AMENDMENT #1 TO FORM S-1
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As filed with the Securities and Exchange Commission on September 30, 2011

Registration No. 333-176097

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

under

The Securities Act of 1933

 

 

Chuy’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   5812   20-5717694

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1623 Toomey Rd.

Austin, Texas 78704

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Steven J. Hislop

President and Chief Executive Officer

Chuy’s Holdings, Inc.

1623 Toomey Road

Austin, Texas 78704

(512) 473-2783

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Charles T. Haag, Esq.

Jones Day

2727 N. Harwood Street

Dallas, Texas 75201

Telephone: (214) 220-3939

Facsimile: (214) 969-5100

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Latham & Watkins LLP

885 3rd Avenue Suite 1000

New York, New York 10022

Telephone: (212) 906-1200

Facsimile: (212) 751-4864

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

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.  ¨

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.  ¨

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.  ¨

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.  ¨

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.

 

Large accelerated filer  ¨      Accelerated filer   ¨
Non-accelerated filer  þ   (Do not check if a smaller reporting company)    Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

TITLE OF EACH CLASS OF

SECURITIES TO BE REGISTERED

 

PROPOSED

MAXIMUM AGGREGATE

OFFERING PRICE (1)(2)

  AMOUNT OF
REGISTRATION FEE (3)

Common Stock, $0.01 par value per share

  $75,000,000  

$8,707.50

 

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes shares of common stock that may be sold pursuant to the underwriter’s overallotment option.
(3) The registration fee was 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 the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information contained in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not a soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 2011

 

PRELIMINARY PROSPECTUS

             Shares

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Chuy’s Holdings, Inc.

Common Stock

We are offering              shares of our common stock and the selling stockholders identified in this prospectus are offering              shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and, prior to this offering, there has been no public market for our common stock. We expect the initial public offering price to be between $             and $             per share. We intend to apply to list our common stock on the Nasdaq Global Market under the symbol “CHUY.”

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 15 of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public Offering Price

   $                        $                    

Underwriting Discounts and Commissions

     

Proceeds to Chuy’s Holdings, Inc., before expenses

     

Proceeds to Selling Stockholders, before expenses

     

 

 

Delivery of the shares of common stock is expected to be made on or about                     , 2011. The selling stockholders have granted the underwriters an option for a period of 30 days to purchase an additional              shares of our common stock to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by the selling stockholders will be $             and the total proceeds to the selling stockholders, before expenses, will be $            .

 

Jefferies    Baird

Prospectus dated                     , 2011


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TABLE OF CONTENTS

 

 

 

     PAGE  

Basis of Presentation

     ii   

Industry and Market Data

     ii   

Trademarks and Copyrights

     ii   

Prospectus Summary

     1   

Risk Factors

     15   

Cautionary Statement Regarding Forward-Looking Statements

     32   

Use of Proceeds

     34   

Dividend Policy

     35   

Capitalization

     36   

Dilution

     37   

Selected Consolidated Historical Financial and Operating Data

     39   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     42   

Business

     57   

Management

     70   

Principal and Selling Stockholders

     76   

Executive and Director Compensation

     78   

Certain Relationships and Related Party Transactions

     91   

Description of Capital Stock

     95   

Description of Indebtedness

     99   

Shares Eligible for Future Sale

     102   

Material U.S. Federal Income Tax Consequences for Non-U.S. Holders

     104   

Underwriting

     107   

Legal Matters

     111   

Experts

     111   

Where You Can Find Additional Information

     112   

Index to Consolidated Financial Statements

     F-1   

 

 

Until                    , 2011 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be distributed to you. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. This document may only be used where it is legal to sell these securities. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus.

 

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Basis of Presentation

We operate on a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2008, 2009 and 2010 fiscal years each consisted of 52 weeks. Fiscal years are identified in this prospectus according to the calendar year in which the fiscal year ends. For example, references to “2010,” “fiscal 2010,” “fiscal year 2010” or similar references refer to the fiscal year ending December 26, 2010.

References to comparable restaurants in this prospectus include restaurants operating in and following the first full quarter following the 18th month of operations. As of June 27, 2010 and June 26, 2011, we had 11 and 15 comparable restaurants, respectively.

The information presented in this prospectus assumes (1) an initial public offering price of $     per share of common stock, which is the midpoint of the estimated range of the price set forth on the cover page of this prospectus, and (2) that the underwriters will not exercise their overallotment option. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. dollars.

