Del Frisco's Restaurant Group Inc
Annual Report 2016

Plain-text annual report

2016 ANNUAL REPORT Cover Image: Del Frisco’s Double Eagle Steak House, (Uptown) Dallas, TX DEL FRISCO’S SULLIVAN’S DEL FRISCO’S GRILLE U N I T G R OW T H 60 50 40 30 20 10 40 11 10 34 5 10 R E V EN U E G R OW T H (in millions) $400.0 $350.0 $300.0 $271.8 $232.4 $44.1 $24.0 $250.0 $200.0 $351.7 $331.6 $107.0 00 $90.8 $301.8 $69.8 53 50 20 23 46 16 11 12 12 $150.0 $124.7 77 $144.6 66 $151.1 11 $161.8 8 $166.9 999 19 19 19 18 18 $100.0 $50.0 $ $83.8 $83.0 $80.9 $79.0 $77.8 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 DEL FRISCO’S GRILLE DEL FRISCO’S SULLIVAN’S DEL FRISCO’S GRILLE DEL FRISCO’S SULLIVAN’S (cid:69)(cid:381)(cid:410)(cid:286)(cid:3)(cid:410)(cid:381)(cid:3)(cid:94)(cid:346)(cid:258)(cid:396)(cid:286)(cid:346)(cid:381)(cid:367)(cid:282)(cid:286)(cid:396)(cid:400) 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(cid:258)(cid:374)(cid:282)(cid:3)(cid:258)(cid:393)(cid:393)(cid:367)(cid:349)(cid:286)(cid:400)(cid:3)(cid:258)(cid:374)(cid:3)(cid:349)(cid:374)(cid:272)(cid:381)(cid:373)(cid:286)(cid:3)(cid:410)(cid:258)(cid:454)(cid:3)(cid:396)(cid:258)(cid:410)(cid:286)(cid:3)(cid:381)(cid:296)(cid:3)(cid:258)(cid:393)(cid:393)(cid:396)(cid:381)(cid:454)(cid:349)(cid:373)(cid:258)(cid:410)(cid:286)(cid:367)(cid:455)(cid:3)(cid:1006)(cid:1013)(cid:1081)(cid:856) 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 27, 2016 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) Accelerated filer 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 14, 2016, 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 $364,070,370. Smaller reporting company (cid:133) (cid:95) (cid:133) As of February 27, 2017, 23,406,042 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 27, 2016, are incorporated by reference in Part III of this Annual Report on Form 10-K. 1  Page 3 10 19 20 21 21 22 24 26 39 39 39 39 40 41 41 41 41 41 42 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 Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services ww Related Stockholder Matters PART IV Item 15. Exhibits and Financial Statement Schedules 2 FORWARD LOOKING STATEMENTS h 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 statemen ts that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, mm 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. ff ff f t PART I Item 1. Business We were initially organized as a Delaware limited liability company on June 30, 2006 in connection with the acquisition by our former principal stockholder of Lone Star Steakhouse & Saloon, Inc., which owned the Del Frisco’s and Sullivan’s restaurant concepts. Following the acquisition, the company was restructured 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. 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 53 restaurants in 24 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. d ff Del Frisco’s Double Eagle Steak House We believe Del Frisco’s is one of the premier steakhouse concepts in the United States. Th r 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 12 Del Frisco’s steakhouses in 9 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 open the entire year were $14.4 million for the fiscal year ended December 27, 2016. During the same period, the average check at these Del Frisco’s locations was $115. e Del Frisco’s brand is defined by its menu, Frisco’s restaurant for locations h a 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 18 Sullivan’s steakhouses in 14 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 $4.4 million for the fiscal year ended December 27, 2016. During the same period, the average check at Sullivan’s was $64. a Del Frisco’s Grille We developed the Grille in 2011 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 23 Grilles in 12 states and the District of Columbia. Additional Grille openings are planned over the next year and we anticipate they will range in size from 6,500 to 7,500 square feet with seating capacity for at least 200 people. Annual AUVs per Grille restaurant for locations open the entire year r were $5.1 million for the fiscal year ended December 27, 2016. During the same period, the average check at these Grille locations was $48. n 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 n. We our restaurant concepts and utilize a customized approach for each concept when selecting and prioritizing markets for expansio 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 area, the specific attributes of each site considered and the unit economics we believe we can realize. and analysis on the dynamics of the local n r 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 have 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: n ff 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. 4 (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 7,500 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. 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 five to seven new restaurants annually, generally composed of one to two Del Frisco’s and four to six 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 the fiscal year ending on December 26, 2017, we expect to open one Grille and open generally takes 9 to 12 months after the signing of a lease or the closing of a purchase to complete construction and open a ne restaurant. Additional time is sometimes required to obtain certain government approvals, permits and licenses, such as liquor aa licenses. We are also currently evaluating the possibility of expanding the Sullivan’s brand th rough a franchising model. one Del Frisco’s. It w r t 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 u recipes, to the procurement and presentation of high quality menu items and the delivery of a positive customer experience. We to provide quality through a carefully controlled and established supply chain and proven preparation techniques. strive Depending on the volume of each restaurant, our typical restaurant-level management team consists of one general manager, two t aa four assistant managers, one executive chef and two sous chefs. We also have an experienced team of regional directors to oversee operations at multiple restaurants. To ensure that each restaurant and its employees meet our demanding performance requirement s, t 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 that our chefs and managers oversee before f 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. each o 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 ten 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 t t raining 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. f Our training programs are administered by the general manager at each restaurant and supervised by our chief people officer, 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 corporate executive chef and director of purchasing work with Stock Yards, a division of U.S. Foods, Inc., our primary beef supplier, as well as secondary beef suppliers, 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. t 5 Our corporate executive chef and our director of purchasing also establish strict product specifications for those items purchased at the ces for each local level. We ensure competitive pricing for such supplies by requiring each restaurant’s chef to obtain at least three pri locally sourced product from suppliers approved by the director of purchasing and submit these bids to their regional chef on a 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. uu f 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 d 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. r 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. 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, digital advertising and social media 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-owne d h 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, Paul Martin’s American Grill and Earl’s Kitchen + Bar. 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 on a 52- or 53-week fiscal year ending the last Tuesday of each December, and our first, second d and third quarters each contain operating weeks with the fourth quarter containing 16 or 17 operating weeks. The fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014, which we refer to as fiscal 2016, fiscal 2015 and fiscal 2014, respectively, had 52 weeks. The following fiscal year that will end on December 26, 2017, which we refer to as fiscal 2017, will have 52 weeks. 12n h t 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 Count agreement. We also agreed not to use the specific registration of the Del Frisco’s name or grant others the right to use it w f miles of the existing restaurant operated by the third party in the territory. We do not have any right to any future or recurring payments from or have any affirmative payment obligations to the third party and they are responsible for all costs associated with running their respective location, including all commodity and labor costs and any risks related th an agreement to obtain and clarify the naming rights in certain counties in Kentucky, Indiana and Ohio related to this unrelated third party for aggregate consideration of $0.6 million. We are also aware of names similar to those of our restaurants used by various third y in Kentucky pursuant to a concurrent use ithin 50 ereto. In fiscal 2016, we entered into r ff 6 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 and financial condition. Our inability to continue to obtain such insurance coverage at reasonable costs also could have a material adverse effect on us. We are also subjec ff Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment. t to the Federal Americans with f r Employees As of December 27, 2016, we had 4,809 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 are covered by a collective bargaining agreement. We believe that we have good relations with our employees. Executive Officers and Key Employees The following table sets forth certain information regarding our executive officers and certain of our key employees. Name Norman J. Abdallah Thomas J. Pennison, Jr. Brandon C. Coleman Thomas G. Dritsas William S. Martens Ray D. Risley April L. Scopa Scott C. Smith Age 54 49 34 46 44 51 49 61 Position Chief Executive Officer; Director Chief Financial Officer Chief Marketing Officer Vice President of Culinary & Corporate Executive Chef Chief Development Officer President, Del Frisco’s Chief People Officer President, Sullivan’s r Norman J. Abdallah has served as Chief Executive Officer since November 2016. Mr. Abdallah has also served as a member of the Board since July 2012. Mr. Abdallah also served as a member of the Company’s Advisory Board from March 2011 to July 2012. Previously, Mr. Abdallah served as an Operating Partner for CIC Partners, a private equity firm, in the role of Chief Executive Officer of TM Restaurant Holdings LLC from September 2014 to September 2016 and Executive Chairman of Willies Grill & Icehouse m Holdings LLC, a restaurant company, from September 2014 to October 2016. From December 2013 through September 2014, Mr. Abdallah served as Chief Executive Officer of Counter Concepts, LLC, a private equity firm. From May 2013 through December 2013, Mr. Abdallah served as interim Chief Executive Officer of Dinosaur Bar-B-Que, a restaurant operating company. Mr. Abdallah formerly served as the Chief Executive Officer of Romano’s Macaroni Grill, a restaurant operating company, from 2010 through April 2013. Prior to joining Romano’s Macaroni Grill, Mr. Abdallah served as Chief Executive Officer of Restaurants Unlimited Inc., a privately-held multi-concept restaurant company, from 2009 to 2010. Prior to joining Restaurants Unlimited, Mr. Abdallah served as the Chief Executive Officer and Co-Founder of Fired Up, Inc., the parent company of U.S.-based casual dining concept Carino’s Italian, from 1997 to 2008. Mr. Abdallah has also served as Chairman of the Board of Triple Tap Ventures, an Alamo Drafthouse Cinema franchisee operator, since 2008 and served as a member of the Board of Directors of California Pizza Kitchen, Inc., a restaurant operating company, from 2011 to April 2013. 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. 7 Brandon C. Coleman has served as Chief Marketing Officer since December 2016 and is responsible for all aspects of marketing for Del Frisco’s, Sullivan’s and the Grille. Prior to joining our company, from 2013 to 2016, Mr. Coleman served as the Chief Executive Officer and lead management consultant for Brava Partners, a brand consulting firm, where he led engagements for over nineteen brands. Prior to Brava Partners, in 2013, Mr. Coleman served as the Chief Marketing Officer for Snapfinger, Inc., an online restaurant ordering and technology company, where he led sales, marketing and product development initiatives. Prior to Snapfinger, Inc., from 2010 to 2013, Mr. Coleman served as the Chief Marketing Officer for Romano’s Macaroni Grill. Prior to Macaroni Grill, from 2009 to 2010, Mr. Coleman served as the Vice President of Marketing for Restaurants Unlimited, Inc. Mr. Coleman’s career began with global advertising leader McCann Erickson NY. r 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. William S. Martens has served as Chief Development Officer since November 2016, and previously 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, 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 President, Del Frisco’s since January 2017. From December 2015 to December 2016, Mr. Risley was Senior Vice President of Operations for the Grille. From October 2013 to December 2015, Mr. Risley was Vice President of Operations for Sullivan’s Steakhouse. Prior to becoming Vice President of Operations for Sullivan’s, Mr. Risley served as a Regional Manager for restaurants under all three of our brands, as well as overseeing 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. r April L. Scopa has served as Chief People Officer since November 2016, and previously 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. Scott C. Smith has served as President, Sullivan’s since January 2017. Prior to joining our company, from 2013 to 2016, Mr. Smith most recently served as the Chairman and CEO of Day Star Restaurant Group, which owns and operates Texas Land & Cattle and Lone Star Steak House restaurants. Prior to Day Star, from 2011 to 2013, Mr. Smith was Senior Vice President of Operations at Macaroni Grill. Prior to Macaroni Grill, from 2009 to 2011, Mr. Smith served as Chief Operating Officer of Restaurants Unlimited and later as the President and CEO. Prior to Restaurants Unlimited, from 2008 to 2009, Mr. Smith served as the President and CEO of AMER Restaurant Group, which operated a portfolio of restaurants in Cairo, Egypt. Prior to AMER Restaurant Group, Mr. Smith served in various leadership positions in various companies throughout the restaurant industry, including Brinker International, in addition to founding, owning and operating different restaurant concepts. 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 12 in the notes to the consolidated financial statements. 8 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, may continue to do so and may do so in the future. 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 r 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 aa 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, Paul Martin’s American Grill and Earl’s Kitchen + Bar. 