit)
Interest income
Interest expense-other
Interest expense-affiliate
Non-cash impairment charges
Write-off of debt issuance costs
Depreciation and amortization
Pre-opening costs
Lease guarantee payments and other
Management fees and expenses (a)
Asset advisory agreement termination fee
Secondary public offering costs
Public offering transaction bonuses
Adjusted EBITDA
General and administrative
Related party shared services fees
Restaurant-level EBITDA
December 28,
December 27,
December 25,
December 31,
December 30,
Fiscal Year Ended (1)
2010
2011
$
$
$
8,757 $
(88)
(75)
9,906
1,775
—
—
6,459
798
324
2,070
—
—
—
29,926 $
7,512
1,275
38,713 $
9,647 $
4,653
(16)
6,355
—
—
2,501
6,998
3,018
130
3,129
—
—
—
36,415 $
10,640
270
47,325 $
2012
14,573 $
5,592
(9)
2,920
—
—
1,649
8,675
4,058
(104)
1,252
3,000
—
1,462
43,068 $
13,449
—
56,517 $
2013
12,212 $
5,556
(3)
72
—
2,360
—
11,300
3,758
54
—
—
1,024
8,355
44,688 $
17,421
—
62,109 $
2014
16,597
7,723
(1)
113
—
3,536
—
13,598
4,735
108
—
—
5
—
46,414
20,537
—
66,951
(a)
Includes asset management fees and expenses paid to an affiliate of Lone Star Fund pursuant to our asset
advisory agreement, but excludes amounts paid to another affiliate of Lone Star Fund for accounting,
administrative and management services under our previously existing shared services agreement, which
is referred to as the related party shared services fee. See Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
We present adjusted EBITDA and restaurant-level EBITDA as supplemental performance measures because we believe they
facilitate a comparative assessment of our operating performance relative to our performance based on our results under generally
accepted accounting principles in the United States, or GAAP, while isolating the effects of some items that vary from period to
period without any correlation to core operating performance. Specifically, adjusted EBITDA allows for an assessment of our
operating performance without the effect of non-cash depreciation and amortization expenses or our ability to service or incur
indebtedness. Restaurant-level EBITDA allows for further assessment of our operating performance by eliminating the effect of
general and administrative expenses incurred at the corporate level. These measures also function as a benchmark to evaluate our
operating performance or compare our performance to that of our competitors because companies within our industry exhibit
significant variations with respect to capital structures and cost of capital (which affect interest expense and tax rates) and
differences in book depreciation of facilities and equipment (which affect relative depreciation expense), including significant
differences in the depreciable lives of similar assets among various companies.
This Annual Report on Form 10-K also includes information concerning adjusted EBITDA margin, which is defined as the ratio of
adjusted EBITDA to revenues, and restaurant-level EBITDA margin, which is defined as the ratio of restaurant-level EBITDA to
revenues. We present adjusted EBITDA margin and restaurant-level EBITDA margin because they are used by management as a
performance measurement to judge the level of adjusted EBITDA and restaurant-level EBITDA, respectively, generated from
revenues. We believe their inclusion is appropriate to provide additional information to investors and other external users of our
financial statements.
Adjusted EBITDA, restaurant-level EBITDA, adjusted EBITDA margin and restaurant-level EBITDA margin are not
measurements of our financial performance under GAAP and should not be considered in isolation or as an alternative to net
income, net cash provided by operating, investing or financing activities or any other financial statement data presented as
indicators of financial performance or liquidity, each as presented in accordance with GAAP. We understand that although
adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, it and
restaurant-level EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for
analysis of our results as reported under GAAP, as adjusted EBITDA and restaurant-level EBITDA do not reflect:
•
discretionary cash available to us to invest in the growth of our business;
26
•
•
•
•
changes in, or cash requirements for, our working capital needs;
our capital expenditures or future requirements for capital expenditures;
the interest expense, or the cash requirements necessary to service interest or principal payments, associated
with our indebtedness; or
depreciation and amortization, which are non-cash charges, although the assets being depreciated and
amortized will likely have to be replaced in the future, and adjusted EBITDA does not reflect any cash
requirements for such replacements.
(5) Adjusted EBITDA margin is the ratio of adjusted EBITDA to revenues.
(6) Restaurant-level EBITDA margin is the ratio of restaurant-level EBITDA to revenues.
(7) We consider a restaurant to be comparable in the first full fiscal period following the eighteenth month of operations.
Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified
period of time.
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Del Frisco’s Restaurant Group develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s
Double Eagle Steak House, Sullivan’s Steakhouse, and Del Frisco’s Grille. We currently operate 46 restaurants in 20 states and the
District of Columbia. Of the 46 restaurants we operated as of the end of the period covered by this report, there are 11 Del Frisco’s
restaurants, 19 Sullivan’s restaurants and 16 Grille restaurants. During 2014, we opened a Del Frisco’s in Washington DC as well as
Grilles in Burlington, Massachusetts, Irvine, California, N. Bethesda, Maryland, Tampa, Florida, and Pasadena, California.
Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:
•
Pursue Disciplined Restaurant Growth. We believe that there are significant opportunities to grow our concepts on
a nationwide basis in both existing and new markets where we believe we can generate attractive unit-level
economics. We are presented with many development opportunities and we carefully evaluate each opportunity to
determine that sites selected for development have a high probability of meeting our return on investment targets.
Our disciplined growth strategy includes accepting only those sites that we believe present attractive rent and tenant
allowance structures as well as reasonable construction costs given the sales potential of the site. We believe our
concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible
unit models, will allow us to expand each of our three concepts into a greater number of locations.
•
Grow Existing Revenue. We will continue to pursue opportunities to increase the sales at our existing restaurants,
pursue targeted local marketing efforts and evaluate operational initiatives, including growth in private dining,
designed to increase restaurant unit volumes.
•
Maintain Margins Throughout Our Growth. We will continue to aggressively protect our margins using economies
of scale, including marketing and purchasing synergies between our concepts and leveraging our corporate
infrastructure as we continue to open new restaurants.
We believe there are opportunities to open six to eight restaurants annually, generally composed of one Del Frisco’s and five to seven
Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the near
term. During 2015, we expect to open five to seven Grilles and one Del Frisco’s. See Item 1, Business for a discussion of our targeted
average cash investment for each concept and other information regarding the opening of a new location.
Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:
•
Comparable Restaurant Sales. We consider a restaurant to be comparable during the first full fiscal period
following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for
the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in
customer count trends as well as changes in average check. Our comparable restaurant base consisted of 30 and 35
restaurants at December 31, 2013 and December 30, 2014, respectively.
•
Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time
period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze
trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer
expenditures.
•
Average Unit Volume. Average unit volume, or AUV, consists of the average sales of our restaurants over a certain
period of time. This measure is calculated by dividing total restaurant sales within a period by the number of
restaurants operating during the relevant period. This indicator assists management in measuring changes in
customer traffic, pricing and development of our concepts.
•
Customer Counts. Customer counts are measured by the number of entrées ordered at our restaurants over a given
time period.
•
•
Adjusted EBITDA Margin. Adjusted EBITDA margin represents net income before interest, taxes and depreciation
and amortization plus the sum of certain non-operating expenses, including pre-opening costs, management fees
and expenses, asset advisory agreement termination fees, non-cash impairment charges, public offering transaction
bonuses and secondary public offering costs, as a percentage of our revenues. By monitoring and controlling our
adjusted EBITDA margins, we can gauge the overall profitability of our company. See Item 6, Selected Financial
Data for additional information on adjusted EBITDA margin.
Restaurant-Level EBITDA Margin . Restaurant-level EBITDA margin represents net income before interest, taxes
and depreciation and amortization plus the sum of certain non-operating expenses, including pre-opening costs,
management fees and expenses, asset advisory agreement termination fees, non-cash impairment charges, public
offering transaction bonuses, secondary public offering costs and general and administrative expenses, as a
28
percentage of our revenues. By monitoring and controlling our restaurant-level EBITDA margins, we can gauge the
overall profitability of our core restaurant operations. See Item 6, Selected Financial Data and note 13 in the notes to
our consolidated financial statements for additional information on restaurant-level EBITDA margin.
Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth
fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday
season, respectively. In addition, we operate on a 52 or 53 week fiscal year ending the last Tuesday of each December, and our first,
second and third quarters each contain 12 operating weeks with the fourth quarter containing 16 or 17 operating weeks. As many of our
operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly
from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other
quarter or for any year.
Key Financial Definitions
Revenues. Revenues consist primarily of food and beverage sales at our restaurants, net of any discounts, such as management meals and
employee meals, associated with each sale. Additionally, revenues are net of the cost of loyalty points earned associated with sales made
to customers in our loyalty program. In 2014, food comprised 67% of food and beverage sales with beverage comprising the remaining
33%. Revenues are directly influenced by the number of operating weeks in the relevant period and comparable restaurant sales growth.
Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. Comparable
restaurant sales growth is primarily influenced by the number of customers eating in our restaurants, which is influenced by the
popularity of our menu items, competition with other restaurants in each market, our customer mix and our ability to deliver a high
quality dining experience, and the average check, which is driven by menu mix and pricing.
Cost of Sales. Cost of sales is comprised primarily of food and beverage expenses. We measure food and beverage expenses by tracking
cost of sales as a percentage of revenues. Food and beverage expenses are generally influenced by the cost of food and beverage items,
distribution costs and menu mix. The components of cost of sales are variable in nature, increase with revenues, are subject to increases
or decreases based on fluctuations in commodity costs, including beef prices, and depend in part on the controls we have in place to
manage costs of sales at our restaurants.
Restaurant Operating Expenses. We measure restaurant operating expenses as a percentage of revenue. Restaurant operating expenses
include the following:
•
Labor expenses, which comprise restaurant management salaries, hourly staff payroll and other payroll-related
expenses, including management bonus expenses, vacation pay, payroll taxes, fringe benefits and health insurance
expenses and are measured by tracking hourly and total labor as a percentage of revenues;
•
Occupancy expenses, which comprise all occupancy costs, consisting of both fixed and variable portions of rent,
common area maintenance charges, real estate property taxes and other related occupancy costs and are measured
by tracking occupancy as a percentage of revenues; and
•
Other operating expenses, which comprise repairs and maintenance, utilities, operating supplies and other
restaurant-level related operating expenses and are measured by tracking other operating expenses as a percentage
of revenues.
Marketing and Advertising Costs. Marketing and advertising costs include all media, production and related costs for both local
restaurant advertising and national marketing. We measure the efficiency of our marketing and advertising expenditures by tracking
these costs as a percentage of total revenues. We have historically spent approximately 1.5% to 2.5% of total revenues on marketing and
advertising and expect to maintain this level in the near term.
Pre-opening Costs. Pre-opening costs are costs incurred prior to opening a restaurant, and primarily consist of manager salaries,
relocation costs, recruiting expenses, employee payroll and related training costs for new employees, including rehearsal of service
activities, as well as non-cash lease costs incurred prior to opening. In addition, pre-opening expenses include marketing costs incurred
prior to opening as well as meal expenses for entertaining local dignitaries, families and friends. We currently target pre-opening costs
per restaurant at $0.8 million for a Del Frisco’s and a Grille and $0.6 million for a Sullivan’s.
General and Administrative Expenses. General and administrative expenses are comprised of costs related to certain corporate and
administrative functions that support development and restaurant operations and provide an infrastructure to support future company
growth. These expenses reflect management, supervisory and staff salaries and employee benefits, travel, information systems, training,
corporate rent, professional and consulting fees, technology and market research. We measure general and administrative costs by
tracking general and administrative expenses as a percentage of revenues. These expenses are expected to increase as a result of costs
related to our anticipated growth, including substantial training costs and significant investments in infrastructure. As we are able to
leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of total revenues over
time.
29
Management and Accounting Fees Paid to Related Party. From December 13, 2006 to August 1, 2012, we incurred an asset
management fee from an affiliate of Lone Star Fund. This fee was billed monthly based upon the actual direct costs incurred by this
affiliate in providing support to us. In 2012, we paid this affiliate of Lone Star Fund approximately $1.3 million for these services.
Concurrent with our initial public offering, this arrangement was terminated in exchange for a lump sum payment to Lone Star Fund of
$3.0 million. As a result, we entered into a transition services agreement with affiliates of Lone Star Fund pursuant to which we were
provided certain insurance management, legal and benefits administration services. In 2012 and 2013, we paid an aggregate of
approximately $0.1 million and $30 thousand, respectively, to an affiliate of Lone Star Fund under the transition services agreement.
This agreement was terminated in the third quarter of 2013.
We measure management and accounting fees paid as a percentage of revenue.
Depreciation and Amortization. Depreciation and amortization includes depreciation of fixed assets and certain definite life intangible
assets. We depreciate capitalized leasehold improvements over the shorter of the total expected lease term or their estimated useful life.
As we accelerate our restaurant openings, depreciation and amortization is expected to increase as a result of our increased capital
expenditures.
Discontinued Operations. On June 30, 2012, we closed our Dallas Sullivan’s location and on July 2, 2012, we completed the sale of the
real property to a third party. We determined that this closure met the criteria for classification as discontinued operations. See note 16 in
the notes to our consolidated financial statements.
30
Results of Operations
The following table sets forth certain statements of income data for the periods indicated:
Revenues
Costs and expenses:
Costs of sales
Restaurant operating expenses
Marketing and advertising costs
Pre-opening costs
General and administrative costs
Management and accounting fees paid to related party
Asset advisory agreement termination fee
Secondary public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
Other income (expense), net:
Interest expense
Write-off of debt issuance costs
Other, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
$
December 25,
2012
Fiscal Year Ended
December 31,
2013
December 30,
2014
$ 232,435 100.0% $ 271,806 100.0% $
301,805 100.0%
71,093
100,143
4,682
4,058
13,449
1,252
3,000
—
1,462
—
8,675
24,621
30.6%
43.1%
2.0%
1.7%
5.8%
0.5%
1.3%
-
0.6%
-
3.7%
10.7%
82,209 30.2%
121,825 44.8%
2.1%
1.4%
6.4%
-
-
0.4%
3.1%
0.9%
4.1%
6.6%
5,663
3,758
17,421
—
—
1,024
8,355
2,360
11,300
17,891
90,990 30.2%
137,695 45.6%
2.0%
1.6%
6.8%
-
-
-
-
1.2%
4.5%
8.1%
6,169
4,735
20,537
—
—
5
—
3,536
13,598
24,540
(2,920)
(1,649)
113
20,165
5,592
14,573
(1.3%)
(0.7%)
-
8.7%
2.4%
6.3% $
(72)
—
(51)
17,768
5,556
12,212
-
-
-
6.6%
2.1%
4.5% $
(113)
—
(107)
24,320
7,723
16,597
-
-
-
8.1%
2.7%
5.4%
31
Fiscal Year Ended December 30, 2014 (52 weeks) Compared to Fiscal Year Ended December 31, 2013 (53 weeks)
The following tables show our operating results by operating segment, as well as our operating results as a percentage of revenues, for
the fiscal years ended December 30, 2014 and December 31, 2013.
Revenues
Costs and expenses:
Cost of sales
Restaurant operating expenses
Marketing and advertising costs
Restaurant-level EBITDA
Pre-opening costs
General and administrative
Secondary public offering costs
Non-cash impairment charges
Depreciation and amortization
Operating income
Revenues
Costs and expenses:
Cost of sales
Restaurant operating expenses
Marketing and advertising costs
Restaurant-level EBITDA
Pre-opening costs
General and administrative
Secondary public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
Fiscal Year Ended December 30, 2014
Del Frisco's
Sullivan's
Grille
Consolidated
(dollars in thousands)
$ 151,142 100.0% $ 80,911 100.0% $ 69,752 100.0% $ 301,805 100.0%
47,502 31.4%
58,275 38.6%
1.6%
42,946 28.4%
2,419
24,166 29.9%
40,908 50.6%
2.9%
13,449 16.6%
2,388
19,322 27.7%
38,512 55.2%
2.0%
10,556 15.1%
1,362
6,169
90,990 30.2%
137,695 45.6%
2.0%
66,951 22.2%
1.6%
6.8%
0.0%
1.2%
4.5%
8.1%
4,735
20,537
5
3,536
13,598
$ 24,540
Fiscal Year Ended December 31, 2013
Del Frisco's
Sullivan's
Grille
Consolidated
(dollars in thousands)
$ 144,634 100.0% $ 83,039 100.0% $ 44,133 100.0% $ 271,806 100.0%
44,521 30.8%
56,428 39.0%
1.5%
41,451 28.7%
2,234
25,340 30.5%
42,171 50.8%
3.2%
12,881 15.5%
2,647
12,348 28.0%
23,226 52.6%
1.8%
7,777 17.6%
782
5,663
82,209 30.2%
121,825 44.8%
2.1%
62,109 22.9%
1.4%
6.4%
0.4%
3.1%
0.9%
4.1%
6.6%
3,758
17,421
1,024
8,355
2,360
11,300
$ 17,891
Revenues. Consolidated revenues increased $30.0 million, or 11.0%, to $301.8 million in 2014 from $271.8 million in 2013. This
increase was due in part to a 1.9% increase in total comparable restaurant sales (on a 52-week comparable basis) comprised of a 5.6%
increase in average check, partially offset by a 3.7% decrease in customer counts. An additional $34.6 million was provided by 313
additional operating weeks resulting from one Del Frisco’s and five Grille openings in 2014 and six Grille openings during 2013,
partially offset by $5.8 million in additional revenue from the 53rd week of 2013.
