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EX-23.1 - EX-23.1 - Ignite Restaurant Group, Inc. | a2204919zex-23_1.htm |
As filed with the Securities and Exchange Commission on October 31, 2011
No. 333-175878
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IGNITE RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
5812 (Primary Standard Industrial Classification Code Number) |
94-3421359 (I.R.S. Employer Identification No.) |
9900 Westpark Drive, Suite 300
Houston, Texas 77063
(713) 366-7500
(Address, including zip code, and telephone number, including area code, of registrant's principal executive
offices)
Raymond A. Blanchette, III
President and Chief Executive Officer
Ignite Restaurant Group, Inc.
9900 Westpark Drive, Suite 300
Houston, Texas 77063
(713) 366-7500
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to: | ||
Christian O. Nagler Jason K. Zachary Kirkland & Ellis LLP 601 Lexington Avenue New York, New York 10022 (212) 446-4800 |
Keith M. Townsend King & Spalding LLP 1180 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 572-4600 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee(2)(3) |
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Common Stock, $1.00 par value per share |
$100,000,000 | $11,610 | ||
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- (1)
- Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
- (2)
- Includes the offering price of any additional shares of common stock that the underwriters have the option to purchase.
- (3)
- Previously paid.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 31, 2011
PROSPECTUS
Shares
Ignite Restaurant Group, Inc.
Common Stock
This is an initial public offering of shares of common stock of Ignite Restaurant Group, Inc. We are offering shares of our common stock, and the selling stockholders identified in this prospectus are offering an additional shares of common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders in this offering.
Prior to this offering, there has been no public market for our common stock. The initial public offering price per share of the common stock is expected to be between $ and $ . We intend to apply to list our common stock on The NASDAQ Global Select Market under the symbol " ."
The underwriters have an option to purchase a maximum of additional shares from us, and up to additional shares from the selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.
Investing in our common stock involves risks. See "Risk Factors" beginning on page 16.
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Price to Public |
Underwriting Discounts and Commissions |
Proceeds, before expenses to us |
Proceeds, before expenses to the selling stockholders |
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Per share |
$ | $ | $ | $ | ||||
Total |
$ | $ | $ | $ |
Delivery of the shares of common stock will be made on or about , 2011.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Credit Suisse | Baird | Piper Jaffray |
The date of this prospectus is , 2011.
You should rely only on the information contained in this prospectus or in any free-writing prospectus we may specifically authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Until , 2011 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.
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MARKET DATA AND FORECASTS
Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications such as KNAPP-TRACK and Technomic, Inc., as well as our own estimates and research. KNAPP-TRACK is a monthly sales and guest count tracking service for the chain dinner house/theme restaurant market in the United States. Each monthly KNAPP-TRACK report aggregates the change in comparable restaurant sales and guest counts compared to the same month in the preceding year from the competitive set of participants in the chain dinner house/theme restaurant market and provides an average to which we can compare our results. The competitive set of participants for each KNAPP-TRACK report is comprised of approximately 50 casual dining restaurant brands and typically includes restaurants such as Applebee's, T.G.I. Friday's, Outback Steakhouse and Red Lobster. We and other restaurants benchmark our performance against the data included in the monthly KNAPP-TRACK report. Technomic, Inc. is a leading restaurant industry consulting and researching firm.
Our estimates are derived from publicly available information released by third-party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of the independent industry publications used in this prospectus were prepared on our behalf, and none of the sources cited in this prospectus have consented to the inclusion of any data from its reports, nor have we sought consent from any of them.
TRADEMARKS AND TRADENAMES
This prospectus includes our trademarks, such as Joe's Crab Shack® and the design, our stylized logos set forth on the cover and back pages of this prospectus and Brick House Tavern + Tap® and the design, which are protected under applicable intellectual property laws and are the property of Ignite Restaurant Group, Inc. or its subsidiaries. Solely for convenience, trademarks, service marks and tradenames referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and tradenames. This prospectus may also contain trademarks, service marks, tradenames and copyrights of other companies, which are the property of their respective owners.
ABOUT THIS PROSPECTUS
Except where the context otherwise requires or where otherwise indicated, the terms "Ignite," "we," "us," "our," "our company" and "our business" refer to Ignite Restaurant Group, Inc. and its consolidated subsidiaries. The term "Joe's" refers to Joe's Crab Shack and "Brick House" refers to Brick House Tavern + Tap.
The term "selling stockholders" refers to JCS Holdings, LLC, our parent company, with respect to the sale of shares of common stock in this public offering and refers to the holders of our common stock that receive such common stock in the liquidation and distribution of JCS Holdings, LLC immediately following this public offering with respect to the sale of additional shares of the selling stockholders upon any exercise of the over-allotment option described herein. See "Prospectus SummaryCompany History and Information" for more information on the liquidation and distribution of JCS Holdings, LLC and "Principal and Selling Stockholders" for more information on our beneficial ownership following the liquidation and distribution.
Throughout this prospectus, we provide a number of key performance indicators used by management and typically used by our competitors in the restaurant industry. These key performance indicators are discussed in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsKey Performance Indicators." In this prospectus we
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also reference Adjusted EBITDA and restaurant-level profit margin, which are both non-GAAP financial measures. See "Prospectus SummarySummary Historical Consolidated Financial and Operating Data" for a discussion of Adjusted EBITDA and restaurant-level profit margin, as well as a reconciliation of those measures to the most directly comparable financial measure required by, or presented in accordance with, generally accepted accounting principles in the United States, or U.S. GAAP.
Our fiscal year ends on the Monday closest to December 31 of each year. Our most recent fiscal year ended on January 3, 2011. Fiscal year 2010 was a 53-week year, while fiscal years 2009 and 2008 were 52-week years. The first three quarters of our fiscal year consist of 12 weeks and our fourth quarter consists of 16 weeks for 52-week fiscal years and 17 weeks for 53-week fiscal years.
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This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus, including the more detailed information regarding our company, the common stock being sold in this offering and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. You should also carefully consider, among other things, the matters discussed in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus before deciding to invest in our common stock. Some of the statements in this prospectus constitute forward-looking statements. For more information, see "Forward-Looking Statements."
Our Company
Ignite Restaurant Group, Inc. operates two restaurant businesses, Joe's Crab Shack and Brick House Tavern + Tap. Each of our restaurant businesses offers a variety of high-quality food in a distinctive, casual, high-energy atmosphere. Joe's Crab Shack and Brick House Tavern + Tap operate in a diverse set of markets across the United States.
Our comparable restaurant sales have increased for 12 consecutive fiscal quarters and outperformed the KNAPP-TRACK report of casual dining restaurants, which is comprised of approximately 50 casual dining restaurant brands, over the same period of time. We have grown our comparable restaurant sales by 17.0% on a cumulative basis over the last three fiscal years. During the twenty-four weeks ended June 20, 2011, our comparable restaurant sales increased by 7.6% over the comparable period in our prior fiscal year.
Over the last three fiscal years ended January 3, 2011, we opened 14 new restaurants, closed seven restaurants and converted three Joe's Crab Shack restaurants to Brick House restaurants, which resulted in a net total of seven new restaurants. We have opened nine new restaurants in fiscal year 2011 (as of August 31, 2011). Total revenues and Adjusted EBITDA (a non-GAAP financial measure) have improved at compounded annual growth rates of 13.4% and 39.8%, respectively, over the last three fiscal years ended January 3, 2011. Over the same period, our total revenues increased from $273.4 million to $351.3 million, net income increased from a net loss of $3.2 million to net income of $11.6 million and Adjusted EBITDA increased from $20.3 million to $39.7 million.
As of August 31, 2011, we owned and operated 135 restaurants in 32 states.
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Joe's Crab Shack
Joe's Crab Shack, founded in 1991, is an established, national chain of casual seafood restaurants. Joe's serves a variety of high-quality seafood items, with an emphasis on crab. Joe's is a high-energy, family-friendly restaurant that encourages guests to "roll up your sleeves and crack into some crab."
Crab is deliberately placed center stage as a defining item to the Joe's experience. Joe's Steampot and Crab in a Bucket offerings allow guests to choose between three varieties of crabs (Snow, Dungeness and King). Our Steampots are overflowing with generous portions of crab, other seafood, red potatoes, a fresh ear of corn and sausage, combined with a complementary set of savory seasonings. Our Crab in a Bucket entrées allow guests to pair their favorite crab selection with several distinctive preparations ranging from BBQ to Chesapeake Style or Garlic Herb. Joe's also leverages its crab-forward menu with other craveable crab items, including Made-From-Scratch Crab Cakes, Crab Nachos and Crazy-Good Crab Dip. In addition to our core crab-focused menu, Joe's also offers a broad range of entrées featuring a variety of seafood, including the Get Stuffed Snapper, Surf 'N Turf Burger and Shrimp Trio, as well as a wide range of traditional seafood entrées like the Fisherman's Platter. Joe's also offers several "out of water" options such as Pan Fried Cheesy Chicken and Ribeye Steak.
Many Joe's Crab Shack restaurants are located on waterfront property, and most locations offer outdoor patio seating and a children's playground. Joe's restaurants perform well in targeted markets with high population density and a propensity for seafood, as well as "destination" markets with national and regional tourist attractions, both of which are key characteristics of our new site selection strategy. Joe's Crab Shack restaurants are largely free-standing and average 8,000 square feet with over 200 seats.
We continuously seek to innovate our menu offerings. For example, we have dramatically shifted the menu mix at Joe's to focus on entrées featuring crab over the last three fiscal years. As a result of this strategy, the percentage of entrées at Joe's featuring crab increased from approximately 20% to 41% of total food revenues over the last three fiscal years. We believe this mix shift has contributed to increases in guest satisfaction, comparable restaurant sales and restaurant-level profit. For the fiscal year ended January 3, 2011, our average check was $22.00, lunch and dinner represented 28% and 72% of revenue, respectively, and our revenues were comprised of 84% food, 14% alcohol and 2% retail merchandise.
Brick House Tavern + Tap
Brick House Tavern + Tap, founded in 2008, is a casual restaurant business that provides guests a differentiated "gastro pub" experience by offering a distinctive blend of menu items in a polished setting. Brick House seeks to strike a balance between providing guests with an elevated experience while also appealing to "every-man, every-day." Brick House was recently listed as the #1 "up and comer" full-service, varied-menu restaurant business by Technomic, a leading restaurant industry consulting and research firm.
Brick House offers guests a broad selection of high-quality, chef-inspired, contemporary tavern food and other American fare. Menu items include handcrafted appetizers such as Deviled Eggs, Meatloaf Sliders and Fried Stuffed Olives. In addition, Brick House's Brick Burgers, including the Gun Show Burger and the Red Chili Burger, offer guests a distinct take on the traditional burger. Brick House further enhances its burger offerings through its most popular burger, The Kobe, which is hand-formed from high-quality American Wagyu beef. Guests can also choose from a broad selection of homemade entrées such as Drunken Chops, BBQ Baby Backs and Chicken & Waffles, which are among our most popular items. In addition, Brick House features a diverse beverage selection highlighted by over 70 varieties of beer, including local microbrews and distinctive imports, a tap-at-your-table Beer Bong and a hand-pulled Cask Beer Engine. All Brick House restaurants have a
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full bar that supports a variety of liquor drinks, wine and beer cocktails like the Shandy and Bee Sting, as well as specialty cocktails like the Dark & Stormy, Jameson Pickleback and St. Bubbles.
The interior design of Brick House Tavern + Tap consists of diverse seating and gathering areas where guests can select multiple ways to enjoy their experience. In addition to a traditional dining room and bar area, Brick House also offers large communal tables and a section of leather recliners positioned in front of large HD TVs, where guests receive their own TV tray for dining. Each restaurant has a state-of-the-art entertainment package and provides guests with a clear line of sight to at least two HD TVs from every seat, making Brick House restaurants an ideal gathering place for sports enthusiasts. Outdoor seating is also available on the patio or around an open fire pit at nearly all locations. Both food and beverages are served by an energetic all-female service staff.
For fiscal year ended January 3, 2011, the daypart mix at Brick House Tavern + Tap was 21% lunch, 25% afternoon, 36% dinner and 18% late night and our revenues were comprised of 50% food and 50% alcohol. Our entreés ranged in price from $7.50 to $20.00.
Our Business Strengths
We are focused on developing brands that have category leading and defendable positions within the casual dining segment. As a result, our core business strengths include the following:
Highly Differentiated Restaurant Brands. Our restaurants strive to provide a unique guest experience in a "come-as-you-are," upbeat and inviting restaurant environment. Both Joe's Crab Shack and Brick House Tavern + Tap are distinctively positioned restaurant brands, designed to have unique guest appeal. Joe's Crab Shack is a leading casual seafood brand that offers more than just a meala visit to Joe's is an event for the whole family, a night out. We provide a memorable, shareable "crab-cracking experience" where guests can roll up their sleeves and "break out of their shell" in a vacation-themed environment that offers an escape from the everyday. Brick House Tavern + Tap offers a comfortable, modern setting where guests can gather and share their passion for elevated, all-American food and beer. Each brand features food offerings and an atmosphere that attracts a diverse group of guests.
Authentic and Unique Menu Offerings. We offer high-quality, authentic seafood at Joe's Crab Shack and trend-forward, chef-inspired, contemporary tavern food and other American fare at Brick House Tavern + Tap. Signature dishes at both brands feature craveable flavor profiles. Food menus are complemented by an assortment of beverages and distinctive cocktails, including Joe's Shark Bite and Brick House's tap-at-your-table Beer Bongs. Our culinary and beverage teams develop recipes and menu offerings for both Joe's and Brick House to ensure that all items feature distinctive twists on classic items, as well as items exclusive to each brand.
Memorable Guest Service. Our servers are friendly, attentive and responsive to the needs of our guests. In addition, our servers strive to provide guests an unforgettable dining experience. Joe's staff creates a fun-loving atmosphere through energetic and interactive dancing, while the staff at Brick House is focused on entertaining and providing hospitable and personal service to guests. We achieve this through experienced restaurant management teams that implement training programs specific to the menu and culture of each brand. We believe our distinctive guest service models provide an additional layer of brand differentiation.
Attractive Unit Economics. We have successfully increased our restaurant average unit volumes at a compounded annual growth rate of 9.3%, from $2.4 million in fiscal year 2008 to $2.8 million in fiscal year 2010. Over the same period of time, we have increased our restaurant-level profit margin (a non-GAAP financial measure) by 410 basis points from 12.6% to 16.7%. We are targeting average unit volumes and restaurant-level profit margins for new locations to exceed system-wide fiscal year 2010 levels.
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Experienced Management Team. Our experienced team of industry veterans has an average of 19 years of experience with restaurant companies such as T.G.I. Friday's, Darden, Applebee's, Yum! Brands, Landry's and Sbarro. Our management team is led by Raymond A. Blanchette, III, our President and Chief Executive Officer, who joined us in 2007. Mr. Blanchette was a former President for Pick Up Stix and Executive Director of International Business at T.G.I. Friday's, both are brands operated by Carlson Restaurants Worldwide. Within twelve months of his arrival, Mr. Blanchette transformed our leadership team by recruiting five highly experienced restaurant executives. Despite a difficult economic environment, we have achieved 12 consecutive fiscal quarters of comparable restaurant sales growth, expanded our geographic footprint and improved our financial performance. From fiscal year 2008 to fiscal year 2010, we increased net income from a net loss of $3.2 million to net income of $11.6 million and increased Adjusted EBITDA from $20.3 million to $39.7 million. The experience of our management team has allowed us to transform Joe's Crab Shack into a market leader while simultaneously developing and launching Brick House Tavern + Tap.
Our Strategy
Our strategies include the following:
Disciplined New Restaurant Growth. We believe there are meaningful opportunities to grow the number of restaurants of both Joe's Crab Shack and Brick House Tavern + Tap. We seek to maximize free cash flow for reinvestment into new restaurants at attractive returns. For both brands, we target new restaurant cash-on-cash returns, which we define as restaurant-level profit per store divided by total build-out cost and pre-opening costs, to exceed 25%.
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- Joe's Crab Shack. We target steady state new restaurant
average unit volumes of approximately $3.9 million for Joe's Crab Shack. Joe's has a narrowly defined new restaurant development strategy that predominantly targets (i) specific
geographies with high population density and a propensity for seafood and (ii) locations in close proximity to regional and national tourist attractions. Twenty two of our twenty five top
performing Joe's restaurants meet one or both of these criteria and generated average unit volumes of $4.4 million in fiscal year 2010. In fiscal year 2010, we developed a new restaurant
prototype for Joe's Crab Shack, which has given Joe's a polished look and feel while maintaining the authentic crab shack ambiance. As of August 31, 2011, we have successfully opened seven new
restaurants using this new prototype and development strategy.
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- Brick House Tavern + Tap. We target steady state new restaurant average unit volumes of approximately $3.2 million for Brick House Tavern + Tap. We believe Brick House has significant growth potential and intend to focus future development in the top 50 designated market areas across the country. We initially opened a limited number of Brick House restaurants across a broad range of geographies with the intent of optimizing the brand prior to a continued build out. We are currently in the process of integrating key insights into our future new restaurant rollout plans.
Target plans for openings across both brands include 14 restaurants in fiscal year 2011, of which ten are Joe's and four are Brick House. For fiscal year 2012, we target opening 11 to 13 new restaurants, the vast majority of which will be new Joe's restaurants. We expect that our new restaurant growth will continue to be substantially weighted towards new Joe's restaurants for the foreseeable future.
Comparable Restaurant Sales Growth. We believe the following strategies have contributed to our successful growth and will allow us to generate comparable restaurant sales growth in the future:
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- Continuous Menu Innovation. We believe menu innovation is a critical factor in building guest loyalty and frequency. Both Joe's Crab Shack and Brick House Tavern + Tap have signature food and beverage offerings and a tradition of consistent menu innovation. New menu items are
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- Marketing our Restaurant Brands. We believe that our
marketing strategies will continue to increase brand awareness while driving new guest trial and repeat guest visits. In June 2007, we changed our marketing strategy for Joe's Crab Shack by developing
a long-term marketing plan supported by quantitative analysis that is designed to increase comparable restaurant sales and guest count, as well as build the brand for the future. We also
moved to a national cable platform, which provides television advertising reach to the Joe's restaurants that were previously outside of the spot/local television markets and previews the Joe's Crab
Shack brand in new development markets. These national marketing efforts are complemented by a combination of local marketing programs and social media. Brick House
Tavern + Tap is primarily marketed through local marketing and social media outlets. We also promote both brands using other in-restaurant sales initiatives,
which are typically focused on products and are not price point promotions.
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- Driving Guest Satisfaction. We believe our focus on menu innovation and guest service has contributed to Joe's Crab Shack's overall guest satisfaction score improving by over 1,400 basis points since we began measuring guest satisfaction through a third party vendor in August 2008. At Joe's Crab Shack, we use this third party research consisting of feedback from more than 40,000 guests, to develop operational initiatives, which we expect will continue to deliver high levels of guest satisfaction. We are in the process of implementing a similar program at Brick House Tavern + Tap. We believe improving guest satisfaction will continue to build loyalty and lead to increased sales from our guests.
typically introduced at both brands twice a year and we test new menu items in restaurants across several diverse geographies before they are introduced into the broader base of restaurants. We have successfully introduced new and innovative items at both brands with such recent additions as the Skillet Paella and Mason Jars at Joe's Crab Shack and Fried Stuffed Olives and Chicken & Waffles at Brick House Tavern + Tap. We plan to continue our tradition of menu innovation in the future.
Leverage our Scale to Enhance our Profitability. We believe we have a scalable infrastructure and can continue to expand our margins as we execute our strategy. While both brands have independent field operations, we use our shared services platform to handle many of the administrative functions for both brands. This leverageable structure should further our ability to enhance our profitability as we grow.
Our Principal Stockholders
Following completion of this offering, J.H. Whitney VI, L.P., or "J.H. Whitney VI," an affiliate of J.H. Whitney Capital Partners, LLC, or "J.H. Whitney," will own approximately % of our outstanding common stock, or % if the underwriters' option to purchase additional shares is fully exercised. See footnote 5 to our unaudited pro forma condensed consolidated statement of operations on page 49. As a result, J.H. Whitney VI will be able to have a significant effect relating to votes over fundamental and significant corporate matters and transactions. See "Risk FactorsRisks Related to This Offering and Ownership of Our Common Stock."
J.H. Whitney is a Connecticut-based private equity firm whose affiliated investment funds have current investments and remaining committed capital totaling $1.7 billion. J.H. Whitney focuses on investing in small and middle market companies with strong growth prospects in a number of industries.
Company History and Information
The first Joe's Crab Shack was opened in Houston, Texas in 1991. Landry's Restaurants, Inc., or "Landry's," acquired Joe's Crab Shack in 1994. On October 13, 2006, in connection with the purchase
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by JCS Holdings, LLC, an entity controlled by J.H. Whitney VI, of 120 Joe's Crab Shack restaurants from Landry's, which we refer to as the "Landry Acquisition," we changed our name to Joe's Crab Shack Holdings, Inc. In 2008, we developed our second brand, Brick House Tavern + Tap. With the addition of the Brick House brand, on July 7, 2009, we changed our name to Ignite Restaurant Group, Inc.
In connection with, and immediately prior to the completion of this public offering, Ignite Restaurant Group, Inc. will effect a -for-1 stock split of our common stock. The stock split will result in shares of common stock outstanding immediately after the stock split, all of which will be held by JCS Holdings, LLC, our parent company. Immediately after completion of this public offering, JCS Holdings, LLC will liquidate and distribute the shares of our common stock then held by it and/or the cash proceeds received in this public offering to the holders of its Series A preferred units and its common units in accordance with the provisions then in effect of the Third Amended and Restated Limited Liability Company Agreement of JCS Holdings, LLC, which we refer to as the Parent LLC Agreement. In addition, following this public offering, we will issue restricted shares of our common stock to members of our management and independent directors who held unvested common units in JCS Holdings, LLC as a replacement for such unvested common units, which will be subject to substantially identical vesting conditions as the unvested common units. The number of restricted shares of our common stock issued will be based on the ratio of unvested common units to vested common units multiplied by the number of our shares of our common stock received in the liquidation of our parent company. See footnote 5 to our unaudited pro forma condensed consolidated statement of operations for additional details relating to the number of restricted shares to be issued as a replacement for unvested common units on page 49.
Immediately following completion of this public offering, the distribution described above and the issuance of restricted shares of our common stock, shares of our common stock will be owned by (i) the entities and persons who purchase our common stock pursuant to this initial public offering and (ii) the entities and persons that owned or who were eligible to receive Series A preferred units and/or vested and unvested common units of JCS Holdings, LLC, which include J.H. Whitney VI and certain of our current and former officers, directors and employees.
Our principal executive office is located at 9900 Westpark Drive, Suite 300, Houston, Texas 77063. Our telephone number is (713) 366-7500, and our website addresses are www.igniterestaurants.com, www.joescrabshack.com and www.brickhousetavernandtap.com. The information contained on our websites are not deemed to be, and you should not consider such information to be, part of this prospectus.
Risk Factors
Investing in shares of our common stock involves a high degree of risk. You should consider the information under the caption "Risk Factors" beginning on page 15 of this prospectus in deciding whether to purchase the common stock in this offering. Risks relating to our business include, among others:
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- our ability to successfully maintain increases in our comparable restaurant sales, average weekly sales and average unit
volumes;
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- our ability to successfully execute our growth strategy and open new restaurants that are profitable;
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- macroeconomic conditions;
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- our ability to compete with many other restaurants;
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- changes in food and supply costs, including the cost of crab;
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- our ability to expand Brick House;
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- concerns regarding food safety and food-borne illness;
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- changes in consumer preferences; and
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- our ability to develop and maintain our restaurant brands.
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The Offering
Common stock offered by us | shares | |
Common stock offered by the selling stockholders |
shares |
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Common stock outstanding immediately after this offering |
shares or shares, if the underwriters exercise their option to purchase additional shares from us and the selling stockholders. |
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Use of proceeds |
We estimate that the proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, will be approximately $ million, assuming the shares offered by us are sold for $ per share, the midpoint of the price range set forth on the cover page of this prospectus. |
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We intend to use the net proceeds from the sale of common stock by us in this offering, together with cash on hand, (i) to prepay a portion of our senior secured credit facility, (ii) to pay J.H. Whitney a fee in connection with the termination of the management agreement, and (iii) for other general corporate purposes. For additional information, see "Use of Proceeds" and "Certain Relationships and Related Party Transactions." |
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We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. |
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Principal stockholders |
Upon completion of this offering, J.H. Whitney VI will own a controlling interest in us. We currently intend to avail ourselves of the "controlled company" exemption under the corporate governance rules of The NASDAQ Stock Market. |
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Dividend policy |
We currently expect to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness; therefore, we do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is limited by our existing credit agreements and may be further restricted by the terms of any of our future debt or preferred securities. For additional information, see "Dividend Policy." |
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Proposed symbol for trading on The NASDAQ Global Select Market |
" " |
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Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after this offering:
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- assumes the effectiveness of our amended and restated certificate of incorporation and amended and restated
by-laws, which we will adopt prior to the completion of this offering;
-
- gives effect to the stock split;
-
- excludes shares of our common stock reserved for future grants under our new equity compensation
plan we intend to adopt in connection with this offering; and
-
- assumes (i) no exercise by the underwriters of their option to purchase up to additional shares from us and the selling stockholders and (ii) an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus.
Immediately following this public offering, we will issue approximately restricted shares of common stock to members of our management and independent directors who held unvested common units in JCS Holdings, LLC as a replacement for such unvested common units, which will be subject to substantially identical vesting conditions as the unvested common units. The exact number of restricted shares of our common stock to be issued will be calculated based upon the initial public offering price net of underwriting discounts and commissions. See footnote 5 to our unaudited pro forma condensed consolidated statement of operations for additional details relating to the number of restricted shares to be issued as a replacement for unvested common units on page 49.
8
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table provides a summary of our historical and unaudited pro forma consolidated financial and operating data for the periods and as of the dates indicated. The summary historical consolidated financial and operating data presented below for the fiscal years ended December 29, 2008, December 28, 2009 and January 3, 2011 and selected balance sheet data presented below as of January 3, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The historical consolidated financial data for the twenty-four weeks ended June 14, 2010 and June 20, 2011 and selected balance sheet data as of June 20, 2011 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The unaudited pro forma consolidated financial data for the year ended January 3, 2011 and for the twenty-four weeks ended June 20, 2011 have been derived from our historical financial statements for such year and period, which are included elsewhere in this prospectus, after giving effect to the transactions specified under "Unaudited Pro Forma Condensed Consolidated Financial Statements."