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 five to seven new restaurants annually, generally composed of one to two Del Frisco’s and four to six 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 are also currently evaluating the possibility of expanding the Sullivan’s brand through a franchising model. In fiscal 2016, we relocated the Del Frisco’s in Dallas, Texas, and opened Grilles in Long Island, New York, Nashville, Tennessee and Brentwood, Tennessee. In fiscal 2017, we expect to open one Grille and one Del Frisco’s. 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: d • finding quality site locations, competing effectively to obtain quality site locations lease or purchase sites; ff and reaching acceptable agreements to 10 • • • • • • complying with applicable zoning, land use and environmental regulations and obtaining, for an acceptable cost, required permits and approvals; 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, 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 ma y 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. uu 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 d 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. each restaurant. We believe there are The failure to continue to successfully develop our Grille concept could have a material adverse effect on our financial condition and results of operations. u We launched our newest concept, the Grille, in the third quarter of fiscal 2011 with the opening of our New York City location, and have grown the concept to 23 locations as of the end of fiscal 2016. 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 doe uu 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 as we enter new markets, 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 successful in further developing and growing the Grille or in developing and growing 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. Some Grille locations 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. s not meet our expectations, our operating results 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 new restaurant growth, including the continued development and promotion of the Grille. We believe there are opportunities to open five to seven restaurants annually, generally composed of one to two Del Frisco’s and four to six 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 are also currently evaluating the possibility of expanding the Sullivan’s brand through a franchising model. During fiscal 2017, we expect to open one Grille and one Del Frisco’s. 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 c 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 fiscal 2016, we completed the refresh of one Sullivan’s and one Del Frisco’s. Looking forward, we expect to complete two to four refreshes each year at an approximate cost of $0.5 to $1.0 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 una a ble to rr implement our growth strategy or maintain current levels of operating performance in our existing restaurants. ase net of n 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 11%, 12% and 13% of our revenues in fiscal 2016, 2015 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, a 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. ny n 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 r use, and uses, a specific registration of the Del Frisco’s name pursuant to a concurrent use agreement, as described in greater detail in “Business—Intellectual Property.” We do not own or control the Louisville 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 restaurant operate s under one of our brand names, we may be subject to litigation as a result of the 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 th matters, beef in general or other similar concerns could adversely affect our business and results of operations. ese a r f 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. ef and premium choice beef. Ouruu Our profitability depends in part on our ability to anticipate and react to changes in commodity costs, which have a substantial effect f on our total costs. For example, we purchase large quantities of beef, particularly USDA prime be beef costs represented approximately 32%, 34% and 34% of our food and beverage costs during fiscal 2016, 2015 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. 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 ff 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 ff accordance with our specifications. In addition, we rely on one or a limited number of suppliers for certain ingredients. For example, Stock Yards, a division of U.S. Foods, Inc., is the primary supplier of the beef for all of our restaurants and has been so since June 2009. 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 restaurant, which could adversely affect our business and results of operations. a n 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 and successfully transition to executives of equal experience and capabilities. Some of our senior executives, such as Norman J. Abdallah, our Chief Executive Officer, are particularly important to our succe ss. Senior executives are important to our business 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. uu In addition, as previously disclosed, Mr. Abdallah assumed the role as our Chief Executive Officer in November 2016. Any significant leadership change or senior management transition involves inherent risk and any failure to complete a smooth transition could hinder our strategic planning, execution and future performance. While we strive to mitigate the negative impact associated with changes to our senior management team, there may be uncertainty among investors, employees and others concerning our future direction and performance. Any disruption in our operations or uncertainty could adversely affect our business and results of operations. ff 13 Changes in consumer preferences and discretionary spending patterns coul operations. ff d adversely impact our business and results of The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consu mer 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. u 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 vio 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. n nn lations of u Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they d 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 one of a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at 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 employee 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. s or tt n n 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 ff 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 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 governme ntal 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. subject to aa ff f 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 n increase the costs of providing health benefits to employees. In addition, because we have a significant number of restaurants 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. located 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 d 14 r 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 total carbohydrates, complex carbohydrates, sugars, dietary ff calories and calories from fat, total fat, saturated fat, cholesterol, sodium, 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. In fiscal 2015, our Grille concept became subject to the requirements to post nutritional information on our menus or in our restaurants because we operated 20 Grille locations. The compliance deadline is May 5, 2017, and we intend to comply with these requirements before the deadline. 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. Any reduction in customer traffic related to these or other government regulations could affect revenues and adversely affect our business and results of operations. h 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 foodff 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 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. In addition, we have a substantial number of hourly employees who are paid wage rates at or based on the federal or state minimum mm 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 15% increase in the minimum wage on January 1, 2017 in Seattle, Washington to $15.00 per hour or the 17% increase in minimum wage in California to $10.50, could increase our costs and have a material adverse impact on our results of operations. Certain other states in which we operate restaurants have adopted or are rr 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. All but one of our restaurants are located in leased premises. Many of our current leases are non-cancelable and typically have initial terms ranging from 5 to 15 years with 2 to 4 5-year extension options. 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. For example, in fiscal 2015, we paid $3.1 million to exit two Grille leases, and in fiscal 2016, we paid $0.9 million to exit one Sullivan’s lease. 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 uu 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. If we are required to make payments or otherwise perform under one of our leases after a restaurant closes or if we are unable to renew our restaurant leases, our business and results of operations could be adversely affected. r 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 r 15 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 landlords or their other retail tenants our business and results of operations may be adversely affected. our ff Fixed rental payments account for a significant portion of our operating expenses, wh ff adverse economic and industry conditions and could limit our operating and financing flexibility. ich increases our vulnerability to general Payments under our operating leases account for a significant portion of our operating expenses, an rr open in the future will similarly be leased by us. Specifically, payments under our operating leases accounted for 13.3%, 13.2% and 13.4% of our restaurant operating expenses in fiscal 2016, 2015 and 2014, respectively. Our substantial operating lease obligations could have significant negative consequences, including: d we expect the new restaurants we • • • • • 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 ff 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. under 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 $30.0 million. There were no outstanding borrowings under this facility at December 27, 2016. We may incur substantial additional indebtedness in the future. Our credit facility, nn debt instruments we may enter into in the future, may have important consequences to us, including the following: and other • • • 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. uu 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. 16 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; • • • 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. f Our credit facility limits our ability to engage in these types of transactions even if we believed that a specific transaction n 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 27, 2016, 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 toy 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. would a Our credit facility carries floating interest rates, thereby exposing us to market risk related to changes in interest rates to 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 y on the credit facility, our interest expense would increase by approximately $0.3 million over the course of 12 months. the extent k 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 County in Kentucky. 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 d aa service marks could diminish the value of our brands and restaurant concepts and may cause a decline in our revenues and force 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. y 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. us to 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 securit 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 y breaches, m uu 17 debit card information of their customers has been stolen. If this or another type of breach occurs at one of our restaurants, become subject to negative publicity as well as 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 ntain uu consultants to conduct auditing and testing for weaknesses in our systems, controls, firewalls and encryption and intend to mai 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 autho rity, or ff any adverse publicity resulting from these allegations, could adversely affect our business and results of operations. we may uu 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 27, 2016, we had awards of stock options, restricted stock and performance stock units outstanding under our equity compensation plan. 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 or other awards 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. q aa 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 ff substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash f low 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 pay ments. y 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. tt 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; m 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 pl an permits vesting of stock options, restricted stock and performance stock units, and payments to be made to the employees thereu 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. nder u nn n We are an “emerging growth company,” but will lose this status as of the end of fiscal 2017. 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 “em 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 regard ing r 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 erging u 18 previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company,” which will occur as of the end of fiscal 2017. As a result of losing our “emerging growth company” status, we will be subject to certain requirements that apply to other public companies from which we have previously been exempt, including those listed abo We expect that the loss of “emerging growth company” status and compliance with the additional requirements will increase our legal and financial compliance costs and make some activities more time consuming and costly. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Secti 404 of the Sarbanes-Oxley Act. on ve. mm t If we are unable to implement and maintain the effectiveness of our internal control over fina registered public accounting firm may not be able to provide an unqualified report on our internal controls. f ncial reporting, our independent 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, which will occur as of the end of fiscal 2017, we will lose the ability to rely on the exemptions related thereto discussed above, and beginning with the audit of our consolidated financial statements for fiscal 2017, our independent registered public accounting firm will be required, as part of an integrated audit, to attest to the effectiveness of our internal control over financial reporting under Section 404. An independent assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not detect. 