Del Frisco’s revenues increased $6.5 million, or 4.5%, to $151.1 million in 2014 from $144.6 million in 2013. This increase was
primarily due to a 5.5% increase in total comparable restaurant sales comprised of a 3.7% increase in average check and a 1.8% increase
in customer counts. The remainder of the increase was provided by 15 additional operating weeks resulting from the Washington DC Del
Frisco’s opening in September 2014. These increases were partially offset by a decrease in revenue related to non-comparable restaurant
sales.
Sullivan’s revenues decreased $2.1 million, or 2.6%, to $80.9 million in 2014 from $83.0 million in 2013. This decrease was primarily
due to a 0.7% decrease in total comparable restaurant sales comprised of a 6.0% decrease in customer counts, partially offset by a 5.3%
increase in average check. Average check was impacted by menu price increases of approximately 2.3% implemented in October 2013,
offset by menu mix shifting to lower priced items and special offerings.
The Grille’s revenues increased $25.7 million to $69.8 million in 2014 from $44.1 million in 2013. This increase was provided by 298
additional operating weeks resulting from five Grille openings during 2014 and six Grille openings during 2013.
32
Cost of Sales. Consolidated cost of sales increased $8.8 million, or 10.7%, to $91.0 million in 2014 from $82.2 million in 2013. This
increase was primarily due to an additional 313 operating weeks in 2014 as compared to 2013 from one Del Frisco’s and five Grille
openings during 2014 and six Grille openings during 2013. As a percentage of consolidated revenues, consolidated cost of sales stayed
consistent at 30.2% in 2014 and 2013.
As a percentage of revenues, Del Frisco’s cost of sales increased to 31.4% during 2014 from 30.8% in 2013. This increase in cost of
sales, as a percentage of revenues, was primarily due to higher protein costs, primarily for our prime beef and seafood, partially offset by
lower liquor and wine costs.
As a percentage of revenues, Sullivan’s cost of sales decreased to 29.9% during 2014 from 30.5% in 2013. This decrease in cost of sales,
as a percentage of revenues, was primarily due to lower seafood, liquor and wine costs, partially offset by higher beef costs.
As a percentage of revenues, the Grille’s cost of sales decreased to 27.7% during 2014 from 28.0% in 2013. The decrease in cost of sales,
as a percentage of revenues, was due primarily to lower new opening inefficiencies related to the Grille openings in 2014 and late 2013,
partially offset by higher beef costs.
Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $15.9 million, or 13.0%, to $137.7 million in
2014 from $121.8 million in 2013. This increase was primarily due to an additional 313 operating weeks in 2014 as compared to 2013
from one Del Frisco’s and five Grille openings during 2014 and six Grille openings during 2013. As a percentage of consolidated
revenues, consolidated restaurant operating expenses increased to 45.6% in 2014 from 44.8% in 2013.
As a percentage of revenues, Del Frisco’s restaurant operating expenses decreased to 38.6% during 2014 from 39.0% in 2013. This
decrease in restaurant operating expenses, as a percentage of revenues, was due to lower direct labor and benefits costs, partially offset
by slightly higher occupancy costs.
As a percentage of revenues, Sullivan’s restaurant operating expenses decreased to 50.6% during 2014 from 50.8% in 2013. This
decrease in restaurant operating expenses, as a percentage of revenues, was due to lower other restaurant operating costs, related to
strategic cost savings initiatives, partially offset by higher occupancy cost.
As a percentage of revenues, the Grille’s restaurant operating expenses increased to 55.2% during 2014 from 52.6% in 2013. This
increase in restaurant operating expenses, as a percentage of revenues, was due to primarily to new opening inefficiencies related to the
five openings in 2014.
Marketing and Advertising Costs. Consolidated marketing and advertising costs increased $0.5 million, or 8.9%, to $6.2 million in 2014
from $5.7 million in 2013. As a percentage of consolidated revenues, consolidated marketing and advertising costs decreased slightly to
2.0% in 2014 from 2.1% in fiscal 2013.
As a percentage of revenues, Del Frisco’s marketing and advertising costs increased slightly to 1.6% in 2014 from 1.5% in 2013. The
increase in marketing and advertising costs, as a percentage of revenues, was primarily due to higher outside promotion costs, partially
offset by lower website development costs.
As a percentage of revenues, Sullivan’s marketing and advertising costs decreased to 2.9% in 2014 from 3.2% in 2013. The decrease in
marketing and advertising costs, as a percentage of revenues, was primarily due to lower website development costs and print production
expenses.
As a percentage of revenues, the Grille’s marketing and advertising costs increased to 2.0% in 2014 from 1.8% in 2013. This increase in
marketing and advertising costs, as a percentage of revenues, was due to higher broadcast advertising and outside promotion costs,
partially offset by lower print media spending and print production expense.
Pre-opening Costs. Pre-opening costs increased by $0.9 million to $4.7 million in 2014 from $3.8 million in 2013. One new Del Frisco’s
and five new Grilles were opened in 2014 compared to six Grilles in 2013. The higher costs, primarily related to non-cash preopening
rent, and to the opening of a Del Frisco’s restaurant, which have higher pre-opening costs, in 2014 and not in 2013.
General and Administrative Expenses. General and administrative expenses increased $3.1 million, or 17.9%, to $20.5 million in 2014
from $17.4 million in 2013. This increase was primarily related to additional compensation costs related to growth in the number of
corporate and regional management-level personnel to support recent and anticipated growth, as well as increased restaurant
management training expenses. In addition, we incurred an additional $0.8 million in non-cash stock compensation expense in 2014
compared to 2013. As a percentage of revenues, general and administrative expenses increased to 6.8% in 2014 from 6.4% in 2013.
General and administrative costs are expected to continue to increase as a result of costs related to our anticipated growth, including
further investments in our infrastructure. As we are able to leverage these investments made in our people and systems, we expect these
expenses to decrease as a percentage of total revenues over time.
33
Secondary Public Offering Costs. In conjunction with the secondary public offerings in the first, third and fourth quarter of 2013, we
incurred $1.0 million in legal, accounting, printing and registration expenses. No such costs were incurred in 2014.
Public Offering Transaction Bonuses. Under letter agreements with LSF5 Wagon Holdings, LLC, an affiliate of Lone Star Fund, and our
former principal stockholder, which we refer to as Wagon, certain of our executives were eligible to receive a transaction bonus upon the
occurrence of an eligible transaction. Wagon was responsible to fund the transaction bonuses. As these bonuses were contingent upon
employment with us, we were required to record the expense of these bonuses and recognize the funding by Wagon as additional paid in
capital. Associated with the completion of the secondary public offerings in the first, third and fourth quarter of 2013, we recorded a total
of $8.4 million in transaction bonuses expense under the transaction bonus agreements. No such costs were incurred in 2014.
Non-cash Impairment Charges. During the fourth quarter of 2014, we determined that the carrying value of our Phoenix Grille’s
location exceeded its estimated future cash flows and recognized a $3.5 million non-cash impairment charge. This charge was based on
the difference between the carrying value of the restaurant assets and the estimated value of furniture and restaurant equipment that may
be transferred to future Grille locations. During the fourth quarter of 2013, we determined that the carrying value of our Seattle
Sullivan’s location exceeded its estimated future cash flows and recognized a $2.4 million non-cash impairment charge. This charge was
based on the difference between the carrying value of the restaurant assets and the estimated sales price of leasehold improvements and
equipment for this location.
Depreciation and Amortization. Depreciation and amortization increased $2.3 million, or 20.3%, to $13.6 million in 2014 from $11.3
million in 2013. The increase in depreciation and amortization expense primarily resulted from new assets related to six restaurants
opened in 2013 and six restaurants opened in 2014 as well as for existing restaurants that were remodeled during 2013 and 2014.
Interest Expense. Interest expense increased $41 thousand to $113 thousand in 2014 from $72 thousand in 2013.
Provision for Income Taxes. The effective income tax rate was 31.8% and 31.3% in 2014 and 2013, respectively. The factors that cause
the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, state income taxes
and certain non-deductible or non-taxable expenses. The increase in the effective tax rate was primarily attributable to a higher
effective state tax rate and higher non-deductible stock compensation expense, which lowered income from continuing operations before
income tax, but were not deductible for certain state and local taxes.
Additionally, in the second quarter of fiscal 2013, we determined that a deferred tax asset of $0.5 million recorded in the fourth quarter
of fiscal 2012 relating to local income tax net operating loss carryforwards was not realizable, as the related net operating losses
originated in years from which the carryforward period had expired. We corrected the deferred tax asset account resulting in a non-cash
$0.5 million cumulative adjustment to record additional income tax expense in the second quarter of fiscal 2013. The adjustment did not
impact historical cash flows and will not impact the timing of future income tax payments. Prior years’ financial statements were not
restated as the impact of these issues was immaterial to previously reported results for any individual prior year and 2012. Partially
offsetting the increase in the effective income tax rate was a higher FICA tip credit, driven by increased tips proportional to increased
restaurant sales.
34
Fiscal Year Ended December 31, 2013 (53 weeks) Compared to Fiscal Year Ended December 25, 2012 (52 weeks)
The following tables show our operating results by operating segment, as well as our operating results as a percentage of revenues, for
the fiscal years ended December 31, 2013 and December 25, 2012.
Revenues
Costs and expenses:
Cost of sales
Restaurant operating expenses
Marketing and advertising costs
Restaurant-level EBITDA
Pre-opening costs
General and administrative
Secondary public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
Revenues
Costs and expenses:
Cost of sales
Restaurant operating expenses
Marketing and advertising costs
Restaurant-level EBITDA
Pre-opening costs
General and administrative
Management and accounting fees paid to
related party
Asset advisory agreement termination fee
Public offering transaction bonuses
Depreciation and amortization
Operating income
Fiscal Year Ended December 31, 2013
Del Frisco's
Sullivan's
Grille
Consolidated
(dollars in thousands)
$ 144,634 100.0% $ 83,039 100.0% $ 44,133 100.0% $ 271,806 100.0%
44,521 30.8%
56,428 39.0%
1.5%
41,451 28.7%
2,234
25,340 30.5%
42,171 50.8%
3.2%
12,881 15.5%
2,647
12,348 28.0%
23,226 52.6%
1.8%
7,777 17.6%
782
5,663
82,209 30.2%
121,825 44.8%
2.1%
62,109 22.9%
1.4%
6.4%
0.4%
3.1%
0.9%
4.1%
6.6%
3,758
17,421
1,024
8,355
2,360
11,300
$ 17,891
Fiscal Year Ended December 25, 2012
Del Frisco's
Sullivan's
Grille
Consolidated
(dollars in thousands)
$ 124,692 100.0% $ 83,767 100.0% $ 23,976 100.0% $ 232,435 100.0%
38,914 31.2%
47,783 38.3%
1.6%
35,993 28.9%
2,002
25,519 30.5%
40,240 48.0%
2.7%
15,721 18.8%
2,287
6,660 27.8%
12,120 50.6%
1.6%
4,803 20.0%
393
4,682
71,093 30.6%
100,143 43.1%
2.0%
56,517 24.3%
1.7%
5.8%
4,058
13,449
1,252
3,000
1,462
8,675
0.5%
1.3%
0.6%
3.7%
$ 24,621 10.7%
Revenues. Consolidated revenues increased $39.4 million, or 16.9%, to $271.8 million in 2013 from $232.4 million in 2012. This
increase was due in part to a 1.3% increase in total comparable restaurant sales (on a 52-week comparable basis) comprised of a 0.3%
increase in customer counts and a 1.0% increase in average check. An additional $33.1 million was provided by 244 additional operating
weeks resulting from six Grille openings during 2013 and three Grille openings in June, July and October 2012 and one Del Frisco’s
opening in December 2012. An additional $5.8 million was also provided due to the 53rd week included in fiscal year 2013.
Del Frisco’s revenues increased $19.9 million, or 16.0%, to $144.6 million in 2013 from $124.7 million in 2012. This increase was
primarily due to a 4.4% increase in total comparable restaurant sales comprised of a 3.9% increase in customer counts and a 0.5%
increase in average check. The increase in average check was impacted by combined menu price increases of approximately 1.6%
implemented in October 2013 as well as the menu mix shifting to higher priced items and special offerings. The remainder of the
increase was provided by 48 additional operating weeks resulting from the Chicago Del Frisco’s opening in December 2012, as well as
the 53rd week included in fiscal year 2013.
Sullivan’s revenues decreased $0.8 million, or 0.9%, to $83.0 million in 2013 from $83.8 million in 2012. This decrease was primarily
due to a 3.0% decrease in total comparable restaurant sales comprised of a 0.7% decrease in average check and a 2.3% decrease in
customer counts, partially offset by the additional 53rd week included in fiscal year 2013. Average check was impacted by menu price
increases of approximately 1.5% implemented in April 2012 and 2.3% implemented in October 2013, offset by menu mix shifting to
lower priced items and special offerings.
35
The Grille’s revenues increased $20.1 million to $44.1 million in 2013 from $24.0 million in 2012. This increase was provided by 196
additional operating weeks resulting from six Grille openings during 2013 and three Grille openings in June, July and October 2012. The
additional 53rd week included in fiscal year 2013 also contributed to the increase.
Cost of Sales. Consolidated cost of sales increased $11.1 million, or 15.6%, to $82.2 million in 2013 from $71.1 million in 2012. This
increase was primarily due to an additional 244 operating weeks in 2013 as compared to 2012 from six Grille openings during 2013 and
three Grille openings in June, July and October 2012 and one Del Frisco’s opening in December 2012 as well as the additional 53rd week
included in fiscal year 2013. As a percentage of consolidated revenues, consolidated cost of sales decreased to 30.2% in 2013 from
30.6% in 2012.
As a percentage of revenues, Del Frisco’s cost of sales decreased to 30.8% during 2013 from 31.2% in 2012. This decrease in cost of
sales, as a percentage of revenues, was primarily due to lower protein costs, primarily for our prime beef and seafood, accounting for
approximately 90% of the decrease, which was partially offset by higher wine and liquor costs.
As a percentage of revenues, Sullivan’s cost of sales was consistent at 30.5% during 2013 and 2012. Beef and produce costs were higher
in 2013 compared to 2012, which were offset by lower seafood and liquor costs.
As a percentage of revenues, the Grille’s cost of sales increased slightly to 28.0% during 2013 from 27.8% in 2012. The increase in cost
of sales, as a percentage of revenues, was due primarily to new opening inefficiencies related to the six Grille openings in 2013.
Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $21.7 million, or 21.7%, to $121.8 million in
2013 from $100.1 million in 2012. This increase was primarily due to an additional 244 operating weeks in 2013 as compared to 2012
from six Grille openings during 2013 and three Grille openings in June, July and October 2012 and one Del Frisco’s opening in
December 2012 as well as the additional 53rd week included in fiscal year 2013. As a percentage of consolidated revenues, consolidated
restaurant operating expenses increased to 44.8% in 2013 from 43.1% in 2012.
As a percentage of revenues, Del Frisco’s restaurant operating expenses increased to 39.0% during 2013 from 38.3% in 2012. This
increase in restaurant operating expenses, as a percentage of revenues, was due to higher direct labor and benefits costs, accounting for
approximately 65% of the increase as well as higher occupancy costs, accounting for approximately 20% of the increase.