Our fiscal year ends on the Monday nearest to December 31 of each year. Fiscal year 2010 was a 53-week year ended on January 3, 2011, while fiscal years 2009 and 2008 were 52-week years ended on December 28, 2009 and December 29, 2008, respectively.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with "Risk Factors," "Selected Historical Consolidated Financial and Operating Data," "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our audited consolidated financial statements and our unaudited
9
condensed consolidated financial statements and each of their related notes included elsewhere in this prospectus.
|
Fiscal Year Ended | Twenty-Four Weeks Ended |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
||||||||||||
|
(in thousands) |
||||||||||||||||
Statement of Operations Data: |
|||||||||||||||||
Revenues |
$ | 273,359 | $ | 307,801 | $ | 351,327 | $ | 160,407 | $ | 190,619 | |||||||
Restaurant operating costs |
|||||||||||||||||
Cost of sales |
80,573 | 89,845 | 103,981 | 47,244 | 59,523 | ||||||||||||
Labor and benefits |
80,604 | 87,920 | 98,162 | 45,446 | 52,546 | ||||||||||||
Occupancy expenses |
21,610 | 25,243 | 27,440 | 12,438 | 13,666 | ||||||||||||
Other operating expenses |
57,210 | 58,140 | 63,963 | 29,642 | 33,382 | ||||||||||||
General and administrative |
15,383 | 18,765 | 20,852 | 9,563 | 11,172 | ||||||||||||
Depreciation and amortization |
13,898 | 12,733 | 13,435 | 5,927 | 6,896 | ||||||||||||
Pre-opening costs |
779 | 1,323 | 3,844 | 1,367 | 1,886 | ||||||||||||
Restaurant impairments and closures |
680 | 15 | 909 | 98 | 37 | ||||||||||||
Loss (gain) on disposal of property and equipment |
84 | 1,017 | 2,797 | (1 | ) | (4 | ) | ||||||||||
Total costs and expenses |
270,821 | 295,001 | 335,383 | 151,724 | 179,104 | ||||||||||||
Income from operations |
2,538 | 12,800 | 15,944 | 8,683 | 11,515 | ||||||||||||
Interest expense, net |
(5,659 | ) | (3,867 | ) | (3,936 | ) | (1,767 | ) | (4,655 | ) | |||||||
Gain on insurance settlements |
| 1,192 | 944 | 172 | | ||||||||||||
(Loss) income before income taxes |
(3,121 | ) | 10,125 | 12,952 | 7,088 | 6,860 | |||||||||||
Income tax expense |
90 | 255 | 1,388 | 1,716 | 1,964 | ||||||||||||
Net (loss) income |
$ | (3,211 | ) | $ | 9,870 | $ | 11,564 | $ | 5,372 | $ | 4,896 | ||||||
|
10
|
Fiscal Year Ended | Twenty-Four Weeks Ended |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
||||||||||||
|
(dollars in thousands, except per share data) |
||||||||||||||||
Per Share Data: |
|||||||||||||||||
Net (loss) income per share: |
|||||||||||||||||
Basic |
$ | $ | $ | $ | $ | ||||||||||||
Diluted |
|||||||||||||||||
Weighted average shares outstanding: |
|||||||||||||||||
Basic |
|||||||||||||||||
Diluted |
|||||||||||||||||
Pro Forma Statement of Operations Data(1): |
|||||||||||||||||
Pro forma net income |
$ | $ | |||||||||||||||
Pro forma net income per share: |
|||||||||||||||||
Basic |
$ | $ | |||||||||||||||
Diluted |
$ | $ | |||||||||||||||
Pro forma weighted average shares outstanding: |
|||||||||||||||||
Basic |
|||||||||||||||||
Diluted |
|||||||||||||||||
Selected Other Data: |
|||||||||||||||||
Restaurants open at end of period |
116 | 119 | 126 | 123 | 133 | ||||||||||||
Change in comparable restaurant sales(2) |
1.9 | % | 9.5 | % | 4.9 | % | 4.1 | % | 7.6 | % | |||||||
Average weekly sales |
$ | 45 | $ | 51 | $ | 54 | $ | 55 | $ | 61 | |||||||
Average unit volumes |
$ | 2,354 | $ | 2,599 | $ | 2,810 | $ | 1,277 | $ | 1,444 | |||||||
Restaurant-level profit margin(3) |
12.6 | % | 15.5 | % | 16.7 | % | 16.3 | % | 16.7 | % | |||||||
EBITDA(4) |
$ | 16,436 | $ | 26,725 | $ | 30,323 | $ | 14,782 | $ | 18,411 | |||||||
Adjusted EBITDA(4) |
$ | 20,314 | $ | 30,276 | $ | 39,692 | $ | 17,376 | $ | 21,870 | |||||||
Adjusted EBITDA margin(5) |
7.4 | % | 9.8 | % | 11.3 | % | 10.8 | % | 11.5 | % | |||||||
Capital expenditures |
$ | 7,576 | $ | 18,348 | $ | 33,010 | $ | 11,606 | $ | 18,323 |
|
|
|
|
June 20, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
January 3, 2011 |
Actual | Pro Forma (6)(7) |
|||||||||||
|
|
|
(in thousands) |
|||||||||||||
Selected Balance Sheet Data: |
||||||||||||||||
Cash and cash equivalents |
$ | 12,572 | $ | 13,697 | $ | |||||||||||
Working capital (deficit) |
(2,000 | ) | (8,562 | ) | ||||||||||||
Total assets |
156,850 | 177,825 | ||||||||||||||
Total debt |
34,833 | 119,272 | ||||||||||||||
Total stockholder's equity |
$ | 89,714 | $ | 14,916 |
- (1)
- Derived
from our unaudited pro forma condensed consolidated statements of operations for the fiscal year ended January 3, 2011 and the twenty-four
weeks ended June 20, 2011, which are included elsewhere in this prospectus. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
- (2)
- Our comparable restaurant base includes restaurants open for at least 104 weeks, or approximately 24 months. Change in comparable restaurant sales represents the change in period-over-period sales for the comparable restaurant base.
11
- (3)
- Restaurant-level profit margin represents revenues (x) less (i) licensing revenue not attributable to core restaurant operations, (ii) cost of sales, (iii) labor and benefits, (iv) occupancy expenses, and (v) other operating expenses (y) plus deferred rent (as described in footnote 4(a) below). Restaurant-level profit is a supplemental measure of operating performance of our restaurants that does not represent and should not be considered as an alternative to net income or revenues as determined by U.S. generally accepted accounting principles, or U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. Restaurant-level profit has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Management believes restaurant-level profit is an important component of financial results because it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant-level profit as a key metric to evaluate our financial performance compared with our competitors, to evaluate the profitability of incremental sales and to evaluate our performance across periods.
|
Fiscal Year Ended | Twenty-Four Weeks Ended |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
|||||||||||||
|
(dollars in thousands) |
|||||||||||||||||
Revenues |
$ | 273,359 | $ | 307,801 | $ | 351,327 | $ | 160,407 | $ | 190,619 | ||||||||
Less: Licensing and other revenues |
(64 | ) | (89 | ) | (373 | ) | (78 | ) | (249 | ) | ||||||||
Restaurant sales(A) |
$ | 273,295 | $ | 307,712 | $ | 350,954 | 160,329 | 190,370 | ||||||||||
Restaurant operating costs |
||||||||||||||||||
Cost of sales |
80,573 | 89,845 | 103,981 | 47,244 | 59,523 | |||||||||||||
Labor and benefits |
80,604 | 87,920 | 98,162 | 45,446 | 52,546 | |||||||||||||
Occupancy expenses |
21,610 | 25,243 | 27,440 | 12,438 | 13,666 | |||||||||||||
Other operating expenses |
57,210 | 58,140 | 63,963 | 29,642 | 33,382 | |||||||||||||
Deferred rent |
(1,017 | ) | (1,162 | ) | (1,322 | ) | (637 | ) | (606 | ) | ||||||||
Restaurant-level profit(B) |
$ | 34,315 | $ | 47,726 | $ | 58,730 | $ | 26,196 | $ | 31,859 | ||||||||
Restaurant-level profit margin(B÷A) |
12.6 | % | 15.5 | % | 16.7 | % | 16.3 | % | 16.7 | % |
- (4)
- EBITDA
represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and
eliminations described in the table below. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net
income or cash flow from operations, as determined by U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. EBITDA and Adjusted EBITDA have
limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations
are:
-
- EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual commitments;
-
- EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our
working capital needs;
-
- EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal payments on our debt;
-
- EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements
to pay our taxes;
-
- although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the future, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
-
- other companies in the restaurant industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
12
- Because
of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in
the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementally. We further believe that
our presentation of these U.S. GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the
strength of our operations and the performance of our core business.
- As
noted in the table below, Adjusted EBITDA includes adjustments for restaurant impairments and closures, gains and losses on disposal of
property and equipment, gains on insurance settlements and pre-opening costs, among other items. It is reasonable to expect that these items will occur in future periods. However, we believe these
adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants and complicate comparisons
of our internal operating results and operating results of other restaurant companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly
record following this offering, such as sponsor management fees. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help
management with a measure of our core operating performance over time by removing items that are not related to day-to-day restaurant-level operations.
- Management
and our principal stockholder use EBITDA and Adjusted EBITDA:
-
- as a measurement of operating performance because they assist us in comparing the
operating performance of our restaurants on a consistent basis, as both remove the impact of items not directly resulting from our core operations;
-
- for planning purposes, including the preparation of our internal annual operating
budget and financial projections;
-
- to evaluate the performance and effectiveness of our operational strategies;
-
- to evaluate our capacity to fund capital expenditures and expand our business; and
-
- to calculate incentive compensation payments for our employees, including assessing
performance under our annual incentive compensation plan.
- In
addition, this measurement is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our
industry. Management believes that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing
results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily
add back events that are not part of normal day-to-day operations of our business. By providing this non-GAAP financial measure, together with reconciliations, we
believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.
- We also present Adjusted EBITDA because it is a measure which is used in calculating financial ratios in material debt covenants in our senior secured credit facility. As of June 20, 2011, we had $119.3 million of outstanding borrowings under the term loan and the ability to borrow up to an additional $23.6 million under the revolving credit facility. Failure to comply with our material debt covenants could cause an acceleration of outstanding amounts under the term loan and restrict us from borrowing amounts under the revolving credit facility to fund our future liquidity requirements. For the fiscal quarter ended June 20, 2011, we are required to maintain a fixed charge coverage ratio (ratio of free cash flow to fixed charges) of 1.40:1 and an effective leverage ratio (ratio of adjusted debt to Adjusted EBITDA plus cash rent expense) of less than 5.50:1. We believe that inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate. The material covenants in our senior secured credit facility are discussed further in "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."
13
- Adjusted EBITDA is calculated as follows:
|
Fiscal Year Ended | Twenty-Four Weeks Ended |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
||||||||||||
|
(in thousands) |
||||||||||||||||
Net (loss) income |
$ | (3,211 | ) | $ | 9,870 | $ | 11,564 | $ | 5,372 | $ | 4,896 | ||||||
Income tax expense |
90 | 255 | 1,388 | 1,716 | 1,964 | ||||||||||||
Interest expense, net |
5,659 | 3,867 | 3,936 | 1,767 | 4,655 | ||||||||||||
Depreciation and amortization |
13,898 | 12,733 | 13,435 | 5,927 | 6,896 | ||||||||||||
EBITDA |
$ | 16,436 | $ | 26,725 | $ | 30,323 | $ | 14,782 | $ | 18,411 | |||||||
Adjustments: |
|||||||||||||||||
Deferred rent(a) |
1,017 | 1,162 | 1,322 | 637 | 606 | ||||||||||||
Restaurant impairments and closures(b) |
680 | 15 | 909 | 98 | 37 | ||||||||||||
Loss (gain) on disposal of property and equipment(c) |
84 | 1,017 | 2,797 | (1 | ) | (4 | ) | ||||||||||
Sponsor management fees(d) |
1,112 | 1,120 | 1,139 | 526 | 545 | ||||||||||||
Gain on insurance settlements(e) |
| (1,192 | ) | (944 | ) | (172 | ) | | |||||||||
Pre-opening costs(f) |
779 | 1,323 | 3,844 | 1,367 | 1,886 | ||||||||||||
Other expenses(g) |
206 | 106 | 302 | 139 | 389 | ||||||||||||
Adjusted EBITDA |
$ | 20,314 | $ | 30,276 | $ | 39,692 | $ | 17,376 | $ | 21,870 | |||||||
- (a)
- Deferred
rent represents the non-cash rent expense calculated as the difference in U.S. GAAP rent expense in any year and amounts payable
in cash under the leases during the year. In measuring our operational performance, we focus on our cash rent payments. See Note 2 to our audited consolidated financial statements for
additional details.
- (b)
- Impairment
charges were recorded in connection with the determination that the carrying value of certain of our restaurants exceeded their estimated fair
value. Also consists of expenses incurred following the closure of restaurants. See Notes 2 and 3 to our audited consolidated financial statements for additional details.
- (c)
- Loss
(gain) on disposal of property and equipment represents the net book value of property and equipment less proceeds received, if applicable, on assets
abandoned or sold.
- (d)
- Sponsor
management fees consist of fees and expenses paid to J.H. Whitney under the management services agreement, and compensation and expenses paid
to certain members of the management committee of our parent company, JCS Holdings, LLC. We will terminate this agreement in connection with the completion of this offering. See "Certain
Relationships and Related Party Transactions."
- (e)
- Gain
on insurance settlements consists of proceeds in excess of the net book value of assets lost and related costs from property insurance claims at
restaurants temporarily closed due to hurricane damage, flooding and/or foundational issues.
- (f)
- Pre-opening
costs include expenses directly associated with the opening of new restaurants and are incurred prior to the opening of a new
restaurant. See Note 2 to our audited consolidated financial statements for additional details.
- (g)
- Other
expenses consists of costs related to abandoned new restaurant developments, fees payable to the agent under historic credit facilities, certain
transitional general and administrative expenses, and expenses related to the modification of a sale-leaseback transaction.
- (5)
- Adjusted EBITDA margin is defined as the ratio of Adjusted EBITDA to total revenues. We present Adjusted EBITDA margin because it is used by management as a performance measurement of Adjusted EBITDA generated from total revenues. See footnote 4 above for a discussion of Adjusted EBITDA as a non-GAAP measure and a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA.
14
- (6)
- The
data included in the pro forma column in the selected balance sheet data table above has been derived from our unaudited pro forma condensed
consolidated balance sheet, which is included elsewhere in this prospectus. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
- (7)
- A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, total assets and total stockholders' equity by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, if we change the number of shares offered by us, the net proceeds we receive will increase or decrease by the increase or decrease in the number of shares sold, multiplied by the offering price per share, less the incremental estimated underwriting discounts and commissions and estimated offering expenses payable by us.
15
Investing in our common stock involves a high degree of risk. Before you purchase our common stock, you should carefully consider the risks described below and the other information contained in this prospectus, including our consolidated financial statements and accompanying notes. If any of the following risks actually occurs, our business, financial condition, results of operation or cash flows could be materially adversely affected. In any such case, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Related to Our Business
You should not rely on past increases in our comparable restaurant sales or our average unit volumes as an indication of our future results of operations because they may fluctuate significantly.
A number of factors have historically affected, and will continue to affect, our comparable restaurant sales and average unit volumes, including, among other factors:
-
- our ability to execute our business strategy effectively;
-
- unusually strong initial sales performance by new restaurants;
-
- competition;
-
- consumer trends and confidence;
-
- introduction of new menu items; and
-
- regional and national macroeconomic conditions.
Our comparable restaurant sales and average unit volumes may not increase at rates achieved over the past several fiscal years. Changes in our comparable restaurant sales and average unit volumes could cause the price of our common stock to fluctuate substantially.
If we fail to execute our growth strategy, which largely depends on our ability to open new restaurants that are profitable, our business could suffer.
One of the key means of achieving our growth strategies will be through opening new restaurants and operating those restaurants on a profitable basis. We expect this to be the case for the foreseeable future. For fiscal year 2012, we target opening 11 to 13 new restaurants, the vast majority of which will be new Joe's restaurants, and expect that our new restaurant growth will continue to be substantially weighted towards new Joe's restaurants for the foreseeable future. Because of the economic downturn, there are fewer new developments, such as shopping centers, being constructed, which reduces the supply of new restaurant locations. As a result, competition for prime locations is intense and the prices commanded for such locations have remained high. There is no guarantee that a sufficient number of locations will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. Delays or failures in opening new restaurants, or achieving lower than expected sales in new restaurants, could materially adversely affect our growth strategy. Once we have identified suitable restaurant sites, our ability to open new restaurants successfully and on the development schedule we anticipate will also depend on numerous other factors, some of which are beyond our control, including, among other items, the following:
-
- our ability to secure suitable new restaurant sites;
-
- consumer acceptance of our new restaurants;
-
- our ability to control construction and development costs of new restaurants;
-
- our ability to negotiate suitable lease terms;
16
-
- our ability to secure required governmental approvals and permits in a timely manner and any changes in local, state or
federal laws and regulations that adversely affect our costs or ability to open new restaurants;
-
- the cost and availability of capital to fund construction costs and pre-opening expenses; and
-
- limitations under our current and future credit facilities.
Although we target specified new restaurant average unit volumes, cash on cash returns and capital investment for both Joe's and Brick House, new restaurants may not meet these targets. Any restaurant we open may not be profitable or achieve operating results similar to those of our existing restaurants. We may not be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure, or be able to hire or retain the necessary management and operating personnel. Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain management and operating personnel.
There is also the potential that some of our new restaurants will be located near areas where we have existing restaurants, thereby reducing the revenues of such existing restaurants.
Macroeconomic conditions could adversely affect our ability to increase the sales and profits of existing restaurants or to open new restaurants.
As in fiscal years 2009 and 2010, the United States may continue to suffer from a downturn in economic activity. Recessionary economic cycles, higher fuel and other energy costs, lower housing values, low consumer confidence, inflation, increases in commodity prices, higher interest rates, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors that may affect discretionary consumer spending could adversely affect our revenues and profit margins and make opening new restaurants more difficult. Our guests may have lower disposable income and reduce the frequency with which they dine out. This could result in reduced guest traffic, reduced average checks or limitations on the prices we can charge for our menu items, any of which could reduce our sales and profit margins. In addition, many of our Joe's Crab Shack restaurants are located in areas that we consider tourist or vacation destinations. Therefore, in those locations, we depend in large part on vacation travelers to frequent our Joe's Crab Shack restaurants, and such destinations typically experience a reduction in visitors during economic downturns, thereby reducing the potential guests that could visit our restaurants. Also, businesses in the shopping vicinity in which some of our restaurants are located may experience difficulty as a result of macroeconomic trends or cease to operate, which could, in turn, further negatively affect guest traffic at our restaurants. All of these factors could have a material adverse impact on our results of operations and growth strategy.
Our success depends on our ability to compete with many other restaurants.
The restaurant industry is intensely competitive, and we compete with many well-established restaurant companies on the basis of taste of our menu items, price of products offered, guest service, atmosphere, location and overall guest experience. Our competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators that have opened restaurants in various markets to well-capitalized national restaurant companies. Our Joe's Crab Shack restaurants compete against other casual seafood restaurants, including both national and regional chains and local seafood restaurants, as well as against casual dining restaurants that provide a different type of food. Our Brick House Tavern + Tap restaurants compete against casual restaurants in the bar and grill segment and restaurants in the casual dining segment.
17
Some of our competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in the restaurant industry better than we can. Other competitors are local restaurants that in some cases have a loyal guest base and strong brand recognition within a particular market. As our competitors expand their operations or as new competitors enter the industry, we expect competition to intensify. Should our competitors increase their spending on advertising and promotions, we could experience a loss of guest traffic to our competitors. Also, if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our results of operations. We also compete with other restaurant chains and other retail businesses for quality site locations, management and hourly employees.
Changes in food and supply costs, including the cost of crab, could adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including crab, shrimp, lobster and other seafood. In fiscal year 2010, Snow Crab, Dungeness Crab, King Crab and shrimp accounted for approximately 47% of our total food purchases. Any increase in food prices, particularly for these food items, could adversely affect our operating results. During the current fiscal year, we have experienced increases in crab pricing. The impact of some of these increases was partially offset by certain fixed priced supply contracts for hard shell crab during the first half of fiscal year 2011. We anticipate our food costs will increase over the balance of 2011. We believe that the cost of crab will remain high into 2012 before moderating towards mean historical prices. In addition, we are susceptible to increases in food costs as a result of factors beyond our control, such as weather conditions (including hurricanes), oil spills, fisherman strikes, food safety concerns, costs of distribution, product recalls and government regulations. Furthermore, the introduction of or changes to tariffs on seafood, such as imported crab and shrimp or other food products, could increase our costs and possibly impact the supply of those products. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu items and prices, and a failure to do so could adversely affect our operating results. In addition, because our menu items are moderately priced, we may not seek to or be able to pass along price increases to our guests. If we adjust pricing there is no assurance that we will realize the full benefit of any adjustment due to changes in our guests' menu item selections and guest traffic.
Brick House is a newer and still evolving brand and our plans to expand Brick House may not be successful.
While Joe's and Brick House are subject to the risks and uncertainties described herein, there is an enhanced level of risk and uncertainty related to the expansion of Brick House, our newer brand. While Brick House has grown to 17 locations since its founding in 2008, it is still evolving and has not yet proven its long-term growth potential. For example, only two Brick House restaurants have been open for more than eight full fiscal quarters, qualifying them for inclusion in our comparable restaurant base.
Initially, we opened 17 Brick House restaurants across a broad range of geographies with the intent of optimizing the brand prior to a continued build out. We are currently in the process of integrating key insights into our new restaurant rollout plans. There can be no assurance that the enhancements we intend to implement as part of the brand optimization process will be successful or that additional new restaurant growth will occur. Brick House will be subject to the risks and uncertainties that accompany any emerging restaurant brand. If Brick House fails to expand and/or continue generating profits, our operating results could suffer.
Food safety and food-borne illness concerns may have an adverse effect on our business.
Food safety is a top priority, and we dedicate substantial resources to ensure that our guests enjoy safe, quality food products. However, food-borne illnesses, such as salmonella, E. coli, hepatitis A,
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trichinosis or "mad cow disease," and food safety issues have occurred in the food industry in the past, and could occur in the future. In addition, publicity regarding certain illnesses and contaminations related to seafood, including high levels of mercury or other carcinogens, oil contaminations, vibrio vulnificus and the Norwalk virus could affect consumer preferences and the consumption of seafood. Any report or publicity linking us to instances of food-borne illness or other food safety issues, including food tampering or contamination, could adversely affect our brands and reputation as well as our revenues and profits. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry or seafood restaurants generally and adversely impact our sales.
Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. Although we inspect food products when they are delivered to us, we cannot assure that all food items are properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled and should not be used in our restaurants. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise, such as "mad cow disease," which could give rise to claims or allegations on a retroactive basis. In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or guests, such as the addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past severely injured the reputations and brands of restaurant chains in the quick service restaurant segment and could affect us in the future as well. If our guests become ill from food-borne illnesses, we could also be forced to temporarily close some restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall pursuant to the recently enacted the Food and Drug Administration Food Safety Modernization Act.
Changes in consumer preferences could harm our performance.
Consumer preferences often change rapidly and without warning, moving from one trend to another among many product or retail concepts. We also depend on trends regarding away-from-home dining. Consumer preferences towards away-from-home dining or certain food products might shift as a result of, among other things, health concerns or dietary trends related to cholesterol, carbohydrate, fat and salt content of certain food items, including crab or other seafood items, in favor of foods that are perceived as more healthy. Our menu is currently comprised of crab and other menu items and a change in consumer preferences away from these offerings would have a material adverse effect on our business. Negative publicity over the health aspects of such food items may adversely affect demand for our menu items and could result in lower guest traffic, sales and results of operations.
If we fail to continue to develop and maintain our restaurant brands, our business could suffer.
We believe that maintaining and developing our restaurant brands are critical to our success and our growth strategy, and that the importance of brand recognition is significant as a result of competitors offering products similar to our products. We have made significant marketing expenditures to create and maintain brand loyalty as well as to increase awareness of our brands. If our brand-building strategy is unsuccessful, these expenses may never be recovered, and we may be unable to increase our future sales or implement our business strategy.
Any incident that erodes consumer affinity for our brands could significantly reduce their respective values and damage our business. If guests perceive or experience a reduction in food quality, service or ambiance, or in any way believe we failed to deliver a consistently positive experience, our brand value could suffer and our business may be adversely affected.
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In addition, in connection with our acquisition by JCS Holdings, LLC, we granted a license to Landry's that allows Landry's to use certain of our intellectual property, including the Joe's Crab Shack name, to operate two Joe's Crab Shack restaurants. Although Landry's is required to adhere to certain minimum quality standards under the license, including with respect to menu, promotional materials and the specification and preparation of food and beverage items, we do not have operational control over the two restaurants. As a result, such Joe's Crab Shack restaurants owned and operated by Landry's may not be operated in a manner consistent with the standards we uphold at our restaurants. If such restaurants do not maintain operational standards consistent with the standards we demand of our restaurants, the image and brand reputation of Joe's Crab Shack may suffer and our business may be materially affected.
The impact of new restaurant openings could result in fluctuations in our financial performance.
As discussed above, for fiscal year 2012, we target opening 11 to 13 new restaurants, the vast majority of which will be new Joe's restaurants. We expect that our new restaurant growth will continue to be substantially weighted towards new Joe's restaurants for the foreseeable future. New restaurants typically experience an adjustment period before sales levels and operating margins normalize. When our new restaurants open, they typically encounter startup costs, but also significant guest traffic and, therefore, high sales in their initial months. However, over time, these new restaurants may experience a decrease in guest traffic and sales compared to their opening months. Accordingly, sales achieved by new restaurants may not be indicative of future operating results. Also, due to the foregoing factors, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for a full fiscal year.
We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business.
Our ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities, especially with respect to shellfish such as crab. While our seafood offerings are generally caught from government regulated fisheries, crab and other fish are caught in the wild, which could cause volatility in supply. In some cases, we may have only one supplier or a limited number of suppliers for a particular food product. We cannot make assurances regarding the continued supply of our food items since we do not have control over the businesses of our suppliers. Furthermore, such food items are perishable, and we cannot assure that such items will be delivered by such third parties in appropriate condition for sale in our restaurants. In addition, we rely on one primary distributor to deliver products to our restaurants. If any of these vendors, our other suppliers or our distributor is unable to fulfill their obligations, or if we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur higher costs to secure adequate supplies, which would materially harm our business.
In addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We also outsource certain accounting, payroll and human resources functions to business process service providers. Such third-party vendors may not be able to handle the volume of activity or perform the quality of service necessary for our operations. The failure of such vendors to fulfill their support and maintenance obligations or service obligations could disrupt our operations. Furthermore, the outsourcing of certain of our business processes could negatively impact our internal control processes.
Approximately 45% of our restaurants are located in California, Texas and Florida and, as a result, we are sensitive to economic and other trends and developments in those States.
As of August 31, 2011, 61 of our 135 restaurants were spread across California (13), Texas (34) and Florida (14). As a result, we are particularly susceptible to adverse trends and economic
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conditions in those States, including their labor markets. In addition, given our geographic concentration in these States, negative publicity regarding any of our restaurants in these States could have a material adverse effect on our business and operations, as could other occurrences in these regions such as local competitive changes, changes in consumer preferences, local strikes, new or revised laws or regulations, energy shortages or increases in energy prices, droughts, hurricanes, fires, floods or other natural disasters.
In addition, many of our restaurants in Florida and California are located in areas that we consider tourist or vacation destinations. Therefore, we depend in large part on vacation travelers to frequent our restaurants in these locations. Any change in consumer preferences away from Florida and California as their choice of destination could have a material adverse effect on our business and results of operation.
Allergy concerns relating to crab and other shellfish items could affect consumer preferences and could negatively impact our results of operations.
Many of our food items contain crab or other shellfish items. In recent years, there has been negative publicity concerning, shellfish and other food allergies. This negative publicity, as well as any other negative publicity concerning food products we serve, may adversely impact demand for our food and could result in a decrease in guest traffic to our restaurants. Owing to the severe nature of certain shellfish allergies, shellfish have recently been identified by the U.S. Food and Drug Administration as a significant allergen. The introduction of seafood and shellfish labeling regulations to the restaurant industry could cause us to modify the operations or atmosphere of our restaurants, which could adversely affect our business and brand differentiation.
Health concerns arising from outbreaks of viruses may have a material adverse effect on our business.
The United States and other countries have experienced, and may experience in the future, outbreaks of viruses, such as H1N1, avian influenza, SARS and various other forms of influenza. To the extent that a virus is transmitted by human-to-human contact, our employees or guests could become infected, or could choose to, or be advised to avoid gathering in public places and avoid eating in restaurant establishments, which could adversely affect our business.
Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. While we utilize our personnel, as well as a variety of hardware and software, to monitor our systems, controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful.
We may incur costs resulting from breaches of security of confidential guest information related to our electronic processing of credit and debit card transactions.
The majority of our restaurant sales are by credit or debit cards. Other retailers have experienced security breaches in which credit and debit card information has been stolen. Although we use secure
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private networks to transmit confidential information, third parties may have the technology or know-how to breach the security of the guest information transmitted in connection with credit and debit card sales, and our security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our operations. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause us to incur significant unplanned expenses, which could have an adverse impact on our financial condition, results of operations and cash flows. Further, adverse publicity resulting from these allegations could significantly harm our reputation and may have a material adverse effect on us and our restaurants.
We depend upon our executive officers and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
We believe that we have benefited substantially from the leadership and experience of our executive officers, including our President and Chief Executive Officer, Raymond A. Blanchette, III, and our Senior Vice President and Chief Financial Officer, Jeffrey L. Rager. The loss of the services of any of our executive officers could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis. In addition, any such departure could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. As our business expands, our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified executive-level personnel. Our inability to attract and retain qualified executive officers in the future could impair our growth and harm our business.
We are dependent on attracting and retaining qualified employees while also controlling labor costs.
We are dependent upon the availability of qualified restaurant personnel. Our future performance will depend on our ability to attract, motivate and retain our chief operating officers, regional vice presidents, directors of operations and restaurant-level managers. Competition for these employees is intense. The loss of the services of members of our restaurant management team or the inability to attract additional qualified personnel as needed could materially harm our business.
In addition, availability of staff varies widely from restaurant to restaurant. In fiscal year 2010, our turnover for restaurant managers at Joe's Crab Shack was 20% and 29% at Brick House. In fiscal year 2010, our hourly restaurant employee turnover at our comparable restaurants was 103%. If restaurant management and staff turnover trends increase, we could suffer higher direct costs associated with recruiting, training and retaining replacement personnel. Moreover, we could suffer from significant indirect costs, including restaurant disruptions due to management changeover and potential delays in new restaurant openings or adverse guest reactions to inadequate guest service levels due to staff shortages. Competition for qualified employees may exert upward pressure on wages paid to attract such personnel, resulting in higher labor costs, together with greater recruitment and training expense.
We must comply with the Fair Labor Standards Act and various federal and state laws governing employment matters, such as minimum wage, tip credit allowance, overtime pay practices, child labor laws and other working conditions and citizenship requirements. Federal, state and municipal laws may also require us to provide new or increased levels of employee benefits to our employees, many of whom are not currently eligible for such benefits. Many of our employees are hourly workers whose wages are likely to be affected by an increase in the federal or state minimum wage or changes to the tip credit allowance. Proposals have been made, and continue to be made, at federal and state levels to increase minimum wage levels, including changes to the tip credit allowance. An increase in the
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minimum wage or a change in the tip credit allowance may require an increase or create pressure to increase the pay scale for our employees. In addition, while we take certain measures to operate our restaurants in strict compliance with federal immigration regulations and the requirements of certain states, some of our employees, especially given the location of many of our restaurants, may fail to meet federal work authorization or residency requirements, which could result in disruptions in our work force, sanctions against us and adverse publicity. A shortage in the labor pool or other general inflationary pressures or changes could also increase our labor costs. A shortage in the labor pool could also cause our restaurants to be required to operate with reduced staff, which could negatively impact our ability to provide adequate service levels to our guests.
Among the federal laws with which we must comply is the National Labor Relations Act that applies to the election by employees to be represented by a labor organization for purposes of collective bargaining over wages, hours, working conditions and terms and conditions of employment. Currently, none of our employees are represented by labor organizations for these purposes. However, potential union representation and collectively bargaining agreements may result in increased labor costs that can have an impact on competitiveness. Labor disputes, as well, may precipitate strikes and picketing that may have an impact on business, including guest patronage and supplier deliveries.
Our existing senior secured credit facilities contain financial covenants, negative covenants and other restrictions and failure to comply with these requirements could cause the related indebtedness to become due and payable and limit our ability to incur additional debt.
The lenders' obligation to extend credit under our existing senior secured credit facilities depends upon our maintaining certain financial covenants. In particular, our senior secured credit facilities require us to maintain a minimum consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio, and limit our capital expenditures to specified levels. Failure to maintain these ratios and comply with capital expenditure limitations could result in an acceleration of outstanding amounts under the term loan and restrict us from borrowing amounts under the revolving credit facility to fund our future liquidity requirements. In addition, our credit facilities contain certain negative covenants, which, among other things, limit our ability to:
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- incur additional indebtedness;
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- enter into new leases;
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- pay dividends and make other restrictive payments beyond specified levels;
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- create or permit liens;
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- dispose of certain assets;
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- make certain investments;
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- engage in certain transactions with affiliates; and
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- consolidate, merge or transfer all or substantially all of our assets.
Our ability to make scheduled payments and comply with financial covenants will depend on our operating and financial performance, which in turn, is subject to prevailing economic conditions and to other financial, business and other factors beyond our control described herein.
We may need additional capital in the future, and it may not be available on acceptable terms.
The development of our business may require significant additional capital in the future to fund our operations and growth, among other activities. We have historically relied upon cash generated by our operations to fund our expansion. In the future, we intend to rely on funds from operations and, if necessary, our senior secured credit facility. We may also need to access the debt and equity capital
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markets. There can be no assurance, however, that these sources of financing will be available on acceptable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance, investor sentiment and our ability to incur additional debt in compliance with agreements governing our then-outstanding debt. These factors may make the timing, amount, terms or conditions of additional financings unattractive to us. If we are unable to generate sufficient funds from operations or raise additional capital, our growth could be impeded.
Assuming that the amount of net proceeds that we receive from this offering is $ and after giving effect to our intended use of proceeds as described in "Use of Proceeds," as of June 20, 2011, we would have had approximately $ million of total indebtedness outstanding, consisting of (i) a $ million term loan facility due on March 24, 2016 and (ii) $ million outstanding in letters of credit. We have no outstanding borrowings under our $25.0 million revolving credit facility, which matures on March 24, 2016. Our obligations and the guarantees under the senior secured credit facility are secured by all of our assets. We may not be able to refinance our indebtedness prior to or at its maturity on acceptable terms or at all.
Legal complaints or litigation may hurt us.
Occasionally, restaurant guests and/or employees file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. We could also become subject to class action lawsuits related to these matters in the future. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace conditions, employment and similar matters. A number of these industry lawsuits have resulted in the payment of substantial damages by defendants. 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 guests.
Regardless, however, of whether any claim brought against us in the future is valid or whether we are liable, such a claim would be expensive to defend and may divert time, money and other valuable resources away from our operations and, thereby, hurt our business.
We are subject to state and local "dram shop" statutes, which may subject us to uninsured liabilities. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. In the past, after allegedly consuming alcoholic beverages at our restaurants, there have been isolated instances where certain individuals have been killed or injured or have killed or injured third parties. Because a plaintiff may seek punitive damages, which may not be fully covered by insurance, this type of action could have an adverse impact on our financial condition and results of operations. A judgment in such an action significantly in excess of our insurance coverage could adversely affect our financial condition, results of operations or cash flows. Further, adverse publicity resulting from any such allegations may adversely affect us and our restaurants taken as a whole.
Brick House currently employs an all-female service staff which could subject our business to litigation.
Brick House guests are served by an all-female staff. Although Title VII of the Civil Rights Act of 1964 would typically prohibit the employment of a female only service staff, we rely on an established exception to Title VII, known as the "bona fide occupational qualification" defense or "BFOQ" defense. The BFOQ defense permits the hiring of a female only service staff when it is reasonably
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necessary to the normal operation of the business. We believe that Brick House qualifies for this defense. However, in the past, courts have narrowly interpreted the BFOQ defense and there is no guarantee that we would qualify for the BFOQ defense if the matter was adjudicated. If a plaintiff brought a claim for discrimination under Title VII, which may include a class action suit, we may be required to change our business model away from an all-female service model and our results of operations could be adversely affected.
Failure to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations could lead to the loss of our liquor and food service licenses and, thereby, harm our business.
The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages. Such regulations are subject to change from time to time. The failure to obtain and maintain these licenses, permits and approvals could adversely affect our operating results. Typically, licenses must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would adversely affect our business.
In fiscal year 2010, approximately 14% of Joe's Crab Shack revenues and 50% of Brick House Tavern + Tap revenues were attributable to the sale of alcoholic beverages, and our alcoholic beverage sales may increase in the future. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on-premises and to provide service for extended hours and on Sundays. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. In the past, we have been subject to fines for violations of alcoholic beverage control regulations. Any future failure to comply with these regulations and obtain or retain liquor licenses could adversely affect our results of operations and overall financial condition.
We are subject to many federal, state and local laws with which compliance is both costly and complex.
The restaurant industry is subject to extensive federal, state and local laws and regulations, including the recently enacted comprehensive health care reform legislation and those relating to building and zoning requirements and those relating to the preparation and sale of food. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act of 1938, the Immigration Reform and Control Act of 1986 and applicable requirements concerning the minimum wage, overtime, family leave, tip credits, working conditions, safety standards, immigration status, unemployment tax rates, workers' compensation rates and state and local payroll taxes), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990, or the ADA.
In March 2010, the United States federal government enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and significant taxes on health insurers and health care
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benefits. The legislation imposes implementation effective dates that began in 2010 and extend through 2020, and many of the changes require additional guidance from government agencies or federal regulations. To date, we have not experienced material costs related to such legislation. However, due to the phased-in nature of the implementation and the lack of interpretive guidance, it is difficult to determine at this time what impact the health care reform legislation will have on our financial results. Possible adverse effects could include increased costs, exposure to expanded liability and requirements for us to revise the ways in which we provide healthcare and other benefits to our employees.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our restaurants if we failed to comply with applicable standards. Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
New information or attitudes regarding diet and health could result in additional menu labeling laws and changes in regulations and consumer eating habits that could adversely affect our results of operations.
Regulations and consumer eating habits may continue to change as a result of new information and attitudes regarding diet and health. These changes may include regulations that impact the ingredients and nutritional content of our menu items. The federal government as well as a number of states (including California), counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to make certain nutritional information available to guests (including caloric, sugar, sodium and fat content) or have enacted legislation prohibiting the sales of certain types of ingredients in restaurants. The success of our restaurant operations depends, in part, upon our ability to effectively respond to changes in consumer health and disclosure regulations and to adapt our menu offerings to fit the dietary needs and eating habits of our guests without sacrificing flavor. If consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items. To the extent we are unable to respond with appropriate changes to our menu offerings, it could materially affect guest traffic and our results of operations. Furthermore, a change in our menu could result in a decrease in guest traffic.
We have recorded impairment charges in past periods and may record additional impairment charges in future periods.
We periodically evaluate possible impairment at the individual restaurant-level, and record an impairment loss whenever we determine impairment factors are present. We also periodically evaluate the criteria we use as an indication of restaurant impairment. We consider a history of restaurant operating losses to be a primary indicator of potential impairment for individual restaurant locations. A lack of improvement at restaurants we are monitoring, or deteriorating results at other restaurants, could result in additional impairment charges.
Our current insurance may not provide adequate levels of coverage against claims.
We currently maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations. In addition, we self-insure a significant portion of expected losses under our workers'
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compensation, general liability and property insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity.
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
Our registered trademarks and service marks include Joe's Crab Shack and the design, our stylized logos set forth on the cover and back pages of this prospectus and Brick House Tavern + Tap and the design, which are protected under applicable intellectual property laws. We believe that our trademarks and other proprietary rights are important to our success and our competitive position, and, therefore, we devote resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized use or imitation by others, which could harm our image, brand or competitive position. If we commence litigation to enforce our rights, we will incur significant legal fees.
We cannot assure you that third parties will not claim infringement by us of their proprietary rights in the future. Any such claim, whether or not it has merit, could be time-consuming and distracting for executive management, result in costly litigation, cause changes to existing menu items or delays in introducing new menu items, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
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- the timing of new restaurant openings and related expense;
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- restaurant operating costs for our newly-opened restaurants, which are often materially greater during the first several
months of operation than thereafter;
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- labor availability and costs for hourly and management personnel;
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- profitability of our restaurants, especially in new markets;
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- changes in interest rates;
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- increases and decreases in average unit volumes and comparable restaurant sales;
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- impairment of long-lived assets and any loss on restaurant closures;
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- macroeconomic conditions, both nationally and locally;
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- negative publicity relating to the consumption of seafood or other products we serve;
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- changes in consumer preferences and competitive conditions;
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- expansion to new markets;
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- increases in infrastructure costs; and
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- fluctuations in commodity prices.
Our business is also subject to seasonal fluctuations. Our revenues are typically highest in the summer months (June, July and August) and lowest in the winter months (November, December and
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January) especially with respect to Joe's Crab Shack restaurants. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for any fiscal year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.
Significant adverse weather conditions and other disasters could negatively impact our results of operations.
Adverse weather conditions and acts of god, such as regional winter storms, fires, floods, hurricanes, tropical storms and earthquakes, and other disasters, such as oil spills and nuclear meltdowns, could negatively impact our results of operations. In particular, a number of our restaurants are located in states which are particularly susceptible to hurricanes, tropical storms, flooding and earthquakes.
Any strategic transactions or initiatives that we consider in the future may have unanticipated consequences that could harm our business and our financial condition.
From time to time, we evaluate potential mergers, acquisitions of restaurants joint ventures or other strategic initiatives to acquire or develop additional restaurant brands. To successfully execute any acquisition or development strategy, we will need to identify suitable acquisition or development candidates, negotiate acceptable acquisition or development terms and obtain appropriate financing. Any acquisition or future development that we pursue, whether or not successfully completed, may involve risks, including:
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- material adverse effects on our operating results, particularly in the fiscal quarters immediately following the
acquisition or development as the restaurants are integrated into our operations;
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- risks associated with entering into new domestic markets or conducting operations where we have no or limited prior
experience, including international markets;
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- risks inherent in accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition candidates and newly developed restaurant brands, and our ability to achieve projected economic and operating synergies;
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- negative impacts on the reputation of our current brands; and
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- the diversion of management's attention from other business concerns.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with the requirements applicable to public companies.
Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, or the other rules and regulations of the Securities Exchange Commission, or the SEC, or any securities exchange relating to public companies. We are working with our legal and financial advisors and independent accountants to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that we will be required to incur in order to adequately prepare for being a public company could be material. Ongoing compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. We cannot predict or
28
estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management's attention to these matters will have on our business. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.
In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial additional costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
Risks Related to This Offering and Ownership of Our Common Stock
Concentration of ownership by J.H. Whitney VI may prevent new investors from influencing significant corporate decisions.
Upon consummation of this offering, J.H. Whitney VI will own, in the aggregate, approximately % of our outstanding common stock. See "Principal and Selling Stockholders" for more information on our beneficial ownership. As a result, J.H. Whitney VI will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. We currently expect that, following this offering, of the members of our board of directors will be principals of J.H. Whitney. J.H. Whitney VI can take actions that have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power with J.H. Whitney VI may have an adverse effect on the price of our common stock. The interests of J.H. Whitney VI may not be consistent with your interests as a stockholder. After the lock-up period expires, J.H. Whitney VI will be able to transfer control of us to a third-party by transferring their common stock, which would not require the approval of our board of directors or our other stockholders.
Our amended and restated certificate of incorporation will provide that the doctrine of corporate opportunity will not apply against J.H. Whitney, or any of our directors who are employees of or affiliated with J.H. Whitney, in a manner that would prohibit them from investing or participating in competing businesses. To the extent J.H. Whitney affiliated funds invest in such other businesses, they may have differing interests than our other stockholders. For example, J.H. Whitney affiliated funds may choose to own other restaurant brands through other investments, which may compete with our brands.
We will be a "controlled company" within the meaning of The NASDAQ Stock Market rules, and, as a result, we will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
Upon completion of this offering, J.H. Whitney VI will own more than 50% of the total voting power of our common stock and we will be a "controlled company" under The NASDAQ Stock Market corporate governance listing standards. As a controlled company, we will be exempt under The NASDAQ Stock Market listing standards from the obligation to comply with certain of The NASDAQ Stock Market corporate governance requirements, including the requirements:
-
- that a majority of our board of directors consist of independent directors, as defined under the rules of The NASDAQ Stock Market;
29
-
- that we have a corporate governance and nominating committee that is composed entirely of independent directors with a
written charter addressing the committee's purpose and responsibilities; and
-
- that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities.
There may not be a viable public market for our common stock.
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representative of the underwriters and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on The NASDAQ Global Select Market or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including those described under "Risks Related to Our Business" and the following:
-
- potential fluctuation in our annual or quarterly operating results due to seasonality and other factors;
-
- changes in capital market conditions that could affect valuations of restaurant companies in general or our goodwill in
particular or other adverse economic conditions;
-
- changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates
or failure of those analysts to initiate or maintain coverage of our common stock;
-
- downgrades by any securities analysts who follow our common stock;
-
- future sales of our common stock by our officers, directors and significant stockholders;
-
- global economic, legal and regulatory factors unrelated to our performance;
-
- investors' perceptions of our prospects;
-
- announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and
-
- investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.
In addition, the stock markets, and in particular The NASDAQ Global Select Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many food service companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities
30
litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, which we refer to as the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
After this offering, J.H. Whitney VI will have the right, subject to certain conditions, to require us to file registration statements registering additional shares of common stock, and J.H. Whitney VI and members of management will have the right to require us to include shares of common stock in registration statements that we may file for ourselves or J.H. Whitney VI. In order to exercise these registration rights, the holder must be permitted to sell shares of its common stock under applicable lock-up restrictions described below. Subject to compliance with applicable lock-up restrictions and restrictions under the registration rights agreement (both of which may be waived), shares of common stock sold under these registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. See "Shares Eligible for Future SaleRegistration Rights Agreement". In addition, we will incur certain expenses in connection with the registration and sale of such shares.
We, each of our officers and directors and the selling stockholders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except, in our case, for the issuance of common stock upon exercise of options under existing option plans. Credit Suisse Securities (USA) LLC may, in its sole discretion, release any of these shares from these restrictions at any time without notice. See "Underwriting."
All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable volume and other limitations imposed under federal securities laws. See "Shares Eligible for Future Sale" for a more detailed description of the restrictions on selling shares of our common stock after this offering.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
31
Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:
-
- establish a classified board of directors for a period of time after the consummation of the public offering, so that not
all members of our board of directors are elected at one time;
-
- authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may
be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;
-
- prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our
stockholders, once J.H. Whitney VI owns less than 50% of our outstanding voting stock;
-
- provide that the board of directors is expressly authorized to make, alter, or repeal our amended and restated bylaws; and
-
- establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.
If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $ per share because the initial public offering price of $ is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See "Dilution."
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
We do not expect to pay any cash dividends for the foreseeable future.
The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including our senior secured credit facility and other indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
32
This prospectus contains statements about future events and expectations that constitute forward-looking statements. Forward-looking statements are based on our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account the information currently available to us. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements and you should not place undue reliance on such statements. Factors that could contribute to these differences include, but are not limited to, the following:
-
- our ability to successfully maintain increases in our comparable restaurant sales, average weekly sales and average unit
volumes;
-
- our ability to successfully execute our growth strategy and open new restaurants that are profitable;
-
- macroeconomic conditions;
-
- our ability to compete with many other restaurants;
-
- changes in food and supply costs, including the cost of crab;
-
- our ability to expand Brick House;
-
- concerns regarding food safety and food-borne illness;
-
- changes in consumer preferences;
-
- our ability to develop and maintain our restaurant brands;
-
- the impact of new restaurant openings on our financial performance;
-
- our reliance on vendors, suppliers and distributors;
-
- our geographic concentration in California, Texas and Florida;
-
- changes in consumer preferences caused by health and allergy concerns and government regulation relating to crab and other
shellfish items;
-
- health concerns arising from outbreaks of viruses;
-
- the reliability of our information technology systems and network security;
-
- costs resulting from breaches of security of confidential guest information;
-
- the continued service of our executive officers;
-
- our ability to attract and retain qualified employees while also controlling labor costs;
-
- our ability to incur additional debt and other restrictions under the terms of our existing senior secured credit
facilities;
-
- our ability to generate or raise capital in the future;
-
- legal complaints or litigation;
-
- adverse litigation relating to Brick House's policy of an all female service staff;
-
- our ability to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control
regulations;
-
- the cost of compliance with federal, state and local laws;
33
-
- the impact of additional menu labeling laws;
-
- impairment charges;
-
- our ability to maintain insurance that provides adequate levels of coverage against claims;
-
- our ability to protect our intellectual property;
-
- potential fluctuations in our annual or quarterly operating results due to seasonality and other factors;
-
- the impact of significant adverse weather conditions and other disasters;
-
- any potential strategic transactions or initiatives;
-
- the costs and time requirements as a result of operating as a public company;
-
- the concentration of ownership among our existing executive officers, directors and principal stockholders;
-
- "controlled company" exemptions under The NASDAQ Stock Market listing standards;
-
- the development and sustainability of an active trading market for our common stock;
-
- the volatility of our stock price;
-
- future sales of our common stock, or the perception in the public markets that sales may occur;
-
- future dilution of our common stock;
-
- inaccurate or unfavorable research about our business published by any securities or industry analysts who follow our
common stock or the lack of analysts covering us; and
-
- the payment of dividends.
Words such as "anticipates," "believes," "continues," "estimates," "expects," "goal," "objectives," "intends," "may," "opportunity," "plans," "potential," "near-term," "long-term," "projections," "assumptions," "projects," "guidance," "forecasts," "outlook," "target," "trends," "should," "could," "would," "will" and similar expressions are intended to identify such forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors. Other risks, uncertainties and factors, including those discussed under "Risk Factors," could cause our actual results to differ materially from those projected in any forward-looking statements we make. We assume no obligation to update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
34
We estimate based upon an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, we will receive proceeds from the offering of approximately $ million, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares sold by the selling stockholders in connection with the exercise of the underwriters' option to purchase additional shares.
We intend to use the net proceeds from this offering together with cash on hand:
-
- to prepay an aggregate amount of $ million of our existing senior secured credit facility;
-
- to pay J.H. Whitney a fee in an aggregate amount of $ in connection with the termination of the
management agreement; and
-
- for other general corporate purposes.
In March 2011, we used borrowings under our senior secured credit facility to discharge all indebtedness under our prior senior secured credit facility, pay a termination fee in connection with our interest rate swap agreement and pay a dividend indirectly to J.H. Whitney VI through JCS Holdings, LLC, our parent company. As of June 20, 2011, we had $119.3 million of borrowings outstanding under our senior secured credit facility, which matures in March 2016. The weighted-average interest rate (including margin) under our senior secured credit facility was 6.25% at June 20, 2011.
A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease the proceeds we receive from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.
By establishing a public market for our common stock, this offering is also intended to facilitate our future access to public markets.
35
On March 24, 2011, we paid a cash dividend in the aggregate amount of $80.0 million indirectly to J.H. Whitney VI through JCS Holdings, LLC, our parent company. The cash dividend was paid as a return of capital to J.H. Whitney VI for its 2006 investment in us. At no other time have we paid any dividends on our common stock since our incorporation. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries and us to pay dividends or make distributions to us under the terms of the agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.
36
The following table sets forth our cash and cash equivalents and our capitalization as of June 20, 2011 on:
-
- an actual basis;
-
- on a pro forma basis to give effect to (i) a -for-1 stock split of our common stock, (ii) the sale of shares of our common stock in this offering by us at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, and (iii) the application of the net proceeds from this offering to us as described under "Use of Proceeds."