Unless otherwise specified or the context otherwise requires, the references in this prospectus to “our company,” “the Company,” “us,” “we” and “our” refer to Chuy’s Holdings, Inc. together with its subsidiaries.

Unless otherwise indicated or the context otherwise requires, financial and operating data in this prospectus reflects the consolidated business and operations of Chuy’s Holdings, Inc. and its wholly owned subsidiaries.

Reverse Stock Split

In connection with this offering, on                     , 2011, we amended and restated our certificate of incorporation to effect a     :     reverse stock split of our common stock. Concurrent with the reverse stock split, we adjusted the number of shares subject to and the conversion price of our series A preferred stock, series B preferred stock and series X preferred stock and the number of shares subject to and the exercise price of our outstanding stock option awards under the 2006 Stock Incentive Plan such that the holders of the preferred stock and options are in the same economic position both before and after the reverse stock split. Immediately prior to this offering, we will convert each outstanding share of our series A preferred stock, series B preferred stock and series X preferred stock into our common stock on a     :     basis. Unless otherwise indicated, all share data gives effect to the reverse stock split and the adjustment of the terms of our preferred stock and outstanding options.

Industry and Market Data

This prospectus includes industry and market data that we derived from internal company records, publicly available information and industry publications and surveys, such as reports from KNAPP-TRACK, the National Restaurant Association and Technomic, Inc. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. We believe this data is accurate in all material respects as of the date of this prospectus. You should carefully consider the inherent risks and uncertainties associated with the industry and market data contained in this prospectus.

KNAPP-TRACK is a monthly sales and guest count tracking service for the full service restaurant industry 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 full service restaurant industry. We and other restaurants use the data included in the monthly KNAPP-TRACK report as one way of benchmarking our performance.

Trademarks and Copyrights

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this prospectus are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks and trade names.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our common shares. You should read this prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

Business Overview

Chuy’s is a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex Mex inspired food. We were founded in Austin, Texas in 1982 by Mike Young and John Zapp and, as of June 26, 2011, we operated 27 Chuy’s restaurants across Texas, Tennessee, Kentucky, Alabama and Indiana, with an average unit volume of $5.0 million for our comparable restaurants for the twelve months ended June 26, 2011. Our restaurants have a common décor, but we believe each location is unique in format, offering an “unchained” look and feel, as expressed by our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” We believe our restaurants have an upbeat, funky, eclectic, somewhat irreverent atmosphere while still maintaining a family-friendly environment. We are committed to providing value to our customers through offering generous portions of made-from-scratch, flavorful Mexican and Tex Mex inspired dishes. We believe our employees are a key element of our culture and set the tone for a fun, family-friendly atmosphere with attentive service. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and our customers’ restaurant experience.

We have grown the total number of Chuy’s restaurants from eight locations as of December 30, 2007 to 27 locations as of June 26, 2011. In the first half of 2011, we opened four restaurants and plan to open an additional four by the end of the year, representing a compound annual growth rate of 41.8% since year-end 2007. From fiscal year 2007 to the twelve months ended June 26, 2011, our annual revenue increased from $42.1 million to $114.0 million and our Adjusted EBITDA increased from $5.7 million to $16.9 million, representing compounded annual growth rates of 33.1% and 36.8%, respectively. Over the same period, our net income (loss) increased from ($0.9 million) to $3.8 million. For a reconciliation of Adjusted EBITDA, a non-GAAP term, to net income, see footnote 4 to “—Summary Historical Financial and Operating Data.” Our change in comparable restaurant sales has outperformed the KNAPP-TRACK™ index of casual dining restaurants for each of the last five years. In our most recent quarterly period ended June 26, 2011, comparable restaurant sales increased 5.2% over the same period from the prior year. We believe the broad appeal of the Chuy’s concept, strong unit economics and flexible real estate strategy enhance the portability of our concept and provide us significant opportunity for expansion.