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 consolidated financial statements. Confidence in the reliability of our consolidated financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal control over financial reporting. This could materially adversely affect us and lead to a decline in the price of our common stock. t t 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 repor rr ted r 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 issued a comprehensive set of changes in accounting for leases. The lease accounting model 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. 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 53 restaurants across 24 states and the District of Columbia. We currently lease all of our restaurants, except for one Del Frisco’s restaurant. 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 5 to 15 years at initiation, with 2 to 4 uu 5-year extension options. None of our restaurant leases can be terminated early by the context of a breach or default under the applicable lease. landlord other than as is customary in the Opening Date Del Frisco’s Double Eagle Steak House April 1996 January 1997 March 2000 July 2000 May 2007 November 2007 November 2008 April 2011 December 2012 September 2014 August 2015 September 2016 Del Frisco’s Grille August 2011 November 2011 July 2012 October 2012 March 2013 July 2013 October 2013 December 2013 December 2013 June 2014 August 2014 September 2014 November 2014 December 2014 May 2015 June 2015 August 2015 September 2015 September 2015 November 2015 June 2016 October 2016 November 2016 Sullivan’s Steakhouse May 1996 November 1996 October 1997 December 1997 January 1998 July 1998 September 1998 September 1998 Ft. Worth Denver New York Las Vegas Charlotte Houston Philadelphia Boston Chicago Washington D.C. Orlando Dallas New York Dallas Washington D.C. Atlanta Houston Santa Monica Fort Worth Chestnut Hill Southlake Burlington Irvine N. Bethesda Tampa Pasadena The Woodlands Plano Stamford Little Rock Hoboken Cherry Creek Long Island Nashville Brentwood Austin Indianapolis Baton Rouge Wilmington Charlotte Houston Anchorage King of Prussia 20 City State Lease/Own Texas Colorado New York Nevada North Carolina Texas Pennsylvania Massachusetts Illinois Florida Texas Lease Lease Lease Lease Lease Lease (1) Lease Lease Lease Lease Own Lease (2) New York Texas Georgia Texas California Texas Massachusetts Texas Massachusetts California Maryland Florida California Texas Texas Connecticut Arkansas New Jersey Colorado New York Tennessee Tennessee 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 Lease Lease Lease Lease Lease Lease (3) Lease Lease Opening Date Sullivan’s Steakhouse (cont.) City State Lease/Own December 1998 January 1999 June 1999 August 1999 December 2000 July 2007 July 2008 November 2008 February 2009 June 2010 Naperville Palm Desert Chicago Raleigh Tucson Omaha Leawood Lincolnshire Baltimore Seattle Illinois California Illinois North Carolina Arizona Nebraska Kansas Illinois Maryland Washington Lease Lease Lease Lease Lease (4) Lease Lease Lease Lease Lease (1) Current lease term expires on November 30, 2017. We have three remaining five-year option periods available that have not yet been exercised. (2) The relocation of the Dallas Del Frisco’s Double Eagle location was treated as a new restaurant opening. (3) Current lease term expires on August 31, 2017. We have one remaining five-year option period available that has not yet been exercised. (4) Current lease term expires on September 30, 2017. We have two remaining five-year option periods available that have not yet been exercised. Our corporate headquarters is located in Southlake, Texas. We lease the property for our corporate headquarters. n 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 matters 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 and results of operations. d ff 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 Exchange Act since July 27, 2012, the date of our initial public offering. The following table sets forth, for the periods u n the high and low sales prices per share for our common stock as quoted by the Nasdaq Global Select Market. indicated, 2016 2015 First Quarter (December 30, 2015 (cid:2163) March 22, 2016) Second Quarter (March 23, 2016 (cid:2163) June 14, 2016) Third Quarter (June 15, 2016 (cid:2163) September 6, 2016) Fourth Quarter (September 7, 2016 (cid:2163) December 27, 2016) First Quarter (December 31, 2014 (cid:2163) March 24, 2015) Second Quarter (March 25, 2015 (cid:2163) June 16, 2015) Third Quarter (June 17, 2015 (cid:2163) September 8, 2015) Fourth Quarter (September 9, 2015 (cid:2163) December 29, 2015) High Low $ $ $ $ $ $ $ $ 17.15 16.86 16.10 18.50 25.95 22.48 19.18 16.42 $ $ $ $ $ $ $ $ 14.10 14.42 14.05 13.01 17.87 18.30 13.73 12.25 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 27, 2017, wa s d $16.25. As of February 27, 2017, there were three holders of record of our common stock, not including beneficial owners of shares registered in nominee or street name. Issuer Purchases of Equity Securities On October 14, 2014, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $25 million of our common stock over the next three years. On February 15, 2017, our Board of Directors increased this authorization to $50 million. 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 27, 2016, we had repurchased 492,214 shares of our common stock at an aggregate cost of approximately $7.8 million under this program. The following table provides information with respect to our purchases of shares of our common stock during the fourth quarter of fiscal 2016: Fiscal Period September 7 - October 4, 2016 October 5 - November 1, 2016 November 2 - November 29, 2016 November 30 - December 27, 2016 Total Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs — $ 163,517 — 139,670 303,187 $ — 13.90 — 18.26 15.91 — $ 163,517 — 139,670 303,187 22,000,055 19,726,959 19,726,959 17,177,000 22 (cid:2163) (cid:2163) (cid:2163) (cid:2163) (cid:2163) (cid:2163) (cid:2163) (cid:2163) Performance Graph The following table and graph shows the cumulative total stockholder return on our 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 $200.00 $190.00 $180.00 $170.00 $160.00 $150.00 $140.00 $130.00 $120.00 $110.00 $100.00 7/27/2012 12/24/2012 12/31/2013 12/30/2014 12/29/2015 12/27/2016 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 $ Del Frisco's Restaurant Group, Inc. 100.00 $ S&P 500 Stock Index S&P SmallCap 600 Index 100.00 $ 100.00 Dow Jones U.S. Restaurants & Bars Index $ $ $ $ $ 12/24/2012 12/31/2013 12/30/2014 12/29/2015 12/27/2016 134.23 163.70 190.40 165.28 180.38 150.10 156.86 132.15 117.92 102.94 106.24 101.95 181.31 133.36 149.12 127.66 124.54 149.96 154.02 159.38 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 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 2012 through 2016 from our audited consolidated 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 Lease termination and closing costs Management and accounting fees paid to related party Asset advisory agreement termination fee Secondary public offering costs Public offering transaction bonuses Impairment charges Depreciation and amortization Operating income Other income (expense), net: Interest expense-other 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 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 27, 2016 Fiscal Year Ended (1) December 31, December 30, December 29, 2015 2013 2014 (dollars in thousands, except per share data) December 25, 2012 $ 351,681 $ 331,612 $ 301,805 $ 271,806 $ 232,435 99,181 169,300 8,260 3,446 25,924 1,031 — — — — 598 18,865 25,076 95,963 156,337 7,745 5,228 23,111 1,386 — — — — 3,248 16,776 21,818 (70) — (432) (77) — (236) 90,990 137,695 6,169 4,735 20,537 — — — 5 — 3,536 13,598 24,540 (113) — (107) 82,209 121,825 5,663 3,758 17,421 — — — 1,024 8,355 2,360 11,300 17,891 (72) — (51) 24,574 6,808 17,766 — 17,766 $ $ 21,505 5,507 15,998 — 15,998 $ $ 24,320 7,723 16,597 — 16,597 $ $ 17,768 5,556 12,212 — 12,212 $ $ 0.76 $ — 0.76 $ 0.76 $ — 0.76 $ 0.68 $ — 0.68 $ 0.68 $ — 0.68 $ 0.71 $ — 0.71 $ 0.70 $ — 0.70 $ 0.51 $ — 0.51 $ 0.51 $ — 0.51 $ 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) 13,754 0.71 (0.04) 0.67 0.71 (0.04) 0.67 Basic Diluted 23,322,344 23,435,275 23,380,085 23,517,288 23,517,883 23,740,318 23,779,782 23,852,200 20,432,579 20,432,579 24 December 27, 2016 December 29, 2015 December 30, 2014 (dollars in thousands) December 31, 2013 December 25, 2012 Balance Sheet Data (at end of period): Cash and cash equivalents Working capital (deficit) (3) Total assets Total debt Total stockholders' equity $ $ $ $ $ 370,782 $ 14,622 (4,396) $ $ — $ $ 246,366 5,176 $ (10,390) $ $ 346,655 4,500 $ $ 227,699 3,520 $ (2,106) $ $ — $ $ 210,983 319,666 13,674 $ 8,048 $ $ — $ $ 196,783 288,651 10,763 (755) 258,385 — 177,901 December 27, 2016 December 29, 2015 Fiscal Year Ended (1) December 30, 2014 (dollars in thousands) December 31, 2013 December 25, 2012 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 $ $ 49,815 (34,168) $ (6,201) $ $ 36,698 45,868 $ (46,530) $ 2,318 $ $ 46,150 42,766 $ (47,956) $ (4,964) $ $ 47,491 29,392 $ (31,462) $ 4,981 $ $ 31,326 30,968 (32,173) (2,151) 33,635 Operating Data: Total Restaurants (at end of period) Total comparable restaurants (at end of period) (3) Average sales per comparable restaurant Percentage change in comparable restaurant sales (3) 53 41 50 37 46 35 40 30 34 28 $ 7,229 $ 7,396 $ 7,563 $ 7,622 $ 7,457 (0.8)% (0.6)% 1.9% 1.3% 4.2% (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 25, 2012, December 30, 2014, December 29, 2015 and December 27, 2016 each had 52 weeks. (2) Defined as total current assets minus total current liabilities. (3) We consider a restaurant to be comparable in the first full fiscal quarter 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. 25 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Del Frisco’s Restaurant Group, Inc. 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 53 restaurants in 24 states and the District of Columbia. Of the 53 restaurants we operated as of the end of the period covered by this report, there are 12 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 23 Grille restaurants. During fiscal 2016, we relocated a Del Frisco’s in Dallas, Texas and opened Grilles in Long Island, New York, Nashville, Tennessee and Brentwood, Tennessee. 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 h 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 and group 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 five to seven restaurants annually, generally composed of one to two Del Frisco’s and four to six 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 fiscal 2017, we expect to open one Grille and one Del Frisco’s. We are also currently evaluating the possibility of expanding the Sullivan’s brand through a franchising model. 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. ff Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants: • Comparable Restaurant Sales Growth. We consider a restaurant to be comparable during the first full fiscal r quarter 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 41 and 37 restaurants at December 27, 2016 and December 29, 2015, 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 f time period. Adjusted EBITDA Margin. Adjusted EBITDA margin represents net income before interest, income taxes and depreciation and amortization plus the sum of certain non-operating expenses, including pre-opening costs, impairment charges, lease termination and closing costs, third-party lease guarantee payments, 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. Restaurant-Level EBITDA Margin. Restaurant-level EBITDA margin represents net income before interest expense, income taxes, other expense, net, pre-opening costs, general and administrative expenses, lease termination and closing costs, secondary public offering costs, impairment charges and depreciation and 26 amortization, as a 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 note 12 in the notes to our consolidated financial statements for a reconciliation of restaurant-level EBITDA to net income. 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. mm r 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. Revenues also include breakage income associated with gift cards. In fiscal 2016, food comprised 68% of food and beverage sales with beverage comprising the remaining 32%. Revenues are directly influenced by the number of operating weeks in the relevant period and comparable restaurant sales growth. Comparable restaurant sales growth reflects ff 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. f Restaurant Operating Expenses. We measure restaurant operating expenses as a percentage of revenues. 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 y expenses and are measured by tracking hourly and total labor as a percentage of revenues; • Occupancy expenses, which comprise all occupancy costs other than pre-opening rent expense, 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 track ing ff 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 mm astructure to support future company t administrative functions that support development and restaurant operations and provide an infr 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 nn of costs related to our anticipated growth, including substantial training costs and significant investments in infrastructure. As we are are expected to increase as a result a 27 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. 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. 