You should read the following table in conjunction with the sections entitled "Use of Proceeds," "Selected Historical Consolidated Financial and Operating Data," "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.
|
As of June 20, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(unaudited) |
|||||||||
|
Actual | Pro Forma(1) | ||||||||
|
(in thousands) |
|||||||||
Cash and cash equivalents |
$ | 13,697 | $ | |||||||
Long-term debt, including current portion: |
||||||||||
Senior secured credit facility(2) |
$ | 119,250 | $ | |||||||
Capital leases |
22 | |||||||||
Total long-term debt, including current portion |
119,272 | |||||||||
Stockholder's equity: |
||||||||||
Common stock, $1.00 par value, 1,000 shares authorized, 1,000 shares issued and outstanding (actual) ; authorized (pro forma); shares issued and outstanding (pro forma) |
1 | |||||||||
Additional paid-in capital |
11,684 | |||||||||
Accumulated earnings |
3,231 | |||||||||
Total stockholder's equity |
14,916 | |||||||||
Total capitalization |
$ | 134,188 | $ | |||||||
- (1)
- A
$1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the
cover page of this prospectus, would increase or decrease the amount of additional paid-in capital, total stockholders' equity and total capitalization by approximately
$ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
- (2)
- Our senior secured credit facility consists of (i) a $120.0 million term loan facility due on March 24, 2016 and (ii) a $25.0 million revolving credit facility due on March 24, 2016. As of June 20, 2011, we had no outstanding borrowings under our revolving credit facility. We intend to use a portion of the net proceeds from this offering to prepay $ million of our existing senior secured credit facility.
The table above:
-
- excludes, as of June 20, 2011, an aggregate
of shares of common stock reserved
for issuance under
our equity compensation plan, which we plan to adopt in connection with this offering; and
-
- assumes no exercise by the underwriters of their option to purchase up to an additional shares from us and the selling stockholders.
37
Dilution represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering. The net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding. Our pro forma net tangible book value as of June 20, 2011 was $ million, or $ per share of common stock after giving effect to the stock split but before giving effect to this offering.
After giving effect to the sale of the shares of common stock offered by us in this offering at a price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, and the application of the net proceeds from this offering to us as described under "Use of Proceeds," our pro forma as adjusted net tangible book value as of June 20, 2011 would have been approximately $ million, or $ per share of common stock. This represents an immediate increase in net tangible book value to our existing stockholders of $ per share and an immediate dilution to new investors in this offering of $ per share.
The following table illustrates this per share dilution in net tangible book value to new investors.
Assumed initial public offering price per share |
$ | |||||||
Pro forma net tangible book value per share as of June 20, 2011 |
$ | |||||||
Increase per share attributable to new investors |
||||||||
Pro forma as adjusted net tangible book value per share after this offering |
||||||||
Dilution per share to new investors |
$ | |||||||
A $1.00 increase (or decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (or decrease) our pro forma as adjusted net tangible book value by $ million, or $ per share, and would increase (or decrease) the dilution per share to new investors by $ , assuming the number of shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
The following table summarizes as of June 20, 2011, on an as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by the existing stockholders (including J.H. Whitney VI and the equity grant recipients) and to be paid by new investors, based upon an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and offering expenses payable by us:
|
Shares Purchased | Total Consideration | |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Price Per Share | |||||||||||||||
|
Number | Percent | Amount | Percent | ||||||||||||
Existing stockholders |
% | $ | % | $ | ||||||||||||
New investors |
||||||||||||||||
Total |
100 | % | $ | 100 | % | |||||||||||
A $1.00 increase (or decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (or decrease) the total consideration paid by new investors and the total average price per share by approximately
38
$ and $ , respectively, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same.
Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters' option to purchase additional shares. If the underwriters' option to purchase additional shares is exercised in full, our existing stockholders would own approximately % and our new investors would own approximately % of the total number of shares of our common stock outstanding after this offering.
The discussion and tables above also exclude an aggregate of shares of common stock reserved for issuance under our equity incentive plan that we intend to adopt in connection with this offering.
39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table provides a summary of our historical and unaudited pro forma consolidated financial and operating data for the periods and as of the dates indicated. We derived the statement of operations data presented below for the fiscal years ended December 29, 2008, December 28, 2009 and January 3, 2011 and selected balance sheet data presented below as of December 28, 2009 and January 3, 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The selected statement of operations data for the period from November 17, 2006 through January 1, 2007 and for the fiscal year ended December 31, 2007 and the selected balance sheet data as of January 1, 2007, December 31, 2007 and December 29, 2008 have been derived from audited consolidated financial statements not included in this prospectus. We derived the statement of operations data for the twenty-four weeks ended June 14, 2010 and June 20, 2011 and the selected balance sheet data as of June 20, 2011, from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The unaudited pro forma consolidated financial data for the year ended January 3, 2011 and for the twenty-four weeks ended June 20, 2011 have been derived from our historical financial statements for such year and period, which are included elsewhere in this prospectus, after giving effect to the transactions specified under "Unaudited Pro Forma Condensed Consolidated Financial Statements."
On November 17, 2006, JCS Holdings, LLC acquired 120 of 136 Joe's Crab Shack restaurant locations from Landry's Restaurants, Inc. These 120 Joe's Crab Shack restaurant locations initially comprised our restaurant base and had not been operated by Landry's as a stand-alone business or as a distinguishable reporting unit. As a result, with respect to the predecessor period from January 2, 2006 to November 16, 2006, we do not have any data regarding general and administrative expenses, interest expense, tax expense, preopening expenses, and gains/losses on disposition of fixed assets, and have limited data on depreciation expenses. In addition, determining the associated debt levels and appropriate capital structure that should be attributed to these initial restaurants for the predecessor period from January 2, 2006 through November 16, 2006 is impossible. Further, assets and liabilities were recorded in legal entities based on the functional nature of the liability and were not often attributed to a specific restaurant location or restaurant brand. For these reasons and given the amount of time that has passed from this reporting period, we do not believe that the selected financial data attributable to these initial restaurants in the predecessor period from January 2 through November 16, 2006 can be created without unreasonable effort and expense and to the degree of accuracy that is necessary to prepare accurate financial data disclosure.
We believe the financial information included in this prospectus, taken as a whole, will provide potential investors with a thorough understanding of our financial condition, results of operations and general business trends. As a result, we believe that the omission of selected financial information for the predecessor period from January 2, 2006 through November 16, 2006 will not have a material impact on potential investors' understanding of our financial results and condition and related trends.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our audited consolidated financial statements and our unaudited condensed consolidated financial statements and each of their related notes included elsewhere in this prospectus.
40
|
|
|
|
|
|
Twenty-Four Weeks Ended |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period from November 17, 2006 through January 1, 2007 |
Fiscal Year Ended | |||||||||||||||||||||
|
December 31, 2007 |
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
|||||||||||||||||
|
(dollars in thousands, except per share data) |
||||||||||||||||||||||
Statement of Operations Data: |
|||||||||||||||||||||||
Revenues |
$ | 27,425 | $ | 273,461 | $ | 273,359 | $ | 307,801 | $ | 351,327 | $ | 160,407 | $ | 190,619 | |||||||||
Restaurant operating costs |
|||||||||||||||||||||||
Cost of sales |
6,938 | 75,711 | 80,573 | 89,845 | 103,981 | 47,244 | 59,523 | ||||||||||||||||
Labor and benefits |
9,894 | 87,290 | 80,604 | 87,920 | 98,162 | 45,446 | 52,546 | ||||||||||||||||
Occupancy expenses |
607 | 14,970 | 21,610 | 25,243 | 27,440 | 12,438 | 13,666 | ||||||||||||||||
Other operating expenses |
6,388 | 59,516 | 57,210 | 58,140 | 63,963 | 29,642 | 33,382 | ||||||||||||||||
General and administrative |
2,227 | 15,163 | 15,383 | 18,765 | 20,852 | 9,563 | 11,172 | ||||||||||||||||
Depreciation and amortization |
1,728 | 14,018 | 13,898 | 12,733 | 13,435 | 5,927 | 6,896 | ||||||||||||||||
Pre-opening costs |
| 25 | 779 | 1,323 | 3,844 | 1,367 | 1,886 | ||||||||||||||||
Restaurant impairments and closures |
| 148 | 680 | 15 | 909 | 98 | 37 | ||||||||||||||||
Loss (gain) on disposal of property and equipment |
| | 84 | 1,017 | 2,797 | (1 | ) | (4 | ) | ||||||||||||||
Total costs and expenses |
27,782 | 266,841 | 270,821 | 295,001 | 335,383 | 151,724 | 179,104 | ||||||||||||||||
(Loss) income from operations |
(357 | ) | 6,620 | 2,538 | 12,800 | 15,944 | 8,683 | 11,515 | |||||||||||||||
Interest expense, net |
(1,473 | ) | (10,510 | ) | (5,659 | ) | (3,867 | ) | (3,936 | ) | (1,767 | ) | (4,655 | ) | |||||||||
Gain on insurance settlements |
| | | 1,192 | 944 | 172 | | ||||||||||||||||
(Loss) income before income taxes |
(1,830 | ) | (3,890 | ) | (3,121 | ) | 10,125 | 12,952 | 7,088 | 6,860 | |||||||||||||
Income tax expense |
| 107 | 90 | 255 | 1,388 | 1,716 | 1,964 | ||||||||||||||||
Net (loss) income |
$ | (1,830 | ) | $ | (3,997 | ) | $ | (3,211 | ) | $ | 9,870 | $ | 11,564 | $ | 5,372 | $ | 4,896 | ||||||
Per Share Data: |
|||||||||||||||||||||||
Net (loss) income per share: |
|||||||||||||||||||||||
Basic |
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Diluted |
|||||||||||||||||||||||
Weighted average shares outstanding: |
|||||||||||||||||||||||
Basic |
|||||||||||||||||||||||
Diluted |
|||||||||||||||||||||||
Pro Forma Statement of Operations Data(1): |
|||||||||||||||||||||||
Pro forma net income |
$ | $ | |||||||||||||||||||||
Pro forma net income per share: |
|||||||||||||||||||||||
Basic |
$ | $ | |||||||||||||||||||||
Diluted |
$ | $ | |||||||||||||||||||||
Pro forma weighted average shares outstanding: |
|||||||||||||||||||||||
Basic |
|||||||||||||||||||||||
Diluted |
|||||||||||||||||||||||
Selected Other Data: |
|||||||||||||||||||||||
Restaurants open at end of period |
120 | 119 | 116 | 119 | 126 | 123 | 133 | ||||||||||||||||
Change in comparable restaurant sales(2) |
(8.7 | )% | (10.2 | )% | 1.9 | % | 9.5 | % | 4.9 | % | 4.1 | % | 7.6 | % | |||||||||
Average weekly sales |
$ | 38 | $ | 44 | $ | 45 | $ | 51 | $ | 54 | 55 | 61 | |||||||||||
Average unit volumes |
* | $ | 2,294 | $ | 2,354 | $ | 2,599 | $ | 2,810 | 1,277 | 1,444 | ||||||||||||
Restaurant-level profit margin(3) |
13.2 | % | 13.0 | % | 12.6 | % | 15.5 | % | 16.7 | % | 16.3 | % | 16.7 | % | |||||||||
EBITDA(4) |
$ | 1,371 | $ | 20,638 | $ | 16,436 | $ | 26,725 | $ | 30,323 | 14,782 | 18,411 | |||||||||||
Adjusted EBITDA(4) |
$ | 1,401 | $ | 23,325 | $ | 20,314 | $ | 30,276 | $ | 39,692 | 17,376 | 21,870 | |||||||||||
Adjusted EBITDA margin(5) |
5.1 | % | 8.5 | % | 7.4 | % | 9.8 | % | 11.3 | % | 10.8 | % | 11.5 | % | |||||||||
Capital expenditures |
$ | 147 | $ | 6,073 | $ | 7,576 | $ | 18,348 | $ | 33,010 | 11,606 | 18,323 |
- *
- Not meaningful.
41
|
January 1, 2007 |
December 31, 2007 |
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 20, 2011 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
||||||||||||||||||
Selected Balance Sheet Data: |
|||||||||||||||||||
Cash and cash equivalents |
$ | 6,574 | $ | 5,257 | $ | 5,110 | $ | 4,976 | $ | 12,572 | $ | 13,697 | |||||||
Working capital (deficit) |
(15,340 | ) | (13,781 | ) | (2,739 | ) | 3,837 | (2,000 | ) | (8,562 | ) | ||||||||
Total assets(6) |
216,115 | 206,587 | 126,318 | 130,854 | 156,850 | 177,825 | |||||||||||||
Total debt |
115,743 | 114,722 | 35,381 | 34,988 | 34,833 | 119,272 | |||||||||||||
Total stockholder's equity |
$ | 71,066 | $ | 67,069 | $ | 67,678 | $ | 77,696 | $ | 89,714 | $ | 14,916 |
- (1)
- Derived
from our unaudited pro forma condensed consolidated statement of operations for the fiscal year ended January 3, 2011 and the twenty-four
weeks ended June 20, 2011, which are included elsewhere in this prospectus. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
- (2)
- Our
comparable restaurant base includes restaurants open for at least 104 weeks, or approximately 24 months. Change in comparable restaurant
sales represents the change in period-over-period sales for the comparable restaurant base.
- (3)
- Restaurant-level profit margin represents revenues (x) less (i) licensing revenue not attributable to core restaurant operations, (ii) cost of sales, (iii) labor and benefits, (iv) occupancy expenses, and (v) other operating expenses (y) plus non-cash rent, as defined in 4(a) below. Restaurant-level profit is a supplemental measure of operating performance of our restaurants that does not represent and should not be considered as an alternative to net income or revenues as determined by U.S. generally accepted accounting principles, or U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. Restaurant-level profit has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Management believes restaurant-level profit is an important component of financial results because it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant-level profit as a key metric to evaluate our financial performance compared with our competitors, to evaluate the profitability of incremental sales and to evaluate our performance across periods.
|
|
|
|
|
|
Twenty-Four Weeks Ended |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period from November 17, 2006 through January 1, 2007 | Fiscal Year Ended | |||||||||||||||||||||
|
December 31, 2007 |
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
|||||||||||||||||
|
(dollars in thousands) |
||||||||||||||||||||||
Revenues |
$ | 27,425 | $ | 273,461 | $ | 273,359 | $ | 307,801 | $ | 351,327 | $ | 160,407 | $ | 190,619 | |||||||||
Less: Licensing and other revenues |
| (94 | ) | (64 | ) | (89 | ) | (373 | ) | (78 | ) | (249 | ) | ||||||||||
Restaurant sales(A) |
$ | 27,425 | $ | 273,367 | $ | 273,295 | $ | 307,712 | $ | 350,954 | $ | 160,329 | $ | 190,370 | |||||||||
Restaurant operating costs |
|||||||||||||||||||||||
Cost of sales |
6,938 | 75,711 | 80,573 | 89,845 | 103,981 | 47,244 | 59,523 | ||||||||||||||||
Labor and benefits |
9,894 | 87,290 | 80,604 | 87,920 | 98,162 | 45,446 | 52,546 | ||||||||||||||||
Occupancy expenses |
607 | 14,970 | 21,610 | 25,243 | 27,440 | 12,438 | 13,666 | ||||||||||||||||
Other operating expenses |
6,388 | 59,516 | 57,210 | 58,140 | 63,963 | 29,642 | 33,382 | ||||||||||||||||
Deferred rent |
(30 | ) | (300 | ) | (1,017 | ) | (1,162 | ) | (1,322 | ) | (637 | ) | (606 | ) | |||||||||
Restaurant-level profit(B) |
$ | 3,628 | $ | 36,180 | $ | 34,315 | $ | 47,726 | $ | 58,730 | $ | 26,196 | $ | 31,859 | |||||||||
Restaurant-level profit margin(B÷A) |
13.2 | % | 13.2 | % | 12.6 | % | 15.5 | % | 16.7 | % | 16.3 | % | 16.7 | % |
- (4)
- EBITDA
represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and
eliminations described in the table below. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net
income or cash flow from operations, as determined by U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. EBITDA and Adjusted EBITDA have
limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations
are:
-
- EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual commitments;
-
- EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
42
-
- EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal payments on our debt;
-
- EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements
to pay our taxes;
-
- although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the future, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
-
- other companies in the restaurant industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
-
- as a measurement of operating performance because they assist us in comparing the
operating performance of our restaurants on a consistent basis, as both remove the impact of items not directly resulting from our core operations;
-
- for planning purposes, including the preparation of our internal annual operating
budget and financial projections;
-
- to evaluate the performance and effectiveness of our operational strategies;
-
- to evaluate our capacity to fund capital expenditures and expand our business; and
-
- to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementally. We further believe that our presentation of these U.S. GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the strength of our operations and the performance of our core business.
As noted in the table below, Adjusted EBITDA includes adjustments for restaurant impairments and closures, gains and losses on disposal of property and equipment, gains on insurance settlements and pre-opening costs, among other items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record following this offering, such as sponsor management fees. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day restaurant-level operations.
Management and our principal stockholder use EBITDA and Adjusted EBITDA:
In addition, this measurement is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back events that are not part of normal day-to-day operations of our business. By providing this non-GAAP financial measure, together with reconciliations, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.
We also present Adjusted EBITDA because it is a measure which is used in calculating financial ratios in material debt covenants in our senior secured credit facility. As of June 20, 2011, we had $119.3 million of outstanding borrowings under the term loan and the ability to borrow up to an additional $23.6 million under the revolving credit facility. Failure to comply with our material debt covenants could cause an acceleration of outstanding amounts under the term loan and restrict us from borrowing amounts under the revolving credit facility to fund our future liquidity requirements. For the fiscal quarter ended June 20, 2011, we are required to maintain a fixed charge coverage ratio (ratio of free cash flow to fixed charges) of 1.40:1 and an effective leverage ratio (ratio of adjusted debt to Adjusted EBITDA plus cash rent expense) of less than 5.50:1. We believe that inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about how the covenants in those agreements operate. The material covenants in our senior secured credit facility are discussed further in "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."
43
Adjusted EBITDA is calculated as follows:
|
|
|
|
|
|
Twenty-Four Weeks Ended |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period from November 17, 2006 through January 1, 2007 | Fiscal Year Ended | ||||||||||||||||||||
|
December 31, 2007 |
December 29, 2008 |
December 28, 2009 |
January 3, 2011 |
June 14, 2010 |
June 20, 2011 |
||||||||||||||||
|
(in thousands) |
|||||||||||||||||||||
Net (loss) income |
$ | (1,830 | ) | $ | (3,997 | ) | $ | (3,211 | ) | $ | 9,870 | $ | 11,564 | $ | 5,372 | $ | 4,896 | |||||
Income tax expense |
| 107 | 90 | 255 | 1,388 | 1,716 | 1,964 | |||||||||||||||
Interest expense, net |
1,473 | 10,510 | 5,659 | 3,867 | 3,936 | 1,767 | 4,655 | |||||||||||||||
Depreciation and amortization |
1,728 | 14,018 | 13,898 | 12,733 | 13,435 | 5,927 | 6,896 | |||||||||||||||
EBITDA |
$ | 1,371 | $ | 20,638 | $ | 16,436 | $ | 26,725 | $ | 30,323 | $ | 14,782 | $ | 18,411 | ||||||||
Adjustments: |
||||||||||||||||||||||
Deferred rent(a) |
30 | 300 | 1,017 | 1,162 | 1,322 | 637 | 606 | |||||||||||||||
Restaurant impairments and closures (b) |
| 148 | 680 | 15 | 909 | 98 | 37 | |||||||||||||||
Loss (gain) on disposal of property and equipment(c) |
| | 84 | 1,017 | 2,797 | (1 | ) | (4 | ) | |||||||||||||
Sponsor management fees(d) |
| 529 | 1,112 | 1,120 | 1,139 | 526 | 545 | |||||||||||||||
Gain on insurance settlements(e) |
| | | (1,192 | ) | (944 | ) | (172 | ) | | ||||||||||||
Pre-opening costs(f) |
| 25 | 779 | 1,323 | 3,844 | 1,367 | 1,886 | |||||||||||||||
Other expenses(g) |
| 1,685 | 206 | 106 | 302 | 139 | 389 | |||||||||||||||
Adjusted EBITDA |
$ | 1,401 | $ | 23,325 | $ | 20,314 | $ | 30,276 | $ | 39,692 | $ | 17,376 | $ | 21,870 | ||||||||
- (a)
- Deferred
rent represents the non-cash rent expense calculated as the difference in U.S. GAAP rent expense in any year and amounts payable
in cash under the leases during the year. In measuring our operational performance, we focus on our cash rent payments. See Note 2 to our audited consolidated financial statements for
additional details.
- (b)
- Impairment
charges were recorded in connection with the determination that the carrying value of certain of our restaurants exceeded their estimated fair
value. Also consists of expenses incurred following the closure of restaurants. See Notes 2 and 3 to our audited consolidated financial statements for additional details.
- (c)
- Loss
(gain) on disposal of property and equipment represents the net book value of property and equipment less proceeds received, if applicable, on assets
abandoned or sold.
- (d)
- Sponsor
management fees consist of fees and expenses paid to J.H. Whitney under the management services agreement, and compensation and expenses paid
to certain members of the management committee of our parent company, JCS Holdings, LLC. We will terminate this agreement in connection with the completion of this offering. See "Certain
Relationships and Related Party Transactions."
- (e)
- Gain
on insurance settlements consists of proceeds in excess of the net book value of assets lost and related costs from property insurance claims at
restaurants temporarily closed due to hurricane damage, flooding and/or foundational issues.
- (f)
- Pre-opening
costs include expenses directly associated with the opening of new restaurants and are incurred prior to the opening of a new
restaurant. See Note 2 to our audited consolidated financial statements for additional details.
- (g)
- Other expenses consists of costs related to abandoned new restaurant developments, fees payable to the agent under historic credit facilities, certain transitional general and administrative expenses, and expenses related to the modification of a sale-leaseback transaction.
- (5)
- Adjusted
EBITDA margin is defined as the ratio of Adjusted EBITDA to total revenues. We present Adjusted EBITDA margin because it is used by management as a
performance measurement of Adjusted EBITDA generated from total revenues. See footnote 4 above for a discussion of Adjusted EBITDA as a non-GAAP measurement and a reconciliation of net
income (loss) to EBITDA and Adjusted EBITDA.
- (6)
- In March 2007, property and improvements for 29 restaurants were sold in a sale-leaseback financing transaction accounted for as capital leases. In April 2008, all these leases were modified and were subsequently treated as operating leases. At that time $79.0 million in property and improvement and $78.2 million in capital lease obligations were removed from the consolidated balance sheet.
44
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements as of June 20, 2011, for the fiscal year ended January 3, 2011, and for the twenty-four weeks ended June 20, 2011, have been derived from our historical consolidated financial statements included elsewhere in this prospectus.
The unaudited pro forma condensed consolidated balance sheet as of June 20, 2011 gives effect to (i) the termination of our management agreement with J.H. Whitney in connection with this public offering and (ii) the issuance of common stock in this public offering and the application of the net proceeds therefrom as described in "Use of Proceeds," as if each had occurred on June 20, 2011. No adjustments have been made related to the refinancing of our senior credit facility and the dividend payment described below, as these transactions are already reflected in the June 20, 2011 unaudited condensed consolidated balance sheet.
The unaudited pro forma condensed consolidated statements of operations for the fiscal year ended January 3, 2011 and for the twenty-four weeks ended June 20, 2011 give effect to (i) adjustments not related to this public offering, including adjustments (a) for the March 2011 refinancing of our senior credit facility and (b) the termination of our management agreement with J.H. Whitney in connection with this offering and (ii) the issuance of common stock in this public offering and the application of the net proceeds therefrom as described in "Use of Proceeds," as if each had occurred on the first day of fiscal year 2010. No adjustment has been made related to the $80.0 million dividend distribution to our parent company in March 2011, as this transaction would have no impact on the consolidated statement of operations.
The audited pro forma condensed consolidated financial statements are presented for informational purposes only and do not purport to represent our actual financial condition or results of operations if such transactions had been completed as of the dates or for the periods indicated above or that may be achieved as of any future date or for any future period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the accompanying notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our historical consolidated financial statements and accompanying notes included elsewhere in this prospectus.
45
Unaudited Pro Forma Condensed Consolidated Balance Sheet
June 20, 2011
(in thousands)
|
Historical As Reported June 20, 2011 |
Termination of Management Agreement |
Pro Forma for Termination of Management Agreement June 20, 2011 |
Adjustments Related to Offering |
Pro Forma June 20, 2011 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||||||||||
Current assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 13,697 | (1 | ) | $ | 13,697 | (4 | ) | $ | 13,697 | ||||||||
Accounts receivable |
7,776 | 7,776 | 7,776 | |||||||||||||||
Inventories |
4,950 | 4,950 | 4,950 | |||||||||||||||
Deferred tax assets |
375 | 375 | 375 | |||||||||||||||
Prepaid rent and other current assets |
4,260 | (2 | ) | 4,260 | (5 | ) | 4,260 | |||||||||||
Total current assets |
31,058 | 31,058 | 31,058 | |||||||||||||||
Property and equipment, net |
137,845 | 137,845 | 137,845 | |||||||||||||||
Intangible assets, net |
2,436 | 2,436 | 2,436 | |||||||||||||||
Deferred charges, net |
5,078 | 5,078 | (6 | ) | 5,078 | |||||||||||||
Other assets |
1,408 | 1,408 | 1,408 | |||||||||||||||
Total assets |
$ | 177,825 | $ | 177,825 | $ | 177,825 | ||||||||||||
LIABILITIES AND STOCKHOLDER'S EQUITY |
||||||||||||||||||
Current liabilities |
||||||||||||||||||
Accounts payable |
$ | 16,542 | $ | 16,542 | $ | 16,542 | ||||||||||||
Accrued liabilities |
20,056 | 20,056 | 20,056 | |||||||||||||||
Current portion of debt obligations |
3,022 | 3,022 | 3,022 | |||||||||||||||
Total current liabilities |
39,620 | 39,620 | 39,620 | |||||||||||||||
Long-term debt obligations |
116,250 | 116,250 | (7 | ) | 116,250 | |||||||||||||
Deferred rent |
4,808 | 4,808 | 4,808 | |||||||||||||||
Deferred tax liabilities |
1,864 | 1,864 | 1,864 | |||||||||||||||
Other long-term liabilities |
367 | 367 | 367 | |||||||||||||||
Total liabilities |
162,909 | 162,909 | 162,909 | |||||||||||||||
Stockholder's equity |
||||||||||||||||||
Common stock |
1 | 1 | (8 | ) | 1 | |||||||||||||
Additional paid-in capital |
11,684 | 11,684 | (8 | ) | 11,684 | |||||||||||||
Accumulated earnings |
3,231 | (3 | ) | 3,231 | (9 | ) | 3,231 | |||||||||||
Total stockholder's equity |
14,916 | 14,916 | 14,916 | |||||||||||||||
Total liabilities and stockholder's equity |
$ | 177,825 | | $ | 177,825 | | $ | 177,825 | ||||||||||
Termination of Management Agreement
- (1)
- To
reflect cash that will be paid to terminate the management agreement between our parent, JCS Holdings LLC, and J.H. Whitney in connection
with this public offering of approximately $ million.