As a percentage of revenues, Sullivan’s restaurant operating expenses increased to 50.8% during 2013 from 48.0% in 2012. This
increase in restaurant operating expenses, as a percentage of revenues, was due to higher direct labor and benefits costs, accounting for
approximately 50% of the increase, and higher other restaurant operating costs, accounting for the remainder of the increase. These
increases were due in part to the de-leveraging of certain fixed and semi-variable costs, such as utilities and building and equipment
maintenance on lower revenues.
As a percentage of revenues, the Grille’s restaurant operating expenses increased to 52.6% during 2013 from 50.6% in 2012. This
increase in restaurant operating expenses, as a percentage of revenues, was due to primarily to new opening inefficiencies related to the
six openings in 2013.
Marketing and Advertising Costs. Consolidated marketing and advertising costs increased $1.0 million, or 21.0%, to $5.7 million in
2013 from $4.7 million in 2012. As a percentage of consolidated revenues, consolidated marketing and advertising costs increased
slightly to 2.1% in 2013 from 2.0% in fiscal 2012.
As a percentage of revenues, Del Frisco’s marketing and advertising costs decreased slightly to 1.5% in 2013 from 1.6% in 2012. The
decrease in marketing and advertising costs, as a percentage of revenues, was primarily due to lower print production expenses, partially
offset by higher public relations spending. These costs were also impacted by our ability to leverage increased marketing and advertising
costs against increased comparable sales.
As a percentage of revenues, Sullivan’s marketing and advertising costs increased to 3.2% in 2013 from 2.7% in 2012. The increase in
marketing and advertising costs, as a percentage of revenues, was primarily due to higher broadcast media advertising and website
development costs.
As a percentage of revenues, the Grille’s marketing and advertising costs increased to 1.8% in 2013 from 1.6% in 2012. This increase in
marketing and advertising costs, as a percentage of revenues, was due to higher public relations and print media spending, partially offset
by lower print production expense.
Pre-opening Costs. Pre-opening costs decreased by $0.3 million to $3.8 million in 2013 from $4.1 million in 2012. Six new Grilles were
opened in 2013 compared to one Del Frisco’s and three Grilles in 2012. The higher costs, primarily related to non-cash preopening rent,
involved in opening up a Del Frisco’s restaurant compared to Grille restaurants, contributed to the decrease in 2013 due to no Del
Frisco’s locations opening in 2013.
36
General and Administrative Expenses. General and administrative expenses increased $4.0 million, or 29.5%, to $17.4 million in 2013
from $13.4 million in 2012. This increase was primarily related to additional compensation costs related to growth in the number of
corporate and regional management-level personnel to support recent and anticipated growth, as well as increased restaurant
management training expenses. In addition, we incurred an additional $1.5 million in public company related expenses in 2013
compared to 2012, including an additional $1.1 million in non-cash stock compensation expense. These increases were partially offset
by a $0.8 million decrease in bonus expense. As a percentage of revenues, general and administrative expenses increased to 6.4% in
2013 from 5.8% in 2012. General and administrative costs are expected to continue to increase as a result of costs associated with being
a public company as well as costs related to our anticipated growth, including further investments in our infrastructure. As we are able to
leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of total revenues over
time.
Management and Accounting Fees Paid to Related Party. Management and accounting fees paid to related party were $1.3 million in
fiscal 2012 and consisted of asset management fees paid to an affiliate of Lone Star Fund under an asset advisory agreement. This
agreement was terminated in the third quarter of fiscal 2012, and there were no such expenses in 2013.
Asset Advisory Agreement Termination Fee. In conjunction with our initial public offering, we terminated our asset advisory agreement
with Lone Star Fund. Related to this termination, we incurred a one-time $3.0 million asset advisory agreement termination fee in the
third quarter of fiscal 2012.
Secondary Public Offering Costs. In conjunction with the secondary public offerings in the first, third and fourth quarter of 2013, we
incurred $1.0 million in legal, accounting, printing and registration expenses.
Public Offering Transaction Bonuses. Under letter agreements with LSF5 Wagon Holdings, LLC, an affiliate of Lone Star Fund
(Wagon), and our former principal stockholder, certain of our executives were eligible to receive a transaction bonus upon the
occurrence of an eligible transaction. Wagon was responsible to fund the transaction bonuses. As these bonuses were contingent upon
employment with us, we were required to record the expense of these bonuses and recognize the funding by Wagon as additional paid in
capital. Associated with the completion of the secondary public offerings in the first, third and fourth quarter of 2013, we recorded a total
of $8.4 million in transaction bonuses expense under the transaction bonus agreements. Associated with the completion of our initial
public offering in 2012, we recorded $1.5 million in transaction bonuses under these transaction bonus agreements.
Non-cash Impairment Charges. During the fourth quarter of 2013, we determined that the carrying value of our Seattle Sullivan’s
location exceeded its estimated future cash flows and recognized a $2.4 million non-cash impairment charge. This charge was based on
the difference between the carrying value of the restaurant assets and the estimated sales price of leasehold improvements and equipment
for this location.
Depreciation and Amortization. Depreciation and amortization increased $2.6 million, or 30.3%, to $11.3 million in 2013 from $8.7
million in 2012. The increase in depreciation and amortization expense primarily resulted from new assets related to four restaurants
opened during 2012 and six restaurants opened in 2013 as well as for existing restaurants that were remodeled during 2012 and 2013.
Interest Expense. Interest expense decreased $2.8 million to $0.1 million in 2013 from $2.9 million in 2012. This decrease is attributable
to the payoff of previously outstanding debt with the proceeds from the IPO and there being no borrowings during fiscal year 2013 under
our revolving credit facility that we entered into in October 2012.
Write-off of Debt Issuance Costs. Write-off of debt issuance costs was $1.6 million in 2012. During 2012, the Company wrote off the
unamortized debt issuance cost related to the full repayment of the outstanding balance of a previous credit facility.
Provision for Income Taxes. The effective income tax rate was 31.3% and 27.7% in 2013 and 2012, respectively. The factors that cause
the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, state income taxes
and certain non-deductible or non-taxable expenses. The increase in the effective tax rate was primarily attributable to a higher
effective state tax rate, impacted by the public offering transaction bonuses, which lowered income from continuing operations before
income tax, but were not deductible for certain state and local taxes.
Additionally, in the second quarter of fiscal 2013, we determined that a deferred tax asset of $0.5 million recorded in the fourth quarter
of fiscal 2012 relating to local income tax net operating loss carryforwards was not realizable, as the related net operating losses
originated in years from which the carryforward period had expired. We corrected the deferred tax asset account resulting in a non-cash
$0.5 million cumulative adjustment to record additional income tax expense in the second quarter of fiscal 2013. The adjustment did not
impact historical cash flows and will not impact the timing of future income tax payments. Prior years’ financial statements were not
restated as the impact of these issues was immaterial to previously reported results for any individual prior year and 2012. Partially
offsetting the increase in the effective income tax rate was a higher FICA tip credit, driven by increased tips proportional to increased
restaurant sales.
37
Liquidity and Capital Resources
We believe that net cash provided by operating activities and available borrowings under our credit facility will be sufficient to fund
currently anticipated working capital, planned capital expenditures and debt service requirements for the next 24 months. We regularly
review acquisitions and other strategic opportunities, which may require additional debt or equity financing.
Our principal liquidity requirements are our lease obligations and our working capital and capital expenditure needs and any principal
and interest obligations on our debt. Subject to our operating performance, which, if significantly adversely affected, would adversely
affect the availability of funds, we expect to finance our operations for at least the next several years, including costs of opening
currently planned new restaurants, through cash provided by operations and existing borrowings available under our credit facility
discussed below. We cannot be sure that these sources will be sufficient to finance our operations, however, and we may seek additional
financing in the future. As of December 30, 2014, we had cash and cash equivalents of approximately $3.5 million.
Our operations have not required significant working capital and, like many restaurant companies, we may at times have negative
working capital. Revenues are received primarily in cash or by credit card, and restaurant operations do not require significant
receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and
supplies, thereby reducing the need for incremental working capital to support growth.
Cash Flows
The following table summarizes the statement of cash flows for the fiscal years ended December 25, 2012, December 31, 2013 and
December 30, 2014:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
December 25,
2012
December 31,
2013
(in thousands)
December 30,
2014
$
$
30,968 $
(32,173)
(2,151)
(3,356) $
29,392 $
(31,462)
4,981
2,911 $
42,766
(47,956)
(4,964)
(10,154)
Operating Activities. Net cash flows provided by operating activities increased $13.4 million during fiscal 2014 as compared to fiscal
2013 primarily due to a $4.4 million increase in net income, a $4.2 million increase in cash related to an increase in accounts payable, a
$2.3 million increase in depreciation and amortization, and a $2.0 million increase in cash related to an increase in other liabilities,
partially offset by a $3.7 million decrease in cash related to income taxes. Cash flows provided by operating activities was $29.4 million
in 2013 consisting primarily of net income of $12.2 million, adjustments for depreciation, amortization, deferred income taxes and other
non-cash charges totaling $18.5 million, a net increase in cash of $2.9 million resulting from a decrease in lease incentives receivable and
$4.6 million from an increase in other liabilities and deferred rent obligations. These cash inflows were partially offset by increases in
inventories and other current assets of $4.1 million and $4.7 million resulting from decreases in accounts payable and income taxes
payable. Cash flows provided by operating activities was $31.0 million in 2012 consisting primarily of net income of $13.8 million,
adjustments for depreciation, amortization and other non-cash charges totaling $11.6 million, a net increase in cash of $8.4 million
resulting from a decrease in restricted cash and lease incentives receivable and an increase in other liabilities and deferred rent
obligations, as well as $3.2 million resulting from increases in accounts payable and income taxes payable. These cash inflows were
partially offset by increases in inventories and other current assets of $4.4 million and deferred income taxes of $1.6 million.
Investing Activities. Net cash used in investing activities in 2014 was $48.0 million, consisting primarily of purchases of property and
equipment. These purchases were primarily related to construction of five Grilles and one Del Frisco’s during fiscal 2014, as well as the
purchase of a land and building site related to a 2015 opening and remodel activity at existing restaurants. Net cash used in investing
activities in 2013 was $31.5 million, consisting primarily of purchases of property and equipment of $31.3 million. These purchases
primarily related to construction of six Grille restaurants opened during the year, one Grille restaurant in progress and one Del Frisco’s
scheduled to open in the first half of fiscal 2014, and remodel activity of existing restaurants. As a component of the remodel activity,
during 2013, we completed refreshes, with varying scopes of work, of six Del Frisco’s and six Sullivan’s at an average cost of $0.4
million per location. Net cash used in investing activities in 2012 was $32.2 million, consisting primarily of purchases of property and
equipment of $33.6 million, partially offset by proceeds from the sale of the Dallas Sullivan’s restaurant property. These purchases
primarily related to construction of three Grille restaurants and one Del Frisco’s opened during the year, two Grille restaurants in
progress and scheduled to open in the first half of fiscal 2013, and remodel activity of existing restaurants. As a component of the
remodel activity, during 2012, we completed refreshes, with varying scopes of work, of five Del Frisco’s and six Sullivan’s at an average
cost of $0.3 million per location.
38
Financing Activities. Net cash used in financing activities in 2014 was $5.0 million, which was comprised of $6.3 million in treasury
stock purchases, partially offset by $1.3 million in proceeds from the exercise of stock options. Net cash provided by financing activities
in 2013 was $5.0 million, comprised primarily of the $8.2 million contribution by Wagon to pay the transaction bonuses related to the
secondary public offerings that occurred in March, July and December of 2013, partially offset by $3.7 million in treasury stock
purchases. Net cash used in financing activities in 2012 was $2.2 million, consisting primarily of net proceeds from the issuance of
common stock in our initial public offering, net of underwriter fees and issuance costs, of $66.5 million and a $1.4 million majority
shareholder contribution made to fund the payment of public offering transaction bonuses, offset by principal payments of $70.0 million
made on our credit facility.
Capital Expenditures
We typically target an average cash investment of approximately $7.0 million to $9.0 million per restaurant for a Del Frisco’s restaurant
and $3.0 million to $4.5 million for a Sullivan’s or a Grille, in each case net of landlord contributions and equipment financing and
including pre-opening costs. In addition, we are currently “refreshing” a number of our Sullivan’s and Del Frisco’s locations to, among
other things, add additional seating, private dining space and patio seating. During 2014, we completed refreshes, with varying scopes of
work, of three Sullivan’s at an average cost of $0.8 million per location. Thereafter, we expect to complete one to two refreshes each year
at an approximate cost of $0.5 million per location. These capital expenditures will primarily be funded by cash flows from operations
and, if necessary, by the use of our credit facility, depending upon the timing of expenditures.
Credit Facility
We entered into the 2011 credit facility in July 2011 and terminated our prior credit facility that consisted of a seven-year $110 million
term loan and six-year revolving credit facility of up to $20.0 million. The 2011 credit facility provided for a five-year term loan of $70.0
million and a five-year revolving credit facility of up to $10.0 million. We used the net proceeds of the borrowings under the 2011 credit
facility to retire our prior credit facility, which at the time had a balance of approximately $67.0 million. The remaining proceeds were
used to pay related fees and expenses and for working capital. We repaid $61.0 million under the 2011 credit facility on August 1, 2012
with proceeds from our initial public offering, and on September 4, 2012 we repaid the remaining $500,000 outstanding under the 2011
credit facility. We expensed approximately $1.6 million of deferred loan costs in connection with the repayment during the third quarter
of fiscal 2012. As discussed below, we replaced the 2011 credit facility in the fourth quarter of fiscal 2012 with a new credit facility.
On October 15, 2012, we entered into a new credit facility that provides for a three-year unsecured revolving credit facility of up to $25.0
million. Borrowings under the 2012 credit facility bear interest at a rate of LIBOR plus 1.50%. We are required to pay a commitment fee
equal to 0.25% per annum on the available but unused revolving loan facility. The credit facility is guaranteed by certain of our
subsidiaries. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA (as
defined in the credit facility), and minimum fixed charge coverage. Specifically, we are required to have a leverage ratio of less than 1.00
and a fixed charge coverage ratio of greater than 2.00. As of December 30, 2014, we were in compliance with each of these tests. The
credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of
dividends, the incurrence of indebtedness and providing financing or other transactions with affiliates. As of December 30, 2014 there
were no outstanding borrowings under this facility.
Common Stock Repurchase Program
On October 9, 2013, our Board of Directors approved a common stock repurchase program. As of December 30, 2014, we had fully
exhausted this authority with 465,496 of our common shares repurchased at a cost of $10.0 million.
On October 14, 2014, our Board of Directors approved a new stock repurchase program authorizing the Company to repurchase up to
$25 million of its common stock over the next three years. Under this program, we may from time to time purchase our outstanding
common stock in the open market at management’s discretion, subject to share price, market conditions and other factors. The common
stock repurchase program does not obligate us to repurchase any dollar amount or number of shares. As of December 30, 2014, we had
not repurchased any common shares of our common stock under this program.
39
Contractual Obligations
The following table summarizes our contractual obligations as of December 30, 2014:
Long-term debt
Operating leases
Total
Initial Public Offering
Total
Less than 1 year
1 - 3 years
(in thousands)
3 - 5 years
More than 5
years
$
$
— $
315,094
315,094 $
— $
17,316
17,316 $
— $
37,329
37,329 $
— $
37,722
37,722 $
—
222,727
222,727
On July 26, 2012, we priced a $75.4 million initial public offering of 5.8 million shares of common stock at $13.00 per share. Upon the
August 1, 2012 closing of our initial public offering, we received net proceeds of approximately $70.1 million, reflecting approximately
$5.3 million of underwriting discounts and commissions. Additionally, we incurred approximately $3.7 million in offering costs that
reduced the net proceeds available to additional paid in capital.
Prior to the closing of our initial public offering, we converted from a limited liability company to a corporation and in connection
therewith, our then-outstanding membership interests were converted into approximately 18.0 million shares of common stock. At
August 1, 2012, the closing date of our initial public offering, we had a total of approximately 23.8 million shares of common stock
issued and outstanding.
We used a portion of the net proceeds from our initial public offering to repay $61.0 million of amounts outstanding under our credit
facility on August 1, 2012, as discussed above. In addition, as discussed above, we used $3.0 million of the net proceeds to make a
one-time payment to Lone Star Fund in consideration for the termination of an asset advisory agreement upon consummation of our
initial public offering. We used the remainder of the net proceeds for working capital and other general corporate purposes. In
conjunction with the repayment of amounts outstanding under the credit facility, we wrote-off approximately $1.6 million in
unamortized debt issuance costs in the third quarter of fiscal 2012.