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 Lease termination and closing costs Secondary public offering costs Impairment charges Depreciation and amortization Operating income Other income (expense), net: Interest, net of capitalized interest Other Income before income taxes Income tax expense Net income December 27, 2016 $ 351,681 100.0% $ Fiscal Year Ended December 29, 2015 (dollars in thousands) 331,612 100.0% December 30, 2014 $ 301,805 100.0% 99,181 169,300 8,260 3,446 25,924 1,031 — 598 18,865 25,076 28.2% 48.1% 2.3% 1.0% 7.4% 0.3% 0.0% 0.2% 5.4% 7.1% 95,963 156,337 7,745 5,228 23,111 1,386 — 3,248 16,776 21,818 28.9% 47.1% 2.3% 1.6% 7.0% 0.4% 0.0% 1.0% 5.1% 6.6% 90,990 137,695 6,169 4,735 20,537 — 5 3,536 13,598 24,540 (70) (432) 24,574 6,808 17,766 $ 0.0% -0.1% 7.0% 1.9% 5.1% $ (77) (236) 21,505 5,507 15,998 0.0% -0.1% 6.5% 1.7% 4.8% $ (113) (107) 24,320 7,723 16,597 30.1% 45.6% 2.0% 1.6% 6.8% 0.0% 0.0% 1.2% 4.5% 8.1% 0.0% 0.0% 8.1% 2.6% 5.5% 28 Fiscal Year Ended December 27, 2016 (52 weeks) Compared to Fiscal Year Ended December 29, 2015 (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 27, 2016 and December 29, 2015. Revenues Costs and expenses: Cost of sales Restaurant operating expenses: Labor Operating expenses Occupancy Restaurant operating expenses Marketing and advertising costs Restaurant-level EBITDA Restaurant operating weeks Average weekly volume Revenues Costs and expenses: Cost of sales Restaurant operating expenses: Labor Operating expenses Occupancy Restaurant operating expenses Marketing and advertising costs Restaurant-level EBITDA Fiscal Year Ended December 27, 2016 Del Frisco's Sullivan's Grille Consolidated (dollars in thousands) $ 166,885 100.0% $ 77,797 100.0% $ 106,999 100.0% $ 351,681 100.0% 48,968 29.3% 22,862 29.4% 27,351 25.6% 99,181 28.2% 38,253 18,366 11,080 67,699 3,341 $ 46,877 620 269 $ 23,033 22.9% 11,641 11.0% 5,608 6.6% 40,282 40.6% 2.0% 2,471 28.1% $ 12,182 29.6% 35,146 15.0% 14,618 7.2% 11,555 51.8% 61,319 3.2% 2,448 15.7% $ 15,881 96,432 32.8% 44,625 13.7% 28,243 10.8% 169,300 57.3% 8,260 2.3% 14.8% $ 74,940 27.4% 12.7% 8.0% 48.1% 2.3% 21.3% 936 83 $ 1,079 99 $ 2,635 133 $ Fiscal Year Ended December 29, 2015 Del Frisco's Sullivan's Grille Consolidated (dollars in thousands) $ 161,809 100.0% $ 78,983 100.0% $ 90,820 100.0% $ 331,612 100.0% 48,479 30.0% 23,703 30.0% 23,781 26.2% 95,963 28.9% 37,110 17,130 10,447 64,687 2,806 $ 45,837 23,107 22.9% 11,646 10.6% 5,113 6.5% 39,866 40.0% 1.7% 2,344 28.3% $ 13,070 29.3% 29,299 14.7% 12,546 6.5% 9,939 50.5% 51,784 3.0% 2,595 16.5% $ 12,660 89,516 32.3% 41,322 13.8% 25,499 10.9% 156,337 57.0% 7,745 2.9% 13.9% $ 71,567 27.0% 12.5% 7.7% 47.1% 2.3% 21.6% Restaurant operating weeks Average weekly volume 591 274 $ 957 $ 83 936 $ 97 2,484 $ 133 Revenues. Consolidated revenues increased $20.1 million, or 6.1%, to $351.7 million in fiscal 2016 from $331.6 million in fiscal 2015. This increase was due to 151 net additional operating weeks in fiscal 2016 resulting from three Grille openings in fiscal 2016 and the full year impact of one Del Frisco’s and six Grille openings in fiscal 2015. This increase was partially offset by the closing of one Sullivan’s location and two Grille locations in fiscal 2015, the temporary closing of the Dallas Del Frisco’s during its relocation in fiscal 2016 and by a 0.8% decrease in total comparable restaurant sales, comprised of a 0.8% decrease in customer counts. t Del Frisco’s revenues increased $5.1 million, or 3.1%, to $166.9 million in fiscal 2016 from $161.8 million in fiscal 2015. This increase was primarily due to 33 additional operating weeks resulting from the full year impact of the Orlando, Florida Del Frisco’s, which opened in August 2015. This increase was partially offset by the temporary closing of the Dallas Del Frisco’s during its relocation in fiscal 2016 and a 1.2% decrease in total comparable restaurant sales, comprised of a 1.6% decrease in customer counts, partially offset by a 0.4% increase in average check. Sullivan’s revenues decreased $1.2 million, or 1.5%, to $77.8 million in fiscal 2016 from $79.0 million in fiscal 2015. This decrease was primarily due to the closing of one Sullivan’s location in May 2015, as well as a 0.2% decrease in total comparable restaurant sales, comprised of a 0.8% decrease in customer counts, partially offset by a 0.6% increase in average check. The Grille’s revenues increased $16.2 million, or 17.8%, to $107.0 million in fiscal 2016 from $90.8 million in fiscal 2015. This increase was driven by 143 net additional operating weeks resulting from three Grille openings during fiscal 2016 and the full year impact of six Grille openings during fiscal 2015. This increase was partially offset by a 0.7% decrease in total comparable restaurant 29 sales, comprised of a 0.8% decrease in average check, partially offset by a 0.1% increase in customer counts, as well as the closure of two Grille locations in fiscal 2015. Cost of Sales. Consolidated cost of sales increased $3.2 million, or 3.4%, to $99.2 million in fiscal 2016 from $96.0 million in fiscal 2015. This increase was primarily due to an additional 151 net operating weeks in fiscal 2016, as discussed above. As a percentage of consolidated revenues, consolidated cost of sales decreased to 28.2% in fiscal 2016 from 28.9% in fiscal 2015. As a percentage of revenues, Del Frisco’s cost of sales decreased to 29.3% during fiscal 2016 from 30.0% in fiscal 2015. This decrease in cost of sales, as a percentage of revenues, was primarily due to lower beef costs, partially offset by higher seafood and wine costs. As a percentage of revenues, Sullivan’s cost of sales decreased to 29.4% during fiscal 2016 from 30.0% in fiscal 2015. This decrease in cost of sales, as a percentage of revenues, was primarily due to lower beef and seafood costs. As a percentage of revenues, the Grille’s cost of sales decreased to 25.6% during fiscal 2016 from 26.2% in fiscal 2015. This decrease in cost of sales, as a percentage of revenues, was primarily due to lower beef, seafood and wine costs. Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $13.0 million, or 8.3%, to $169.3 million in fiscal 2016 from $156.3 million in fiscal 2015. This increase was primarily due to an additional 151 net operating weeks in fiscal 2016, as discussed above. As a percentage of consolidated revenues, consolidated restaurant operating expenses increased to 48.1% in fiscal 2016 from 47.1% in fiscal 2015. As a percentage of revenues, Del Frisco’s restaurant operating expenses increased to 40.6% during fiscal 2016 from 40.0% in fiscal 2015. This increase in restaurant operating expenses, as a percentage of revenues, was due to higher occupancy costs and other restaurant operating costs. As a percentage of revenues, Sullivan’s restaurant operating expenses increased to 51.8% during fiscal 2016 from 50.5% in fiscal 2015. This increase in restaurant operating expenses, as a percentage of revenues, was due to higher labor costs, other restaurant operating costs and occupancy costs. As a percentage of revenues, the Grille’s restaurant operating expenses increased to 57.3% during fiscal 2016 from 57.0% in fiscal 2015. This increase in restaurant operating expenses, as a percentage of revenues, was due to higher labor costs, partially offset by lower occupancy costs and other restaurant operating expenses. ff Marketing and Advertising Costs. Consolidated marketing and advertising costs increased $0.5 million, or 6.6%, to $8.3 million in fiscal 2016 from $7.7 million in fiscal 2015. As a percentage of consolidated revenues, consolidated marketing and advertising costs remained flat at 2.3% in fiscal 2016 compared to fiscal 2015. As a percentage of revenues, Del Frisco’s marketing and advertising costs increased to 2.0% in fiscal 2016 from 1.7% in fiscal 2015. The increase in marketing and advertising costs, as a percentage of revenues, was primarily due to higher digital and print advertising, partially offset by lower broadcast media costs. As a percentage of revenues, Sullivan’s marketing and advertising costs increased to 3.2% in fiscal 2016 from 3.0% in fiscal 2015. The increase in marketing and advertising costs, as a percentage of revenues, was primarily due to higher digital and print advertising, partially offset by lower broadcast media costs. As a percentage of revenues, the Grille’s marketing and advertising costs decreased to 2.3% in fiscal 2016 from 2.9% in fiscal 2015. This decrease in marketing and advertising costs, as a percentage of revenues, was due to lower broadcast media and other advertising, partially offset by higher digital advertising and print production costs. Pre-opening Costs. Pre-opening costs decreased by $1.8 million to $3.4 million in fiscal 2016 from $5.2 million in fiscal 2015. One new Del Frisco’s and three new Grilles were opened in fiscal 2016 compared to one new Del Frisco’s and six new Grilles in fiscal 2015. The relocated Dallas Del Frisco’s was treated as a new restaurant opening and incurred customary pre-opening expenses in preparation for the opening of the restaurant. General and Administrative Expenses. General and administrative expenses increased $2.8 million, or 12.2%, to $25.9 million in fiscal 2016 from $23.1 million in fiscal 2015. This increase was primarily related to additional compensation costs related to growth in the number of restaurant support center and regional management-level personnel to support recent and anticipated growth, as well as increased legal expenses and $0.8 million in reorganization severance expenses. As a percentage of revenues, general and administrative expenses increased to 7.4% in fiscal 2016 from 7.0% in fiscal 2015. 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 30 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. Lease termination and closing costs. During the fourth quarter of fiscal 2016, we decided to close the Seattle Sullivan’s location by March 31, 2017. In conjunction with this anticipated closing, we incurred $0.9 million in lease termination costs, as well as $0.1 million in closing costs from prior year closures. In fiscal 2015, we incurred $1.4 million in lease termination and closing costs due to the closing of two Grille locations in the fourth quarter of fiscal 2015. Impairment Charges. During the fourth quarter of fiscal 2016, we determined that the carrying value of two Sullivan’s locations exceeded their estimated future cash flows, due in part by our determination to close these locations, and recognized a combined $0.6 million impairment charge. This charge was based on the difference between the carrying value of the restaurant assets and the estimated value of leasehold improvements, furniture and restaurant equipment that may be transfer t During the third quarter of fiscal 2015, we determined that the carrying value of one Grille location exceeded its estimated future cash flows and recognized a $3.2 million 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. red to other restaurant locations. Depreciation and Amortization. Depreciation and amortization increased $2.1 million, or 12.5%, to $18.9 million in fiscal 2016 from $16.8 million in fiscal 2015. The increase in depreciation and amortization expense primarily resulted from new assets related to seven restaurants opened in fiscal 2015 and four restaurants opened in fiscal 2016, as well as for existing restaurants that were remodeled during fiscal 2015 and fiscal 2016. Interest Expense. Interest expense decreased to $70,000 in 2016, net of capitalized interest of $19,000 f , from $77,000 in 2015. Provision for Income Taxes. The effective income tax rate was 27.7% and 25.6% in fiscal 2016 and fiscal 2015, 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 increased state tax expense, and a higher taxable income without a corresponding increase in tax credits. 31 Fiscal Year Ended December 29, 2015 (52 weeks) Compared to Fiscal Year Ended December 30, 2014 (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 29, 2015 and December 30, 2014. Revenues Costs and expenses: Cost of sales Restaurant operating expenses: Labor Operating expenses Occupancy Restaurant operating expenses Marketing and advertising costs Restaurant-level EBITDA Fiscal Year Ended December 29, 2015 Del Frisco's Sullivan's Grille Consolidated (dollars in thousands) $ 161,809 100.0% $ 78,983 100.0% $ 90,820 100.0% $ 331,612 100.0% 48,479 30.0% 23,703 30.0% 23,781 26.2% 95,963 28.9% 37,110 17,130 10,447 64,687 2,806 $ 45,837 22.9% 23,107 10.6% 11,646 6.5% 5,113 40.0% 39,866 2,344 1.7% 28.3% $ 13,070 29.3% 29,299 14.7% 12,546 6.5% 9,939 50.5% 51,784 2,595 3.0% 16.5% $ 12,660 32.3% 89,516 13.8% 41,322 10.9% 25,499 57.0% 156,337 7,745 2.9% 13.9% $ 71,567 27.0% 12.5% 7.7% 47.1% 2.3% 21.6% Restaurant operating weeks Average weekly volume 591 274 $ 957 $ 83 936 $ 97 2,484 $ 133 Revenues Costs and expenses: Cost of sales Restaurant operating expenses: Labor Operating expenses Occupancy Restaurant operating expenses Marketing and advertising costs Restaurant-level EBITDA 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% 24,166 29.9% 19,322 27.7% 90,990 30.1% 33,635 15,292 9,348 58,275 2,419 $ 42,946 23,184 22.3% 12,313 10.1% 5,411 6.2% 40,908 38.6% 1.6% 2,388 28.4% $ 13,449 22,380 28.7% 9,295 15.2% 6,837 6.7% 38,512 50.6% 3.0% 1,362 16.6% $ 10,556 79,199 32.1% 36,900 13.3% 21,596 9.8% 137,695 55.2% 6,169 2.0% 15.1% $ 66,951 26.2% 12.2% 7.2% 45.6% 2.0% 22.2% Restaurant operating weeks Average weekly volume 534 283 $ 988 $ 82 641 $ 109 2,163 $ 139 Revenues. Consolidated revenues increased $29.8 million, or 9.9%, to $331.6 million in fiscal 2015 from $301.8 million in fiscal 2014. This increase was due to 321 net additional operating weeks resulting from one Del Frisco’s and six Grille openings in fiscal 2015 and the full year impact of one Del Frisco’s and five Grille openings in fiscal 2014. This increase was partially offset by the closing of one Sullivan’s location and two Grille locations in fiscal 2016 and by a 0.6% decrease in total comparable restaurant sales, comprised of a 2.6% decrease in customer counts, which was partially offset by a 2.0% increase in average check. Del Frisco’s revenues increased $10.7 million, or 7.1%, to $161.8 million in fiscal 2015 from $151.1 million in fiscal 2014. This increase was primarily due to 57 additional operating weeks resulting from the Orlando, Florida Del Frisco’s opening in August 2015 and the full year impact of the Washington, D.C. Del Frisco’s, which opened in September 2014, as well as a 0.1% increase in total comparable restaurant sales, comprised of a 2.9% increase in average check, partially offset by a 2.8% decrease in customer counts. u Sullivan’s revenues decreased $1.9 million, or 2.4%, to $79.0 million in fiscal 2015 from $80.9 million in fiscal 2014. This decrease was primarily due to the closing of one Sullivan’s location in May 2015. This decrease was partially offset by a 0.2% increase in total comparable restaurant sales, comprised of a 3.4% increase in average check, partially offset by a 3.2% decrease in customer counts. u 32 The Grille’s revenues increased $21.1 million, or 30.2%, to $90.8 million in fiscal 2015 from $69.8 million in fiscal 2014. This increase was provided by 294 additional operating weeks resulting from six Grille openings during fiscal 2015 and five Grille openings during fiscal 2014. This increase was partially offset by a 4.1% decrease in total comp arable restaurant sales, comprised of a 2.5% decrease in average check and a 1.6% decrease in customer counts, as well as the closure of two Grille locations in fiscal 2015. y Cost of Sales. Consolidated cost of sales increased $5.0 million, or 5.5%, to $96.0 million in fiscal 2015 from $91.0 million in fiscal 2014. This increase was primarily due to 321 net additional operating weeks in fiscal 2015, as discussed above. As a percentage of consolidated revenues, consolidated cost of sales decreased to 28.9% in fiscal 2015 from 30.1% in fiscal 2014. As a percentage of revenues, Del Frisco’s cost of sales decreased to 30.0% during fiscal 2015 from 31.4% in fiscal 2014. This decrease in cost of sales, as a percentage of revenues, was primarily due to lower wine and protein costs, primarily for our prime beef and seafood. As a percentage of revenues, Sullivan’s cost of sales increased to 30.0% during fiscal 2015 from 29.9% in fiscal 2014. This increase in cost of sales, as a percentage of revenues, was primarily due to higher beef, liquor and wine costs, partially offset by lower seafood and dairy costs. As a percentage of revenues, the Grille’s cost of sales decreased to 26.2% during fiscal 2015 from 27.7% in fiscal 2014. The decrease in cost of sales, as a percentage of revenues, was due primarily to lower liquor, wine and protein costs, primarily for our pri y and seafood. me beef Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $18.6 million, or 13.5%, to $156.3 million in fiscal 2015 from $137.7 million in fiscal 2014. This increase was primarily due to 321 net additional operating weeks in fiscal 2015, as discussed above. As a percentage of consolidated revenues, consolidated restaurant operating expenses increased to 47.1% in fiscal 2015 from 45.6% in fiscal 2014. x As a percentage of revenues, Del Frisco’s restaurant operating expenses increased to 40.0% during fiscal 2015 from 38.6% in fiscal 2014. This increase in restaurant operating expenses, as a percentage of revenues, was due to higher direct labor and benefits costs, operating and occupancy costs due in part to new opening inefficiencies of the Orlando, Flor restaurant growth insufficient to offset increases in certain expenses. ida location and the comparable ff As a percentage of revenues, Sullivan’s restaurant operating expenses decreased to 50.5% during fiscal 2015 from 50.6% in fiscal 2014. 