- (2)
- To
adjust prepaid income taxes to reflect a tax benefit of $ related to the recognition of the termination fee for the management agreement
with J.H. Whitney, calculated at an estimated statutory tax rate of 35%.
- (3)
- To
reflect the expense for the $ termination fee related to the management agreement with J.H. Whitney, net of a tax benefit of
$ calculated using an estimated statutory tax rate of 35%.
Adjustments Related to the Offering
- (4)
- To reflect adjustments made to cash for the following:
Proceeds from this offering |
$ | |||
Less: estimated fees and expenses related to this offering |
||||
Less: prepayment of a portion of our existing senior secured credit facility |
||||
|
$ | |||
- (5)
- To adjust prepaid income taxes to reflect the recording of a tax benefit related to the writeoff of unamortized debt issuance costs, as calculated in note 6 below, calculated at an estimated statutory tax rate of 35%.
46
- (6)
- To
reflect the writeoff of a portion of the unamortized debt issuance costs in connection with the prepayment of debt.
- (7)
- To
reflect the prepayment of $ million of our existing senior secured credit facility.
- (8)
- The adjustments to additional paid-in capital are summarized as follows:
Proceeds from this offering (a) |
$ | |||
Less: estimated fees and expenses related to this offering |
||||
Less: par value of common stock in this offering (b) |
||||
Additional paid-in capital on shares issued in this offering |
$ | |||
- (a)
- To
reflect the issuance of shares of our common stock in this public offering at an assumed initial public
offering price of
$ per share, the midpoint of the price range set forth on the cover of this prospectus.
- (b)
- To
reflect the increase to common stock for the par value of $1.00 per share for shares issued in this public
offering.
- (9)
- To reflect a $ after-tax loss on writeoff of unamortized debt issuance costs as discussed in notes 5 and 6.
47
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Fiscal Year Ended January 3, 2011
(dollars in thousands, except per share amounts)
|
|
|
|
Pro Forma for Other Transactions Fiscal Year Ended January 3, 2011 |
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Historical As Reported Fiscal Year Ended January 3, 2011 |
Adjustments for Other Transactions | |
|
|||||||||||||||||
|
|
Pro Forma Fiscal Year Ended January 3, 2011 |
|||||||||||||||||||
|
Debt Refinancing |
Termination of Management Agreement |
Adjustments Related to Offering |
||||||||||||||||||
Revenues |
$ | 351,327 | $ | 351,327 | $ | 351,327 | |||||||||||||||
Costs and expenses |
|||||||||||||||||||||
Restaurant operating costs and expenses |
|||||||||||||||||||||
Cost of sales |
103,981 | 103,981 | 103,981 | ||||||||||||||||||
Labor and benefits |
98,162 | 98,162 | 98,162 | ||||||||||||||||||
Occupancy expenses |
27,440 | 27,440 | 27,440 | ||||||||||||||||||
Other operating expenses |
63,963 | 63,963 | 63,963 | ||||||||||||||||||
General and administrative |
20,852 | (1,025 | )(3) | 19,827 | 19,827 | ||||||||||||||||
Depreciation and amortization |
13,435 | 13,435 | 13,435 | ||||||||||||||||||
Pre-opening costs |
3,844 | 3,844 | 3,844 | ||||||||||||||||||
Restaurant impairments and closures |
909 | 909 | 909 | ||||||||||||||||||
Loss on disposal of property and equipment |
2,797 | 2,797 | 2,797 | ||||||||||||||||||
Total costs and expenses |
335,383 | (1,025 | ) | 334,358 | 334,358 | ||||||||||||||||
Income from operations |
15,944 | 1,025 | 16,969 | 16,969 | |||||||||||||||||
Interest expense, net |
(3,936 | ) | (4,513 | )(1) | (8,449 | ) | (4) | (8,449 | ) | ||||||||||||
Gain on insurance settlements |
944 | 944 | 944 | ||||||||||||||||||
Income (loss) before income taxes |
12,952 | (4,513 | ) | 1,025 | 9,464 | 9,464 | |||||||||||||||
Income tax expense (benefit) |
1,388 | (1,580 | )(2) | 359 | (2) | 167 | (2) | 167 | |||||||||||||
Net income (loss) |
$ | 11,564 | $ | (2,933 | ) | $ | 666 | $ | 9,297 | $ | | $ | 9,297 | ||||||||
Pro forma net income per share: |
|||||||||||||||||||||
Basic |
$ | (5 | ) | ||||||||||||||||||
Diluted |
$ | (5 | ) | ||||||||||||||||||
Pro forma weighted average shares outstanding: |
|||||||||||||||||||||
Basic |
(5 | ) | |||||||||||||||||||
Diluted |
(5 | ) |
Debt Refinancing
- (1)
- The adjustments related to the debt refinancing and payment of a dividend to our parent reflect the impact on interest expense as if the March 2011 transactions had occurred on the first day of fiscal year 2010. Proceeds of $120.0 million from the new senior credit facility were used to repay the prior credit facility and pay an $80.0 million dividend to our parent company. Pro forma adjustments were as follows:
Increase in interest expense for new credit facility(a) |
$ | 7,434 | ||
Elimination of historical interest expense on prior credit facility and interest rate swap |
(3,093 | ) | ||
Elimination of historical amortization on debt issuance costs on prior credit facility |
(754 | ) | ||
Increase in amortization on debt issuance costs on new credit facility |
926 | |||
|
$ | 4,513 | ||
- (a)
- Interest
expense on the new credit facility is calculated based on an annual rate of 6.75% for the first seven days and 6.25% for the balance of the fiscal
year. Our current LIBOR-based borrowings are subject to an interest rate floor of 150 basis points. Prevailing interest rates would have to increase by approximately 130 basis points to exceed the
floor and the interest rate at June 20, 2011, before our interest rate would change.
- (2)
- To
reflect the tax effect of the pro forma adjustments at an estimated statutory rate of 35%.
Termination of Management Agreement
- (3)
- To reflect a reduction of $1.0 million annually as a result of the termination of the management agreement with J.H. Whitney. Upon completion of this public offering, we expect to incur an expense of approximately $ within
48
general and administrative expenses and a corresponding tax benefit of $ related to the termination of the management agreement, which have been excluded from the pro forma condensed consolidated statement of operations.
Adjustments Related to the Offering
- (4)
- Had the offering occurred on the first day of fiscal year 2010, we would have used $ million of the proceeds to prepay a portion of our new senior secured credit facility. The adjustments related to the offering reflect the reduction of interest expense resulting from this pro forma prepayment and are as follows:
Reduction in interest expense from lower balance outstanding |
$ | |||
Reduction in amortization of debt issuance costs due to prepayment amount |
||||
|
$ | | ||
- (5)
- Reflects
adjustments to outstanding common stock as if the initial public offering was completed at the beginning of fiscal year 2010. Immediately after the
completion of this public offering, JCS Holdings, LLC, our parent company, will liquidate and distribute the shares of our common stock then held by it and/or the cash proceeds received in this
public offering to the holders of its Series A preferred units and its vested common units. Following this public offering, we will issue restricted shares of our common stock to certain
members of our management and independent directors who hold unvested common units as a replacement for such unvested common units, which will be subject to substantially identical vesting conditions.
The number of restricted shares of our common stock issued will be based on the ratio of unvested common units to vested common units multiplied by the number of our shares of our common stock
received in the liquidation of our parent company.
Basic net income per share is computed on the basis of the weighted average number of common shares that were outstanding during the period. Diluted net income per share includes the dilutive effect of restricted common shares, using the treasury stock method. Shares to be sold in the public offering are included in the pro forma basic and diluted net income per share calculations. The following table sets forth the computation of pro forma basic and diluted net income per share based on an offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus:
|
Basic | Diluted | ||||||
---|---|---|---|---|---|---|---|---|
Pro forma net income (in thousands) |
$ | $ | ||||||
Pro forma weighted average number of shares: |
||||||||
Weighted average number of existing shares |
||||||||
Shares issued in this offering |
||||||||
Pro forma weighted average number of common shares |
||||||||
Pro forma net income per share |
$ | $ |
As the number of restricted shares of our common stock to be issued is determined based on the initial public offering price, the pro forma diluted weighted average number of shares, and therefore pro forma diluted net income per share, would change if the offering price is not $ per share. The following table sets forth the impact of a change in the offering price on the number of restricted shares of our common stock, pro forma weighted average number of shares, and pro forma net income per share:
Offering price per share |
$ | $ | $ | $ | $ | |||||||||||
Restricted shares of common issued |
||||||||||||||||
Pro forma weighted average number of sharesbasic |
||||||||||||||||
Pro forma weighted average number of sharesdiluted |
||||||||||||||||
Pro forma net income per sharebasic |
$ | $ | $ | $ | $ | |||||||||||
Pro forma net income per sharediluted |
$ | $ | $ | $ | $ |
49
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Twenty-Four Weeks Ended June 20, 2011
(dollars in thousands, except per share amounts)
|
|
Adjustments for Other Transactions | |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Pro Forma for Other Transactions Twenty-Four Weeks Ended June 20, 2011 |
|
|
|||||||||||||||||
|
Historical As Reported Twenty-Four Weeks Ended June 20, 2011 |
Debt Refinancing |
Termination of Management Agreement |
Adjustments Related to Offering |
Pro Forma Twenty-Four Weeks Ended June 20, 2011 |
||||||||||||||||
Revenues |
$ | 190,619 | $ | 190,619 | $ | 190,619 | |||||||||||||||
Costs and expenses |
|||||||||||||||||||||
Restaurant operating costs and expenses |
|||||||||||||||||||||
Cost of sales |
59,523 | 59,523 | 59,523 | ||||||||||||||||||
Labor and benefits |
52,546 | 52,546 | 52,546 | ||||||||||||||||||
Occupancy expenses |
13,666 | 13,666 | 13,666 | ||||||||||||||||||
Other operating expenses |
33,382 | 33,382 | 33,382 | ||||||||||||||||||
General and administrative |
11,172 | (489) | (3) | 10,683 | 10,683 | ||||||||||||||||
Depreciation and amortization |
6,896 | 6,896 | 6,896 | ||||||||||||||||||
Pre-opening costs |
1,886 | 1,886 | 1,886 | ||||||||||||||||||
Restaurant impairments and closures |
37 | 37 | 37 | ||||||||||||||||||
Gain on disposal of property and equipment |
(4 | ) | (4 | ) | (4 | ) | |||||||||||||||
Total costs and expenses |
179,104 | (489 | ) | 178,615 | 178,615 | ||||||||||||||||
Income from operations |
11,515 | 489 | 12,004 | 12,004 | |||||||||||||||||
Interest expense |
(4,655 | ) | 527 | (1) | (4,128 | ) | (4) | (4,128 | ) | ||||||||||||
Income (loss) before income taxes |
6,860 | 527 | 489 | 7,876 | 7,876 | ||||||||||||||||
Income tax expense |
1,964 | 184 | (2) | 171 | (2) | 2,319 | (2) | 2,319 | |||||||||||||
Net income (loss) |
$ | 4,896 | $ | 343 | $ | 318 | $ | 5,557 | $ | | $ | 5,557 | |||||||||
Pro forma net income per share: |
|||||||||||||||||||||
Basic |
$ | (5) | |||||||||||||||||||
Diluted |
$ | (5) | |||||||||||||||||||
Pro forma weighted average shares outstanding: |
|||||||||||||||||||||
Basic |
(5) | ||||||||||||||||||||
Diluted |
(5) |
Debt Refinancing
- (1)
- The adjustments related to the debt refinancing and payment of a dividend to our parent reflect the impact on interest expense as if the March 2011 transactions had occurred on the first day of fiscal year 2010 and carried forward through June 20, 2011. Proceeds of $120.0 million from the new senior credit facility were used to repay the prior credit facility and pay an $80.0 million dividend to our parent company. Pro forma adjustments were as follows:
Increase in interest expense for new credit facility |
$ | 1,688 | ||
Elimination of historical interest expense on prior credit facility and interest rate swap |
(561 | ) | ||
Elimination of historical expense for termination of interest rate swap |
(427 | ) | ||
Elimination of historical writeoff of unamortized debt issuance costs on prior credit facility |
(1,266 | ) | ||
Elimination of historical amortization on debt issuance costs on prior credit facility |
(171 | ) | ||
Increase in amortization on debt issuance costs on new credit facility |
210 | |||
|
$ | (527 | ) | |
- (2)
- To reflect the tax effect of the pro forma adjustments at an estimated statutory rate of 35%.
50
Termination of Management Agreement
- (3)
- To
reflect a reduction of $0.5 million as a result of the termination of the management agreement with J. H. Whitney. Upon completion of this public
offering, we expect to incur an expense of approximately $ within general and administrative expenses and a corresponding tax benefit of
$ related to the termination of
the management agreement, which have been excluded from the pro forma condensed consolidated statement of operations.
Adjustments Related to the Offering
- (4)
- Had the offering occurred on the first day of fiscal year 2010, we would have used $ million of the proceeds to prepay a portion of our new senior secured credit facility. The adjustments related to the offering reflect the reduction of interest expense resulting from this pro forma prepayment and are as follows:
Reduction in interest expense from lower balance outstanding |
$ | |||
Reduction in amortization of debt issuance costs due to prepayment amount |
||||
|
$ | | ||
- (5)
- Reflects
adjustments to outstanding common stock as if the initial public offering was completed at the beginning of fiscal year 2010. Immediately after the
completion of this public offering, JCS Holdings, LLC, our parent company, will liquidate and distribute the shares of our common stock then held by it and/or the cash proceeds received in this
public offering to the holders of its Series A preferred units and its vested common units. Following this public offering, we will issue restricted shares of our common stock to certain
members of our management and independent directors who hold unvested common units as a replacement for such unvested common units, which will be subject to substantially identical vesting conditions.
The number of restricted shares of our common stock issued will be based on the ratio of unvested common units to vested common units multiplied by the number of our shares of our common stock
received in the liquidation of our parent company.
- Basic net income per share is computed on the basis of the weighted average number of common shares that were outstanding during the period. Diluted net income per share includes the dilutive effect of restricted common shares, using the treasury stock method. Shares to be sold in the public offering are included in the pro forma basic and diluted net income per share calculations. The following table sets forth the computation of pro forma basic and diluted net income per share based on an offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus:
|
Basic | Diluted | ||||||
---|---|---|---|---|---|---|---|---|
Pro forma net income (in thousands) |
$ | $ | ||||||
Pro forma weighted average number of shares: |
||||||||
Weighted average number of existing shares |
||||||||
Shares issued in this offering |
||||||||
Pro forma weighted average number of common shares |
||||||||
Pro forma net income per share |
$ | $ |
- As the number of resticted shares of our common stock to be issued is determined based on the initial public offering price, the pro forma diluted weighted average number of shares, and therefore pro forma diluted net income per share, would change if the offering price is not $ per share. The following table sets forth the impact of a change in the offering price on the number of restricted shares of our common stock, pro forma weighted average number of shares, and pro forma net income per share:
Offering price per share |
$ | $ | $ | $ | $ | |||||||||||
Restricted shares of common issued |
||||||||||||||||
Pro forma weighted average number of sharesbasic |
||||||||||||||||
Pro forma weighted average number of sharesdiluted |
||||||||||||||||
Pro forma net income per sharebasic |
$ | $ | $ | $ | $ | |||||||||||
Pro forma net income per sharediluted |
$ | $ | $ | $ | $ |
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Historical Consolidated Financial and Operating Data," and the historical financial statements and related notes included elsewhere in this prospectus. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors" and "Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends on the Monday nearest to December 31 of each year. Fiscal year 2010 was a 53-week year, while fiscal years 2009 and 2008 were 52-week years. References to fiscal years 2010, 2009 and 2008 are references to fiscal years ended January 3, 2011, December 28, 2009 and December 29, 2008, respectively. The first three quarters of our fiscal year consist of 12 weeks and our fourth quarter consists of 16 weeks for 52-week fiscal years and 17 weeks for 53-week fiscal years.
Overview
Ignite Restaurant Group, Inc. operates two restaurant businesses, Joe's Crab Shack and Brick House Tavern + Tap. Each of our restaurant businesses offers a variety of high-quality food in a distinctive, casual, high-energy atmosphere. Joe's Crab Shack and Brick House Tavern + Tap operate in a diverse set of markets across the United States. As of August 31, 2011, we owned and operated 118 Joe's and 17 Brick House restaurants in 32 states.
Joe's Crab Shack is an established, national chain of casual seafood restaurants. Joe's serves a variety of high-quality seafood items, with an emphasis on crab. Joe's is a high-energy, family-friendly restaurant that encourages guests to "roll up your sleeves and crack into some crab."
Brick House Tavern + Tap is a casual restaurant business that provides guests a differentiated "gastro pub" experience by offering a distinctive blend of menu items in a polished setting. Brick House seeks to strike a balance between providing guests with an elevated experience while also appealing to "every-man, every-day."
Since our acquisition from Landry's Restaurants, Inc. in 2006, we have implemented several initiatives that we believe have favorably impacted our performance at Joe's Crab Shack. These factors include improving our executive leadership team as well as management in our restaurants, expanding our marketing program from spot network to national cable advertising, innovating Joe's menu to increase our sales of crab related items and improving operational execution and efficiency. As a result of these initiatives, we have experienced 12 consecutive fiscal quarters of positive comparable restaurant sales growth and improved our financial results. We believe the initiatives undertaken at Joe's have also repositioned the brand as a market leading casual seafood restaurant.
While executing these initiatives at Joe's, we also developed and successfully launched a new restaurant brand, Brick House Tavern + Tap. With the addition of the Brick House brand, on July 7, 2009, we officially changed our name to Ignite Restaurant Group, Inc. The first two Brick House locations were opened in 2008 by converting former Joe's locations into Brick House locations. Based on the results of these two locations, we began opening Brick House locations as new restaurants. Brick House has since grown to 17 restaurants operating in 10 states, but remains a relatively small part of our business when compared to our Joe's Crab Shack brand. As of June 20, 2011, only two Brick House restaurants were open for at least 104 weeks, qualifying them for inclusion in our comparable restaurant base. For fiscal year 2010 and for the twenty-four weeks ended June 20, 2011, revenues from our Brick House brand were only 9% and 12%, respectively, of our total revenues. We expect that our
52
new restaurant growth will continue to be substantially weighted towards new Joe's restaurants for the foreseeable future, which will decrease the proportion of total revenues attributable to Brick House Tavern + Tap.
Outlook
We believe that a significant portion of the casual dining industry, particularly the traditional bar & grill segment, has become undifferentiated and the competitive landscape presents a significant growth opportunity for distinctive casual dining restaurants. Similar to the way the bar & grill segment emerged as an alternative to traditional family dining restaurants in the 1990's, we believe that distinctive casual dining restaurants like ours are now positioned to capture market share from conventional bar & grill restaurants. We intend to continue to position our restaurants to capitalize on that trend by constantly refining our brands, elevating food and service, and offering an aspirational experience to our guests. We expect that the casual dining segment will follow broader macroeconomic trends. However, over the past three fiscal years, we have substantially outperformed the rest of the casual dining segment in same store sales performance. We expect the factors above will continue to position our restaurant businesses favorably against our casual dining competitors.
As of August 31, 2011, we have opened five Joe's Crab Shack restaurants and four Brick House Tavern + Tap restaurants in fiscal year 2011. For the remainder of fiscal year 2011, we expect to open five additional Joe's Crab Shack restaurants.
Key Performance Indicators
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are comparable restaurant sales growth, average weekly sales, restaurant operating weeks, average check, average unit volume and number of restaurant openings.
Comparable Restaurant Sales Growth
Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for at least 104 weeks, or approximately 24 months. As of the fiscal years ended January 3, 2011 and December 28, 2009, there were 111 and 112 restaurants, respectively, in our comparable restaurant base. Comparable restaurant sales growth can be generated by an increase in guest counts and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights performance of existing restaurants as the impact of new restaurant openings is excluded.
As a result of the 53-week fiscal year 2010, our fiscal year 2011 began one week later than our 2010 fiscal year. Due to the seasonality and holiday sensitivity of our sales, this one week lag can have a significant impact on comparable restaurant sales. Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. In order to provide useful information to investors, we have provided the change in comparable restaurant sales on both a calendar-adjusted basis and a fiscal period basis. Comparable restaurant sales for the twenty-four weeks ended June 20, 2011 presented on a calendar-adjusted basis compares the results for the period from January 4, 2011 through June 20, 2011 (weeks 1 through 24 of fiscal year 2011) to the results for the period from January 5, 2010 through June 21, 2010 (weeks 2 through 25 of fiscal year 2010). We believe that comparable restaurant sales calculated on a calendar-adjusted basis is more indicative of the health of our business. However, we also recognize that comparable restaurant sales calculated on a fiscal period basis is a useful measure when analyzing year-over-year changes in
53
our consolidated financial statements. Unless noted otherwise, all references to comparable restaurant sales for the twenty-four weeks ended June 20, 2011 in this prospectus refer to comparable restaurant sales calculated on a calendar-adjusted basis.
Average Weekly Sales
Average weekly sales is a key measure of individual restaurant economic performance of new and existing restaurants. Average weekly sales reflects total sales of all restaurants divided by restaurant operating weeks, which is the aggregate number of weeks that restaurants are in operation over a specified period of time. This measure is subject to seasonality for periods less than one year.
Restaurant Operating Weeks
Restaurant operating weeks is the aggregate number of weeks that our restaurants are in operation over a specific period of time.
Average Check
Average check is calculated for Joe's by dividing net sales by guest counts for a given time period. Management uses this indicator to analyze the dollars spent in our Joe's restaurants per guest. This measure aids management in identifying trends in guest preferences, as well as the effectiveness of menu price increases and other menu changes.
Guest counts represent the estimated number of guests served in our Joe's Crab Shack restaurants. The count is estimated based on the number of entrées sold with a multiplier assigned to entrées that are commonly shared. Our estimates may vary from actual guest counts due to the variability in the level of sharing of certain entrée items on our menu. Given the significant level of alcohol sales and appetizer sales at Brick House, guest count is more difficult to quantify and therefore, we do not calculate average check as a key performance indicator for that brand.
Average Unit Volume
Average unit volume represents the average sales for restaurants included in the comparable restaurant base for a given time period, typically annually. Average unit volume reflects total sales for restaurants in our comparable restaurant base divided by the number of restaurants in our comparable restaurant base. This measure is subject to seasonality for periods less than one year.
Number of Restaurant Openings
Number of restaurant openings reflects the number of restaurants opened or converted during a particular reporting period. Before we open new restaurants or convert existing restaurants, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses for several months and as a result, restaurant operating margins are generally lower during the start-up period of operation. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations.
54
Key Financial Definitions
Revenues
Revenues primarily consist of food and beverage sales, net of promotional allowances, discounts and employee meals. Revenues are influenced by new restaurant openings, comparable restaurant sales and total operating weeks.
Cost of Sales
Cost of sales consists primarily of food and beverage related costs. The components of cost of sales are variable in nature, change with sales volume, are influenced by menu mix and are subject to increases or decreases based on fluctuations in commodity costs.
Labor and Benefits
Labor and benefits include all restaurant-level management and hourly labor costs, including salaries, wages, benefits and performance incentives, payroll taxes and other indirect labor costs.
Occupancy Expenses
Occupancy expenses include fixed and variable portions of rent, common area maintenance and property taxes.
Other Operating Expenses
Other operating expenses include all other restaurant-level operating costs, the major components of which are operating supplies, utilities, repair and maintenance costs, marketing and advertising costs and credit card fees.
General and Administrative Expense
General and administrative expense is comprised of expenses associated with corporate and administrative functions that support the development and operations of restaurants, including multi-unit management and Restaurant Support Center staff compensation and benefits, travel expenses, Restaurant Support Center costs, stock compensation costs, legal and professional fees, costs related to abandoned new restaurant development sites and other related corporate costs.
Depreciation and Amortization
Depreciation and amortization includes the depreciation of fixed assets, capitalized leasehold improvements and amortization of intangibles and deferred sale-leaseback charges.
Pre-Opening Costs
Pre-opening costs consist of costs incurred prior to opening a new restaurant and are made up primarily of manager salaries, employee payroll, rent expense and other costs related to training and preparing new restaurants for opening.
Restaurant Impairments and Closures
We review long-lived assets, such as property and equipment and intangibles, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable and record an impairment charge when appropriate. Expenses incurred following the closure of restaurants are also included.
55
Loss (Gain) on Disposal of Property and Equipment
Loss or gain on disposal of property and equipment represents the net book value of property and equipment less proceeds received, if applicable, on assets abandoned or sold. These losses (or gains) are related to normal disposals in the ordinary course of business, along with disposals related to restaurant closures and selected restaurant remodeling activities.
Interest Expense, Net
Interest expense, net consists primarily of interest expense related to our debt and amortization of debt issuance costs net of interest income.
Gain on Insurance Settlements
Gain on insurance settlements represents proceeds received from natural disaster insurance claims in excess of the net book value of assets lost and related costs.