In connection with our initial public offering, we adopted the 2012 Long-Term Incentive Plan which provides for the issuance of up to
2,232,800 shares of common stock. We granted options to purchase 745,000 shares to our officers, employees and certain director
nominees under this plan at the time of the pricing of the offering with an exercise price equal to $13.00, the initial public offering price.
Off-Balance Sheet Arrangements
Following the acquisition of Lone Star Steakhouse & Saloon, Inc. by Lone Star Fund, our former principal stockholder restructured the
company to separate certain other Lone Star Steakhouse & Saloon concepts by, among other things, spinning off the subsidiaries that
owned and operated those concepts. The entities which were spun-off, which along with their affiliate companies we refer to as the
Casual Dining Companies, were wholly-owned by Lone Star Fund and were therefore considered related parties of us. We did not have
any ownership interest in them and they did not have any ownership interest in us.
Prior to the acquisition of Lone Star Steakhouse & Saloon, Inc. by Lone Star Fund, the predecessor guaranteed certain lease payments of
certain of the Casual Dining Companies in connection with the leasing of real estate for restaurant locations. As of December 30, 2014,
we continue to be a guarantor for five of these leases. The leases expire at various times through 2016. These guarantees would require
payment by us only in an event of default by the Casual Dining Company tenant where it failed to make the required lease payments or
perform other obligations under a lease. We believe that the likelihood is remote that material payments will be required under these
guarantees. At December 30, 2014, the maximum potential amount of future lease payments we could be required to make as a result of
the guarantees was $0.9 million.
Inflation
Over the past five years, inflation has not significantly affected our operations. However, the impact of inflation on labor, food and
occupancy costs could, in the future, significantly affect our operations. We pay many of our employees hourly rates related to the
applicable federal or state minimum wage. Food costs as a percentage of revenues have been somewhat stable due to procurement
efficiencies and menu price adjustments, although no assurance can be made that our procurement will continue to be efficient or that we
will be able to raise menu prices in the future. Costs for construction, taxes, repairs, maintenance and insurance all impact our occupancy
costs. We believe that our current strategy, which is to seek to maintain operating margins through a combination of menu price
increases, cost controls, careful evaluation of property and equipment needs, and efficient purchasing practices, has been an effective
tool for dealing with inflation. There can be no assurance, however, that future inflationary or other cost pressure will be effectively
offset by this strategy.
40
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are based upon our audited consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements is based on our critical accounting policies that require us to make estimates and judgments that affect the amounts
reported in those financial statements. Our significant accounting policies, which may be affected by our estimates and assumptions, are
more fully described in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical accounting policies are those that we believe are most important to portraying our financial condition and results of operations
and also require the greatest amount of subjective or complex judgments by management. Judgments or uncertainties regarding the
application of these policies may result in materially different amounts being reported under different conditions or using different
assumptions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing the
consolidated financial statements.
Goodwill and Other Intangible Assets. We account for our goodwill and intangible assets in accordance with Accounting Standards
Codification, or ASC, Topic 350, Intangibles—Goodwill and Other . In accordance with ASC 350, goodwill and intangible assets,
primarily trade names, which have indefinite useful lives, are not being amortized. However, both goodwill and trade names are subject
to annual impairment testing in accordance with ASC Topic 350.
The impairment evaluation for goodwill is conducted annually using a two-step process. In the first step, the fair value of each reporting
unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is
generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying
amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that
should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting
unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The resulting
implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the
goodwill and an impairment charge is recorded for the difference.
The evaluation of the carrying amount of other intangible assets with indefinite lives is made annually by comparing the carrying amount
of these assets to their estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows
of the restaurant concepts. We make assumptions regarding future profits and cash flows, expected growth rates, terminal value, and
other factors which could significantly impact the fair value calculations. If the estimated fair value is less than the carrying amount of
the other intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value.
The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and other
intangible assets and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions
are subject to change as a result of changing economic and competitive conditions.
The fair value of our restaurant concepts were substantially in excess of the carrying value as of our 2014 goodwill impairment test that
was performed at year-end.
Property and Equipment. We assess recoverability of property and equipment in accordance with ASC Topic 360, Property, Plant and
Equipment . Our assessment of recoverability of property and equipment is performed on a restaurant-by-restaurant basis. Certain events
or changes in circumstances may indicate that the recoverability of the carrying amount of property and equipment should be assessed.
These events or changes may include a significant decrease in market value, a significant change in the business climate in a particular
market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or
changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we
recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value.
Additionally, we periodically review assets for changes in circumstances which may impact their useful lives.
Our assessments of cash flows represent our best estimate as of the time of the impairment review and are consistent with our internal
planning. If different cash flows had been estimated in the current period, the property and equipment balances could have been
materially impacted. Furthermore, our accounting estimates may change from period to period as conditions change, and this could
materially impact our results in future periods. Factors that we must estimate when performing impairment tests include sales volume,
prices, inflation, marketing expense, and capital expenses.
In 2013, we recognized non-cash impairment charges of long-lived assets of $2.4 million. This impairment charge was related to our
determination that the carrying amount of long-lived assets at one Sullivan’s location exceeded its estimated future cash flows. The
estimated fair value was based on an estimated sales price of leasehold improvements and equipment for this location.
In 2014, we recognized non-cash impairment charges of long-lived assets of $3.5 million. This impairment charge was related to our
determination that the carrying amount of long-lived assets at one Grille location exceeded its estimated future cash flows. The estimated
fair value was based on an estimated value of the furniture and equipment that we may transfer to future Grille locations.
41
Leases. We currently lease all but one of our restaurant locations. We evaluate each lease to determine its appropriate classification as an
operating or capital lease for financial reporting purposes. All of our leases are classified as operating leases. We record the minimum
lease payments for our operating leases on a straight-line basis over the lease term, including option periods which in the judgment of
management are reasonably assured of renewal. The lease term commences on the date that the lessee obtains control of the property,
which is normally when the property is ready for tenant improvements. Contingent rent expense is recognized as incurred and is usually
based on either a percentage of restaurant sales or as a percentage of restaurant sales in excess of a defined amount. Our lease costs will
change based on the lease terms of our lease renewals as well as leases that we enter into with respect to our new restaurants.
Leasehold improvements financed by the landlord through tenant improvement allowances are capitalized as leasehold improvements
with the tenant improvement allowances recorded as deferred lease incentives. Deferred lease incentives are amortized on a straight-line
basis over the lesser of the life of the asset or the lease term, including option periods which in the judgment of management are
reasonably assured of renewal (same term that is used for related leasehold improvements) and are recorded as a reduction of occupancy
expense. As part of the initial lease terms, we negotiate with our landlords to secure these tenant improvement allowances. There is no
guarantee that we will receive tenant improvement allowances for any of our future locations, which would result in additional
occupancy expenses.
In an exposure draft issued in 2010, the FASB, together with the International Accounting Standards Board, has proposed a
comprehensive set of changes in accounting for leases. While the Exposure Draft addresses new financial accounting rules for both,
lessors and lessees, the primary focus will likely be on changes affecting lessees. The lease accounting model contemplated by the new
standard is a “right of use” model that assumes that each lease creates an asset (the lessee’s right to use the leased asset) and a liability
(the future rent payment obligations) which should be reflected on a lessee’s balance sheet to fairly represent the lease transaction and
the lessee’s related financial obligations. All of our restaurant leases are accounted for as operating leases, with no related assets and
liabilities on our balance sheet. However, changes in lease accounting rules or their interpretation, or changes in underlying assumptions,
estimates or judgments by us could significantly change our reported or expected financial performance.
Income Taxes. We have accounted for, and currently account for, income taxes in accordance with ASC Topic 740, Accounting for
Income Taxes . This statement requires an asset and liability approach for financial accounting and reporting of income taxes. Under
ASC Topic 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit
carry-forwards. Income taxes are one of our critical accounting policies and estimates and therefore involve a certain degree of
judgment. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at
that time while the actual effective tax rate is calculated at year-end.
The realization of tax benefits of deductible temporary differences will depend on whether we will have sufficient taxable income of an
appropriate character to allow for utilization of the deductible amounts.
We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return.
We recognize any interest and penalties related to unrecognized tax benefits in income tax expense. Significant judgment is required in
assessing, among other things, the timing and amounts of deductible and taxable items. Tax reserves are evaluated and adjusted as
appropriate, while taking into account the progress of audits of various taxing jurisdictions.
Self-Insurance Reserves. We maintain various insurance policies including workers’ compensation and general liability. Pursuant to
those policies, we are responsible for losses up to certain limits and are required to estimate a liability that represents our ultimate
exposure for aggregate losses below those limits. This liability is based on management’s estimates of the ultimate costs to be incurred to
settle known claims and claims not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a
number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends,
including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.
Recent Accounting Pronouncements
The information regarding recent accounting pronouncements materially affecting our consolidated financial statements is included in
Note 2 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K, which is incorporated herein by
reference.
New and Revised Financial Accounting Standards
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. Section 102 of the JOBS Act provides that an
“emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act
for complying with new or revised accounting standards. However, we chose to “opt out” of this extended transition period, and as a
result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for
non-“emerging growth companies.” Our decision to opt out of the extended transition period is irrevocable.
42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The inherent risk in market risk sensitive instruments and positions primarily relates to potential losses arising from adverse changes in
interest rates.
We are exposed to market risk from fluctuations in interest rates. For fixed rate debt, interest rate changes affect the fair market value of
the debt but do not impact earnings or cash flows. Conversely for variable rate debt, including borrowings under our credit facility,
interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flows, assuming
other factors are held constant. At December 30, 2014, we had no outstanding debt. Assuming a full drawdown on the revolving credit
facility, and holding other variables constant, such as foreign exchange rates and debt levels, a hypothetical immediate one percentage
point change in interest rates would be expected to have an impact on pre-tax earnings and cash flows of approximately $0.3 million over
the course of 12 months.
Commodity Price Risk
We are exposed to market price fluctuations in beef, seafood, produce and other food product prices. Given the historical volatility of
beef, seafood, produce and other food product prices, these fluctuations can materially impact our food and beverage costs. While we
have taken steps to qualify multiple suppliers who meet our standards as suppliers for our restaurants and enter into agreements with
suppliers for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such
commodities will not fluctuate due to weather and other market conditions outside of our control. We currently do not contract for some
of our commodities, such as fresh seafood and certain produce, for periods longer than one week. Consequently, such commodities can
be subject to unforeseen supply and cost fluctuations. Dairy costs can also fluctuate due to government regulation. Because we typically
set our menu prices in advance of our food product prices, our menu prices cannot immediately take into account changing costs of food
items. To the extent that we are unable to pass the increased costs on to our customers through price increases, our results of operations
would be adversely affected. We do not use financial instruments to hedge our risk to market price fluctuations in beef, seafood, produce
and other food product prices at this time.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and notes thereto and the reports of KPMG LLP and Ernst & Young LLP, independent registered
public accounting firms, are set forth in the Index to Financial Statements under Item 15, Exhibits and Financial Statement Schedules ,
and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree
of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures
may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule
13a-15(f) under the Exchange Act. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the
framework established in “Internal Control—Integrated Framework”, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework). Based on this evaluation, management has concluded that our internal control over financial
reporting was effective as of the as of the end of the period covered by this report.
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair
presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of
43
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Because we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm, KPMG LLP, is
not required to issue an attestation report on our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC
no later than 120 days after the close of our fiscal year ended December 30, 2014. The information with respect to our executive officers
required under this Item is set forth in Item 1, Business and incorporated herein by reference.
Item 11. Executive Compensation
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC
no later than 120 days after the close of our fiscal year ended December 30, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
All information, except the equity compensation plans table below, required under this Item is incorporated herein by reference to our
definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 30, 2014.
Equity Compensation Plans
The following table sets forth information as of December 30, 2014 with respect to our equity compensation plans under which our
equity securities are authorized for issuance:
Number of securities to
be issued upon exercise
of outstanding options
and rights
Weighted average
exercise price of
outstanding options
and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
the first column)
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
1,429,000 $
-
1,429,000 $
17.45 $
—
17.45 $
689,925
—
689,925
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC
no later than 120 days after the close of our fiscal year ended December 30, 2014.
Item 14. Principal Accountant Fees and Services
The information required under this item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no
later than 120 days after the close of our fiscal year ended December 30, 2014.
44
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedules
PART IV
See Index to Consolidated Financial Statements appearing on page F-1. All schedules have been omitted because they are not
required or applicable or the information is included in the consolidated financial statements or notes thereto.
(b) Exhibits
See Exhibit Index appearing on the next page for a list of exhibits filed with or incorporated by reference as part of this
Annual Report on Form 10-K.
45
Exhibit No.
3.1
3.2
4.1
10.1
10.2 #
10.3 #
10.4 #
10.5 #
10.6 #
10.7 #
10.8 #
10.9 #
10.10 #
10.11 #
10.12 #
10.13 #
Exhibit Index
Description
Reference
Certificate of Incorporation, filed on July 24, 2012 as Exhibit 3.1 to Amendment No. 6 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-179141) and incorporated herein by
reference.
Bylaws, filed on June 11, 2012 as Exhibit 3.2 to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Registration Rights Agreement between Del Frisco’s Restaurant Group, Inc. and LSF5 Wagon
Holdings, LLC, dated July 26, 2012, filed on August 21, 2012 as Exhibit 4.1 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended June 12, 2012 and incorporated herein by
reference.
Loan Agreement, dated as of October 15, 2012, by and among Del Frisco’s Restaurant Group, Inc.,
certain subsidiaries as guarantors, and JP Morgan Chase Bank N.A., filed on October 16, 2012 as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended
September 4, 2012 and incorporated herein by reference.
Del Frisco’s Restaurant Group 2012 Long-Term Incentive Plan, filed on July 24, 2012 as Exhibit
10.25 to Amendment No. 6 to the Registrant’s Registration Statement on Form S-1 (File No.
333-179141) and incorporated herein by reference.
Del Frisco’s Restaurant Group Nonqualified Deferred Compensation Plan, effective as Amended and
Restated December 1, 2007, filed on January 24, 2012 as Exhibit 10.4 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
First Amendment to Del Frisco’s Restaurant Group Nonqualified Deferred Compensation Plan, dated
as of December 31, 2009, filed on January 24, 2012 as Exhibit 10.5 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Executive Employment Agreement, dated February 7, 2011, by and between Mark Mednansky and
Center Cut Hospitality, Inc., filed on January 24, 2012 as Exhibit 10.6 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Letter Agreement, dated February 14, 2011, by and between Mark Mednansky and LSF5 Wagon
Holdings, LLC, filed on January 24, 2012 as Exhibit 10.7 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Letter Agreement, dated October 21, 2011, by and between LSF5 Wagon Holdings, LLC, Del
Frisco’s Restaurant Group, LLC and Mark S. Mednansky., filed on January 24, 2012 as Exhibit 10.8
to the Registrant’s Registration Statement on Form S-1 (File No. 333-179141) and incorporated
herein by reference.
Subscription Agreement, dated April 30, 2007, by and between Mark S. Mednansky and LSF5
Wagon Holdings, LLC, filed on January 24, 2012 as Exhibit 10.15 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Executive Employment Agreement, dated October 17, 2011, by and between Thomas J. Pennison, Jr.
and Center Cut Hospitality, Inc., filed on January 24, 2012 as Exhibit 10.9 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Letter Agreement, dated October 17, 2011, by and between Thomas J. Pennison, Jr. and LSF5 Wagon
Holdings, LLC and Del Frisco’s Restaurant Group, LLC., filed on January 24, 2012 as Exhibit 10.10
to the Registrant’s Registration Statement on Form S-1 (File No. 333-179141) and incorporated
herein by reference.
Executive Employment Agreement, dated November 12, 2012, between Jeff Carcara and Center Cut
Hospitality, Inc., filed on November 14, 2012 as Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K and incorporated herein by reference.
Employment Agreement, effective January 4, 2012, between Thomas G. Dritsas and Center Cut
Hospitality, Inc., filed on January 24, 2012 as Exhibit 10.13 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-179141) and incorporated herein by reference.