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 labor cost. As a percentage of revenues, the Grille’s restaurant operating expenses increased to 57.0% during fiscal 2015 from 55.2% in fiscal 2014. This increase in restaurant operating expenses, as a percentage of revenues, was due primarily to higher occupancy and new opening inefficiencies related to the six openings in fiscal 2015 and two openings in late fiscal 2014, as well as diminished operations at the two Grille locations that closed during the fourth quarter of fiscal 2015. Additionally, the decline in comparable restaurant sales resulted in deleveraging against certain fixed costs. Marketing and Advertising Costs. Consolidated marketing and advertising costs increased $1.6 million, or 25.5%, to $7.7 million in fiscal 2015 from $6.2 million in fiscal 2014. As a percentage of consolidated revenues, consolidated marketing and advertising costs increased to 2.3% in fiscal 2015 from 2.0% in fiscal 2014. As a percentage of revenues, Del Frisco’s marketing and advertising costs increased to 1.7% in fiscal 2015 from 1.6% in fiscal 2014. The increase in marketing and advertising costs, as a percentage of revenues, was primarily due to higher digital and outdoor advertising. As a percentage of revenues, Sullivan’s marketing and advertising costs remained flat at 3.0% in fiscal 2015 compared to fiscal 2014. As a percentage of revenues, the Grille’s marketing and advertising costs increased to 2.9% in fiscal 2015 from 2.0% in fiscal 2014. This increase in marketing and advertising costs, as a percentage of revenues, was due to higher digital, broadcast and print media spending. Pre-opening Costs. Pre-opening costs increased by $0.5 million to $5.2 million in fiscal 2015 from $4.7 million in fiscal 2014. One new Del Frisco’s and six new Grilles were opened in fiscal 2015 compared to five new Grilles in fiscal 2014. General and Administrative Expenses. General and administrative expenses increased $2.6 million, or 12.5%, to $23.1 million in fiscal 2015 from $20.5 million in fiscal 2014. This increase was primarily related to additional compensation costs related to growth in the number of restaurant support center and regional management-level personnel to support recent and anticipated growth, as well as $0.7 million in increased restaurant management training expenses. In addition, we incurred an additional $0.3 million in non-cash 33 stock compensation expense in fiscal 2015 compared to fiscal 2014. These increases were partially offset by lower incentive compensation during fiscal 2015. As a percentage of revenues, general and administrative expenses increased to 7.0% in fiscal 2015 from 6.8% in fiscal 2014. 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. Lease Termination and Closing Costs. In conjunction with the closing of two Grille locations in the fourth quarter of fiscal 2015, we incurred $1.4 million in lease termination and closing costs. No such costs were incurred in fiscal 2014. Impairment Charges. During the third quarter of fiscal 2015, we determined that the carrying value of one Grille location exceeded its estimated future cash flows and recognized a $3.2 million impairment charge. This charge was based on the difference between th e carrying value of the restaurant assets and the estimated value of furniture and restaurant equipment that may be transferred t f Grille locations. During the fourth quarter of fiscal 2014, we determined that the carrying value of one Grille location exceeded its estimated future cash flows and recognized a $3.5 million 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 t o future Grille locations. o future f t Depreciation and Amortization. Depreciation and amortization increased $3.2 million, or 23.4%, to $16.8 million in fiscal 2015 from $13.6 million in fiscal 2014. The increase in depreciation and amortization expense primarily resulted from new assets related to six restaurants opened in fiscal 2014 and seven restaurants opened in fiscal 2015 as well as for existing restaurants that were remodeled during fiscal 2014 and fiscal 2015. Interest Expense. Interest expense decreased to $77,000 in fiscal 2015, net of capitalized interest of $115,000, from $113,000 in fiscal 2014. Provision for Income Taxes. The effective income tax rate was 25.6% and 31.8% in fiscal 2015 and fiscal 2014, respectively. The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of the FICA tip and other credits, state income taxes and certain non-deductible or non-taxable expenses. The decrease in the effective tax rate was prim arily a attributable to increased tax credits against a lower taxable income and the settlement of uncertain tax positions during fiscal 2015. This decrease was partially offset by 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. 34 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. t 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 27, 2016, we had cash and cash equivalents of approximately $14.6 million. Our operations have not required significant working capital and, like many restaurant t working capital. Revenues are received primarily in cash or by credit card, and restaurant operations do not require significan y 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. companies, we may at times have negative t Cash Flows The following table summarizes the statement of cash flows for the fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014: Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by financing activities Net change in cash and cash equivalents December 27, 2016 Fiscal Year Ended December 29, 2015 (dollars in thousands) December 30, 2014 $ $ $ 49,815 (34,168) (6,201) 9,446 $ 45,868 (46,530) 2,318 1,656 $ $ 42,766 (47,956) (4,964) (10,154) . Net cash flows provided by operating activities increased $3.9 million during fiscal 2016 as compared to fiscal 2015, primarily due to a $6.2 million net increase in cash related to income taxes and a $3.4 million net increase in cash related to deferred rent obligations, partially offset by a $5.5 million net decrease in cash related to accounts payable and other net changes in certain operating assets and liabilities (as noted in the consolidated statement of cash flows). Net cash flows provided by ope d activities increased $3.1 million during fiscal 2015 as compared to fiscal 2014 primarily due to a $3.2 million increase in depreciation and amortization, as well as other net changes in certain operating assets and liabilities (as noted in the consolidated statement of cash flows). Cash flows from operating activities was $42.8 million in fiscal 2014, consisting primarily of net income of $16.6 million, adjustments for depreciation, amortization, deferred income taxes and other non-cash charges totaling $19.6 million, a net increase in cash of $3.8 million resulting from a decrease in lease incentives receivable and $10.5 million from an increase in other liabilities and deferred rent obligations. These cash inflows were partially offset by increases in inventories, other current assets and incom receivable of $7.7 million. e taxes rating t Investing Activities. Net cash used in investing activities in fiscal 2016 was $34.2 million, consisting primarily of purchases of leasehold improvements, property and equipment, as well as a trade name acquisition (see note 3 to the consolidated financial statements for information related to the trade name acquisition). These purchases were primarily related to construction of three h Grilles and one Del Frisco’s during fiscal 2016, as well as remodel activity at existing restaurants. Net cash used in investing activities in fiscal 2015 was $46.5 million, consisting primarily of purchases of leasehold improvements, property and equipment. These purchases were primarily related to construction of six Grilles and one Del Frisco’s during fiscal 2015, as well as remodel a existing restaurants. Net cash used in investing activities in fiscal 2014 was $48.0 million, consisting primarily of purchase property and equipment. These purchases were primarily related to construction of five Grilles and one Del Frisco’s during fiscal d 2014, as well as the purchase of a land and building site related to a fiscal 2015 opening and remodel activity at existing res ctivity at s of taurants. n rr Financing Activities. Net cash used in financing activities in fiscal 2016 was $6.2 million, which was comprised of $4.5 million in net payments toward the outstanding balance under our credit facility and $4.8 million in share repurchases, offset by $3.2 million in proceeds from the exercise of stock options. Net cash provided by financing activities in fiscal 2015 was $2.3 million, which was comprised of $4.5 million in net proceeds from borrowings on the credit facility and $0.8 million in proceeds from the exercise of stock options, partially offset by $3.0 million in share repurchases. Net cash used in financing activities in fiscal 2014 was $5.0 million, which was comprised of $6.3 million in share repurchases, partially offset by $1.3 million in proceeds from the exercise of stock options. n 35 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 fiscal 2016, we completed a refresh of one Sullivan’s and one Del Frisco’s. Looking forward, we expect to complete two to four refreshes each year at an approximate cost of $0.5 million to $1.0 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 On October 15, 2012, we entered into a credit facility that provides for a three-year unsecured revolving credit facility of up to $25 million. Borrowings under the credit facility bear interest at 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. On June 30, 2015, we entered into a Second Amendment to the credit facility. The amendment, among other things, extended the termination date of the credit facility to October 15, 2017 and modified the revolving credit commitment to $15 million, with such amount subject to increases in increments of $5 million at our request, up to a maximum amount of $30 million. On December 21, 2016, we entered into a Third Amendment to the credit facility. The amendment, among other things, extended the termination date of the credit facility to October 15, 2019 and modifies the revolving credit commitment to $10 million, with such amount subject to increases in increments of $5 million at our request, up to a maximum amount of $30 million. The credit facility contains various financial covenants, including a maximum leverage ratio of total indebtedness to EBITDA (as defined in the credit facility), and minimum fixed charge coverage ratio. 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 27, 2016, 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 27, 2016, there was no outstanding balance under the credit facility. Under the revolving loan commitment, we had approximately $28.8 million of borrowings available, net of $1.2 million in letter of credit commitments. Contractual Obligations The following table summarizes our contractual obligations as of December 27, 2016: Operating leases Total Inflation Total Less than 1 year $ $ 330,199 330,199 $ $ 20,771 20,771 1 - 3 years (in thousands) 42,966 42,966 $ $ 3 - 5 years More than 5 years $ $ 41,022 41,022 $ $ 225,440 225,440 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. We have been impacted by recent increases in minimum wage laws, such as the 15% increase in the minimum wage on January 1, 2017 in Seattle, Washington to $15.00 per hour or the 17% increase in minimum wage in California to $10.50. 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. ff 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 consolidated financial statements is based on our critical accounting policies that require us to make estimates and judgments that affect the amounts reported in those consolidated 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 tt 36 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 n 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 Topic 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. Currently, we define the reporting units as the Del Frisco’s and Sullivan’s concepts. 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 and a market-based approach. 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 of the reporting unit is less than the carrying amount of the reporting unit, then a f second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the secon 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 is recorded for the difference. amount of the goodwill and an impairment charge d d ff t 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. The fair value of our restaurant concepts were in excess of the carrying value as of our fiscal 2016 goodwill and other intangible 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 d 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 undiscounted 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 fiscal 2016, we recognized impairment charges of long-lived assets of $0.6 million. This impairment charge was related to our u determination that the carrying amount of long-lived assets at two Sullivan’s locations exceeded their estimated undiscounted future cash flows, due in part by our determination to close these locations. The estimated fair value was based on an estimated sales price of leasehold improvements, furniture and restaurant equipment for this location. In fiscal 2015, we recognized impairment charges of long-lived assets of $3.2 million. This impairment charge was related to our u determination that the carrying amount of long-lived assets at one Grille location exceeded its estimated undiscounted 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. 37 In fiscal 2014, we recognized impairment charges of long-lived assets of $3.5 million. This impairment charge was related to our uu determination that the carrying amount of long-lived assets at one Grille location exceeded its estimated undiscounted 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. Leases. We currently lease all but one of our restaurant locations. We evaluate each lease to determine its appropriate classification asn 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. d Leasehold improvements financed by the landlord through tenant improvement allowances are ca with the tenant improvement allowances recorded as deferred lease incentives. Deferred lease incentives are amortized on a straight- line basis over 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 receiv e tenant improvement allowances for any of our future locations, which would result in additional occupancy expenses. pitalized as leasehold improvements mm t In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which provides for a comprehensive set of changes in accounting for leases. The lease accounting model 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 uu to fairly represent the lease transaction and the lessee’s related financial obligations. All of our 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 adjust ed as appropriate, while taking into account the progress of audits of various taxing jurisdictions. f 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. r 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. 