Results of Operations
The following table presents the consolidated statement of operations for the past three fiscal years and the twenty-four weeks ended June 14, 2010 and June 20, 2011 expressed as a percentage of revenues.
|
Fiscal Year* | Twenty-Four Weeks Ended* | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2010 | June 14, 2010 |
June 20, 2011 |
|||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Restaurant operating costs |
||||||||||||||||||
Cost of sales |
29.5 | 29.2 | 29.6 | 29.5 | 31.2 | |||||||||||||
Labor and benefits |
29.5 | 28.6 | 27.9 | 28.3 | 27.6 | |||||||||||||
Occupancy expenses |
7.9 | 8.2 | 7.8 | 7.8 | 7.2 | |||||||||||||
Other operating expenses |
20.9 | 18.9 | 18.2 | 18.5 | 17.5 | |||||||||||||
General and administrative |
5.6 | 6.1 | 5.9 | 6.0 | 5.9 | |||||||||||||
Depreciation and amortization |
5.1 | 4.1 | 3.8 | 3.7 | 3.6 | |||||||||||||
Pre-opening costs |
0.3 | 0.4 | 1.1 | 0.9 | 1.0 | |||||||||||||
Restaurant impairments and closures |
0.2 | 0.0 | 0.3 | 0.1 | 0.0 | |||||||||||||
Loss (gain) on disposal of property and equipment |
0.0 | 0.3 | 0.8 | 0.0 | 0.0 | |||||||||||||
Total costs and expenses |
99.1 | % | 95.8 | % | 95.5 | % | 94.6 | % | 94.0 | % | ||||||||
Income from operations |
0.9 | 4.2 | 4.5 | 5.4 | 6.0 | |||||||||||||
Interest expense, net |
(2.1 | ) | (1.3 | ) | (1.1 | ) | (1.1 | ) | (2.4 | ) | ||||||||
Gain on insurance settlements |
0.0 | 0.4 | 0.3 | 0.1 | 0.0 | |||||||||||||
(Loss) income before income taxes |
(1.1 | )% | 3.3 | % | 3.7 | % | 4.4 | % | 3.6 | % | ||||||||
Income tax expense |
0.0 | 0.1 | 0.4 | 1.1 | 1.0 | |||||||||||||
Net (loss) income |
(1.2 | )% | 3.2 | % | 3.3 | % | 3.3 | % | 2.6 | % | ||||||||
- *
- The percentages reflected have been subject to rounding adjustments. Accordingly, figures expressed as percentages when aggregated may not be the arithmetic aggregation of the percentages that precede them.
56
The following table sets forth additional operating information that we use in assessing our performance as of the periods indicated:
|
Fiscal Year | Twenty-Four Weeks Ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2010 | June 14, 2010 |
June 20, 2011 |
||||||||||||
Selected Other Data (1)(2): |
|||||||||||||||||
Number of restaurants open (end of period): |
|||||||||||||||||
Joe's Crab Shack |
114 | 114 | 113 | 115 | 116 | ||||||||||||
Brick House Tavern + Tap |
2 | 5 | 13 | 8 | 17 | ||||||||||||
Total restaurants |
116 | 119 | 126 | 123 | 133 | ||||||||||||
Average weekly sales (in thousands) |
$ | 45 | $ | 51 | $ | 54 | $ | 55 | $ | 61 | |||||||
Restaurant operating weeks |
6,038 | 6,060 | 6,499 | 2,908 | 3,102 | ||||||||||||
Comparable Restaurant Data (1)(2): |
|||||||||||||||||
Comparable restaurant base (end of period) |
114 | 112 | 111 | 112 | 111 | ||||||||||||
Average unit volume (in thousands) |
$ | 2,354 | $ | 2,599 | $ | 2,810 | $ | 1,277 | $ | 1,444 | |||||||
Change in comparable restaurant sales |
1.9 | % | 9.5 | % | 4.9 | % | 4.1 | % | 7.6 | % | |||||||
Average check (Joe's only) |
$ | 19.17 | $ | 20.80 | $ | 22.00 | $ | 21.73 | $ | 23.05 |
- (1)
- Includes
both restaurant brands, unless otherwise noted.
- (2)
- See the definitions of key performance indicators beginning on page 53.
57
Twenty-Four Weeks Ended June 20, 2011 Compared to Twenty-Four Weeks Ended June 14, 2010
Financial Performance Overview
The following are highlights of our performance for the twenty-four weeks ended June 20, 2011 compared to the twenty-four weeks ended June 14, 2010:
-
- revenues increased 18.8% to $190.6 million;
-
- comparable restaurant sales increased 7.6% (11.0% increase on a fiscal period basis);
-
- seven new restaurants were opened during the twenty-four weeks ended June 20, 2011, bringing our total number of
restaurants to 133 compared to 123 restaurants for the twenty-four weeks ended June 14, 2010;
-
- as a percentage of revenues, cost of sales increased to 31.2% from 29.5%, primarily due to the higher cost of crab and
other commodities. While menu mix shift contributed to the higher percentage, the shift yielded higher gross profit dollars;
-
- income from operations increased 32.6% to $11.5 million;
-
- interest expense, net increased $2.9 million, primarily due to the write-off of debt issuance costs, the early
termination of an interest rate swap agreement when we refinanced our debt, and the higher average balance of total debt outstanding during the twenty-four weeks ended June 20, 2011; and
-
- net income decreased 8.9%, to $4.9 million.
The following table sets forth information comparing the components of net income for the 24 weeks ended June 14, 2010 and June 20, 2011.
|
Twenty-Four Weeks Ended | |
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
June 14, 2010 |
June 20, 2011 |
Increase (Decrease) |
Percent Change |
|||||||||||
|
(dollars in thousands) |
||||||||||||||
Revenues |
$ | 160,407 | $ | 190,619 | $ | 30,212 | 18.8 | % | |||||||
Restaurant operating costs |
|||||||||||||||
Cost of sales |
47,244 | 59,523 | 12,279 | 26.0 | |||||||||||
Labor and benefits |
45,446 | 52,546 | 7,100 | 15.6 | |||||||||||
Occupancy expenses |
12,438 | 13,666 | 1,228 | 9.9 | |||||||||||
Other operating expenses |
29,642 | 33,382 | 3,740 | 12.6 | |||||||||||
General and administrative |
9,563 | 11,172 | 1,609 | 16.8 | |||||||||||
Depreciation and amortization |
5,927 | 6,896 | 969 | 16.3 | |||||||||||
Pre-opening costs |
1,367 | 1,886 | 519 | 38.0 | |||||||||||
Restaurant impairments and closures |
98 | 37 | (61 | ) | (62.2 | ) | |||||||||
Gain on disposal of property and equipment |
(1 | ) | (4 | ) | (3 | ) | 300.0 | ||||||||
Total costs and expenses |
151,724 | 179,104 | 27,380 | 18.0 | % | ||||||||||
Income from operations |
8,683 | 11,515 | 2,832 | 32.6 | |||||||||||
Interest expense, net |
(1,767 | ) | (4,655 | ) | (2,888 | ) | 163.4 | ||||||||
Gain on insurance settlements |
172 | | (172 | ) | (100.0 | ) | |||||||||
Income before income taxes |
7,088 | 6,860 | (228 | ) | (3.2 | )% | |||||||||
Income tax expense |
1,716 | 1,964 | 248 | 14.5 | |||||||||||
Net income |
$ | 5,372 | $ | 4,896 | $ | (476 | ) | (8.9 | )% | ||||||
Other data: |
|||||||||||||||
Restaurant operating weeks |
2,908 | 3,102 | 194 | 6.7 | % | ||||||||||
Number of restaurants open (end of period) |
123 | 133 | 10 | 8.1 | % |
58
Revenues
Revenues were $190.6 million for the twenty-four weeks ended June 20, 2011, an increase of $30.2 million, or 18.8%, as compared to revenues of $160.4 million for the twenty-four weeks ended June 14, 2010. The revenue increase was driven by an increase in comparable restaurant sales and sales from non-comparable restaurants. Comparable restaurant sales and non-comparable restaurant sales contributed 9.9% and 8.9% of the total revenue increase, respectively. Comparable restaurant sales increased 7.6% for the twenty-four weeks ended June 20, 2011 over the twenty-four weeks ended June 14, 2010, largely due to a 2.3% increase in guest counts and a 5.8% increase in average check (which is a result of a shift in menu mix and an increase in price) at Joe's Crab Shack.
Cost of Sales
Cost of sales increased $12.3 million, or 26.0%, to $59.5 million for the twenty-four weeks ended June 20, 2011, as compared to $47.2 million for the twenty-four weeks ended June 14, 2010, primarily due to the growth in revenues from new restaurants and existing restaurants. As a percentage of revenues, cost of sales increased to 31.2% for the twenty-four weeks ended June 20, 2011 from 29.5% for the twenty-four weeks ended June 14, 2010. The increase in cost of sales as a percentage of revenues was primarily driven by the higher cost of crab and certain other commodities and menu mix changes, which were partially offset by pricing and operating efficiency improvements. While the menu mix shift contributed to a higher cost of sales as a percentage of revenues, the shift yielded higher gross profit dollars. We anticipate our food costs will increase over the balance of 2011.
While we provide our guests a large variety of menu items, crab and shrimp generally account for one-third of our cost of sales. We have experienced increases in crab pricing and believe the cost will remain high into 2012 before moderating towards mean historical prices.
Labor and Benefits
Labor and benefits increased by $7.1 million, or 15.6%, to $52.5 million for the twenty-four weeks ended June 20, 2011 from $45.4 million for the twenty-four weeks ended June 14, 2010, primarily due to new restaurant openings and higher sales from the comparable restaurant base. As a percentage of revenues, labor and benefits decreased to 27.6% for the twenty-four weeks ended June 20, 2011 from 28.3% for the twenty-four weeks ended June 14, 2010. The improvement was primarily due to better leveraging of restaurant management personnel and efficiencies gained from implementing a new labor scheduling software system, partially offset by higher incentive payouts.
Occupancy Expenses
Occupancy expenses increased by $1.2 million, or 9.9%, to $13.7 million for the twenty-four weeks ended June 20, 2011 from $12.4 million for the twenty-four weeks ended June 14, 2010, primarily due to new restaurant openings. As a percentage of revenues, occupancy expenses decreased to 7.2% for the twenty-four weeks ended June 20, 2011 from 7.8% for the twenty-four weeks ended June 14, 2010 primarily due to improved leverage relative to comparable restaurant sales growth.
Other Operating Expenses
Other operating expenses increased by $3.7 million, or 12.6%, to $33.4 million for the twenty-four weeks ended June 20, 2011 from $29.6 million for the twenty-four weeks ended June 14, 2010 primarily due to new restaurant openings. As a percentage of revenues, other operating expenses decreased to 17.5% for the twenty-four weeks ended June 20, 2011 from 18.5% for the twenty-four weeks ended June 14, 2010, primarily due to improved leverage relative to comparable restaurant sales growth. As a percentage of revenue, restaurant supplies, repair and maintenance costs, utility costs, and marketing and advertising costs all decreased as a result of the improved leverage and were the main drivers of the decrease in operating costs relative to revenues. As a percentage of revenues, marketing and advertising costs were lower due to greater leverage with the growth in comparable restaurant sales and
59
the increase in the number of Brick House restaurants, which have lower marketing and advertising expenditures.
General and Administrative
General and administrative expenses increased by $1.6 million, or 16.8%, to $11.2 million for the twenty-four weeks ended June 20, 2011 from $9.6 million for the twenty-four weeks ended June 14, 2010 primarily driven by higher personnel costs from increased Restaurant Support Center headcount to manage and support the increase in new restaurants, higher incentive expenses due to improved operating performance, costs on abandoned restaurant development sites, and higher travel expenses due to restaurant development activity. As a percentage of revenues, general and administrative expenses decreased slightly to 5.9% for the twenty-four weeks ended June 20, 2011 from 6.0% for the twenty-four weeks ended June 14, 2010.
Depreciation and Amortization
Depreciation and amortization expense increased by $1.0 million, or 16.3%, to $6.9 million for the twenty-four weeks ended June 20, 2011 from $5.9 million for the twenty-four weeks ended June 14, 2010 primarily due to a higher depreciable base from new restaurants opened. As a percentage of revenues, depreciation and amortization declined to 3.6% for the twenty-four weeks ended June 20, 2011 from 3.7% for the twenty-four weeks ended June 14, 2010.
Pre-Opening Costs
Pre-opening costs increased by $0.5 million, or 38.0%, to $1.9 million for the twenty-four weeks ended June 20, 2011 from $1.4 million for the twenty-four weeks ended June 14, 2010. The increase was due to the timing of restaurant openings during 2011 and 2010. Seven restaurants were opened during the twenty-four weeks ended June 20, 2011, while four restaurants were opened during the twenty-four weeks ended June 14, 2010.
Restaurant Impairments and Closures
Restaurant impairments and closures decreased by $0.1 million, or 62.2%, due to miscellaneous closing expenses.
Interest Expense, Net
Interest expense, net increased by $2.9 million to $4.7 million for the twenty-four weeks ended June 20, 2011 from $1.8 million for the twenty-four weeks ended June 14, 2010 primarily due to the write-off of debt issuance costs related to the refinancing of our debt prior to the end of March 2011, the cost to terminate an interest rate swap agreement associated with that debt and the higher average outstanding debt balance.
Gain on Insurance Settlements
Gain on insurance settlements decreased by $0.2 million due to an insurance claim for one restaurant that was severely flooded and rebuilt in 2010.
Income Tax Expense
Income tax expense increased by $0.3 million, or 14.5%, to $2.0 million for the twenty-four weeks ended June 20, 2011 from $1.7 million for the twenty-four weeks ended June 14, 2010. The effective tax rates were 28.6% and 24.2% for the twenty-four weeks ended June 20, 2011 and the twenty-four weeks ended June 14, 2010, respectively. The tax rate for the twenty-four weeks ended June 20, 2011 was impacted by improved operating results and significant permanent differences, primarily FICA & Medicare tax paid on tips allowable as a federal tax credit. The tax rate for the twenty-four weeks ended June 14, 2010 was also impacted by permanent differences.
60
In future fiscal years, we expect our effective tax rate to more closely approximate applicable statutory rates, reduced by the impact of applicable federal tax credits. Our effective tax rates for historic periods presented in this prospectus benefitted from current operating losses and/or the partial release of reserves against deferred tax assets that we do expect to benefit from in future periods.
Net Income
As a result of the foregoing, net income decreased 8.9%, or $0.5 million, to $4.9 million for the twenty-four weeks ended June 20, 2011 from $5.4 million for the twenty-four weeks ended June 14, 2010.
Fiscal Year 2010 (53 Weeks) Compared to Fiscal Year 2009 (52 Weeks)
Financial Performance Overview
The following are highlights of our performance for fiscal year 2010 compared to fiscal year 2009:
-
- revenues increased 14.1% to $351.3 million;
-
- comparable restaurant sales increased 4.9%;
-
- new restaurants, net of closures, increased by seven;
-
- as a percentage of revenues, labor decreased to 27.9% from 28.6%, primarily due to the efficiencies gained in hourly labor
from implementing a new labor scheduling software system and better leveraging of restaurant management through increases in comparable restaurant sales;
-
- income from operations increased 24.6% to $15.9 million; and
-
- net income increased 17.2%, to $11.6 million.
The following table sets forth information comparing the components of net income for fiscal year 2009 and fiscal year 2010.
|
Fiscal Year | |
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase (Decrease) |
Percent Change |
|||||||||||||
|
2009 | 2010 | |||||||||||||
|
(dollars in thousands) |
||||||||||||||
Revenues |
$ | 307,801 | $ | 351,327 | $ | 43,526 | 14.1 | % | |||||||
Restaurant operating costs |
|||||||||||||||
Cost of sales |
89,845 | 103,981 | 14,136 | 15.7 | |||||||||||
Labor and benefits |
87,920 | 98,162 | 10,242 | 11.6 | |||||||||||
Occupancy expenses |
25,243 | 27,440 | 2,197 | 8.7 | |||||||||||
Other operating expenses |
58,140 | 63,963 | 5,823 | 10.0 | |||||||||||
General and administrative |
18,765 | 20,852 | 2,087 | 11.1 | |||||||||||
Depreciation and amortization |
12,733 | 13,435 | 702 | 5.5 | |||||||||||
Pre-opening costs |
1,323 | 3,844 | 2,521 | 190.6 | |||||||||||
Restaurant impairments and closures |
15 | 909 | 894 | 5,960.0 | |||||||||||
Loss on disposal of property and equipment |
1,017 | 2,797 | 1,780 | 175.0 | |||||||||||
Total costs and expenses |
295,001 | 335,383 | 40,382 | 13.7 | % | ||||||||||
Income from operations |
12,800 | 15,944 | 3,144 | 24.6 | |||||||||||
Interest expense, net |
(3,867 | ) | (3,936 | ) | (69 | ) | 1.8 | ||||||||
Gain on insurance settlements |
1,192 | 944 | (248 | ) | (20.8 | ) | |||||||||
Income before income taxes |
10,125 | 12,952 | 2,827 | 27.9 | % | ||||||||||
Income tax expense |
255 | 1,388 | 1,133 | 444.3 | |||||||||||
Net income |
$ | 9,870 | $ | 11,564 | $ | 1,694 | 17.2 | % | |||||||
Other data: |
|||||||||||||||
Restaurant operating weeks |
6,060 | 6,499 | 439 | 7.2 | % | ||||||||||
Number of restaurants open (end of period) |
119 | 126 | 7 | 5.9 | % |
61
Revenues
Revenues were $351.3 million for fiscal year 2010, an increase of $43.5 million, or 14.1%, as compared to revenues of $307.8 million for fiscal year 2009. The revenue increase was driven by sales from non-comparable restaurants and comparable restaurant sales and one additional operating week in fiscal year 2010, contributing 7.7%, 4.6% and 1.9% of the total revenue increase, respectively. Year-over-year comparable restaurant sales increased 4.9%, largely due to a 5.8% increase in average check at Joe's Crab Shack, which was partially offset by a 0.6% decrease in guest counts.
Cost of Sales
Cost of sales increased $14.1 million, or 15.7%, to $104.0 million for fiscal year 2010, as compared to $89.8 million for fiscal year 2009, primarily due to the growth in revenues from new restaurants and existing restaurants. As a percentage of revenues, cost of sales increased to 29.6% for fiscal year 2010 from 29.2% for fiscal year 2009. The increase in cost of sales as a percentage of revenues was primarily driven by the impact from menu mix changes, which were partially offset by pricing and operating efficiency improvements. While the menu mix shift contributed to a higher cost of sales as a percentage of revenues, the shift also yielded higher gross profit dollars.
Labor and Benefits
Labor and benefits increased by $10.2 million, or 11.6%, to $98.2 million for fiscal year 2010 from $87.9 million for fiscal year 2009, primarily due to new restaurant openings and higher sales from the comparable restaurant base. As a percentage of revenues, labor and benefits decreased to 27.9% for fiscal year 2010 from 28.6% for fiscal year 2009. The improvement was primarily due to efficiencies gained in hourly labor from implementing a new labor scheduling software system and better leveraging of restaurant management personnel through increases in comparable restaurant sales.
Occupancy Expenses
Occupancy expenses increased by $2.2 million, or 8.7%, to $27.4 million for fiscal year 2010 from $25.2 million for fiscal year 2009, primarily due to new restaurant openings. As a percentage of revenues, occupancy expenses decreased to 7.8% for fiscal year 2010 from 8.2% for fiscal year 2009, primarily due to improved leverage relative to comparable restaurant sales growth.
Other Operating Expenses
Other operating expenses increased by $5.8 million, or 10.0%, to $64.0 million for fiscal year 2010 from $58.1 million for fiscal year 2009 primarily due to new restaurant openings. As a percentage of revenues, other operating expenses decreased to 18.2% for fiscal year 2010 from 18.9% for fiscal year 2009, primarily due to improved leverage relative to comparable restaurant sales growth. Lower marketing and advertising expenses as a percentage of revenues were the main drivers of the decrease in other operating costs relative to revenues. As a percentage of revenues, marketing and advertising costs are lower due to greater leverage with the growth in comparable restaurant sales and the increase in the number of Brick House restaurants, which have lower marketing and advertising expenditures.
General and Administrative
General and administrative expenses increased by $2.1 million, or 11.1%, to $20.9 million for fiscal year 2010 from $18.8 million for fiscal year 2009, primarily due to higher personnel costs from increased multi-unit manager and Restaurant Support Center headcount to manage and support the increase in new restaurants, higher travel expenses due to restaurant development activity, partially offset by lower legal expenses due to improved experience in resolving specific claims against the Company. As a percentage of revenues, general and administrative expenses decreased to 5.9% for fiscal year 2010 from 6.1% for fiscal year 2009, primarily due to improved leverage relative to the growth in revenues.
62
Depreciation and Amortization
Depreciation and amortization expense increased by $0.7 million, or 5.5%, to $13.4 million for fiscal year 2010 from $12.7 million for fiscal year 2009, primarily due to a higher depreciable base from new restaurants opened. As a percentage of revenues, depreciation and amortization declined to 3.8% for fiscal year 2010 from 4.1% for fiscal year 2009.
Pre-Opening Costs
Pre-opening costs increased by $2.5 million, or 190.6%, to $3.8 million for fiscal year 2010 from $1.3 million for fiscal year 2009. The increase was due to the number of restaurant openings. Eleven new restaurants were opened in fiscal year 2010 (including one that reopened after being rebuilt) compared to five new restaurants opened in fiscal year 2009.
Restaurant Impairments and Closures
We performed a long-lived asset impairment analysis during fiscal year 2010 and determined that two restaurants had carrying amounts in excess of their fair value. Impairment charges of $0.3 million were recorded as a result. No impairment charges were recorded in fiscal year 2009. Three restaurants were also closed in fiscal year 2010 accounting for the additional $0.6 million in expense.
Loss on Disposal of Property and Equipment
Loss on disposal of property and equipment increased by $1.8 million to $2.8 million for fiscal year 2010 from $1.0 million for fiscal year 2009. The loss in fiscal year 2010 was primarily due to the writeoff of property and equipment for two Joe's restaurant locations; one was razed and rebuilt due to the condition of the facility while the other underwent construction to re-brand it as a Brick House restaurant. The loss in fiscal year 2009 was due to the closure of two restaurants and the writeoff of other assets no longer used in the business.
Interest Expense, Net
Interest expense, net increased slightly by approximately $0.1 million to $3.9 million for fiscal year 2010, primarily due to an extra week of interest on our outstanding debt from our bank credit facility.
Gain on Insurance Settlements
The gain on insurance settlements of $0.9 million for fiscal year 2010 related to the settlement of an insurance claim for one restaurant severely flooded and rebuilt in fiscal year 2010. The gain on insurance settlements of $1.2 million in fiscal year 2009 related to an insurance claim for hurricane damage to several Texas restaurants incurred late in fiscal year 2008.
Income Tax Expense
Income tax expense increased by $1.1 million to $1.4 million for fiscal year 2010 from $0.3 million for fiscal 2009. The effective tax rates were 10.7% and 2.5% for fiscal year 2010 and fiscal year 2009, respectively. The tax rate for fiscal year 2010, relative to pretax income of $13.0 million, was impacted by significant permanent differences, primarily FICA & Medicare tax paid on tips allowable as a federal tax credit, and a $1.9 million partial release of the reserve against deferred tax assets. The impact of these items is less profound in 2010 and results in a higher effective tax rate due to the increase in pretax income. The tax rate for fiscal year 2009, relative to pretax income of $10.1 million, was also impacted by permanent differences and a $2.1 million partial release of the reserve against deferred tax assets.
Net deferred tax assets consist primarily of temporary differences and net operating loss and credit carry-forwards. The valuation allowance was established primarily on FICA credit carry-forwards that begin to expire in 2027, as we believed that it was more likely than not that these deferred tax assets would not be realized. We will analyze the need for this reserve periodically. The tax benefits relating to any reversal of the valuation allowance will be recognized as a reduction of income tax expense.
63
Net Income
As a result of the foregoing, net income increased 17.2%, or $1.7 million, to $11.6 million for fiscal year 2010 from $9.9 million for fiscal year 2009.
Fiscal Year 2009 (52 Weeks) Compared to Fiscal Year 2008 (52 Weeks)
Financial Performance Overview
The following are highlights of our performance for fiscal year 2009 compared to fiscal year 2008:
-
- revenues increased 12.6% to $307.8 million from $273.4 million;
-
- comparable restaurant sales increased 9.5%;
-
- new restaurants, net of closures, increased by three in fiscal year 2009 compared to a decrease of three in fiscal year
2008;
-
- income from operations increased 404.3% to $12.8 million primarily due to the strong comparable restaurant sales
increase and the resulting leverage over operating expenses; and
-
- net income increased $13.1 million to $9.9 million compared to a net loss of $3.2 million.
The following table sets forth information comparing the components of net income (loss) for fiscal year 2008 and fiscal year 2009.
|
Fiscal Year | |
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase (Decrease) |
Percent Change |
|||||||||||||
|
2008 | 2009 | |||||||||||||
|
(dollars in thousands) |
||||||||||||||
Revenues |
$ | 273,359 | $ | 307,801 | $ | 34,442 | 12.6 | % | |||||||
Restaurant operating costs |
|||||||||||||||
Cost of sales |
80,573 | 89,845 | 9,272 | 11.5 | |||||||||||
Labor and benefits |
80,604 | 87,920 | 7,316 | 9.1 | |||||||||||
Occupancy expenses |
21,610 | 25,243 | 3,633 | 16.8 | |||||||||||
Other operating expenses |
57,210 | 58,140 | 930 | 1.6 | |||||||||||
General and administrative |
15,383 | 18,765 | 3,382 | 22.0 | |||||||||||
Depreciation and amortization |
13,898 | 12,733 | (1,165 | ) | (8.4 | ) | |||||||||
Pre-opening costs |
779 | 1,323 | 544 | 69.8 | |||||||||||
Restaurant impairments and closures |
680 | 15 | (665 | ) | (97.8 | ) | |||||||||
Loss on disposal of property and equipment |
84 | 1,017 | 933 | 1,110.7 | |||||||||||
Total costs and expenses |
270,821 | 295,001 | 24,180 | 8.9 | % | ||||||||||
Income from operations |
2,538 | 12,800 | 10,262 | 404.3 | |||||||||||
Interest expense, net |
(5,659 | ) | (3,867 | ) | 1,792 | (31.7 | ) | ||||||||
Gain on insurance settlements |
| 1,192 | 1,192 | | |||||||||||
(Loss) income before income taxes |
(3,121 | ) | 10,125 | 13,246 | * | ||||||||||
Income tax expense |
90 | 255 | 165 | 183.3 | |||||||||||
Net (loss) income |
$ | (3,211 | ) | $ | 9,870 | $ | 13,081 | * | |||||||
Other data: |
|||||||||||||||
Restaurant operating weeks |
6,038 | 6,060 | 22 | 0.4 | % | ||||||||||
Number of restaurants open (end of period) |
116 | 119 | 3 | 2.6 | % |
- *
- Not meaningful.
Revenues
Revenues were $307.8 million for fiscal year 2009, an increase of $34.4 million, or 12.6%, as compared to revenues of $273.4 million for fiscal year 2008. The revenue increase was driven by an increase in sales from comparable restaurants and non-comparable restaurants, contributing 9.3% and
64
3.3% of the total revenue increase, respectively. Comparable restaurant sales growth was 9.5% for fiscal year 2009 compared to fiscal year 2008 due to an 8.5% increase in average check at Joe's Crab Shack, while guest counts increased by 1.1%. Brick House Tavern + Tap had no restaurants that were comparable in fiscal year 2009.