Employment Agreement, effective January 25, 2012, between William S. Martens, III and Center Cut
Hospitality, Inc., filed on April 16, 2012 as Exhibit 10.26 to Amendment No. 1 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-179141) and incorporated herein by reference.
46
Exhibit No.
10.14
10.15
10.16
10.17
10.18
21.1
23.1
23.2
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Description
Reference
Form of Indemnification Agreement for officers and directors, filed on June 11, 2012 as Exhibit
10.3 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No.
333-179141) and incorporated herein by reference.
Asset Advisory Agreement, dated December 13, 2006, by and between Hudson Advisors, L.L.C.
and Lone Star Steakhouse & Saloon, Inc., filed on April 16, 2012 as Exhibit 10.27 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No.
333-179141) and incorporated herein by reference.
Termination Agreement between Hudson Americas LLC, Center Cut Hospitality, Inc. and Lone
Star Fund V (U.S.), L.P. dated as of July 23, 2012, filed on July 24, 2012 as Exhibit 10.29 to
Amendment No. 6 to the Registrant’s Registration Statement on Form S-1 (File No.
333-179141) and incorporated herein by reference.
Transition Services Agreement between Del Frisco’s Restaurant Group, Inc., Hudson Advisors
LLC and Hudson Americas LLC dated as of July 23, 2012, filed on July 24, 2012 as Exhibit
10.30 to Amendment No. 6 to the Registrant’s Registration Statement on Form S-1 (File No.
333-179141) and incorporated herein by reference.
First Amendment to Loan Agreement, dated as of October 8, 2013, among the Company and
JPMorgan Chase Bank, N.A. filed on October 9, 2013 as Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 3, 2013 and incorporated herein
by reference.
List of Subsidiaries of the Registrant.
Consent of KPMG LLP.
Consent of Ernst & Young LLP.
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
XBRL Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
*
*
*
*
*
*
* Filed herewith.
# Denotes management compensatory plan or arrangement.
47
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Del Frisco’s Restaurant Group, Inc.
By:
Name:
Title:
/s/ Thomas J. Pennison, Jr.
Thomas J. Pennison, Jr.
Chief Financial Officer
Date: February 27, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
/s/ Mark S. Mednansky
Mark S. Mednansky
Chief Executive Officer; Acting Chairman of the Board
February 27, 2015
(Principal Executive Officer)
/s/ Thomas J. Pennison, Jr.
Thomas J. Pennison, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 27, 2015
/s/ Norman J. Abdallah
Norman J. Abdallah
/s/ David B. Barr
David B. Barr
/s/ Richard L. Davis
Richard L. Davis
/s/ William Lamar, Jr.
William Lamar, Jr.
Director
Director
Director
Director
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements –December 25, 2012, December 31, 2013, and December 30, 2014:
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Del Frisco’s Restaurant Group, Inc.
We have audited the accompanying consolidated balance sheet of Del Frisco’s Restaurant Group, Inc. and subsidiaries (the
Company) as of December 30, 2014, and the related consolidated statements of income and comprehensive income, changes in
stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Del Frisco’s Restaurant Group, Inc. as of December 30, 2014, and the results of their operations and their cash flows for the year then
ended in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
February 27, 2015
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Del Frisco’s Restaurant Group, Inc.
We have audited the accompanying consolidated balance sheet of Del Frisco’s Restaurant Group, Inc. (the Company) as of
December 31, 2013, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and
cash flows for the fiscal years ended December 31, 2013 and December 25, 2012. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 2013 and the consolidated results of its operations and its cash flows for the fiscal years ended
December 31, 2013 and December 25, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
February 28, 2014
F-3
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31, 2013
December 30, 2014
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Inventory
Income tax receivable
Deferred income taxes, net
Lease incentives receivable
Prepaid expenses and other
Total current assets
Property and equipment:
Land
Buildings
Leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Property and equipment, net
Deferred compensation plan investments
Other assets:
Goodwill
Intangible assets, net
Loan costs, net of accumulated amortization of $20 in 2013 and $37 in 2014
Other
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Sales tax payable
Accrued payroll
Real estate taxes
Accrued self-insurance
Deferred revenue
Deferred rent obligations, current
Other
Total current liabilities
Long-term debt, less current maturities
Other noncurrent liabilities
Deferred compensation plan liabilities
Deferred rent obligations
Deferred tax liabilities, net
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value , 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2013 or December 30, 2014
Common stock, $0.001 par value , 190,000,000 shares authorized, 23,823,142 shares
issued and 23,626,642 shares outstanding at December 31, 2013 and 23,908,542 shares
issued and 23,443,046 shares outstanding at December 30, 2014
Treasury stock at cost: 196,500 and 465,496 shares at December 31, 2013 and December
30, 2014, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes.
F-4
$
$
$
$
$
$
$
13,674
215
14,094
1,471
2,797
4,226
5,355
41,832
2,122
1,740
126,432
39,093
(45,296)
124,091
10,754
75,365
36,348
31
230
288,651
8,478
1,865
5,524
165
1,778
12,983
1,396
1,595
33,784
—
4,352
11,022
27,511
15,199
91,868
—
24
(3,681)
129,961
70,479
—
196,783
288,651
$
3,520
215
16,592
4,769
3,124
5,406
6,007
39,633
8,295
4,312
151,917
48,918
(58,443)
154,999
12,760
75,365
36,575
13
321
319,666
12,198
2,505
5,788
417
1,793
15,716
1,786
1,536
41,739
—
4,600
12,979
33,186
16,179
108,683
—
24
(10,000)
133,883
87,076
—
210,983
319,666
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except share and per share data)
Revenues
Costs and expenses:
Costs of sales
Restaurant operating expenses
Marketing and advertising costs
Pre-opening costs
General and administrative costs
Management and accounting fees paid to related party
Asset advisory agreement termination fee
Secondary public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
Other income (expense), net:
Interest expense
Write-off of debt issuance costs
Other, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Discontinued operations, net of income tax benefit
Net income
Basic income (loss) per common share:
Continuing operations
Discontinued operations
Basic income per share
Diluted income (loss) per common share:
Continuing operations
Discontinued operations
Diluted income per share
Shares used in computing net income (loss) per common share:
Basic
Diluted
Comprehensive income
December 25,
2012
Fiscal Year Ended
December 31,
2013
December 30,
2014
$
232,435 $
271,806 $
301,805
71,093
100,143
4,682
4,058
13,449
1,252
3,000
—
1,462
—
8,675
24,621
(2,920)
(1,649)
113
20,165
5,592
14,573 $
(819)
82,209
121,825
5,663
3,758
17,421
—
—
1,024
8,355
2,360
11,300
17,891
(72)
—
(51)
17,768
5,556
12,212 $
—
13,754 $
12,212 $
0.71 $
(0.04)
0.67 $
0.71 $
(0.04)
0.67 $
0.51 $
—
0.51 $
0.51 $
—
0.51 $
90,990
137,695
6,169
4,735
20,537
—
—
5
—
3,536
13,598
24,540
(113)
—
(107)
24,320
7,723
16,597
—
16,597
0.71
—
0.71
0.70
—
0.70
20,432,579
20,432,579
23,779,782
23,852,200
23,517,883
23,740,318
13,754 $
12,212 $
16,597
$
$
$
$
$
$
$
See accompanying notes.
F-5
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders’ Equity
(Dollars in thousands)
Common Stock
Shares
Par Value
Additional
Paid
In Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Balance at December 27, 2011
Net income
Share-based compensation costs
17,994,667 $
—
—
18 $
—
—
51,341 $
—
378
— $ 44,513 $
—
—
13,754
—
— $ 95,872
13,754
—
378
—
Issuance of common stock for
initial public offering, net of fees
and issuance costs
Contribution by majority shareholder
(see Note 4)
Balance at December 25, 2012
Net income
Share-based compensation costs
Stock option exercises, including tax
effects
Treasury stock purchases
Contribution by shareholder (see Note
4)
Balance at December 31, 2013
Net income
Share-based compensation costs
Stock option exercises, including tax
effects
Treasury stock purchases
Balance at December 30, 2014
5,800,000
6
66,451
—
—
—
66,457
—
23,794,667 $
—
—
1,440
—
24 $ 119,610 $
—
—
1,689
—
—
—
— $ 58,267 $
—
—
12,212
—
1,440
—
— $ 177,901
12,212
—
1,689
—
28,475
(196,500)
—
—
428
—
—
(3,681)
—
—
—
—
428
(3,681)
—
23,626,642 $
—
—
85,400
(268,996)
23,443,046 $
—
8,234
—
24 $ 129,961 $ (3,681) $ 70,479 $
—
—
16,597
—
—
—
2,567
—
—
—
—
24 $ 133,883 $ (10,000) $ 87,076 $
—
(6,319)
1,355
—
—
—
8,234
—
— $ 196,783
16,597
—
2,567
—
1,355
—
—
(6,319)
— $ 210,983
See accompanying notes.
F-6
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
December 25,
2012
Fiscal Year Ended
December 31,
2013
December 30,
2014
$
13,754 $
12,212 $
16,597
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Loss on disposal of restaurant property
Write-off of goodwill associated with disposed restaurant property
Write-off of deferred debt issuance costs
Loan cost amortization
Non-cash equity based compensation
Non-cash impairment charges
Deferred income taxes
Amortization of deferred lease incentives
Changes in operating assets and liabilities:
Restricted cash
Inventories
Lease incentives receivable
Other assets
Accounts payable
Income taxes
Deferred rent obligations
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of property and equipment
Purchases of property and equipment
Other
Net cash used in investing activities
Cash flows from financing activities:
8,809
103
738
1,649
222
378
—
(1,608)
(285)
761
(2,212)
2,902
(2,146)
1,313
1,840
1,343
3,407
30,968
1,682
(33,635)
(220)
(32,173)
11,300
55
—
—
14
1,689
2,360
3,677
(546)
—
(1,991)
2,889
(2,162)
(945)
(3,767)
1,344
3,263
29,392
5
(31,326)
(141)
(31,462)
Proceeds from issuance of common stock, net of underwriter fees and
issuance costs
Payments of long-term debt
Deferred debt issuance costs
Purchase of treasury stock
Proceeds from exercise of stock options
Contribution from shareholder
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Capital expenditures included in accounts payable
66,457
(70,000)
(48)
—
—
1,440
(2,151)
(3,356)
14,119
10,763 $
3,127 $
5,283 $
— $
—
—
—
(3,681)
428
8,234
4,981
2,911
10,763
13,674 $
65 $
5,361 $
747 $
$
$
$
$
See accompanying notes.
F-7
13,598
108
—
—
18
2,567
3,536
653
(852)
—
(2,498)
3,767
(2,154)
3,209
(3,050)
1,970
5,297
42,766
13
(47,491)
(478)
(47,956)
—
—
—
(6,319)
1,355
—
(4,964)
(10,154)
13,674
3,520
129
10,225
511
DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands)
(1) Organization and Basis of Presentation
Background
Del Frisco’s Restaurant Group, Inc. (the Company) is incorporated in Delaware as a corporation. Prior to its initial public offering
(IPO) in 2012, the Company was a wholly owned subsidiary of LSF5 Wagon Holdings, LLC (Wagon), which is a wholly owned
subsidiary of LSF5 COI Holdings, LLC (Holdings), which is majority owned by Lone Star Fund V (U.S.), L.P. (the Fund), which is a
private investment fund.
Effective December 13, 2006, the Fund, through Holdings, acquired all of the outstanding capital stock of Lone Star Steakhouse &
Saloon, Inc. (Star), through a series of transactions pursuant to an Agreement and Plan of Merger (the Acquisition). Prior to the
Acquisition, Star was a public company that owned and operated steakhouse restaurants under four different restaurant brands, which
included Lone Star Steakhouse & Saloon (Lone Star), Texas Land & Cattle Steak House (TXLC), Sullivan’s Steakhouse (Sullivan’s),
and Del Frisco’s Double Eagle Steak House (Del Frisco’s).
In connection with the Acquisition, Holdings contributed all of the assets, restaurant operations, trade names, and other intangible
assets of its Lone Star and TXLC restaurants to LSF5 Cowboy Holdings, LLC (Casual Dining Companies), which is a wholly owned
subsidiary of Holdings. In addition, LS Management, Inc. (LSM), which was previously a wholly owned subsidiary of Star that provided
all of the accounting, legal, and other administrative support to all of Star’s restaurants, was contributed to the Casual Dining Companies.
Concurrently, the remaining assets and restaurant operations of Star, which primarily included the Del Frisco’s and Sullivan’s
restaurants as well as LS Finance, LLC which was previously a wholly owned subsidiary of Star that provided all of the cash
management and treasury support to all of Star’s restaurants, were contributed to the Company.
On July 26, 2012, the Company priced a $75,400 IPO of 5.8 million shares of common stock at $13.00 per share. On July 27, 2012,
the Company’s common stock began trading on the NASDAQ Global Select Market under the ticker symbol “DFRG.” Upon the
August 1, 2012 closing of the IPO, the Company received net proceeds of $70,122, reflecting $5,278 of underwriting discounts and
commissions. Additionally, the Company incurred $3,666 in offering costs that reduced the net proceeds available to additional paid in
capital. At the completion of the IPO, Wagon owned approximately 18.0 million shares of common stock, or approximately 75.6% of
the Company’s outstanding shares.
Prior to the IPO closing, the Company converted from a limited liability company to a corporation and in connection therewith, the
Company’s then-outstanding membership interests were converted into approximately 18.0 million shares of Company common stock
(the “Conversion”). As part of the IPO, the Company established its authorized shares at 10,000,000 shares of preferred stock, $0.001
par value per share, and 190,000,000 shares of common stock, $0.001 par value per share. At August 1, 2012, the closing date of the IPO,
the Company had a total of approximately 23.8 million common shares issued and outstanding.
The Company used a portion of the net proceeds from the IPO to repay $61,000 of amounts outstanding under its credit facility on
August 1, 2012. In addition, the Company used $3,000 of the net proceeds to make a one-time payment to an affiliate of the Fund in
consideration for the termination of an asset advisory agreement upon consummation of the IPO, which is reflected as an operating
expense in the consolidated statements of income and comprehensive income. The remainder of the net proceeds were used for working
capital and other general corporate purposes. In conjunction with the repayment of amounts outstanding under the credit facility, the
Company wrote-off $1,649 in unamortized debt issuance costs in the third quarter of fiscal 2012.
On March 7, 2013, a secondary public offering of the Company’s common stock was completed by the Fund. The selling
shareholder sold 4,750,000 previously outstanding shares. In addition, on April 10, 2013, the shareholder sold an additional 150,000
shares of common stock to cover over-allotments related to the March 7, 2013 offering. The Company did not receive any proceeds from
the offering. The selling shareholder paid all of the underwriting discounts and commissions associated with the sale of the shares;
however, the Company incurred $412 in costs and registration expenses related to this offering.
On July 25, 2013, a secondary public offering of the Company’s common stock was completed by the Fund. The selling
shareholder sold 6,000,000 previously outstanding shares. In addition, on August 6, 2013, the shareholder sold an additional 900,000
shares of common stock to cover over-allotments related to the July 25, 2013 offering. The Company did not receive any proceeds from
the offering. The selling shareholder paid all of the underwriting discounts and commissions associated with the sale of the shares;
however, the Company incurred $381 in costs and registration expenses related to this offering.
On December 4, 2013, a secondary public offering of the Company’s common stock was completed by the Fund. The selling
shareholder sold 5,386,667 previously outstanding shares. In addition, on December 6, 2013, the shareholder sold an additional 808,000
shares of common stock to cover over-allotments related to the December 4, 2013 offering. The Company did not receive any proceeds
from the offering. The selling shareholder paid all of the underwriting discounts and commissions associated with the sale of the shares;
however, the Company incurred $231 in costs and registration expenses related to this offering. At the completion of this offering and
F-8
the exercise of the underwriters’ over-allotment option, Lone Star Fund did not own any shares of the Company’s outstanding common
stock.
Description of Business
The Company owns and operates restaurants under the brand names of Del Frisco’s Double Eagle Steak House (Del Frisco’s),
Sullivan’s Steakhouse (Sullivan’s), and Del Frisco’s Grille (Grille). As of December 30, 2014 the Company owned and operated 11 Del
Frisco’s, 19 Sullivan’s and 16 Grille restaurants. During fiscal 2014, the Company opened one Del Frisco’s in Washington DC and five
Grilles in Burlington, Massachusetts, Irvine, California, N. Bethesda, Maryland, Tampa, Florida, and Pasadena, California.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending the last Tuesday in December. Fiscal 2012 and 2014 included 52
weeks of operations, while fiscal 2013 included 53 weeks of operations.