38 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 27, 2016, we had no outstanding debt on our revolving credit facility. 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. tt Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and notes thereto and the reports of KPMG LLP, our independent registered public accounting firm, are set forth in the Index to Financial Statements under Item 15, Exhibits and Financial Statement Schedules, and are 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 Rules 13a-15(e) and 15d-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 disclosure controls and procedures 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 control 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 (2013 framework)”, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective 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. 39 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 effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, o degree of compliance with the policies or procedures may deteriorate. a r that the 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. r Item 9B. Other Information None. 40 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 27, 2016. The information with respect to our executive officers required under this Item is set forth in Item 1, Business and incorporated herein by reference. h 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 27, 2016. h 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 27, 2016. Equity Compensation Plans The following table sets forth information as of December 27, 2016, 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 1,273,194 — 1,273,194 $ $ 19.75 — 19.75 519,080 — 519,080 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 27, 2016. h Item 14. Principal Accountant Fees and Services h The information required under this item is incorporated herein by reference to our definitive proxy statement to be filed with no later than 120 days after the close of our fiscal year ended December 27, 2016. y the SEC 41 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. 42 Exhibit No. 3.1 3.2 10.1 10.2 # 10.3 # 10.4 # 10.5 # 10.6 # 10.7 # 10.8 # 10.9 # 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. Loan Agreement, dated as of October 15, 2012, by and among Del Frisco’s Restaurant Group, Inc., y 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. 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. Employment Agreement, dated November 21, 2016, between Norman Abdallah and Del Frisco’s Restaurant Group, Inc. * 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. 10.10 # 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. 10.11 10.12 10.13 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. Second Amendment to Loan Agreement, dated as of June 30, 2015, among the Company and JPMorgan Chase Bank, N.A. filed on July 2, 2015 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. Third Amendment to Loan Agreement, dated as of December 21, 2016, among the Company and JPMorgan Chase Bank, N.A. filed on December 22, 2016 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. 10.14# Form of Non-Qualified Stock Option Award Agreement under the Del Frisco’s Restaurant Group 2012 Long-Term Incentive Plan. * 43 10.15# 10.16# 10.17# Form of Incentive Stock Option Award Agreement under the Del Frisco’s Restaurant Group 2012 Long-Term Incentive Plan. Form of Restricted Stock Award Agreement under the Del Frisco’s Restaurant Group 2012 Long- Term Incentive Plan. Form of Performance-Based Restricted Stock Unit Award Agreement under the Del Frisco’s Restaurant Group 2012 Long-Term Incentive Plan. * * * 44 Exhibit No. Description Reference 21.1 23.1 31.1 31.2 32.1 List of Subsidiaries of the Registrant. Consent of KPMG LLP. Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. t Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. t Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Definition Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. * Filed herewith. # Denotes management compensatory plan or arrangement. * * * * * * * * * * * 45 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 28, 2017 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/ Norman J. Abdallah Norman J. Abdallah Chief Executive Officer and Director (Principal Executive Officer) February 28, 2017 /s/ Thomas J. Pennison, Jr. Thomas J. Pennison, Jr. Chief Financial Officer (Principal Financial and Accounting Officer) February 28, 2017 /s/ Ian R. Carter Ian R. Carter /s/ Mark S. Mednansky Mark S. Mednansky /s/ David B. Barr David B. Barr /s/ Richard L. Davis Richard L. Davis /s/ William Lamar, Jr. William Lamar, Jr. Chairman of the Board, Director February 28, 2017 Director Director Director Director February 28, 2017 February 28, 2017 February 28, 2017 February 28, 2017 46 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Financial Statements –December 27, 2016, December 29, 2015 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-3 F-4 F-5 F-6 F-7 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 sheets of Del Frisco’s Restaurant Group, Inc. and subsidiaries (the Company) as of December 27, 2016 and December 29, 2015, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 27, 2016. 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 audits. uu 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. 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 audits provide 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. and subsidiaries as of December 27, 2016 and December 29, 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 27, 2016 in conformity with U.S. generally accepted accounting principles. Dallas, Texas February 28, 2017 /s/ KPMG LLP F-2 DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) Assets Current assets: Cash and cash equivalents Inventory Income taxes receivable Lease incentives receivable Prepaid expenses Other current assets 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 Goodwill Intangible assets, net Other assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Sales tax payable Accrued payroll Deferred revenue Other current liabilities Total current liabilities Long-term debt Deferred compensation plan liabilities Deferred rent obligations Deferred income taxes Other noncurrent liabilities Total liabilities Commitments and contingencies (Note 10) Stockholders' equity: December 27, 2016 December 29, 2015 $ $ $ $ $ $ 14,622 16,400 3,599 4,025 5,199 2,835 46,680 6,477 9,460 200,122 68,123 (88,190) 195,992 15,054 75,365 37,409 282 370,782 12,791 2,531 7,359 18,735 9,660 51,076 — 15,212 37,697 18,189 2,242 124,416 5,176 17,308 5,487 2,252 4,270 2,504 36,997 8,295 11,162 173,545 60,948 (70,759) 183,191 13,955 75,365 36,865 282 346,655 16,486 2,548 5,538 17,635 5,180 47,387 4,500 14,083 34,336 16,550 2,100 118,956 Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at December 27, 2016 or December 29, 2015 Common stock, $0.001 par value, 190,000,000 shares authorized, 24,234,909 shares issued and 23,272,274 shares outstanding at December 27, 2016 and 23,967,692 shares issued and 23,313,169 shares outstanding at December 29, 2015 Treasury stock at cost: 962,635 shares and 654,523 shares at December 27, 2016 and December 29, 2015, respectively Additional paid in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes. — 24 — 24 (17,823) 143,325 120,840 246,366 370,782 $ (13,000) 137,601 103,074 227,699 346,655 $ F-3 DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income (Dollars in thousands, except per share data) Revenues Costs and expenses: Costs of sales Restaurant operating expenses Marketing and advertising costs Pre-opening costs General and administrative costs Lease termination and closing costs Secondary public offering costs Impairment charges Depreciation and amortization Operating income Other income (expense), net: Interest, net of capitalized interest Other Income before income taxes Income tax expense Net income Basic earnings per common share Diluted earnings per common share Shares used in computing earnings per common share: Basic Diluted Comprehensive income December 27, 2016 351,681 $ Fiscal Year Ended December 29, 2015 331,612 $ December 30, 2014 $ 301,805 99,181 169,300 8,260 3,446 25,924 1,031 — 598 18,865 25,076 95,963 156,337 7,745 5,228 23,111 1,386 — 3,248 16,776 21,818 (70) (432) 24,574 6,808 17,766 0.76 0.76 $ $ $ (77) (236) 21,505 5,507 15,998 0.68 0.68 $ $ $ 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 0.71 0.70 23,322,344 23,435,275 23,380,085 23,517,288 23,517,883 23,740,318 17,766 $ 15,998 $ 16,597 $ $ $ $ See accompanying notes. F-4 DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders’ Equity (Dollars in thousands) 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 Net income Share-based compensation costs Stock option exercises, including tax effects Treasury stock purchases Balance at December 29, 2015 Net income Share-based compensation costs Stock option exercises, including tax effects Shares issued under stock compensation plan, net of shares withheld for tax effects Treasury stock purchases Balance at December 27, 2016 Common Stock Shares 23,626,642 — — 85,400 (268,996) 23,443,046 — — 59,150 (189,027) 23,313,169 — — 228,800 $ Par Value 24 $ — — — — 24 — — — — 24 — — — $ 33,492 (303,187) 23,272,274 $ — — 24 $ $ $ $ Additional Paid In Capital $ — — — (6,319) Retained Treasury Earnings Stock (3,681) $ 70,479 16,597 — — — $ (10,000) $ 87,076 15,998 — — — $ (13,000) $ 103,074 17,766 — — — — — (3,000) — — — $ $ Total 196,783 16,597 2,567 1,355 (6,319) 210,983 15,998 2,900 818 (3,000) 227,699 17,766 2,602 3,207 129,961 — 2,567 1,355 — 133,883 — 2,900 818 — 137,601 — 2,602 3,207 (85) — 143,325 — (4,823) — — $ (17,823) $ 120,840 $ (85) (4,823) 246,366 See accompanying notes. F-5 DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) 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 Loan cost amortization Equity based compensation Impairment charges Deferred income taxes Amortization of deferred lease incentives Changes in operating assets and liabilities: Restricted cash Inventory Lease incentives receivable Prepaid expenses and other assets Accounts payable Income taxes Deferred rent obligations Deferred revenue Other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from sale of property and equipment Purchase of trade name Purchases of property and equipment Other investing activities Net cash used in investing activities Cash flows from financing activities: Net (payments on) proceeds from revolving credit facility Purchases of treasury stock Cash settlement for share-based awards Proceeds from exercise of stock options Net cash (used in) provided by financing activities Net change 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 during the year for: Interest Income taxes Non cash investing and financing activities: Capital expenditures included in accounts payable at end of period Acquisition of trade name financed by current liabilities $ $ $ $ $ December 27, 2016 Fiscal Year Ended December 29, 2015 December 30, 2014 17,766 $ 15,998 $ 16,597 18,865 429 2 2,666 598 1,575 (1,140) — 908 2,692 (1,497) (2,666) 1,888 2,307 1,100 4,322 49,815 3,078 (546) (36,698) (2) (34,168) (4,500) (4,823) (85) 3,207 (6,201) 9,446 5,176 14,622 87 3,756 968 100 16,776 27 8 2,900 3,248 3,495 (666) 215 (716) 5,760 (2,282) 2,801 (4,287) (1,094) 1,919 1,766 45,868 1 — (46,150) (381) (46,530) 4,500 (3,000) — 818 2,318 13,598 108 18 2,567 3,536 653 (852) — (2,498) 3,767 (2,154) 3,209 (3,050) 1,970 2,733 2,564 42,766 13 — (47,491) (478) (47,956) — (6,319) — 1,355 (4,964) 1,656 3,520 5,176 $ (10,154) 13,674 3,520 175 $ 6,626 $ 129 10,225 1,998 $ — $ 511 — $ $ $ $ $ See accompanying notes. F-6 DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization, Business and Basis of Presentation Description of Business Del Frisco’s Restaurant Group, Inc., or the Company, is incorporated in Delaware as a corporation. We own and operate restaurants under the brand names of Del Frisco’s Double Eagle Steak House, Sullivan’s Steakhouse, and Del Frisco’s Grille. As of December 27, 2016, we owned and operated 12 Del Frisco’s, 18 Sullivan’s and 23 Grille restaurants. During fiscal 2016, we relocated one Del Frisco’s in Dallas, Texas and opened Grilles in Long Island, New York, Nashville, Tennessee and Brentwood, Tennessee. (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 We operate on a 52- or 53-week fiscal year ending the last Tuesday in December. Fiscal 2016, 2015 and 2014 included 52 weeks of operations. Concentrations We have certain financial instruments exposed to a concentration of credit risk, which consist primarily of cash and cash equivalents. We place cash with high-credit-quality financial institutions, and, at times, such cash may be in excess of the federal depository insurance limit. Additionally, we purchased a significant amount of total beef purchases from one supplier during fiscal 2016, 2015 and 2014. 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 We consider 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 27, 2016 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 use 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 us. 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. ful lives uu F-7 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 $19,000, $115,000 and $0 for the fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014, respectively. Operating Leases We lease all but one of our restaurants under operating leases. The majority of our leases provide for rent escalation clauses, r 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 us. Certain of our operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. We recognize contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of that target is considered probable. We record 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. Pre-opening Costs Pre-opening 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 Our intangible assets primarily include goodwill, trade names and licensing agreements. Our 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, or more frequently if an event or other circumstance indicates that goodwill or the trade names may be impaired. We amortize our finite-lived intangible assets on a straight-line basis over the estimated period of benefit, generally 7 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 generally 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 valu 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, we define the reporting units as the Del Frisco’s and Sullivan’s concepts. We perform its annual impairment test as of its year-end. e of the reporting unit’s goodwill is determined m n 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. d 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 mm consistent with what management believes hypothetical market participants would use. However, estimates are inherently uncertain and represent only reasonable expectations regarding future developments. u F-8 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 our deferred-compensation plan, we have created a grantor trust to which we contribute amounts equal to employee participants’ qualified deferrals and our 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 us; however, we do 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 of the life insurance policies. Because the investment assets of the deferred-compensation plan are our assets and would be subject to general claims by creditors in the event of our 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. 