Cost of Sales
Cost of sales increased $9.3 million, or 11.5%, to $89.8 million for fiscal year 2009, as compared to $80.6 million for fiscal year 2008, primarily due to the growth in revenues from comparable restaurants. As a percentage of revenues, cost of sales decreased to 29.2% for fiscal year 2009 from 29.5% for fiscal year 2008. The decrease in cost of sales as a percentage of revenues was primarily driven by slightly lower cost of crab and other commodities, partially offset by menu mix shift and investments in select menu items.
Labor and Benefits
Labor and benefits increased by $7.3 million, or 9.1%, to $87.9 million for fiscal year 2009 from $80.6 million for fiscal year 2008, primarily due to new restaurant openings and higher sales from the comparable restaurant base. As a percentage of revenues, labor and benefits decreased to 28.6% for fiscal year 2009 from 29.5% for fiscal year 2008. The improvement was primarily due to leveraging restaurant personnel through a strong increase in comparable restaurant sales.
Occupancy Expenses
Occupancy expenses increased by $3.6 million, or 16.8%, to $25.2 million for fiscal year 2009 from $21.6 million for fiscal year 2008, primarily due to the modification of 29 restaurant capital leases in April 2008 and the net increase in restaurants open. These leases were previously part of a sale leaseback financing transaction and had been treated as capital leases. After the lease agreements were amended, the leases were treated as operating leases and rent expense began being recorded. If the lease terms had been modified prior to fiscal year 2008, occupancy expenses for fiscal year 2008 would have been approximately $1.7 million higher and occupancy expenses as a percentage of revenues would have been 8.5%. For fiscal year 2009, occupancy expenses as a percentage of revenues was 8.2%.
Other Operating Expenses
Other operating expenses increased by $0.9 million, or 1.6%, to $58.1 million for fiscal year 2009 from $57.2 million for fiscal year 2008 primarily due to increased leverage of sales growth and lower utility expenses. As a percentage of revenues, other operating expenses decreased to 18.9% for fiscal year 2009 from 20.9% for fiscal year 2008, primarily due to greater leverage relative to strong sales growth for comparable restaurants. Lower utility expenses and marketing and advertising expenses as a percentage of revenues were the main drivers of the decrease in operating costs relative to revenues.
General and Administrative
General and administrative expenses increased by $3.4 million, or 22.0%, to $18.8 million for fiscal year 2009 from $15.4 million for fiscal year 2008, primarily due to higher personnel costs from increased multi-unit manager and Restaurant Support Center headcount to manage and support the increase in new restaurants and higher incentive expenses due to improved operating performance. As a percentage of revenues, general and administrative expenses increased to 6.1% for fiscal year 2009 from 5.6% for fiscal year 2008, primarily due to lower leverage relative to the growth in revenues.
Depreciation and Amortization
Depreciation and amortization expense decreased by $1.2 million, or 8.4%, to $12.7 million for fiscal year 2009 from $13.9 million for fiscal year 2008, primarily due to decreased depreciation from a
65
restaurant with assets that became fully depreciated in fiscal year 2008 and the modification of 29 restaurant leases in April 2008. At that time, $79.0 million in property and improvements ceased being depreciated and were removed from the consolidated balance sheet since the leases began being treated as operating leases instead of as capital leases. As a percentage of revenues, depreciation and amortization declined to 4.1% for fiscal year 2009 from 5.1% for fiscal year 2008.
Pre-Opening Costs
Pre-opening costs increased by $0.5 million, or 69.8%, to $1.3 million for fiscal year 2009 from $0.8 million for fiscal year 2008. The increase was due to the number of restaurant openings. Five new restaurants were opened in fiscal year 2009 compared to two new restaurants opened in fiscal year 2008.
Restaurant Impairments and Closures
We did not recognize any impairment charges in fiscal year 2009. A long-lived asset impairment analysis conducted in fiscal year 2008 determined that two restaurants had carrying amounts in excess of their fair value. Impairment charges of $0.1 million were recorded as a result. We also closed or converted five restaurants in fiscal year 2008 compared to one restaurant converted in fiscal year 2009.
Loss on Disposal of Property and Equipment
Loss on disposal of property and equipment increased by $0.9 million to $1.0 million for fiscal year 2009 from $0.1 million for fiscal year 2008. The loss in fiscal year 2009 was primarily due to the closure of two restaurants and the writeoff of other fixtures and computer equipment no longer used in the business.
Interest Expense, Net
Interest expense, net decreased by $1.8 million to $3.9 million for fiscal year 2009 from $5.7 million for fiscal year 2008, primarily due to the modification of 29 restaurant leases in April 2008. These leases were previously treated as capital leases and after the amendment, they were treated as operating leases. Capital lease obligations of $78.2 million were removed from the consolidated balance sheet at that time.
Gain on Insurance Settlements
The gain on insurance settlements of $1.2 million for fiscal year 2009 related to an insurance claim for hurricane damage to several Texas restaurants incurred late in fiscal year 2008. There were no insurance settlements on casualty events in fiscal year 2008.
Income Tax Expense
Income tax expense increased by $0.2 million to $0.3 million for fiscal year 2009 from $0.1 million for fiscal 2008. The effective tax rates were 2.5% and (2.9%) for fiscal year 2009 and fiscal year 2008, respectively. The tax rate for fiscal year 2009, relative to pretax income of $10.1 million, was impacted by significant permanent differences, primarily FICA & Medicare tax paid on tips allowable as a federal tax credit, and a $2.1 million partial release of the reserve against deferred tax assets. The tax rate for fiscal year 2008, relative to a pretax loss of $3.1 million, was also impacted by permanent differences and a $2.0 million increase to our valuation allowance against net deferred tax assets.
Net deferred tax assets consist primarily of temporary differences and net operating loss and credit carry-forwards. The valuation allowance was established as we believed that it was more likely than not that these deferred tax assets would not be realized. The tax benefits relating to any reversal of the valuation allowance will be recognized as a reduction of income tax expense.
66
Net Income (Loss)
As a result of the foregoing, net income increased to $9.9 million in fiscal year 2009 from a net loss of $3.2 million in fiscal year 2008.
Quarterly Results and Seasonality
The following table sets forth certain unaudited financial and operating data in each fiscal quarter during fiscal years 2009 and 2010, and the first quarter of fiscal year 2011. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with the audited consolidated and unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. There is a seasonal component to Joe's Crab Shack's business which typically peaks in the summer months (June, July and August) and slows in the winter months (November, December, January). Because of the seasonality of our business, results for any fiscal quarter are not necessarily indicative of the results that may be achieved for future fiscal quarters or for the full fiscal year. All quarterly periods presented below include 12 weeks, except for the fourth quarter of fiscal year 2009, which included 16 weeks and the fourth quarter of fiscal year 2010, which included 17 weeks.
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Fiscal Year 2009 | Fiscal Year 2010 | Fiscal Year 2011 |
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|
First Quarter | Second Quarter |
Third Quarter |
Fourth Quarter |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
First Quarter |
Second Quarter |
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Number of restaurants open |
116 | 115 | 117 | 119 | 122 | 123 | 123 | 126 | 129 | 133 | |||||||||||||||||||||
Total revenues (in millions) |
$ | 65.8 | $ | 78.5 | $ | 90.3 | $ | 73.2 | $ | 71.9 | $ | 88.5 | $ | 102.6 | $ | 88.3 | $ | 87.4 | $ | 103.2 | |||||||||||
Change in total comparable |
8.4 | % | 13.3 | % | 11.1 | % | 4.3 | % | 5.1 | % | 3.4 | % | 4.9 | % | 6.5 | % | 9.4 | % | 6.0 | % | |||||||||||
Average weekly sales (in thousands) |
$ | 47 | $ | 57 | $ | 65 | $ | 39 | $ | 50 | $ | 60 | $ | 69 | $ | 42 | $ | 57 | $ | 66 | |||||||||||
Average unit volumes (in thousands) |
$ | 555 | $ | 674 | $ | 775 | $ | 589 | $ | 585 | $ | 695 | $ | 822 | $ | 682 | $ | 673 | $ | 774 |
Liquidity and Capital Resources
General
Our primary sources of liquidity and capital resources have been cash provided from operating activities, cash and cash equivalents, and the senior secured credit facility. Our primary requirements for liquidity and capital are new restaurant development, working capital and general corporate needs. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate, and will continue to operate with negative working capital. Our requirement for working capital is not significant since our restaurant guests pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our restaurants do not require significant inventories or receivables.
We believe that these sources of liquidity and capital will be sufficient to finance our continued operations and expansion plans for at least the next twelve months.
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The following table shows summary cash flows information for fiscal years 2008, 2009 and 2010, and the twenty-four weeks ended June 14, 2010 and June 20, 2011:
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|
|
|
Twenty-Four Weeks Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Fiscal Years | |||||||||||||||||
|
June 14, 2010 | June 20, 2011 | ||||||||||||||||
|
2008 | 2009 | 2010 | |||||||||||||||
|
(in thousands) |
|||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||
Operating activities |
$ | 6,471 | $ | 14,953 | $ | 37,914 | $ | 23,169 | $ | 19,287 | ||||||||
Investing activities |
(10,560 | ) | (14,745 | ) | (30,163 | ) | (9,636 | ) | (18,038 | ) | ||||||||
Financing activities |
3,942 | (342 | ) | (155 | ) | (58 | ) | (124 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents |
$ | (147 | ) | $ | (134 | ) | $ | 7,596 | $ | 13,475 | $ | 1,125 | ||||||
Operating Activities
Net cash provided by operating activities was $19.3 million for the twenty-four weeks ended June 20, 2011 compared to $23.2 million for the twenty-four weeks ended June 14, 2010. The decrease was primarily due to the timing of vendor payments at the end of fiscal year 2009, partially offset by additional guest receipts.
Net cash provided by operating activities was $37.9 million in fiscal year 2010 compared to $15.0 million in fiscal year 2009. The increase in fiscal year 2010 was primarily the result of increased sales, partially offset by timing of vendor payments. Net cash provided by operating activities in fiscal year 2008 was $6.5 million. The improvement in fiscal year 2009 as compared to fiscal year 2008 was mostly the result of increase in sales, partially offset by an acceleration of vendor payments made at the end of fiscal year 2009 in order to take advantage of favorable payment terms.
Investing Activities
Capital expenditures were $18.3 million for the twenty-four weeks ended June 20, 2011 compared to $11.6 million for the twenty-four weeks ended June 14, 2010. Capital expenditures for fiscal years 2010, 2009 and 2008 were $33.0 million, $18.3 million and $7.6 million, respectively. In each period, development of new locations accounted for most of the expenditures. Period-over-period variances in capital expenditures are due to the number and timing of new or updated locations under construction. We estimate that total capital expenditures for fiscal year 2011 will be approximately $37.0 to $42.0 million.
Financing Activities
Net cash used in financing activities was $0.1 million for the twenty-four weeks ended June 20, 2011 compared to net cash used in financing activities of $58 thousand for the twenty-four weeks ended June 14, 2010. The increase in net cash used was primarily due to the net effect of refinancing our senior credit facility in March 2011 and a scheduled $0.8 million principal repayment. We made mandatory principal repayments on our previous senior secured term loan facility totaling $0.1 million for each of fiscal years 2010 and 2009. We had no outstanding balance on our revolving credit facility as of January 3, 2011.
Senior Secured Credit Facility
In November 2006, we entered into a $125.0 million credit agreement that consisted of a $100.0 million first-lien bank credit facility due November 2012 and a $25.0 million second-lien term loan due May 2013. The first-lien bank credit facility was comprised of a $90.0 million term loan and a $10.0 million revolving credit facility. The interest rate of the first-lien term loan was set at LIBOR plus 3.75% or the bank's base rate plus 2.75%. The second-lien term loan bore interest at the lower of
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LIBOR plus 7.5% or the bank's base rate plus 6.5%. The first-lien term loan required quarterly principal payments of $25,510 plus accrued interest through September 2012. The first-lien bank credit facility and the second-lien term loan were repaid in full and terminated as part of the refinancing in March 2011 discussed below.
In March 2011, we entered into a $145.0 million senior secured credit facility with General Electric Capital Corporation and a syndicate of financial institutions. The senior secured credit facility consists of (a) a five-year $120.0 million term loan and (b) a five-year $25.0 million revolving credit facility, which includes a letter of credit sub-facility of up to $6.0 million and a swing line facility of up to $5.0 million. We used the proceeds from the term loan to repay in full $34.8 million under our prior credit facility, make an $80.0 million distribution to J.H. Whitney VI indirectly through JCS Holdings, LLC, our parent company, and terminate the interest rate swap contract on our prior credit facility. As of June 20, 2011, we had $119.3 million of outstanding borrowings under our senior secured credit facility and $1.4 million outstanding in letters of credit.
Our senior secured credit facility requires us to maintain a certain effective leverage ratio, as defined in the credit agreement, as of the last day of each fiscal quarter. For the fiscal quarter ending September 12, 2011, the effective leverage ratio may not be more than 5.50:1; for the fiscal quarters ending January 2, 2012 and March 26, 2012, the effective leverage ratio may not be more than 5.40:1; for the fiscal quarter ending June 18, 2012, the effective leverage ratio may not be more than 5.25:1; for the fiscal quarters ending September 10, 2012, December 31, 2012, March 25, 2013 and June 17, 2013, the effective leverage ratio may not be more than 5.00:1; for the fiscal quarters ending September 9, 2013, December 30, 2013, March 24, 2014 and June 16, 2014, the effective leverage ratio may not be more than 4.75:1; and for the fiscal quarter ending September 8, 2014 and the last day of each fiscal quarter thereafter, the effective leverage ratio may not be more than 4.50:1.
Our senior secured credit facility also requires us to maintain a certain fixed charge coverage ratio as of the last day of each fiscal quarter. For the fiscal quarters ending September 9, 2011 through June 18, 2012, the fixed charge coverage ratio may not be less than 1.40:1; for the fiscal quarters ending September 10, 2012 through September 9, 2013, the fixed charge coverage ratio may not be less than 1.45:1; and for the fiscal quarter ending December 30, 2013 and thereafter, the fixed charge coverage ratio may not be less than 1.40:1.
Finally, our senior secured credit facility limits the amount of consolidated capital expenditures, excluding maintenance capital expenditures, we may incur in any fiscal year, provided that we may carry over into the next fiscal year, the lesser of (i) 75% of the unused amount of consolidated capital expenditures for any fiscal year and (ii) $10.0 million. For fiscal year ending January 2, 2012, the capital expenditure limit is $42.75 million; for fiscal year ending December 31, 2012, the capital expenditure limit is $34.0 million; for fiscal year ending December 30, 2013, the capital expenditure limit is $33.0 million; for fiscal year ending December 29, 2014, the capital expenditure limit is $33.25 million; and for fiscal year ending December 28, 2015 and each fiscal year thereafter, the capital expenditure limit is $33.5 million.
We were in compliance with these covenants as of June 20, 2011. Failure to comply with these covenants in the future could cause an acceleration of outstanding amounts under the term loan and restrict us from borrowing under the revolving credit facility to fund our liquidity requirements. Our effective leverage ratio and fixed rate ratio are each calculated based on Adjusted EBITDA, as presented in this prospectus. In connection with this offering we intend to refinance or obtain an amendment to the senior secured credit facility to permit this offering, to allow us to use the proceeds from this offering in the manner described in "Use of Proceeds" and for certain related matters.
Initial Public Offering
We believe that becoming a public company may provide additional sources of liquidity because we will have better access to public markets in order to raise additional capital. In addition, we believe
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that current conditions in the capital markets provide us with an attractive opportunity for an initial public offering.
Off-Balance Sheet Arrangements
Except for restaurant operating leases, we have no material off-balance sheet arrangements.
Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of January 3, 2011:
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Payments Due by Period in Years | ||||||||||||||||
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|
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
||||||||||||
|
(in thousands) |
||||||||||||||||
Senior credit facility(a) |
$ | 34,796 | $ | 102 | $ | 34,694 | $ | | $ | | |||||||
Operating leases(b) |
261,350 | 20,283 | 41,150 | 39,663 | 160,254 | ||||||||||||
Interest payments(a) |
3,368 | 1,760 | 1,608 | | | ||||||||||||
Capital leases |
37 | 35 | 2 | | | ||||||||||||
Total |
$ | 299,551 | $ | 22,180 | $ | 77,454 | $ | 39,663 | $ | 160,254 | |||||||
- (a)
- We
refinanced our senior secured credit facility in March 2011 (see discussion above). As of June 20, 2011, we have $119.3 million outstanding
under the refinanced facility due March 24, 2016, which bears interest at 6.25%. As a result of this refinancing:
-
- scheduled principal payments in the new senior secured credit facility are
scheduled to be $2.25 million in fiscal year 2011, $3.0 million in fiscal year 2012, $5.25 million in fiscal year 2013, $8.25 million in fiscal year 2014,
$11.25 million in fiscal year 2015, and $90.0 million thereafter; and
-
- assuming no change in the interest rate in effect at June 20, 2011, the
scheduled cash interest payments would be $5.6 million in fiscal year 2011, $7.3 million in fiscal year 2012, $7.1 million in fiscal year 2013, $6.7 million in fiscal year
2014, $6.1 million in fiscal year 2015 and $1.4 million thereafter.
- (b)
- Includes base lease terms and certain optional renewal periods that are included in the lease term in accordance with accounting guidance related to leases.
Indemnifications
We are parties to certain indemnifications to third parties in the ordinary course of business. The probability of incurring an actual liability under such indemnifications is sufficiently remote so that no liability has been recorded.
Segment Reporting
We own and operate the Joe's Crab Shack and Brick House Tavern + Tap restaurant brands in the United States. All of our restaurants compete in the full-service casual dining industry, providing similar products to similar guests. Our brands also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. We believe we meet the criteria for aggregating our restaurant operations into a single reporting segment.
Impact of Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and beverages, labor, energy and other services. Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed along to our guests. Apart from the commodity effects discussed above, in general, we have been able to substantially offset restaurant and operating cost increases
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resulting from inflation by altering our menu items, increasing menu prices, making productivity improvements or other adjustments. However, certain areas of costs, notably labor and utilities, can be significantly volatile or subject to significant changes due to changes in laws or regulations, such as the minimum wage laws. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update, or ASU, No. 2010-06, Improving Disclosures about Fair Value Measurements, which requires entities to disclose separately the amount and reasons behind significant transfers in and out of Level 1 and 2, disclose the fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used to measure both recurring and nonrecurring activities under Levels 2 and 3. The new disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009. ASU 2010-06 also requires that reconciliations for fair value measurements using significant unobservable inputs, or Level 3, should separately present significant information on a gross basis. This Level 3 disclosure requirement is effective for fiscal years beginning after December 15, 2010. We adopted ASU 2010-06 and early adopted its Level 3 disclosure requirement as of December 29, 2009. Our adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS, which clarifies Topic 820 and provides guidance on changes to certain principles or requirements for measuring fair value. The amendment is effective during interim and annual periods beginning after December 15, 2011. We do not believe that adoption of this standard will have a significant impact on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholder's equity and other reclassifications presented in the financial statements. The update is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe adoption of this standard will have a significant impact on the consolidated financial statements.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience, outside advice from parties believed to be experts in such matters, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our significant accounting policies can be found in Note 2 to our consolidated financial statements. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
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Impairment of Long-Lived Assets and Disposal of Property and Equipment
We evaluate the recoverability of the carrying amount of long-lived assets, which include property and equipment and intangible assets with definite useful lives, whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Our review for impairment of these long-lived assets takes into account estimates of future undiscounted cash flows. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Our asset group for impairment testing is comprised of the assets and liabilities of each of our individual restaurants, since this is the lowest level of identifiable cash flows. An impairment loss is recognized if the future undiscounted cash flows associated with the assets are less than their carrying value. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values. For assets held for sale or disposal, we measure fair value using quoted market prices or an estimation of net realizable value.
From time to time, we have decided to close or dispose of restaurants. Typically, such decisions are made based on operating performance or strategic considerations and must be made before the actual costs or proceeds of disposition are known, and management must make estimates of these outcomes. Such outcomes could include the sale of a leasehold, mitigating costs through a tenant or subtenant, or negotiating a buyout of a remaining lease term. In these instances, management evaluates possible outcomes, frequently using outside real estate and legal advice, and records provisions for the effect of such outcomes. The accuracy of such provisions can vary materially from original estimates, and management regularly monitors the adequacy of the provisions until final disposition occurs.
Leases
We currently lease all of our restaurant locations under leases classified as operating leases. Minimum base rent for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. As such, an equal amount of rent expense is attributed to each period during the term of the lease regardless of when actual payments occur. Lease terms begin on the inception date and include option periods only where such renewals are imminent and assured. The difference between rent expense and actual cash payments is classified as deferred rent in the consolidated balance sheets.
Some of our leases provide for contingent rent, which is determined as a percentage of sales in excess of specified minimum sales levels. We recognize contingent rent expense prior to the achievement of the specified sales target that triggers the contingent rent, provided achievement of the sales target is considered probable.
Insurance Reserves
We maintain large deductibles on workers' compensation, general liability, property, and business interruption insurance coverage. These policies have been structured to limit our per-occurrence exposure. We record a liability for workers' compensation and general liability for all unresolved claims based on actuarial information provided by our insurance brokers and insurers, combined with management judgments regarding economic conditions, including future medical and indemnity costs, the frequency and severity of claims and claim development history, case jurisdiction, applicable legislation and settlement practices. Changes in any of these factors in the future may produce materially different amounts of expense than otherwise would be reported under these insurance programs.
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Income Taxes
We are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions where we operate restaurants. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years' tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years' tax returns.
We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for the fiscal year ended January 1, 2007 and forward. Although the outcome of any potential tax audit is uncertain, we believe that we do not have significant uncertain tax positions, as defined in ASC No. 740, Income Taxes, that need to be recognized in our financial statements. We also have an on-going federal income tax audit for fiscal year 2009 that we believe will not have a material impact to our financial statements.
Stock-Based Compensation
Certain key members of management and independent directors have been granted common units of JCS Holdings, LLC, our parent company, under unit grant agreements. Because our parent company's membership interests have no active market, we estimated the fair value of each common unit granted on the date of grant based on a variety of considerations and assumptions, including but not limited to a third-party valuation. The valuation study used the market and income approaches with an appropriate discount factor for the common unit's lack of marketability. Common units granted prior to 2009 did not have any value at their grant date and no common units were granted in 2010.
We recognize compensation expense for employee and independent director services received in exchange for our parent company's common units, which is equal to the fair value of the common units at grant date. We ratably expense the fair value of grants in general and administrative expenses in our consolidated statements of operations over the remaining service period of the awards.
Claims and Other Contingencies
We recognize legal claims and other loss contingencies when information becomes available indicating that a liability has been incurred and the loss amount can be reasonably estimated. Predicting the outcome of claims and litigation involves substantial uncertainties that could cause actual results to vary materially from estimates. We recognize legal expenses, including those related to loss contingencies, as incurred.
Generally, we do not recognize gain contingencies until all contingencies have been resolved, but we recognize gain contingencies that are recoveries of previously recognized contingent losses when realization of the recovery is deemed probable and reasonably estimable.
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Quantitative and Qualitative Disclosures of Market Risks
Commodity Price Risk
Many of the food products we purchase are affected by commodity pricing that is subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control and are generally unpredictable. For fiscal year 2010, Snow Crab, Dungeness Crab, King Crab and shrimp accounted for approximately 47% of total food purchases. Crab is wild caught and sourced from government regulated and sustainable fisheries. During the current fiscal year, we have experienced increases in crab costs. The impact of some of these increases was partially offset by certain fixed forward pricing contracts for hard shell crab but we anticipate our food costs will increase over the balance of 2011. Other categories affected by the commodities markets, such as seafood, beef and fish, may each account for approximately 5 to 8% of our food purchases. While we have some of our food items prepared to our specifications, our food items are based on generally available products, and if any existing suppliers fail, or are unable to deliver in quantities we require, we believe that there are sufficient other quality suppliers in the marketplace that our sources of supply can be replaced as necessary. We also recognize, however, that commodity pricing is extremely volatile and can change unpredictably and over short periods. Our purchasing department negotiates prices and quantities for all of our ingredients through either cancellable contracts (with varying length terms), spot market purchases or commodity pricing formulas. Changes in commodity prices would generally affect us and our competitors similarly, depending on the terms and duration of supply contracts. We also enter into fixed price supply contracts for certain products in an effort to minimize volatility of supply and pricing. In many cases, or over the longer term, we believe we will be able to pass through some or all of the increased commodity costs by adjusting menu pricing. From time to time, competitive circumstances, or judgments about consumer acceptance of price increases, may limit menu price flexibility, and in those circumstances, increases in commodity prices can have an adverse effect on margins.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our senior secured credit facility, which bear interest at variable rates. As of June 20, 2011, we had $119.3 million outstanding under our senior secured credit facility. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from our variable rate debt obligations that are expected to remain outstanding. Interest rate changes do not affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. Our current LIBOR-based borrowings are subject to an interest rate floor of 150 basis points. Prevailing interest rates would have to increase by approximately 130 basis points over the interest rate at June 20, 2011, before our interest expense would change.
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Our Company
Through the success of our two restaurant businesses, Joe's Crab Shack and Brick House Tavern + Tap, we believe that Ignite Restaurant Group is developing a reputation as a company that can successfully create, develop and grow distinctive restaurant brands. Each of our restaurant businesses offers a variety of high-quality food in a unique, casual, high-energy atmosphere. Joe's Crab Shack and Brick House Tavern + Tap operate in a diverse set of markets across the United States.
Joe's Crab Shack, founded in 1991, is an established, national chain of casual seafood restaurants. Joe's serves a variety of high-quality seafood items, with an emphasis on crab. Joe's is a high-energy, family-friendly restaurant that encourages guests to "roll up your sleeves and crack into some crab."
Brick House Tavern + Tap, founded in 2008, is a casual restaurant business that provides guests a differentiated "gastro pub" experience by offering a distinctive blend of menu items in a polished setting. Brick House seeks to strike a balance between providing guests with an elevated experience while also appealing to "every-man, every-day." Brick House was recently listed as the #1 "up and comer" full-service, varied-menu restaurant business by Technomic, a leading restaurant industry consulting and research firm.
Our comparable restaurant sales have increased for 12 consecutive fiscal quarters and outperformed the KNAPP-TRACK report of casual dining restaurants, which is comprised of approximately 50 casual dining restaurant brands, over the same period of time. We have grown our comparable restaurant sales by 17.0% on a cumulative basis over the last three fiscal years. During the twenty-four weeks ended June 20, 2011, our comparable restaurant sales increased by 7.6% over the comparable period in our prior fiscal year.