Concentrations
The Company has certain financial instruments exposed to a concentration of credit risk, which consist primarily of cash and cash
equivalents. The Company places cash with high-credit-quality financial institutions, and, at times, such cash may be in excess of the
federal depository insurance limit.
Additionally, the Company purchased a significant amount of total beef purchases from one supplier during fiscal 2012, 2013, and
2014, respectively. Due to the nature of the beef purchases, there are alternative sources of supply available; however, a change in
suppliers could potentially cause increased costs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include currency on hand, demand deposits with banks or other financial institutions, credit card
receivables, and short-term investments with maturities of three months or less when purchased. Cash and cash equivalents are carried at
cost, which approximates fair value.
Financial Instruments
The Company considers the carrying amounts of cash and cash equivalents, short-term investments, receivables and accounts
payable to approximate fair value based on the short-term nature of these items. Borrowings available under the credit facility at
December 30, 2014 have variable interest rates that reflect currently available terms and conditions for similar debt.
Inventories
Inventories, which primarily consist of food and beverages, are valued at the lower of cost, using the first-in, first-out (FIFO)
method, or market.
Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs, and renewals that do not enhance the value of or increase the lives
of the assets are expensed as incurred. Buildings are depreciated using the straight-line method over their estimated useful lives of 20 to
25 years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets
of 20 years or the expected term of the lease, including cancelable optional renewal periods when failure to exercise such renewal
options would result in an economic penalty to the Company. Furniture, fixtures, and equipment are depreciated using the straight-line
method over three to seven years, which are the estimated useful lives of the assets.
Interest is capitalized in connection with the construction of restaurant facilities. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset’s estimated useful life. Capitalized interest was $104, $0 and $0 for the years
ended December 25, 2012, December 31, 2013 and December 30, 2014, respectively.
F-9
Operating Leases
The Company leases restaurants under operating leases. The majority of the Company’s leases provide for rent escalation clauses,
contingent rental expense, and/or tenant improvement allowances.
Rent expense is recognized on a straight-line basis over the expected term of the lease, which includes cancelable optional renewal
periods that are reasonably assured to be exercised and where failure to exercise such renewal options would result in an economic
penalty to the Company.
Certain of the Company’s operating leases contain clauses that provide additional contingent rent based on a percentage of sales
greater than certain specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified
target that triggers the contingent rent, provided achievement of that target is considered probable.
The Company records tenant improvement allowances and other landlord incentives as a component of deferred rent which is
amortized on a straight-line basis over the expected term of the lease.
Preopening Costs
Preopening costs, including rent, labor costs, costs of hiring and training personnel, and certain other costs related to opening new
restaurants, are expensed when the costs are incurred.
Goodwill and Other Intangible Assets
The Company’s intangible assets primarily include goodwill, trade names, and licensing agreements, arising from the Acquisition.
The Company’s trade names include “Del Frisco’s Double Eagle Steak House” and “Sullivan’s Steakhouse,” both of which have
indefinite lives and, accordingly, are not subject to amortization. The trade names are used in the advertising and marketing of the
restaurants and are widely recognized and accepted by consumers in their respective markets for providing its customers an enjoyable
fine-dining experience. Goodwill represents the excess of costs over the fair value of the net assets acquired.
Goodwill and intangible assets that have indefinite useful lives are not amortized. However, both goodwill and trade names are
subject to annual impairment testing. The Company amortizes its finite-lived intangible assets on a straight-line basis over the estimated
period of benefit, generally seven to 17 years. See Note 3 for additional information.
The impairment evaluation for goodwill is conducted annually using a two-step process. In the first step, the fair value of each
reporting unit is compared to the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit
is determined using discounted cash flows and a market-based approach. If the estimated fair value of the reporting unit is less than the
carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment
that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the
reporting unit’s fair value to all of its assets and liabilities, other than goodwill, in a manner similar to a purchase price allocation. If the
resulting implied fair value of the goodwill that results from the application of this second step is less than the carrying amount of the
goodwill, an impairment charge is recorded for the difference. Currently, the Company defines the reporting units for assessing goodwill
impairment to be Del Frisco’s and Sullivan’s concepts. The Company performs its annual impairment test as of its year-end.
The evaluation of the carrying amount of other intangible assets with indefinite lives is made annually by comparing the carrying
amount of these assets to their estimated fair value. The estimated fair value is determined on the basis of existing market-based
conditions as well as discounted future cash flow or the royalty-relief method for trade names. If the estimated fair value is less than the
carrying amount, an impairment charge is recorded to reduce the asset to its estimated fair value.
The valuation approaches used to determine fair value of each reporting unit and other intangible assets are subject to key
judgments and assumptions about revenue growth rates, operating margins, weighted average cost of capital and comparable company
and acquisition market multiples. When developing these key judgments and assumptions, which are sensitive to change, management
considers economic, operational and market conditions that could impact the fair value. The judgments and assumptions used are
consistent with what management believes hypothetical market participants would use. However, estimates are inherently uncertain and
represent only reasonable expectations regarding future developments.
Loan Costs
Loan costs are stated at cost and amortized using the effective interest method over the life of the related loan.
Deferred Compensation Plan
In connection with the Company’s deferred-compensation plan, the Company has created a grantor trust to which it contributes
amounts equal to employee participants’ qualified deferrals and the Company’s matching portion. The plan is informally funded using
life insurance policies and mutual funds held by the grantor trust. All assets held by the grantor trust remain the property of the
Company; however, the Company does not currently intend to use such assets for any purpose other than to fund payments to the
participants pursuant to the terms of the deferred-compensation plan. The assets of the plan consist principally of cash surrender values
F-10
of the life insurance policies. Because the investment assets of the deferred-compensation plan are assets of the Company and would be
subject to general claims by creditors in the event of the Company’s insolvency, the accompanying consolidated balance sheets reflect
such investments as assets, with a liability for deferred compensation reflected in long-term liabilities for amounts owed to employees.
During fiscal 2013, the mutual fund investments were sold and the proceeds were used to purchase additional life insurance policies.
Impairment of Long-Lived Assets
Property and equipment and finite-life intangibles are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. The Company reviews applicable finite-lived intangible assets and
long-lived assets related to each restaurant on a periodic basis. The Company’s assessment of recoverability of property and equipment
and finite-lived intangible assets is performed at the component level, which is generally an individual restaurant. When events or
changes in circumstances indicate an asset may not be recoverable, the Company estimates the future cash flows expected to result from
the use of the asset. If the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment
loss is recognized. The impairment loss is recognized by measuring the difference between the carrying value of the assets and the
estimated fair value of the assets. The Company’s estimates of fair values are based on the best information available and require the use
of estimates, judgments, and projections. The actual results may vary significantly from the estimates.
During fiscal 2013, the Company determined that the carrying amount of one of its Sullivan’s restaurants was most likely not
recoverable. Therefore, the Company recorded a non-cash impairment charge of $2,360, which represents the difference between the
carrying value of the restaurant assets and their estimated fair value, which was based on an estimated sales price. This amount is
included in non-cash impairment charges in the consolidated statements of income and comprehensive income.
During fiscal 2014, the Company determined that the carrying amount of one of its Grille restaurants was most likely not
recoverable. Therefore, the Company recorded a non-cash impairment charge of $3,536, which represents the difference between the
carrying value of the restaurant assets and the estimated value of furniture and restaurant equipment that may be transferred to future
Grille locations. This amount is included in non-cash impairment charges in the consolidated statements of income and comprehensive
income.
Self-Insurance Reserves
The Company maintains self-insurance programs for its workers’ compensation and general liability insurance programs. In order
to minimize the exposure under the self-insurance programs, the Company has purchased stop-loss coverage both on a per-occurrence
and on an aggregate basis. The self-insured losses under the programs are accrued based on the Company’s estimate of the ultimate
expected liability for both claims incurred and on an incurred but not reported basis. The establishment of such accruals for
self-insurance involves certain management judgments and assumptions regarding the frequency or severity of claims, the historical
patterns of claim development, and the Company’s experience with claim-reserve management and settlement practices. To the extent
actual results differ from the assumptions used to develop the accruals, such unanticipated changes may produce significantly different
amounts of expense than those estimated under the self-insurance programs.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company regularly evaluates the
likelihood of realization of tax benefits derived from positions it has taken in various federal and state filings after consideration of all
relevant facts, circumstances, and available information. For those tax benefits deemed more likely than not that will be sustained, the
Company recognizes the benefit it believes is cumulatively greater than 50% likely to be realized. To the extent the Company were to
prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, the effective tax
rate in a given financial statement period could be materially impacted.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the fiscal years ended December 25, 2012, December 31,
2013 and December 30, 2014 was $4,682, $5,663 and $6,169, respectively.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. Proceeds from the sale of gift cards are
recorded as deferred revenue at the time of sale and recognized as revenue when the gift card is redeemed by the holder or the likelihood
of redemption becomes remote (gift card breakage) and the Company determines there is no legal obligation to remit the value of the
unredeemed gift cards to governmental agencies. The Company determines the gift card breakage rate based upon historical redemption
patterns. Certain of the Company’s gift cards are sold on a discount and the net value (face value to be redeemed less the proceeds
received) is deferred until redeemed or breakage is deemed appropriate. The Company has deemed gift card breakage income immaterial
for fiscal years 2012, 2013 and 2014, and it is included in revenues in the consolidated statements of income and comprehensive income.
The Company excludes from revenue any taxes assessed by governmental agencies that are directly imposed on revenue-producing
transactions between the Company and a customer.
F-11
Stock-Based Compensation
In connection with the IPO, the Company adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan
(the “2012 Plan”), which allows the Company’s Board of Directors to grant stock options, restricted stock, restricted stock units,
deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services
for the Company. The Company recognizes stock-based compensation in accordance with “Compensation—Stock Compensation,” the
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 (Topic 718). Stock-based
compensation cost includes compensation cost for all share-based payments granted based on the grant date fair value estimated in
accordance with the provisions of Topic 718. Compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over
the requisite service period of each award.
Reclassifications
Certain amounts from the prior years have been reclassified to conform with the fiscal 2014 presentation.
Recently Issued Accounting Standards
In July 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-02, Intangibles—Goodwill and Other (Topic 350),
Testing Indefinite Lived Intangible Assets for Impairment. This ASU simplifies the guidance for impairment testing of indefinite-lived
intangible assets other than goodwill and gives companies the option to assess qualitative factors to determine whether it is necessary to
perform a quantitative impairment test. Companies electing to perform a qualitative assessment are no longer required to calculate the
fair value of an indefinite-lived intangible asset unless the company determines, based on a qualitative assessment, that it is “more likely
than not” that the asset is impaired. This update is effective for annual and interim impairment tests performed in fiscal years beginning
after September 15, 2012. All provisions of the update were effective for the Company in fiscal 2013. The Company does not believe the
new guidance had a significant impact on its consolidated financial statements.
In April 2014, the FASB issued ASU, 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity. This ASU raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both
discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This update is effective
in fiscal periods beginning after December 15, 2014. The adoption of this new guidance is not expected to have a significant impact on
our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers. This
ASU is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The
ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This update is effective in fiscal
periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or
cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements
and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing
financial reporting.
F-12
(3) Intangible Assets and Goodwill
Amortized intangible assets:
Gross carrying amount:
Favorable leasehold interests
Licensing and development rights
Other
Accumulated amortization:
Favorable leasehold interests
Licensing and development rights
Other
Net amortized intangible assets
Unamortized intangible assets:
Goodwill
Trade names
Liquor license permits
December 31,
December 30,
2013
2014
(In Thousands)
$
$
848
1,077
391
2,316
(724)
(465)
(57)
(1,246)
1,070
75,365
34,893
385
110,643
$
$
848
1,077
453
2,378
(795)
(531)
(80)
(1,406)
972
75,365
34,893
710
110,968
Licensing contract rights and favorable lease rights are being amortized using the straight-line method over the estimated lives of
the related contracts and agreements, which are seven to nine years for favorable leasehold interest and 17 years for licensing contract
rights. Liquor licenses that are transferable are carried at cost. Such licenses are reviewed for impairment on an annual basis.
Goodwill is allocated to the Del Frisco’s and Sullivan’s reporting units, respectively, as follows: $43,928 and $31,437 at December
31, 2013 and December 30, 2014. A portion of the goodwill allocated to the Sullivan’s location that was sold in fiscal 2012 was written
off in fiscal 2012. See Note 16 for further discussion of discontinued operations.
The Company has estimated that annual amortization expense will amount to approximately $142 for 2015, $106 for 2016, $97 for
2017, $97 for 2018, and $97 for 2019.
Amortization expense was $169, $169 and $160 for the years ended December 25, 2012, December 31, 2013, and December 30,
2014, respectively.
The Company performed the annual test for impairment of goodwill and intangible assets and concluded that no impairment
existed as of December 25, 2012, December 31, 2013 or December 30, 2014 accordingly, no impairment losses were recorded.
On February 1, 2012, the Company entered into an agreement to terminate a license agreement with the licensee operating a Del
Frisco’s in Orlando, Florida effective June 1, 2013. The original licensing agreement has been amortized over the expected term of the
agreement, and has a remaining book value of $546 as of December 30, 2014. Under the agreement, in exchange for the Company
surrendering its right to receive licensing fees from January 1, 2012 through June 1, 2013 and making a one-time $25 payment to the
licensee, the Company will have the rights to open and operate any of its restaurants in the three counties that make up the Orlando
metropolitan area no earlier than January 1, 2015. The Company accounted for this as an exchange of non-monetary assets, for which the
Company has concluded that the fair value of the asset surrendered approximates its book value and therefore no gain or loss has been
recorded on the exchange. To determine the fair value of the asset surrendered, the Company utilized a discounted cash flow method that
applied a discount rate of 11.5%, the Company’s weighted-average cost of capital, to the future estimated cash flows to be received over
the remaining term, including expected renewal, of the license agreement.
(4) Related Party Transactions
Management and Accounting Fees Paid to Related Party
At the date of Acquisition, the Company entered into an agreement with Hudson Advisors, L.L.C. (Hudson), an affiliate of certain
entities that held an indirect investment interest in the Company. Pursuant to the agreement, Hudson provided certain asset management
and advisory services to the Company. During the year ended December 25, 2012, the Company incurred charges for such services of
$1,252. This agreement was terminated upon consummation of the IPO, as discussed in Note 1.
F-13
Transaction Bonuses
In connection with the IPO, certain executives of the Company earned transaction bonuses of $1,462. These bonuses were earned
under a letter agreement, as amended, with Wagon, in which certain executives of the Company are eligible to receive a transaction
bonus upon the occurrence of an eligible transaction. Wagon is responsible to fund the transaction bonus. As this bonus is contingent
upon employment with the Company, the Company is required to record the expense of these bonuses and recognize the funding by
Wagon as additional paid in capital. $1,462 was recorded as an expense to the Company and $1,440 was recorded as a capital
contribution by Wagon in fiscal 2012, which was used by the Company to pay these bonuses. Associated with the completion of the
secondary public offerings in the first, third and fourth quarters of fiscal 2013, similar to the 2012 treatment, the Company recorded
$8,355 in transaction bonuses expense and $8,234 in additional paid in capital as a capital contribution by Wagon.
General and Administrative Expenses
Upon completion of the IPO, the Company entered into a Transition Services Agreement with an affiliate of the Fund to provide
certain limited support services, including legal and risk management, until the Company could complete transition of these functions to
internal or third-party resources. General and administrative expenses include charges of approximately $73 and $30 for these services
in fiscal 2012 and 2013, respectively. This agreement was terminated in the third quarter of 2013.
(5) Leases
The Company leases certain facilities under noncancelable operating leases with terms expiring between 2015 and 2035. The
leases have renewal options ranging from five to 20 years, which are exercisable at the Company’s option. In addition, certain leases
contain escalation clauses based on a fixed percentage increase and provisions for contingent rentals based on a percentage of gross
revenues, as defined. Total rental expense amounted to $13,065,(cid:3)$15,875 and $18,728 including contingent rentals of approximately
$3,240, $3,490 and $3,918 for the years ended December 25, 2012, December 31, 2013, and December 30, 2014, respectively.