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. We review applicable finite-lived intangible assets and long-lived assets related to each restaurant on a periodic basis. Our 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, we estimate 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. Our estimates of fair values are based on the best information available and require the use of estimates, judgment projections. The actual results may vary significantly from the estimates. s, and t During fiscal 2016, we determined that the carrying amount of two of our Sullivan’s restaurants were most likely not recoverable. Therefore, we recorded a non-cash impairment charge of $0.6 million, which represents the difference between the carrying value of the restaurant assets and the estimated value of leasehold improvements, furniture and restaurant equipment that may be transferred to other restaurant locations. This amount is included in impairment charges in the consolidated statements of income and comprehensive income. During fiscal 2015, we determined that the carrying amount of one of our Grille restaurants was most likely not recoverable. Therefore, we recorded a non-cash impairment charge of $3.2 million, 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 impairment charges in the consolidated statements of income and comprehensive income. During fiscal 2014, we determined that the carrying amount of one of our Grille restaurants was most likely not recoverable. Therefore, we recorded a non-cash impairment charge of $3.5 million, 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 impairment charges in the consolidated statements of income and comprehensive income. Self-Insurance Reserves We maintain self-insurance programs for our workers’ compensation and general liability insurance programs. In order to minimize the exposure under the self-insurance programs, we have purchased stop-loss coverage both on a per-occurrence and on a aggregate basis. The self-insured losses under the programs are accrued based on our 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 t, nn r management judgments and assumptions regarding the frequency or severity of claims, the historical patterns of claim developmen and our 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 esti mated under the self-insurance programs. n ff t t Income Taxes We use 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. We regularly evaluate the likelihood of realization of tax benefits derived from positions we have taken in various federal and state filings after consideration of al facts, circumstances, and available information. For those tax benefits deemed more likely than not that will be sustained, we recognize the benefit we believe is cumulatively greater than 50% likely to be realized. To the extent we 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. l relevant ff F-9 Advertising Costs Advertising costs are expensed as incurred. Advertising expense for the fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014 was $8.3 million, $7.7 million, and $6.2 million, respectively. Revenue Recognition Revenue from restaurant sales is recognized when food and beverage products are sold. Proceeds from the sale of gift cards are f 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 we determine there is no legal obligation to remit the value of the unredeemed gift cards to governmental agencies. We determine the gift card breakage rate based upon historical redemption patterns. Certain of our gift cards are sold at a discount and the net value (face value to be redeemed less the proceeds received) is deferred until redeemed or breakage is deemed appropriate. We have deemed gift card breakage income immaterial for fiscal years 2016, 2015 and t 2014, and it is included in revenues in the consolidated statements of income and comprehensive income. Additionally, revenues are net of the cost of loyalty points earned associated with sales made to customers in our loyalty program. We exclude from revenue any taxes assessed by governmental agencies that are directly imposed on revenue-producing transactions between us and a customer. Stock-Based Compensation In 2012, we adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (2012 Plan), which allows our Board of Directors or a committee thereof 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 us. We recognize stock-based compensation in accordance with Compensation—Stock Compensation (ASC 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 h 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 2016 presentation. Recently Issued Accounting Standards – – – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which will supersede ASC Topic 605, Revenue Recognition. In August 2015, the FASB deferred the effective date of this new standard by one year. The FASB later issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, in April 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, in May 2016, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in December 2016, all of which further clarified aspects of Topic 606. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. While we have not yet selected a transition method nor determined the effect of the new standard on our consolidated financial statements, through our assessment of these ASUs, we have identified that the primary items affected by these ASUs are our loyalty program liability and the breakage income associated with our gift card program. See the revenue recognition section of this footnote for a description of the accounting policy related to our gift card and loyalty programs. w In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. A f 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the potential impact of ASU 2016-02 on our consolidated financial statements. SU In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. The FASB is issuing this ASU as part of its Simplification Initiative. The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification – F-10 of awards as either equity or liability and classification on the statement of cash flows. Specifically, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The threshold to qualify fo t classifications permits withholding up to the maximum statutory tax rates in the applicable jurisdiction. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition m ethod. We are adopting this ASU on December 28, 2016. While we do not expect this ASU to have a material impact on our consolidated financial statements, it will introduce an additional element of volatility in our effective tax rate. x r r equity In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted. We currently assessing the impact of this f ASU on our consolidated financial statements. – In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally describe d restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, and early application is permitted. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements. d as In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the goodwill impairment test and requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, and early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements. ff F-11 (3) Intangible Assets and Goodwill The components of intangible assets and goodwill consist of the following: 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 27, 2016 December 29, 2015 (in thousands) $ $ $ 848 1,077 540 2,465 (848) (663) (133) (1,644) 821 75,365 35,493 1,095 111,953 $ 848 1,077 494 2,419 (840) (597) (105) (1,542) 877 75,365 34,893 1,095 111,353 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 7 to 9 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, as follows: $43.9 million and $31.4 million at December 27, 2016 and December 29, 2015, respectively. We have estimated that annual amortization expense will amount to approximately $0.1 million for 2017, $0.1 million for 2018, $0.1 million for 2019, $0.1 million for 2020, and $0.1 million for 2021. Amortization expense was $0.1 million, $0.1 million, and $0.2 million for the years ended December 27, 2016, December 29, 2015 and December 30, 2014, respectively. We performed the annual test for impairment of goodwill and indefinite-lived intangible assets and concluded that no impairment existed as of December 27, 2016, December 29, 2015 or December 30, 2014, and accordingly, no impairment losses were recorded. On February 1, 2012, we 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 f agreement, and has a remaining book value of $0.5 million as of December 27, 2016. Under the agreement, in exchange for us surrendering our right to receive licensing fees from January 1, 2012 through June 1, 2013 and making a one-time $25,000 payment to the licensee, we received the rights to open and operate any of our restaurants in the three counties that make up the Orlando u metropolitan area no earlier than January 1, 2015. We accounted for this as an exchange of non-monetary assets, for which we have 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, we utilized a discounted cash flow method that applied a discount rate of 11.5%, our 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. On March 17, 2016, we entered into an agreement to obtain and clarify ownership of all naming rights for Del Frisco’s in certain f counties of Kentucky, Indiana and Ohio for aggregate consideration of $0.6 million. Under the terms of the agreement, we made a payments totaling $0.5 million in 2016, with the remaining $0.1 million to be paid on August 1, 2017. This intangible asset has been recorded as a trade name with an indefinite life. (4) Leases We lease certain facilities under noncancelable operating leases with terms expiring between 2017 and 2036. The leases have renewal options ranging from 5 to 20 years, which are exercisable at our 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 F-12 rental expense amounted to $22.9 million, $21.1 million, and $18.7 million, including contingent rentals of approximately $3.6 million, $3.6 million, and $3.9 million for the fiscal years ended December 27, 2016, December 29, 2015 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 27, 2016, future minimum rentals for each of the next five years and thereafter, and in total, are as follows: 2017 2018 2019 2020 2021 Thereafter Total minimum lease payments (5) Income Taxes x The components of income tax expense consist of the following: (in thousands) 20,771 21,431 21,535 20,751 20,271 225,440 330,199 $ $ 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 December 27, 2016 Fiscal Year Ended December 29, 2015 (in thousands) December 30, 2014 $ $ 2,768 2,465 5,233 1,381 194 1,575 6,808 $ $ 894 1,117 2,011 1,722 1,774 3,496 5,507 $ $ 3,689 3,381 7,070 932 (279) 653 7,723 The difference between the reported income tax expense and taxes determined by applying the applicable U.S. federal statutory income tax rate to income before taxes is reconciled as follows: Income tax expense at federal statutory rate State tax expense, net FICA tip and work opportunity credits Other items, net Total income tax expense $ $ 35% $ 8,602 1,835 7% (3,519) -14% 0% 28% $ (110) 6,808 December 27, 2016 Fiscal Year Ended December 29, 2015 (dollars in thousands) 35% 7,527 1,215 6% -16% (3,428) 1% 193 26% 5,507 December 30, 2014 $ $ 8,486 1,872 (3,007) 372 7,723 35% 8% -12% 1% 32% F-13 or ff Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities f ff ities financial reporting purposes and amounts used for income tax purposes. Significant components of deferred tax assets and liabil r are presented below: Deferred tax assets: Equity-based compensation Accrued liabilities Deferred compensation Deferred rent liabilities Tax Credits carryover Intangible Assets – Pre-opening Costs Other Total deferred tax assets Deferred tax liabilities: Property and equipment Intangible assets Other Total deferred tax liabilities Net deferred tax liabilities – December 27, 2016 December 29, 2015 (in thousands) $ $ 1,507 5,212 5,620 14,480 — 3,073 172 30,064 32,001 15,968 284 48,253 (18,189) $ $ 1,471 4,333 5,643 11,986 819 3,413 105 27,770 28,048 15,988 284 44,320 (16,550) We 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 our financial results. In the event we receive an assessment for interest and penalties, it has been classified in the consolidated financial statements as income tax expense. Generally, our federal, state, and local tax returns for years subsequent to 2012 remain open to examination by the major taxing jurisdictions to which we is subject. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Balance at beginning of year Additions resulting from current year positions Additions for positions taken in prior years Payments made for settlements Expiration of statute of limitations Balance at end of year December 27, 2016 Fiscal Year Ended December 29, 2015 (in thousands) December 30, 2014 $ $ 40 — — — (24) 16 $ $ 1,386 — — (944) (402) 40 $ $ 1,386 — — — — 1,386 December 27, 2016, accrued interest and penalties included in the consolidated balance sheets totaled $0.3 million. The change in interest and penalties associated with our unrecognized tax benefits is included as a component of the Other, net line of the effective tax rate reconciliation. ially during the next 12 months. As of December 29, 2015 and (6) Long-Term Debt On October 15, 2012, we entered into a credit facility that provides for a three-year unsecured revolving credit facility of up to $25 million. Borrowings under the credit facility bear interest at 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 fac The credit facility contains various financial covenants, including a maximum leverage ratio of total indebtedness to EBITDA, as defined in the credit agreement, and minimum fixed charge coverage ratio, as defined in the credit agreement. The 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. ility is guaranteed by certain of our subsidiaries. d On June 30, 2015, we entered into a Second Amendment to the credit facility. The amendment, among other things, extended the termination date of the credit facility to October 15, 2017 and modified the revolving credit commitment to $15 million, with such amount subject to increases in increments of $5 million at our request, up to a maximum amount of $30 million. All other major terms remain unchanged. On December 21, 2016, we entered into a Third Amendment to the credit facility. The amendment, among other things, extended the termination date of the credit facility to October 15, 2019 and modified the revolving credit commitment to $10 million, with such amount subject to increases in increments of $5 million at our request, up to a maximum amount of $30 million. F-14 We were in compliance with the financial debt covenants as of December 27, 2016. As of December 27, 2016, there was no outstanding balance on our revolving credit facility. Under the revolving loan commitment, we had approximately $28.8 million of borrowings available, net of $1.2 million in letter of credit