Over the last three fiscal years ended January 3, 2011, we opened 14 new restaurants, closed seven restaurants and converted three Joe's Crab Shack restaurants to Brick House restaurants, which resulted in a net total of seven new restaurants. We have opened nine new restaurants in fiscal year 2011 (as of August 31, 2011). Total revenues and Adjusted EBITDA (a non-GAAP financial measure) have improved at compounded annual growth rates of 13.4% and 39.8%, respectively, over the last three fiscal years ended January 3, 2011. Over the same period, our total revenues increased from $273.4 million to $351.3 million, net income increased from a net loss of $3.2 million to net income of $11.6 million and Adjusted EBITDA increased from $20.3 million to $39.7 million.
As of August 31, 2011, we owned and operated 135 restaurants in 32 states.
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Our Business Strengths
We are focused on developing brands that have category leading and defendable positions within the casual dining segment. As a result, our core business strengths include the following:
Highly Differentiated Restaurant Brands. Our restaurants strive to provide a unique guest experience in a "come-as-you-are," upbeat and inviting restaurant environment. Both Joe's Crab Shack and Brick House Tavern + Tap are distinctively positioned restaurant brands, designed to have unique guest appeal. Joe's Crab Shack is a leading casual seafood brand that offers more than just a meala visit to Joe's is an event for the whole family, a night out. We provide a memorable, shareable "crab-cracking experience" where guests can roll up their sleeves and "break out of their shell" in a vacation-themed environment that offers an escape from the everyday. Brick House Tavern + Tap offers a comfortable, modern setting where guests can gather and share their passion for elevated, all-American food and beer. Each brand features food offerings and an atmosphere that attracts a diverse group of guests.
Authentic and Unique Menu Offerings. We offer high-quality, authentic seafood at Joe's Crab Shack and trend-forward, chef-inspired, contemporary tavern food and other American fare at Brick House Tavern + Tap. Signature dishes at both brands feature craveable flavor profiles. Food menus are complemented by an assortment of beverages and distinctive cocktails, including Joe's Shark Bite and Brick House's tap-at-your-table Beer Bongs. Our culinary and beverage teams develop recipes and menu offerings for both Joe's and Brick House to ensure that all items feature distinctive twists on classic items, as well as items exclusive to each brand.
Memorable Guest Service. Our servers are friendly, attentive and responsive to the needs of our guests. In addition, our servers strive to provide guests an unforgettable dining experience. Joe's staff creates a fun-loving atmosphere through energetic and interactive dancing, while the staff at Brick House is focused on entertaining and providing hospitable and personal service to guests. We achieve this through experienced restaurant management teams that implement training programs specific to the menu and culture of each brand. We believe our distinctive guest service models provide an additional layer of brand differentiation.
Attractive Unit Economics. We have successfully increased our restaurant average unit volumes at a compounded annual growth rate of 9.3%, from $2.4 million in fiscal year 2008 to $2.8 million in fiscal year 2010. Over the same period of time, we have increased our restaurant-level profit margin (a non-GAAP financial measure) by 410 basis points from 12.6% to 16.7%. We are targeting average unit volumes and restaurant-level profit margins for new locations to exceed system-wide fiscal year 2010 levels.
Experienced Management Team. Our experienced team of industry veterans has an average of 19 years of experience with restaurant companies such as T.G.I. Friday's, Darden, Applebee's, Yum! Brands, Landry's and Sbarro. Our management team is led by Raymond A. Blanchette, III, our President and Chief Executive Officer, who joined us in 2007. Mr. Blanchette was a former President for Pick Up Stix and Executive Director of International Business at T.G.I. Friday's, both are brands operated by Carlson Restaurants Worldwide. Within twelve months of his arrival, Mr. Blanchette transformed our leadership team by recruiting five highly experienced restaurant executives. Despite a difficult economic environment, we have achieved 12 consecutive fiscal quarters of comparable restaurant sales growth, expanded our geographic footprint and improved our financial performance. From fiscal year 2008 to fiscal year 2010, we increased net income from a net loss of $3.2 million to net income of $11.6 million and increased Adjusted EBITDA from $20.3 million to $39.7 million. The experience of our management team has allowed us to transform Joe's Crab Shack into a market leader while simultaneously developing and launching Brick House Tavern + Tap.
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Our Strategy
Our strategies include the following:
Disciplined New Restaurant Growth. We believe there are meaningful opportunities to grow the number of restaurants of both Joe's Crab Shack and Brick House Tavern + Tap. We seek to maximize free cash flow for reinvestment into new restaurants at attractive returns. For both brands, we target new restaurant cash-on-cash returns, which we define as restaurant-level profit per store divided by total build-out cost and pre-opening costs, to exceed 25%.
-
- Joe's Crab Shack. We target steady state new restaurant
average unit volumes of approximately $3.9 million for Joe's Crab Shack. Joe's has a narrowly defined new restaurant development strategy that predominantly targets (i) specific
geographies with high population density and a propensity for seafood and (ii) locations in close proximity to regional and national tourist attractions. Twenty two of our twenty five top
performing Joe's restaurants meet one or both of these criteria and generated average unit volumes of $4.4 million in fiscal year 2010. In fiscal year 2010, we developed a new restaurant
prototype for Joe's Crab Shack, which has given Joe's a polished look and feel while maintaining the authentic crab shack ambiance. As of August 31, 2011, we have successfully opened seven new
restaurants using this new prototype and development strategy.
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- Brick House Tavern + Tap. We target steady state new restaurant average unit volumes of approximately $3.2 million for Brick House Tavern + Tap. We believe Brick House has significant growth potential and intend to focus future development in the top 50 designated market areas across the country. We initially opened a limited number of Brick House restaurants across a broad range of geographies with the intent of optimizing the brand prior to a continued build out. We are currently in the process of integrating key insights into our future new restaurant rollout plans.
Target plans for openings across both brands include 14 restaurants in fiscal year 2011, of which ten are Joe's and four are Brick House. For fiscal year 2012, we target opening 11 to 13 new restaurants, the vast majority of which will be new Joe's restaurants. We expect that our new restaurant growth will continue to be substantially weighted towards new Joe's restaurants for the foreseeable future.
Comparable Restaurant Sales Growth. We believe the following strategies have contributed to our successful growth and will allow us to generate comparable restaurant sales growth in the future:
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- Continuous Menu Innovation. We believe menu innovation is
a critical factor in building guest loyalty and frequency. Both Joe's Crab Shack and Brick House Tavern + Tap have signature food and beverage offerings and a tradition of consistent menu
innovation. New menu items are typically introduced at both brands twice a year and we test new menu items in restaurants across several diverse geographies before they are introduced into the broader
base of restaurants. We have successfully introduced new and innovative items at both brands with such recent additions as the Skillet Paella and Mason Jars at Joe's Crab Shack and Fried Stuffed
Olives and Chicken & Waffles at Brick House Tavern + Tap. We plan to continue our tradition of menu innovation in the future.
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- Marketing our Restaurant Brands. We believe that our marketing strategies will continue to increase brand awareness while driving new guest trial and repeat guest visits. In June 2007, we changed our marketing strategy for Joe's Crab Shack by developing a long-term marketing plan supported by quantitative analysis that is designed to increase comparable restaurant sales and guest count, as well as build the brand for the future. We also moved to a national cable platform, which provides television advertising reach to the Joe's restaurants that were previously outside of the spot/local television markets and previews the Joe's Crab Shack brand in new
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- Driving Guest Satisfaction. We believe our focus on menu innovation and guest service has contributed to Joe's Crab Shack's overall guest satisfaction score improving by over 1,400 basis points since we began measuring guest satisfaction through a third party vendor in August 2008. At Joe's Crab Shack, we use this third party research consisting of feedback from more than 40,000 guests, to develop operational initiatives, which we expect will continue to deliver high levels of guest satisfaction. We are in the process of implementing a similar program at Brick House Tavern + Tap. We believe improving guest satisfaction will continue to build loyalty and lead to increased sales from our guests.
development markets. These national marketing efforts are complemented by a combination of local marketing programs and social media. Brick House Tavern + Tap is primarily marketed through local marketing and social media outlets. We also promote both brands using other in-restaurant sales initiatives, which are typically focused on products and are not price point promotions.
Leverage our Scale to Enhance our Profitability. We believe we have a scalable infrastructure and can continue to expand our margins as we execute our strategy. While both brands have independent field operations, we use our shared services platform to handle many of the administrative functions for both brands. This leverageable structure should further our ability to enhance our profitability as we grow.
Our Restaurants
Joe's Crab Shack
Joe's Crab Shack is a come-as-you-are, family restaurant that offers guests an environment that is laid-back, comfortable, fun, and energetic. Most locations offer an outdoor patio for guests to enjoy eating and drinking and a children's playground as part of the "I'm relaxed" restaurant experience. Joe's also has many locations that are located on waterfront property. Interior design elements include a nautical, vacation theme to invoke memories of beach vacations and a genuine crab shack experience. Table tops are decorated with art to prompt dinner conversation, while picnic tables across the patio and interior help guests feel the relaxed tropical vacation experience. Joe's Crab Shack restaurants are largely free-standing and average 8,000 square feet with over 200 seats. Most Joe's Crab Shack bars are on one side of the restaurant to provide for a distinct place to grab a drink while waiting for a table. Colorful party lights, a disco ball and bright paint colors enhance the dining experience. Many of our restaurants also include a small gift shop where guests can purchase souvenirs to commemorate their dining experience. Our new restaurant prototype, introduced in fiscal year 2010, contemporizes many of our key brand elements, while maintaining our authentic crab shack appeal.
Joe's Crab Shack restaurants perform well in targeted markets with high population density and a propensity for seafood as well as "destination" markets with national and regional tourist attractions, both of which are key characteristics of our new site selection strategy.
Brick House Tavern + Tap
Brick House is a trend-forward "gastro pub" set in an inviting, comfortable and modern venue that provides a distinctive guest experience. Brick House's interior décor includes custom lighting, dark mahogany woods, HD TVs, brick walls and an inviting fireplace. The interior design of Brick House Tavern + Tap consists of diverse seating and gathering areas where guests can pick multiple ways to enjoy their experience. In addition to a traditional dining room and bar area, Brick House also offers large communal tables and a section of leather recliners positioned in front of large HD TVs, where guests receive their own TV tray for dining. Each restaurant has a state-of-the-art entertainment package and provides guests with a clear line of sight to at least two HD TVs from every seat, making Brick House restaurants an ideal gathering place for sports enthusiasts. Outdoor seating is also
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available on the patio or around an open fire pit at nearly all locations. Both food and beverages are served by an energetic all-female service staff. The typical Brick House restaurant is approximately 8,500 square feet and averages approximately 250 seats, which includes both traditional tables and seats in unique settings.
Menu and Menu Development
We are focused on continually elevating our unique and high-quality food and beverage offerings. Born out of consumer insights, our in-house Marketing & Menu department continually creates new chef-driven food and beverage products for both Joe's Crab Shack and Brick House Tavern + Tap, which are intended to exceed guest expectations. A variety of research tools are used to identify opportunities and evaluate current offerings, including a brand-tracker program, segmentation and core menu studies, brand screens, focus groups and in-restaurant surveys. We use a third party econometric consulting firm to provide statistical analysis around pricing, allowing us to make fact-based decisions on pricing and menu engineering.
Joe's Crab Shack
Joe's Crab Shack aims to offer signature, craveable items to its guests by continuously seeking to innovate our menu offerings. For example, we have dramatically shifted the menu mix at Joe's to focus on entrées featuring crab over the past three fiscal years. Crab is strategically positioned center stage in our menu through the Steampots and Crab in a Bucket categories, highlighting the importance of the menu item that defines Joe's Crab Shack. Joe's Steampot and Crab in a Bucket offerings allow guests to choose between three varieties of crabs (Snow, Dungeness and King). Steampots, our best selling item, are overflowing with generous portions of crab, other seafood, red potatoes, a fresh ear of corn and sausage, combined with a complementary set of seasoning flavors. Our Crab in a Bucket entrées allow guests to pair their favorite crab selection with several distinctive preparations ranging from BBQ to Chesapeake Style or Garlic Herb. Joe's Crab Shack also leverages its crab-forward menu with other craveable crab items, including Made-From-Scratch Crab Cakes, Crab Nachos and Crazy-Good Crab Dip. As a result of this strategy, the percentage of entrées at Joe's featuring crab has increased from approximately 20% to 41% of total food revenues. We believe this shift in menu mix has contributed to increases in guest satisfaction, comparable restaurant sales and gross profit dollars. In addition to our core crab-focused menu, Joe's also offers a broad range of entrées featuring a variety of seafood, including the Get Stuffed Snapper, Surf 'N Turf Burger and Shrimp Trio, as well as a wide range of traditional seafood entrées like the Fisherman's Platter. Joe's also offers several "out of water" options such as Pan Fried Cheesy Chicken and Ribeye Steak. In addition, alcoholic beverages have significantly evolved to support the elevated food strategy, with vacation-style drinks, including the 'Shark Bite,' 'Category 5 Hurricane' and Mason Jar cocktails emerging as guests' top choices.
Joe's menu includes more than 25 items made with either Snow, Dungeness or King Crabs sourced from government regulated and sustainable fisheries. Our current menu offers 14 appetizers, including Made-From-Scratch Crab Cakes, Crab Nachos and Crazy-Good Crab Dip, and over 50 entrées, including Steampots, Crab in a Bucket, Skillet Paella, Stuffed Snapper and "out of water" options like Rib Eye Steak. For fiscal year 2010, Joe's average check was $22.00, lunch and dinner represented 28% and 72% of revenue, respectively, and revenue distribution was 84% food, 14% alcohol and 2% retail. Prices currently range from $6.89 to $38.99 for items on Joe's menu, including appetizers ordered as entrées and entrées that are frequently shared.
Menu implementation roll-outs occur in May and November. For all new menu roll-outs, new product launches are combined with a new menu design and updated pricing to reflect the current economic environment, as well as the current strategic marketing and creative plan. A menu change typically includes the introduction of five to ten new menu items while maintaining a balance of
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approximately 65 total menu items. Menu items are added or removed only after thorough testing and analysis, which includes guest satisfaction feedback.
Brick House Tavern + Tap
The Brick House Tavern + Tap food and beverage menu was created to support the brand position of "Dispensing Happiness to the Common Man." We believe Brick House's elevated menu has changed the game for the "burger & beer" crowd by offering an innovative premium food selection, along with over 70 varieties of beer.
Brick House offers its guests a broad selection of high-quality, chef-inspired, contemporary tavern food and other American fare. Brick House's menu includes 12 appetizers and over 40 entrées. Unique handcrafted appetizers include Deviled Eggs, Meatloaf Sliders, and Fried Stuffed Olives. Brick House offers an array of burgers, including The Kobe, which is hand formed from high-quality American Wagyu beef. Guests can also choose from a broad selection of home made entrées such as Drunken Chops, BBQ Baby Backs, Chicken & Waffles, and our Prime Rib Sandwich. In addition, Brick House's Brick Burgers, including the Gun Show Burger and the Red Chili Burger, offer guests a distinct take on the traditional burger. Brick House's beverage selection includes imports and domestic beers along with hand-pulled cask beer. Beer is served in vessels unique to our industry such as 40s, micro kegs and Brick House's signature tap-at-your table beer bongs. All Brick House restaurants have a full bar that supports a variety of liquor drinks, wine and beer cocktails like the Shandy and Bee Sting as well as specialty cocktails like the Dark & Stormy, Jameson Pickleback and St. Bubbles. For fiscal year 2010, Brick House had four full day parts with lunch, afternoon, dinner and late night accounting for 21%, 25%, 36% and 18%, respectively, and Brick House's revenue distribution was approximately 50% food and 50% alcohol. Brick House's entrées range in price from $7.50 to $20.00, including appetizers ordered as entrées.
Continuous menu innovation is a key strategy for Brick House Tavern + Tap. We revise the Brick House Tavern + Tap menu twice a year with design, pricing and product offerings assessed before each menu implementation. New menu offerings are created to reinforce differentiation in our appetizers, entrées and beverage offerings as part of our effort to provide our guests with exceptional food. Testing of new menu items is done in-restaurant before a new item is rolled system-wide.
Marketing
Over 80% of our marketing budget is invested in advertising through television (national cable, syndication and satellite), and digital advertising (including location-based media, on-demand media as well as in the social media such as Facebook and Twitter), with the balance of the budget being spent on marketing research, in-restaurant advertising, menus and production costs. Our marketing strategy is fact-based, using consumer insights to build brand affinity, and drive menu optimization. Our marketing expenditures were 5.7%, 5.4% and 4.9% of revenues for the fiscal years 2008, 2009 and 2010, respectively. As a percentage of revenues, marketing and advertising costs were lower due to greater leverage with the growth in comparable restaurant sales and the increase in the number of Brick House restaurants, which have lower marketing and advertising expenditures.
Joe's Crab Shack advertising campaigns typically occur five times per year and are annual, seasonal and frequency-focused campaigns aimed at attracting guests and communicating new menu items through quality-focused messaging. We engage in a national cable advertising campaign for Joe's that consists of 26 weeks on air, 14 networks, approximately 2,000 target rating points, or TRPs, and branded partnerships. We supplement Joe's national advertising with innovative media support, including interactive TV advertising on Dish Network, social media outreach, location-based mobile media, weather-triggered advertising, free media and a Steampot Game application. The Joe's email club currently has approximately 350,000 members.
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Brick House Tavern + Tap's marketing efforts are focused on menu innovation and local marketing initiatives. Local marketing includes events such as bike nights and pint nights. In April 2011, we added a Happy Hour program using local sports radio, in-house promotion through check attachments, posters and banners, and social media to support the rollout. The Brick House email club currently has over 55,000 members and has doubled since January 2011.
Guest Satisfaction
We use third party vendors to systematically gather, record and analyze key guest data for both of our brands. Our marketing research tools include:
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- AAU, or attitude, awareness and usage surveys;
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- third party guest satisfaction surveys;
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- annual core menu studies; and
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- TURF, or total unduplicated reach and frequency analysis.
We use the insights gathered from market research and data analytics to support strategic and tactical decisions. We embrace and rely on the use of market research as a tool to better understand our business and drive improved performance. These market research and data analytics provide us with critical guest feedback that guide us to change or refine individual menu items and implement operational initiatives to drive positive results on "Satisfaction," "Likely to Return" and "Likely to Recommend" metrics. Our AAU also guides us on changes to perception and awareness of the Joe's Crab Shack brand when considering shifts in our marketing and advertising strategies and tactics. We believe improved performance of our menu items, in our restaurants and in the effectiveness of our advertising is driven by understanding guest feedback and making changes accordingly.
In particular, we use a third party vendor to conduct detailed guest satisfaction surveys of our current guests and provide comparable industry satisfaction survey data for industry peers. Several surveys have been conducted since 2008 for Joe's Crab Shack and 11 other anonymous national and regional casual dining restaurant chains. While we are unable to confirm the extent to which the results of the surveys represents a comparison to our primary competitors, of the 12 casual dining companies included in the population study, Joe's ranks second at 76% for overall satisfaction (top box only) versus the leading company at 77%. Joe's Crab Shack has been increasing its top box satisfaction scores steadily over time with a 1,400 basis improvement since August 2008. In 2010, our third party vendor conducted a complete summary of the survey data based on four criteria: "Overall Satisfaction," "Return," "Recommend" and "Overall Value," and Joe's Crab Shack was one of only two companies to score above average on all four loyalty metrics. Due to the success of using this tool for Joe's, a similar program was implemented for Brick House in June 2011.
Restaurant Operations and Shared Services
While both brands have independent field operations, we maintain a shared services platform, which handles many of the administrative functions for both brands. We believe this provides a scalable infrastructure, which will allow us to increase our profitability and continue to grow.
Joe's Crab Shack
Joe's Crab Shack operations are currently led by one chief operating officer and two regional vice presidents. Each regional vice president oversees seven directors of operations, who typically manage nine to ten restaurants. Restaurant-level management at Joe's typically includes a general manager, an assistant general manager, a restaurant manager and flex managers, as required. The flex manager is an hourly employee that is trained during the off-season and may be called upon to perform a managerial
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role during the peak season. Each restaurant general manager reports to one of our directors of operations. Each restaurant also has a brand ambassador that volunteers in the local community on behalf of Joe's for group sales and fundraisers. Our restaurant managers have bonus incentives that are based on sales and restaurant-level profits.
The Joe's Crab Shack training has three distinct levels. Our manager training is designed to fit all manager levels from the hourly flex manager to general manager. This comprehensive program is up to nine weeks in length, depending on the knowledge base and skill of the trainee and is both classroom and on-the-job based. Our certified trainer training is a special workshop designed to develop training specialists that reside in a restaurant or market that can oversee the training programs in that area. In order to be a certified trainer, candidates must be a fully validated hourly team member with recommendations from their general manager and director of operations. Hourly trainees are orientated by the general manager of their home restaurant with their program, schedule of activities and on-the-job training then set by the certified trainer. Through the training process, hourly trainees will attend classroom sessions, take examinations, watch videos and work along side a certified trainer or a highly recommended individual that reports back to the certified trainer on performance and progress.
Brick House Tavern + Tap
The Brick House team is led by a chief operating officer who oversees a vice president of operations and three directors of operations who, in turn, each manage five to seven restaurants. Typical restaurant management includes a general manager, service manager, back-of-the-house manager, whom we refer to as our "executive chef," and bar manager. Brick House Tavern + Tap restaurant managers have bonus incentives that are based on sales and restaurant-level profits.
Our training programs are seven weeks for all salaried managers and one to two weeks for all hourly positions. Our new hire training program is conducted by in-house trainers who have been certified by our restaurant lead trainer. At the end of training, there is a comprehensive written test and an on-the-job training review that must be completed before permission to work independently is granted.
Shared Services
Both Joe's Crab Shack and Brick House Tavern + Tap are supported by our Restaurant Support Center located in Houston, Texas. The Restaurant Support Center provides support services to both brands including marketing, menu development, accounting, real estate and development, human resources, legal, purchasing and information systems. We believe our Restaurant Support Center allows us to leverage our scale and share best practices across key functional areas that are common to both of our brands.
Site Selection
Over the next several years, we intend to focus our development strategy for Joe's Crab Shack on new locations in narrowly defined geographic regions with high population density and a propensity for seafood and in close proximity to regional and national tourist attractions. Our development strategy for Brick House Tavern + Tap is largely intended to focus on opening new locations in the top 50 designated market areas across the country.
We have a dedicated development team that takes an analytical, data-driven approach to selecting new sites, which is largely based upon, but not limited to, the following criteria:
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- with respect to Joe's, attractiveness of locations from a regional/national and/or "destination market" perspective;
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- local market demographics and psychographic profiles;
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- characteristics similar to our most successful existing restaurants;
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- regional consumer trends and preferences;
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- local performance of nationally branded peers;
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- vehicle traffic patterns, visibility and access;
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- occupancy rates and other performance data from local hotels and other retail establishments, offices and other
establishments that draw restaurant traffic;
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- available square footage, parking and lease economics;
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- local investment and operating costs; and
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- development and expansion constraints.
Restaurant Development and Economics
We have experienced in-house real estate and development capabilities. Beginning fiscal year 2010, we have opened seven Joe's using our new prototype, and beginning fiscal year 2008, we have opened 17 Brick House locations across the United States. The average investment, including build-out costs and pre-opening costs, for our six new Joe's and seven new Brick House restaurants opened during the twelve months ended August 31, 2011, was $3.0 million and $2.8 million, respectively. Half of the Joe's restaurants opened during this period of time were newly developed and built restaurants. Conversions of other existing restaurants to Joe's or Brick House typically require less capital investment than newly developed and built restaurants. Over the longer term, we expect the mix of conversions and newly developed restaurants to be roughly equivalent. As we continue to develop new Brick House restaurants, we expect our build-out, pre-opening and other new restaurant development costs to moderate. Accordingly, our targets for build-out costs and pre-opening costs for typical Joe's and Brick House restaurants are $3.0 million and $2.6 million, respectively.
We target steady state new restaurant average unit volumes of approximately $3.9 million for Joe's Crab Shack and $3.2 million for Brick House, and cash-on-cash returns, which is defined as restaurant-level profit per store divided by total build-out costs and pre-opening costs, to exceed 25%.
Performance of any new restaurant location will usually differ from its originally targeted performance due to a variety of factors, and these differences may be material. In particular, average unit volumes of our new restaurants are impacted by a range of risks and uncertainties beyond our control, including those described under the caption "Risk Factors."
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Restaurant Locations and Other Properties
As of August 31, 2011, we had 118 Joe's Crab Shack restaurants in 31 states and 17 Brick House Tavern + Tap restaurants in 10 states, as shown in the chart below.
State
|
Joe's Crab Shack | Brick House Tavern + Tap | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Alabama |
1 | | 1 | |||||||
Arizona |
3 | | 3 | |||||||
California |
13 | | 13 | |||||||
Colorado |
4 | | 4 | |||||||
Delaware |
1 | | 1 | |||||||
Florida |
11 | 3 | 14 | |||||||
Georgia |
5 | | 5 | |||||||
Idaho |
1 | | 1 | |||||||
Illinois |
4 | 2 | 6 | |||||||
Indiana |
4 | | 4 | |||||||
Iowa |
1 | | 1 | |||||||
Kansas |
1 | | 1 | |||||||
Kentucky |
2 | 1 | 3 | |||||||
Louisiana |
2 | | 2 | |||||||
Maryland |
2 | | 2 | |||||||
Michigan |
3 | | 3 | |||||||
Minnesota |
1 | | 1 | |||||||
Missouri |
3 | 1 | 4 | |||||||
Nebraska |
| 1 | 1 | |||||||
Nevada |
2 | | 2 | |||||||
New Jersey |
3 | 1 | 4 | |||||||
New York |
2 | 1 | 3 | |||||||
North Carolina |
1 | | 1 | |||||||
Ohio |
1 | 1 | 2 | |||||||
Oklahoma |
3 | | 3 | |||||||
Pennsylvania |
2 | 1 | 3 | |||||||
South Carolina |
3 | | 3 | |||||||
Tennessee |
2 | | 2 | |||||||
Texas |
29 | 5 | 34 | |||||||
Utah |
2 | | 2 | |||||||
Virginia |
5 | | 5 | |||||||
Washington |
1 | | 1 | |||||||
Total |
118 | 17 | 135 |
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