Future minimum lease payments under noncancelable operating leases include renewal option periods for certain leases when such
option periods are included for purposes of calculating straight-line rents. At December 30, 2014, future minimum rentals for each of the
next five years and in total are as follows:
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
(6) Income Taxes
$
$
17,316
18,708
18,621
18,750
18,972
222,727
315,094
Total income tax expense for fiscal years 2012, 2013, and 2014 was allocated as follows (in thousands):
Income tax expense from continuing operations
Income tax benefit from discontinued operations
Total income tax expense
December 25,
2012
$
$
5,592 $
(2)
5,590 $
Year Ended
December 31,
2013
December 30,
2014
5,556 $
—
5,556 $
7,723
—
7,723
The components of income tax expense from continuing operations consist of the following (in thousands):
Current tax expense (benefit):
Federal
State
Total current tax expense
Deferred tax expense (benefit):
Federal
State
Total deferred tax expense (benefit)
Total income tax expense from continuing operations
F-14
December 25,
2012
Year Ended
December 31,
2013
December 30,
2014
$
$
5,406 $
2,220
7,626
(1,098)
(936)
(2,034)
5,592 $
(39) $
1,919
1,880
2,859
817
3,676
5,556 $
3,689
3,381
7,070
932
(279)
653
7,723
The difference between the reported income tax expense from continuing operations and taxes determined by applying the
applicable U.S. federal statutory income tax rate to income before taxes from continuing operations is reconciled as follows (dollars
in thousands):
December 25,
2012
Year Ended
December 31,
2013
December 30,
2014
Income tax expense at federal statutory rate
State tax expense, net
FICA tip and work opportunity credits
Nondeductible (nontaxable) insurance
Other items, net
Total income tax expense from continuing operations
$
$
7,058
443
(2,200)
(160)
451
5,592
35% $
2%
-10%
-1%
2%
28% $
6,220
2,163
(2,620)
(486)
279
5,556
35%
12%
-15%
-3%
2%
31%
$
$
8,486
1,872
(3,007)
35%
8%
-12%
— 0%
1%
32%
372
7,723
In the second quarter of fiscal 2013, the Company determined that a deferred tax asset of $535 recorded in the fourth quarter of
fiscal 2012 relating to local income tax net operating loss carryforwards was not realizable, as the related net operating losses originated
in years for which the carryforward period had expired. The Company corrected the deferred tax asset account resulting in a non-cash
$535 cumulative adjustment to record additional income tax expense in the second quarter of fiscal 2013. The adjustment did not impact
historical cash flows and will not impact the timing of future income tax payments. Prior years’ financial statements were not restated as
the impact of these issues was immaterial to previously reported results for any individual prior year and fiscal 2012.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are
presented below (in thousands):
Deferred tax assets:
Equity-based compensation
Accrued liabilities
Deferred compensation
Deferred rent liabilities
Other
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
December 31,
2013
December 30,
2014
(In Thousands)
$
$
355
3,259
4,400
8,282
2,470
18,766
19,517
11,430
221
31,168
(12,402)
$
$
829
3,627
5,192
11,172
2,882
23,702
24,685
11,846
226
36,757
(13,055)
The Company accounts for unrecognized tax benefits in accordance with the provisions of FASB guidance which, among other
directives, requires uncertain tax positions to be recognized only if they are more likely than not to be upheld based on their technical
merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more likely than not (determined on
a cumulative probability basis) to be realized upon settlement.
The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments
historically have been minimal and immaterial to the Company’s financial results. In the event the Company receives an assessment for
interest and penalties, it has been classified in the consolidated financial statements as income tax expense. Generally, the Company’s
federal, state, and local tax returns for years subsequent to 2010 remain open to examination by the major taxing jurisdictions to which
the Company is subject.
At December 25, 2012, the Company’s unrecognized tax benefits totaled approximately $1,631, related primarily to acquisitions
and state tax issues. At December 31, 2013, the Company’s unrecognized tax benefits totaled approximately $1,386, related primarily to
state tax issues. At December 30, 2014, the Company’s unrecognized tax benefits totaled approximately $1,386. The Company does not
F-15
believe its uncertain tax positions will change materially during the next 12 months. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year
Additions resulting from current year positions
Additions for positions taken in prior years
Expiration of statute of limitations
Balance at end of year
December 25,
2012
Year Ended
December 31,
2013
December 30,
2014
$
$
1,631 $
—
—
—
1,631 $
1,631 $
—
—
(245)
1,386 $
1,386
—
—
—
1,386
The Company accrues interest and penalties in its tax provision. As of December 31, 2013 and December 30, 2014, accrued
interest and penalties included in the consolidated balance sheets totaled $2,362 and $2,520, respectively. The change in interest and
penalties associated with the Company’s unrecognized tax benefits is included as a component of the Other, net line of the effective tax
rate reconciliation.
(7) Long-Term Debt
On October 15, 2012, the Company entered into a new credit facility that provides for a three-year unsecured revolving credit
facility of up to $25,000. Borrowings under the new credit facility bear interest at a rate of LIBOR plus 1.50%. The Company is required
to pay a commitment fee equal to 0.25% per annum on the available but unused revolving loan facility. The credit facility is guaranteed
by certain subsidiaries of the Company. The new credit facility contains various financial covenants, including a maximum ratio of total
indebtedness to EBITDA, as defined in the credit agreement, and minimum fixed charge coverage, as defined in the credit agreement.
The new credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the
payment of dividends, changes of control, the incurrence of indebtedness and providing financing or other transactions with
affiliates. The Company was in compliance with all of the debt covenants as of December 30, 2014. As of December 30, 2014, the
outstanding balance on the Company’s revolving credit facility was $0. Under the revolving loan commitment, the Company had
approximately $25,000 of borrowings available under its revolving credit facility, less $861 in letter of credit commitments.
(8) Retirement Plans
The Company provides two retirement benefit plans to participants. The salary-reduction plans are provided through a qualified
401(k) plan and a nonqualified deferred compensation plan (the Plans). Under the Plans, employees who meet minimum service
requirements and elect to participate may make contributions of up to 15% of their annual salaries under the 401(k) plan and up to 80%
under the deferred-compensation plan. The Company may make additional contributions at the discretion of the Board of Directors.
Expenses related to the Plans for the years ended December 25, 2012, December 31, 2013 and December 30, 2014 totaled $1,256,
$1,724 and $1,736, respectively.
(9) Litigation
The Company is involved, from time to time, in litigation arising in the ordinary course of business. The Company believes the
outcome of such matters will not have a material adverse effect on its consolidated financial position or results of operations.
(10) Stockholders’ Equity
On October 9, 2013, the Company’s Board of Directors approved a common stock repurchase program. Under this program, the
Company could from time to time purchase up to $10,000 of its outstanding common stock in the open market at management’s
discretion, subject to share price, market conditions and other factors. As of September 9, 2014, the Company had fully exhausted this
authority with 465,496 of our common shares repurchased over the life of the program at a cost of $10,000.
On October 14, 2014 the Company’s Board of Directors approved a new stock repurchase program authorizing the Company to
repurchase up to $25,000 of its common stock over the next three years. Under this program, the Company could from time to time
purchase outstanding common stock in the open market at management’s discretion, subject to share price, market conditions and other
factors. The common stock repurchase program does not obligate the Company to repurchase any dollar amount or number of shares. As
of December 30, 2014, the Company had not repurchased any shares of common stock under this program.
(11) Commitments and Contingencies
Prior to the Acquisition, the Company guaranteed certain lease payments of Star’s subsidiaries in connection with the leasing of
real estate for restaurant locations. As of December 30, 2014, the Company was responsible as guarantor for five of the leases of its
former affiliates. The leases expire at various times through 2016. These guarantees will require payment by the Company only in an
event of default by the former affiliate where it is unable to make the required lease payments. Management believes that any future
payments required under these guarantees will not be significant. At December 30, 2014 the maximum potential amount of future
payments the Company could be required to make as a result of the guarantees was $893.
F-16
At December 30, 2014, the Company had outstanding letters of credit of $1,076, of which $215 were collateralized by restricted
cash and $861 were outstanding on the Company’s revolving credit facility. The letters of credit typically act as guarantee of payment to
certain third parties in accordance with specified terms and conditions.
(12) Fair Value Measurement
Under generally accepted accounting principles in the United States, the Company is required to measure certain assets and
liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value
measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon
transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most
advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in
pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of
non-performance risk, including the Company’s own credit risk. Each fair value measurement is reported in one of the following three
levels:
•
•
•
Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active
markets.
Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that
market participants would use in pricing the asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following tables present our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2013
and December 30, 2014 (in thousands):
Fair Value Measurements
Deferred compensation plan investments (life insurance policies)
Deferred compensation plan liabilities
Level
2
2
December 31, 2013
$
$
10,754 $
(11,022) $
December 30, 2014
12,760
(12,979)
There were no transfers among levels within the fair value hierarchy during the years ended December 31, 2013 or December 30,
2014. The carrying value of the Company’s cash and cash equivalents and restricted cash approximate fair value because of their short
term nature, and are classified within Level 1 of the fair value hierarchy. The carrying value of the Company’s accounts payable
approximate fair value because of their short term nature, and are classified within Level 2 of the fair value hierarchy.
The Company has no derivative instruments at December 31, 2013 or December 30, 2014.
(13) Segment Reporting
The Company operates the Del Frisco’s, Sullivan’s, and Del Frisco’s Grille brands as operating segments. The concepts operate
solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales to external customers are
derived principally from food and beverage sales, and the Company does not rely on any major customers as a source of sales. The
concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics.
However, as Del Frisco’s restaurants typically have higher revenues, driven by their larger physical presence and higher check average,
the Del Frisco’s, Sullivan’s, and Del Frisco’s Grille operating segments have varying operating income and restaurant-level EBITDA
margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building
maintenance.
F-17
The following table presents information about reportable segments for fiscal years 2012, 2013, and 2014 (in thousands):
Revenues
Restaurant-level EBITDA
Capital expenditures
Property and equipment
Revenues
Restaurant-level EBITDA
Capital expenditures
Property and equipment
Revenues
Restaurant-level EBITDA
Capital expenditures
Property and equipment
$
$
$
Del Frisco's
151,142 $
42,946
19,839
93,267
Del Frisco's
144,634 $
41,451
3,234
73,518
Del Frisco's
124,692 $
35,993
13,922
70,342
Fiscal Year Ended December 30, 2014
Grille
Sullivan's
Corporate
80,911 $
13,449
3,452
45,848
69,752 $
10,556
24,219
72,066
— $
—
492
2,261
Fiscal Year Ended December 31, 2013
Grille
Sullivan's
Corporate
83,039 $
12,881
2,847
42,658
44,133 $
7,777
25,580
51,402
— $
—
412
1,809
Fiscal Year Ended December 25, 2012
Grille
Sullivan's
Corporate
83,767 $
15,721
3,521
42,217
23,976 $
4,803
15,857
25,828
— $
—
335
1,417
Consolidated
301,805
66,951
48,002
213,442
Consolidated
271,806
62,109
32,073
169,387
Consolidated
232,435
56,517
33,635
139,804
In addition to using consolidated results in evaluating the Company’s performance and allocating its resources, the Company’s
chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by generally accepted accounting
principles. Restaurant-level EBITDA is defined as operating income before pre-opening costs, general and administrative expenses,
management and accounting fees paid to related party, asset advisory agreement termination fees, non-cash impairment charges, public
offering transaction bonuses, secondary public offering costs and depreciation and amortization. Pre-opening costs are excluded because
they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative expenses and
management and accounting fees paid to related party are only included in the Company’s consolidated financial results as they are
generally not specifically identifiable to individual operating segments as these costs relate to supporting all of the restaurant operations
of the Company and the extension of the Company’s concepts into new markets. Depreciation and amortization is excluded because it is
not an ongoing controllable cash expense and it is not related to the health of ongoing operations. Property and equipment is the only
balance sheet measure used by the Company’s chief operating decision maker in allocating resources. See table below for a
reconciliation of restaurant-level EBITDA to operating income.
December 25, 2012
December 31, 2013
December 30, 2014
$
56,517 $
62,109 $
66,951
Fiscal Year Ended
4,058
13,449
1,252
3,000
—
1,462
—
8,675
24,621 $
3,758
17,421
—
—
1,024
8,355
2,360
11,300
17,891 $
4,735
20,537
—
—
5
—
3,536
13,598
24,540
Restaurant-level EBITDA
Less:
Pre-opening costs
General and administrative
Management and accounting fees
paid to related party
Asset advisory agreement termination fee
Public offering costs
Public offering transaction bonuses
Non-cash impairment charges
Depreciation and amortization
Operating income
$
F-18
(14) Earnings Per Share
Basic earnings per share (EPS) data is computed based on the weighted average number of shares of common stock outstanding
during the period. Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding,
including all potentially issuable shares of common stock. Diluted earnings per share for fiscal 2012, 2013 and 2014 exclude stock
options of 825,000, 423,579 and 716,335, respectively, which were outstanding during the period, but were anti-dilutive.
(dollars in thousands, except per share data)
Income from continuing operations
Discontinued operations, net of income tax benefit
Net income
Shares:
Weighted average number of common shares outstanding
Dilutive shares
Total Diluted Shares
Basic income (loss) per common share:
Continuing operations
Discontinued operations
Basic income per share
Diluted income (loss) per common share:
Continuing operations
Discontinued operations
Diluted income per share
(15) Stock-Based Employee Compensation
2012 Long-Term Equity Incentive Plan
December 25,
2012
Year Ended
December 31,
2013
December 30,
2014
14,573 $
(819)
13,754 $
12,212 $
—
12,212 $
16,597
—
16,597
20,432,579
—
20,432,579
23,779,782
72,418
23,852,200
23,517,883
222,435
23,740,318
0.71 $
(0.04)
0.67 $
0.71 $
(0.04)
0.67 $
0.51 $
—
0.51 $
0.51 $
—
0.51 $
0.71
—
0.71
0.70
—
0.70
$
$
$
$
$
$
In connection with the IPO, the Company adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan
(the “2012 Plan”), which allows the Company’s Board of Directors to grant stock options, restricted stock, restricted stock units,
deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services
for the Company. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than
the fair value of the stock on the date of grant. Options are exercisable at various periods ranging from one to four years from date of
grant. The 2012 Plan has 2,232,800 shares authorized for issuance under the plan. There are 1,429,000 shares of common stock issuable
upon exercise of currently outstanding options at December 30, 2014, and 689,925 shares available for future grants.
The following table details the Company’s total stock option compensation costs during the years ended December 31, 2013 and
December 30, 2014 as well as where the costs were expensed (in thousands):
Restaurant operating expenses
General and administrative costs
Total stock compensation cost
Fiscal Year Ended
December 25,
December 31,
December 30,
2012
2013
2014
$
$
74 $
304
378 $
332 $
1,357
1,689 $
442
2,125
2,567
F-19
The following table summarizes stock option activity during 2014:
December 30, 2014
Shares
Weighted average
exercise price
Weighted average
Remaining
Contractual Term
Aggregate Intrinsic
Value ($000's)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of period
Options exercisable at end of period
1,492,775 $
82,375
(85,400)
(60,750)
1,429,000 $
$
454,750
17.01
22.65
13.93
18.76
17.45
16.12
8.17 years
7.97 years
$
$
8,640
3,335
The intrinsic value of options exercised during fiscal 2014 was $759. A summary of the status of non-vested shares as of
December 30, 2014 and changes during fiscal 2014 is presented below:
Non-vested shares at beginning of year
Granted
Vested
Forfeited
Non-vested shares at end of period
December 30, 2014
Shares
1,326,375
82,375
(375,000)
(59,500)
974,250
$
$
Weighted average Grant-Date
Fair Value
6.84
8.85
6.61
7.41
7.08
As of December 30, 2014, there was $5,603 of total unrecognized compensation cost related to non-vested stock options. This cost
is expected to be recognized over a period of approximately 2.2 years. The total fair value of shares vested during fiscal 2014 was
$2,477.
The following table details the values from and assumptions for the Black-Scholes option pricing model for stock options issued
during the fiscal years ended December 25, 2012, December 31, 2013 and December 30, 2014.