commitments. (7) Retirement Plans We provide 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. We may make additional contributions at the discretion of the Board of Directors. Expenses related to the Plans for the fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014 totaled $1.3 million, $2.2 million, and $1.7 million, respectively. n (8) Litigation We are involved, from time to time, in litigation arising in the ordinary course of business. We believe the outcome of such matters will not have a material adverse effect on our consolidated financial position or results of operations. (9) Stockholders’ Equity On October 14, 2014, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $25 million of our common stock over the next three years. On February 15, 2017, our Board of Directors increased this authorizatio n to rr $50 million. Under this program, we can 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 us to repurchase any dollar amount or number of shares. As of December 27, 2016, we had repurchased 492,214 shares of our common stock at an aggregate cost of approximately $7.8 million under this program. (10) Commitments and Contingencies At December 27, 2016, we had outstanding letters of credit of $1.2 million on our revolving credit facility. The letters of credit rr typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions. (11) Fair Value Measurement Under generally accepted accounting principles in the United States, we are 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 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 consideratio performance risk, including our own credit risk. Each fair value measurement is reported in one of the following three levels: n of non- of a r r • • • — Level 1—valuation inputs are based upon unadjusted quoted d markets. prices for identical instruments traded in active — Level 2—valuation inputs are based upon quoted prices for si 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. milar instruments in active markets, quoted prices 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 27, 2016 and December 29, 2015: Deferred compensation plan investments Deferred compensation plan liabilities Fair Value Measurements December 27, 2016 December 29, 2015 (in thousands) $ $ 15,054 (15,212) $ $ 13,955 (14,083) Level 2 2 There were no transfers among levels within the fair value hierarchy during the years ended December 27, 2016 or December 29, 2015. The carrying value of our cash and cash equivalents and restricted cash approximate fair value because of their short term t F-15 nature, and are classified within Level 1 of the fair value hierarchy. The carrying value of our accounts payable approximate fair value because of their short term nature, and are classified within Level 2 of the fair value hierarchy. The fair value of the credit facility at December 27, 2016 approximated its carrying value since it is a variable rate credit facility (Level 2). ff t We had no derivative instruments at December 27, 2016 or December 29, 2015. (12) Segment Reporting We operate 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 we do 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. The following table presents information about reportable segments for fiscal years 2016, 2015, and 2014: Del Frisco's Sullivan's Grille Corporate Consolidated Fiscal Year Ended December 27, 2016 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 $ $ $ $ $ $ $ $ $ $ $ $ 166,885 46,877 17,284 115,889 Del Frisco's 161,809 45,837 11,646 104,508 Del Frisco's 151,142 42,946 19,839 93,267 $ $ $ $ $ $ $ $ $ $ $ $ 77,797 12,182 (in thousands) $ $ 2,489 $ $ 106,999 15,881 17,080 116,451 49,416 $ $ $ $ — $ — $ $ 97 2,426 $ 351,681 74,940 36,950 284,182 Fiscal Year Ended December 29, 2015 Sullivan's Grille Corporate Consolidated 78,983 13,070 (in thousands) $ $ 3,644 $ $ 90,820 12,660 32,717 99,371 47,578 $ $ $ $ — $ — $ $ 2,493 $ 102 331,612 71,567 48,109 253,950 Fiscal Year Ended December 30, 2014 Sullivan's Grille Corporate Consolidated 80,911 13,449 (in thousands) $ $ 3,452 $ $ 69,752 10,556 24,219 72,066 45,848 $ $ $ $ — $ — $ $ 2,261 $ 492 301,805 66,951 48,002 213,442 F-16 In addition to using consolidated results in evaluating our performance and allocating our resources, our chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP. Restaurant-level EBITDA is defined as net income before interest expense, income taxes, other expense, net, pre-opening costs, general and administrative expenses, lease termination and closing costs, secondary public offering costs, impairment charges 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 are excluded as they are generally not specifically identifiable to indi vidual operating segments as these costs relate to supporting all of our restaurant operations and the extension of our concepts into new markets. Lease termination and closing costs, impairment charges and depreciation and amortization are excluded because they are not ongoing controllable cash expenses and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by our chief operating decision maker in allocating resources. See the table below for a reconciliation of net income to restaurant-level EBITDA. d t Net income Income tax expense Net income before income taxes Interest expense, net of capitalized interest Other Operating income Pre-opening costs General and administrative costs Lease termination and closing costs Secondary public offering costs Impairment charges Depreciation and amortization Restaurant-level EBITDA December 27, 2016 Fiscal Year Ended December 29, 2015 (in thousands) December 30, 2014 $ $ 17,766 6,808 24,574 70 432 25,076 3,446 25,924 1,031 — 598 18,865 74,940 $ $ 15,998 5,507 21,505 77 236 21,818 5,228 23,111 1,386 — 3,248 16,776 71,567 $ $ 16,597 7,723 24,320 113 107 24,540 4,735 20,537 — 5 3,536 13,598 66,951 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 2016, 2015, and 2014 exclude stock options of 632,565, 728,604 and 716,335, respectively, which were outstanding during the period, but were anti-dilutive. Diluted earnings per share for fiscal 2016 exclude restricted stock shares of 106,726, which were outstanding during the period, but were anti- dilutive. December 27, 2016 Fiscal Year Ended December 29, 2015 (dollars in thousands, except per share data) December 30, 2014 Net income Shares: Weighted average number of common shares outstanding Dilutive shares Total Diluted Shares Basic earnings per common share Diluted earnings per common share (14) Stock-Based Employee Compensation 2012 Long-Term Equity Incentive Plan $ $ $ 17,766 $ 15,998 $ 16,597 23,322,344 112,931 23,435,275 23,380,085 137,203 23,517,288 23,517,883 222,435 23,740,318 0.76 0.76 $ $ 0.68 0.68 $ $ 0.71 0.70 In connection with the IPO, we adopted the 2012 Plan, which allows our Board of Directors or a committee thereof 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 us. 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. Outstanding stock options vest at various periods ranging from one to four years from date of grant. Outstanding shares of restricted stock vest over periods ranging F-17 from one to four years. The 2012 Plan has 2,232,800 shares authorized for issuance under the plan. There are 927,675 shares of common stock issuable upon exercise of currently outstanding options, 145,519 outstanding shares of restricted stock, and 200,000 outstanding performance stock units at December 27, 2016. There are 519,080 shares available for future grants. The following table details our total stock based compensation costs during the fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014, as well as where the costs were expensed: Restaurant operating expenses General and administrative costs Total stock compensation cost Outstanding at beginning of period Granted Vested Forfeited Outstanding at end of period December 27, 2016 Fiscal Year Ended December 29, 2015 (in thousands) December 30, 2014 $ $ $ 361 2,305 2,666 $ 468 2,432 2,900 $ $ 442 2,125 2,567 Fiscal Year Ended December 27, 2016 Weighted average grant date fair value Aggregate intrinsic value ($000's) Shares 90,379 154,957 (38,701) (61,116) 145,519 $ $ 19.96 16.54 19.72 17.22 17.55 $ 2,539 gnized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a period of approximately 2.7 years. The following table summarizes stock option activity during fiscal 2016: Outstanding at beginning of period Exercised Forfeited Outstanding at end of period Options exercisable at end of period Fiscal Year Ended December 27, 2016 Weighted average exercise price Weighted average remaining contractual term Aggregate intrinsic value ($000's) $ $ $ 17.44 13.00 20.50 18.33 17.76 6.2 years 6.1 years $ $ 1,455 1,448 Shares 1,221,100 (228,800) (64,625) 927,675 776,050 The intrinsic value of options exercised during fiscal 2016 was $1.1 million. A summary of the status of non-vested stock options as of December 27, 2016 and changes during fiscal 2016 is presented below: Non-vested stock options at beginning of period Vested Forfeited Non-vested stock options at end of period Fiscal Year Ended December 27, 2016 Shares 506,500 (316,250) (38,625) 151,625 Weighted average grant-date fair value 7.25 $ 6.60 7.92 8.44 $ As of December 27, 2016, there was $0.7 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 0.7 years. The total fair value of stock options vested during fiscal 2016 was $2.1 million. F-18 We issue performance share units, or PSUs, to certain employees that represent shares potentially issuable in the future. During fiscal 2016, we granted 200,000 PSUs to our CEO. The issuance of these shares is based upon our stock price reaching $28.00 per share for five consecutive days and is subject to post vesting holding periods. The fair value of performance share units was calculated f using a Monte Carlo simulation model, which requires the use of highly subjective and complex assumptions, including the expect life of the award, the price volatility of the underlying stock and a blended illiquidity discount of 16.9%. The following table summarizes performance stock unit activity during fiscal 2016: ed u Outstanding at beginning of period Granted Outstanding at end of period Fiscal Year Ended December 27, 2016 Weighted average grant date fair value Aggregate intrinsic value ($000's) Shares — $ 200,000 200,000 $ — 8.98 8.98 $ 1,892 is dependent on our estimate of the number December 27, 2016 there was $1.7 million of total unrecognized compensation cost related to non-vested performance stock units. This cost is expected to be recognized over a period of approximately 2.1 years. of shares that will ultimately be issued. As of d The following table details the values from and assumptions for the Monte Carlo PSU pricing model for PSUs granted during the fiscal 2016. Weighted average grant date fair value Weighted average risk-free interest rate Derived service period Weighted average volatility Expected dividend 2016 $8.98 1.98% 2.2 years 34.41% — (15) Quarterly Financial Information (Unaudited) The following tables set forth certain unaudited consolidated financial information for each of the four quarters in fiscal 2016 and fiscal 2015. Revenues Operating income Net income Basic income per common share Basic weighted average shares outstanding First Quarter $ 81,194 7,879 $ 5,411 $ 0.23 $ 23,315 Second Quarter Fiscal Year Ended December 27, 2016 Fourth Third Quarter Quarter (in thousands, except per share data) $ 71,407 1,118 $ 786 $ 0.03 $ 23,354 $ 119,164 9,754 $ 7,125 $ 0.31 $ 23,282 $ 79,916 6,325 $ 4,444 $ 0.19 $ 23,350 Total Year $ 351,681 25,076 $ 17,766 $ 0.76 $ 23,322 Diluted income per common share Diluted weighted average shares outstanding $ 0.23 23,398 $ 0.19 23,437 $ 0.03 23,431 $ 0.30 23,415 $ 0.76 23,435 Revenues Operating income (loss) Net income (loss) Basic income (loss) per common share Basic weighted average shares outstanding First Quarter $ 75,102 7,800 $ 5,394 $ 0.23 $ 23,443 Second Quarter Fiscal Year Ended December 29, 2015 Fourth Third Quarter Quarter (in thousands, except per share data) $ 68,629 $ $ $ (2,080) $ (1,035) $ (0.04) $ 23,361 $ 114,105 10,604 7,926 0.34 23,298 $ 73,776 5,494 $ 3,713 $ 0.16 $ 23,446 Total Year $ 331,612 21,818 $ 15,998 $ 0.68 $ 23,380 Diluted income (loss) per common share Diluted weighted average shares outstanding $ 0.23 23,596 $ 0.16 23,672 $ (0.04) 23,361 $ 0.34 23,308 $ 0.68 23,517 During the fourth fiscal quarter of 2016, we incurred $0.6 in million impairment charges related to two u Sullivan’s locations, $0.9 million in lease termination costs associated with one Sullivan’s location and $0.8 million in reorganization severance costs. In the third fiscal quarter of 2016, we incurred $0.4 million in expenses to settle an easement claim related to the sale of the previous Dallas, Texas Del Frisco’s location. F-19 During the third fiscal quarter of 2015, we incurred a $3.2 million impairment charge related to one Grille location. During the fourth fiscal quarter of 2015, we incurred a $1.4 million charge related to the lease termination and closing costs associated with the closure of two Grille locations. 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 h of the unaudited quarterly results when read in conjunction with the consolidated financial statements and the accompanying not We believe that quarter-to-quarter comparisons of our financial results are not necessarily indicative of future performance. es. F-20 BOARD OF DIRECTORS SHAREHOLDER INFORMATION Ian R. Carter Chairman of the Board; President, Global Development & Architecture, Hilton Worldwide Holdings, Inc. 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:585)(cid:74)(cid:76)(cid:89)(cid:19)(cid:3)(cid:43)(cid:80)(cid:89)(cid:76)(cid:74)(cid:91)(cid:86)(cid:89) David B. Barr Chairman, PMTD Restaurants LLC Pauline J. Brown Senior Lecturer, Harvard Business School Richard L. Davis Director William Lamar Jr. Director Mark S. Mednansky (cid:45)(cid:86)(cid:89)(cid:84)(cid:76)(cid:89)(cid:3)(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:585)(cid:74)(cid:76)(cid:89)(cid:19)(cid:3)(cid:43)(cid:80)(cid:89)(cid:76)(cid:74)(cid:91)(cid:86)(cid:89) 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 OUR PEOPLE – 2016 NEW RESTAURANT OPENING TEAMS (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:47)(cid:60)(cid:53)(cid:59)(cid:48)(cid:53)(cid:46)(cid:59)(cid:54)(cid:53)(cid:19)(cid:3)(cid:53)(cid:64)(cid:3)(cid:15)(cid:49)(cid:60)(cid:53)(cid:44)(cid:3)(cid:25)(cid:23)(cid:24)(cid:29)(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:15)(cid:60)(cid:55)(cid:59)(cid:54)(cid:62)(cid:53)(cid:16)(cid:3)(cid:182)(cid:3)(cid:43)(cid:40)(cid:51)(cid:51)(cid:40)(cid:58)(cid:19)(cid:3)(cid:59)(cid:63)(cid:3)(cid:15)(cid:58)(cid:44)(cid:55)(cid:59)(cid:44)(cid:52)(cid:41)(cid:44)(cid:57)(cid:3)(cid:25)(cid:23)(cid:24)(cid:29)(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:40)(cid:58)(cid:47)(cid:61)(cid:48)(cid:51)(cid:51)(cid:44)(cid:19)(cid:3)(cid:59)(cid:53)(cid:3)(cid:15)(cid:54)(cid:42)(cid:59)(cid:54)(cid:41)(cid:44)(cid:57)(cid:3)(cid:25)(cid:23)(cid:24)(cid:29)(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:41)(cid:57)(cid:44)(cid:53)(cid:59)(cid:62)(cid:54)(cid:54)(cid:43)(cid:19)(cid:3)(cid:59)(cid:53)(cid:3)(cid:15)(cid:53)(cid:54)(cid:61)(cid:44)(cid:52)(cid:41)(cid:44)(cid:57)(cid:3)(cid:25)(cid:23)(cid:24)(cid:29)(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 

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