Weighted average grant date fair value
Weighted average risk-free interest rate
Weighted average expected life
Weighted average volatility
Expected dividend
2012
$4.82
0.58%
5.40 years
40.21%
—
2013
$8.30
1.44%
5.49 years
41.65%
—
2014
$8.85
1.91%
5.91 years
38.00%
—
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the
stock-based award. The assumptions above represent management’s best estimates, but these estimates involve inherent uncertainties
and the application of management’s judgment. The expected term of options granted is based on a representative peer group with
similar employee groups and expected behavior. The risk-free rate for periods within the contractual life of the option is based on the
U.S. Treasury constant maturities rate in effect at the time of grant. The Company utilized a weighted rate for expected volatility based
on a representative peer group with a similar expected term of options granted. Outstanding options granted under the Company’s 2012
Equity Incentive Plan are subject to a four year vesting period and have a ten year maximum contractual term.
In addition, the Company is required to estimate the expected forfeiture rate and only recognizes expense for those shares expected
to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the share-based compensation expense could be
materially different.
(16) Discontinued Operations
On June 30, 2012, the Company closed its Dallas Sullivan’s location and on July 2, 2012, the Company completed the sale of the
real property to a third party. The real property sold for $1,682, net of selling related expenses, which approximated its carrying value. In
connection with the closure and sale of this restaurant, the Company allocated $739 in goodwill from the Sullivan’s reporting unit to this
restaurant to determine the loss on the disposition. After this allocation, the total loss on the sale of this property was $465, net of tax. The
Company previously recognized a non-cash asset impairment charge of $1,400 associated with this restaurant during fiscal 2011.
F-20
The Company determined that this closure met the criteria for classification as discontinued operations. As a result, all historical
operating results of this property are reflected within discontinued operations in the consolidated statements of comprehensive income
(loss) for all periods presented. Loss from discontinued operations, net of tax is comprised of the following:
Revenues
Loss before income tax
Income tax benefit
Loss from discontinued operations, net of income tax
(17) Quarterly Financial Information (Unaudited)
Fiscal Year Ended
December 25, 2012
1,505
(821)
2
(819)
$
$
The following tables set forth certain unaudited consolidated financial information for each of the four quarters in fiscal 2014 and
fiscal 2013 (in thousands, except per share data).
Fiscal Year Ended December 30, 2014
First
Second
Third
Fourth
Revenues
Operating income
Income from continuing operations
Net income
Basic income per common share:
Continuing operations
Discontinued operations
Basic income per share
Basic weighted average shares outstanding
Diluted income per common share:
Continuing operations
Discontinued operations
Diluted income per share
Quarter
Quarter
Total Year
Quarter
$ 66,622 $ 67,386 $ 61,949 $ 105,848 $ 301,805
24,540
16,597
16,597
6,749
4,522
4,522
6,920
4,769
4,769
8,419
5,521
5,521
2,452
1,785
1,785
Quarter
$
$
$
$
0.19 $
—
0.19 $
0.20 $
—
0.20 $
0.08 $
—
0.08 $
0.24 $
—
0.24 $
23,627
23,579
23,464
23,430
0.19 $
—
0.19 $
0.20 $
—
0.20 $
0.08 $
—
0.08 $
0.23 $
—
0.23 $
0.71
—
0.71
23,518
0.70
—
0.70
23,740
Diluted weighted average shares outstanding
23,856
23,847
23,683
23,611
Fiscal Year Ended December 31, 2013
Revenues
Operating income
Income from continuing operations
Net income
Basic income (loss) per common share:
Continuing operations
Discontinued operations
Basic income (loss) per share
Basic weighted average shares outstanding
Diluted income (loss) per common share:
Continuing operations
Discontinued operations
Diluted income (loss) per share
Diluted weighted average shares outstanding
First
Quarter
Second
Quarter
Third
Quarter
$ 59,802 $ 60,359 $ 54,183 $
6,935
4,431
4,431
4,904
3,569
3,569
(759)
(380)
(380)
Fourth
Quarter
Total Year
97,462 $ 271,806
17,891
12,212
12,212
6,811
4,592
4,592
$
$
$
$
0.15 $
—
0.15 $
0.19 $
—
0.19 $
23,795
23,795
(0.02) $
—
(0.02) $
23,801
0.19 $
—
0.19 $
23,744
0.51
—
0.51
23,780
0.15 $
—
0.15 $
0.19 $
—
0.19 $
23,795
23,827
(0.02) $
—
(0.02) $
23,937
0.19 $
—
0.19 $
23,859
0.51
—
0.51
23,852
During the fourth fiscal quarter of 2014, the Company incurred a $3,536 non-cash impairment charge related to the Phoenix Grille
location.
F-21
During the first fiscal quarter of 2013, the Company incurred $412 in secondary public offering costs and a $1,805 public offering
transaction bonus expense associated with the March secondary public offering. During the third fiscal quarter of 2013, the Company
incurred $381 in secondary public offering costs and a $3,705 public offering transaction bonus expense associated with the July
secondary public offering. During the fourth fiscal quarter of 2013, the Company incurred a $2,360 non-cash impairment charge related
to the Seattle Sullivan’s location, $231 in secondary public offering costs and a $2,845 public offering transaction bonus expense
associated with the December secondary public offering.
In management’s opinion, the unaudited quarterly information shown above has been prepared on the same basis as the audited
consolidated financial statements and includes all necessary adjustments that management considers necessary for a fair presentation of
the unaudited quarterly results when read in conjunction with the consolidated financial statements and the accompanying notes. The
Company believes that quarter-to-quarter comparisons of its financial results are not necessarily indicative of future performance.
F-22
SENIOR OFFICERS
BOARD OF DIRECTORS
SHAREHOLDER INFORMATION
Ian R. Cater
(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:3)(cid:86)(cid:77)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:41)(cid:86)(cid:72)(cid:89)(cid:75)(cid:34)(cid:3)
(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)(cid:46)(cid:83)(cid:86)(cid:73)(cid:72)(cid:83)(cid:3)(cid:43)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:13)(cid:3)
(cid:40)(cid:89)(cid:74)(cid:79)(cid:80)(cid:91)(cid:76)(cid:74)(cid:91)(cid:92)(cid:89)(cid:76)(cid:19)(cid:3)(cid:47)(cid:80)(cid:83)(cid:91)(cid:86)(cid:85)(cid:3)(cid:62)(cid:86)(cid:89)(cid:83)(cid:75)(cid:94)(cid:80)(cid:75)(cid:76)(cid:3)
(cid:47)(cid:86)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:90)(cid:19)(cid:3)(cid:48)(cid:85)(cid:74)(cid:21)
Norman J. Abdallah
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)(cid:19)(cid:3)
(cid:59)(cid:52)(cid:3)(cid:57)(cid:76)(cid:90)(cid:91)(cid:72)(cid:92)(cid:89)(cid:72)(cid:85)(cid:91)(cid:3)(cid:47)(cid:86)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:90)(cid:19)(cid:3)(cid:51)(cid:51)(cid:42)
David B. Barr
(cid:42)(cid:79)(cid:72)(cid:80)(cid:89)(cid:84)(cid:72)(cid:85)(cid:19)(cid:3)(cid:55)(cid:52)(cid:59)(cid:43)(cid:3)(cid:57)(cid:76)(cid:90)(cid:91)(cid:72)(cid:92)(cid:89)(cid:72)(cid:85)(cid:91)(cid:90)(cid:3)(cid:51)(cid:51)(cid:42)
(cid:57)(cid:80)(cid:74)(cid:79)(cid:72)(cid:89)(cid:75)(cid:3)(cid:51)(cid:21)(cid:3)(cid:43)(cid:72)(cid:93)(cid:80)(cid:90)
(cid:43)(cid:80)(cid:89)(cid:76)(cid:74)(cid:91)(cid:86)(cid:89)
William Lamar Jr.
(cid:43)(cid:80)(cid:89)(cid:76)(cid:74)(cid:91)(cid:86)(cid:89)
Mark S. Mednansky
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)
Mark S. Mednansky
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)
Thomas J. Pennison, Jr.
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:45)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)
(cid:49)(cid:76)(cid:584)(cid:89)(cid:76)(cid:96)(cid:3)(cid:45)(cid:21)(cid:3)(cid:42)(cid:72)(cid:89)(cid:74)(cid:72)(cid:89)(cid:72)
(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:54)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:54)(cid:1117)(cid:74)(cid:76)(cid:89)
Thomas G. Dritsas
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)
(cid:42)(cid:92)(cid:83)(cid:80)(cid:85)(cid:72)(cid:89)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:42)(cid:79)(cid:76)(cid:77)
(cid:49)(cid:72)(cid:84)(cid:76)(cid:90)(cid:3)(cid:62)(cid:21)(cid:3)(cid:50)(cid:80)(cid:89)(cid:82)(cid:87)(cid:72)(cid:91)(cid:89)(cid:80)(cid:74)(cid:82)
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)(cid:57)(cid:76)(cid:72)(cid:83)(cid:3)(cid:44)(cid:90)(cid:91)(cid:72)(cid:91)(cid:76)
Lisa H. Kislak
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)(cid:41)(cid:89)(cid:72)(cid:85)(cid:75)(cid:3)(cid:52)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:80)(cid:85)(cid:78)
William S. Martens
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)
(cid:43)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:42)(cid:86)(cid:85)(cid:90)(cid:91)(cid:89)(cid:92)(cid:74)(cid:91)(cid:80)(cid:86)(cid:85)
Ray D. Risley
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)
(cid:54)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90)(cid:3)(cid:58)(cid:92)(cid:83)(cid:83)(cid:80)(cid:93)(cid:72)(cid:85)(cid:187)(cid:90)(cid:3)(cid:58)(cid:91)(cid:76)(cid:72)(cid:82)(cid:79)(cid:86)(cid:92)(cid:90)(cid:76)
(cid:40)(cid:87)(cid:89)(cid:80)(cid:83)(cid:3)(cid:51)(cid:21)(cid:3)(cid:58)(cid:74)(cid:86)(cid:87)(cid:72)
(cid:61)(cid:80)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:19)(cid:3)
(cid:55)(cid:76)(cid:86)(cid:87)(cid:83)(cid:76)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:44)(cid:75)(cid:92)(cid:74)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)
(cid:54)(cid:60)(cid:57)(cid:3)(cid:55)(cid:44)(cid:54)(cid:55)(cid:51)(cid:44)(cid:3)(cid:182)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:3)(cid:53)(cid:44)(cid:62)(cid:3)(cid:57)(cid:44)(cid:58)(cid:59)(cid:40)(cid:60)(cid:57)(cid:40)(cid:53)(cid:59)(cid:3)(cid:54)(cid:55)(cid:44)(cid:53)(cid:48)(cid:53)(cid:46)(cid:3)(cid:59)(cid:44)(cid:40)(cid:52)(cid:58)(cid:3)
STOCK LISTING
Del Frisco’s Restaurant Group’s common
stock is listed on the NASDAQ Global Select
Market under the symbol “DFRG.”
TRANSFER AGENT
American Stock Transfer & Trust
Company, LLC, Operations Center
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
INVESTOR RELATIONS
Integrated Corporate Relations
761 Main Avenue
Norwalk, CT 06851
(203) 682-8200
INDEPENDENT AUDITORS
KPMG LLP
717 N. Harwood St., Suite 3100
Dallas, TX 75201
COUNSEL
Gibson, Dunn & Crutcher LLP
2100 McKinney Avenue
Dallas, TX 75201
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:46)(cid:57)(cid:48)(cid:51)(cid:51)(cid:44)(cid:3)(cid:182)(cid:3)(cid:41)(cid:60)(cid:57)(cid:51)(cid:48)(cid:53)(cid:46)(cid:59)(cid:54)(cid:53)(cid:19)(cid:3)(cid:52)(cid:40)(cid:3)(cid:15)(cid:49)(cid:60)(cid:53)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:46)(cid:57)(cid:48)(cid:51)(cid:51)(cid:44)(cid:3)(cid:182)(cid:3)(cid:48)(cid:57)(cid:61)(cid:48)(cid:53)(cid:44)(cid:19)(cid:3)(cid:42)(cid:40)(cid:3)(cid:15)(cid:40)(cid:60)(cid:46)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:43)(cid:54)(cid:60)(cid:41)(cid:51)(cid:44)(cid:3)(cid:44)(cid:40)(cid:46)(cid:51)(cid:44)(cid:3)(cid:3)(cid:182)(cid:3)(cid:62)(cid:40)(cid:58)(cid:47)(cid:48)(cid:53)(cid:46)(cid:59)(cid:54)(cid:53)(cid:3)(cid:43)(cid:42)(cid:3)(cid:15)(cid:58)(cid:44)(cid:55)(cid:59)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:46)(cid:57)(cid:48)(cid:51)(cid:51)(cid:44)(cid:3)(cid:182)(cid:3)(cid:53)(cid:21)(cid:3)(cid:41)(cid:44)(cid:59)(cid:47)(cid:44)(cid:58)(cid:43)(cid:40)(cid:3)(cid:15)(cid:58)(cid:44)(cid:55)(cid:59)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:46)(cid:57)(cid:48)(cid:51)(cid:51)(cid:44)(cid:3)(cid:3)(cid:182)(cid:3)(cid:59)(cid:40)(cid:52)(cid:55)(cid:40)(cid:19)(cid:3)(cid:45)(cid:51)(cid:3)(cid:15)(cid:53)(cid:54)(cid:61)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:43)(cid:44)(cid:51)(cid:3)(cid:45)(cid:57)(cid:48)(cid:58)(cid:42)(cid:54)(cid:187)(cid:58)(cid:3)(cid:46)(cid:57)(cid:48)(cid:51)(cid:51)(cid:44)(cid:3)(cid:182)(cid:3)(cid:55)(cid:40)(cid:58)(cid:40)(cid:43)(cid:44)(cid:53)(cid:40)(cid:19)(cid:3)(cid:42)(cid:40)(cid:3)(cid:15)(cid:43)(cid:44)(cid:42)(cid:21)(cid:3)(cid:25)(cid:23)(cid:24)(cid:27)(cid:16)
(cid:45)(cid:86)(cid:89)(cid:3)(cid:72)(cid:75)(cid:75)(cid:80)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)(cid:196)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:75)(cid:86)(cid:74)(cid:92)(cid:84)(cid:76)(cid:85)(cid:91)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:80)(cid:85)(cid:77)(cid:86)(cid:89)(cid:84)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:19)(cid:3)(cid:87)(cid:83)(cid:76)(cid:72)(cid:90)(cid:76)(cid:3)(cid:93)(cid:80)(cid:90)(cid:80)(cid:91)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:94)(cid:76)(cid:73)(cid:90)(cid:80)(cid:91)(cid:76)(cid:3)(cid:72)(cid:91)(cid:3)(cid:94)(cid:94)(cid:94)(cid:21)(cid:75)(cid:77)(cid:89)(cid:78)(cid:21)(cid:74)(cid:86)(cid:84)
(cid:58)(cid:92)(cid:87)(cid:87)(cid:86)(cid:89)(cid:91)(cid:3)(cid:42)(cid:76)(cid:85)(cid:91)(cid:76)(cid:89)(cid:33)(cid:3)(cid:32)(cid:25)(cid:23)(cid:3)(cid:58)(cid:21)(cid:3)(cid:50)(cid:80)(cid:84)(cid:73)(cid:72)(cid:83)(cid:83)(cid:3)(cid:40)(cid:93)(cid:76)(cid:19)(cid:3)(cid:58)(cid:92)(cid:80)(cid:91)(cid:76)(cid:3)(cid:24)(cid:23)(cid:23)(cid:3)(cid:99)(cid:3)(cid:58)(cid:86)(cid:92)(cid:91)(cid:79)(cid:83)(cid:72)(cid:82)(cid:76)(cid:19)(cid:3)(cid:59)(cid:63)(cid:3)(cid:30)(cid:29)(cid:23)(cid:32)(cid:25)(cid:3)(cid:99)(cid:3)(cid:55)(cid:79)(cid:86)(cid:85)(cid:76)(cid:33)(cid:3)(cid:15)(cid:31)(cid:24)(cid:30)(cid:16)(cid:3)(cid:29)(cid:23)(cid:24)(cid:20)(cid:26)(cid:27)(cid:25)(cid:24)(cid:3)(cid:99)(cid:3)(cid:45)(cid:72)(cid:95)(cid:33)(cid:3)(cid:15)(cid:31)(cid:24)(cid:30)(cid:16)(cid:3)(cid:29)(cid:23)(cid:24)(cid:20)(cid:26)(cid:27)(cid:26)(cid:31)
DEL FRISCO’S
SULLIVAN’S
DEL FRISCO’S GRILLE