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Our core menu was established using original recipes from family and friends of our founders, and has remained relatively unchanged over the years. We offer the same menu during lunch and dinner, which includes enchiladas, fajitas, tacos, burritos, combination platters and daily specials, complemented by a variety of appetizers, soups and salads. Each of our restaurants also offers a variety of homemade sauces, including the signature Hatch green chile and creamy jalapeño sauces, all of which we make from scratch daily in each restaurant. These sauces are a key element of our offering and provide our customers with an added ability to customize their orders. Our menu offers significant value to our customers, with only three out of 49 menu items priced over $10.00. We also offer a full-service bar in all of our restaurants providing our customers a variety of value-priced beverage offerings. We feature a selection of specialty cocktails including our signature on-the-rocks margaritas made with fresh, hand-squeezed lime juice and the Texas Martini, a made-to-order, hand-shaken cocktail served with jalapeño-stuffed olives. The bar represents an important aspect of our concept, where customers frequently gather prior to being seated. For the twelve months ended June 26, 2011, alcoholic beverages constituted 19.9% of our total restaurant sales.

We strive to create a unique and memorable customer experience at each of our locations. While the layout in each of our restaurants varies, we maintain distinguishable elements across our locations, including hand-carved, hand-painted wooden fish imported from Mexico, a variety of vibrant Mexican folk art, a “Nacho Car” that provides complimentary chips, salsa and chile con queso in the trunk of a classic car, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile and festive metal palm trees. Our restaurants range in size from 5,300 to 12,500 square feet, with seating for approximately 225 to 400 customers. Nearly all of our restaurants feature outdoor patios. We design our restaurants to have flexible seating arrangements that allows us to cater to families and parties of all sizes. Our brand strategy of having an “unchained” look and feel allows our restaurants to establish their own identity and provides us with a flexible real estate model. Our site selection process is focused on conversions of existing restaurants as well as new ground-up prototypes in select locations. Our restaurants are open for lunch and dinner seven days a week. We serve approximately 7,500 customers per location per week or 400,000 customers per location per year, on average, by providing high-quality, freshly prepared food at a competitive, compelling price point. We believe that many of Chuy’s customers visit one of our restaurants multiple times per week.

Our Business Strengths

Over our 29-year operating history, we have developed and refined the following strengths:

Fresh, Authentic Mexican and Tex Mex Inspired Cuisine. Our goal is to provide unique, authentic Mexican and Tex Mex inspired food using only the freshest ingredients. Every day in each restaurant, we roast and hand pull whole chickens, hand roll fresh tortillas, squeeze fresh lime juice and prepare fresh guacamole from whole avocados. In addition, we make all nine to eleven of our homemade sauces daily using high-quality ingredients. We believe this commitment to made-from-scratch, freshly prepared cooking results in great tasting, high-quality food, a sense of pride among our restaurant employees and loyalty among our customers. Some of our kitchen managers travel to Hatch, New Mexico every summer to hand-select batches of our green chiles. We believe our commitment to serving the highest quality food is also evidenced by us serving only Choice quality beef. Our culture revolves around freshly-prepared food, as there are no walk-in freezers in our prototype kitchens. We believe our servers and kitchen staff are highly proficient in executing the core menu and capable of satisfying large quantities of custom orders, as the majority of our orders are customized.

Significant Dining Value with Broad Customer Appeal. We are committed to providing value to our customers through offering generous portions of flavorful Mexican and Tex Mex inspired dishes using fresh, high-quality ingredients. We believe our menu offers a considerable value proposition to our customers, with only three out of our 49 menu items priced over $10.00. For the twelve months ended June 26, 2011, our average check was $12.92, which we believe is lower than many of our primary competitors. Through our training programs, we train our employees to make sure that each plate is prepared according to our presentation and recipe standards.

Although our core demographic is ages 21 to 44, we believe our restaurants appeal to a broad spectrum of customers and will continue to benefit from trends in consumers’ preferences. We believe consumers are

 

 

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craving bold, “high taste profile” foods, like those featured in our core offering. Additionally, we believe our brand appeals to a wide demographic and will continue to benefit from the growing demand for fresh, authentic Mexican and Tex Mex inspired food and a fun, festive dining experience. We are also a popular venue for families and other large parties, and consider many of our restaurants to be destination locations, drawing customers from as far as 30 miles away. We locate our restaurants in high-traffic locations to attract primarily local patrons with limited reliance on business travelers.

Upbeat Atmosphere Coupled with Irreverent Brand Helps Differentiate Concept. As stated in our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” each of our restaurants is uniquely designed. However, most share a few common elements – hand-carved, hand-painted wooden fish, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile, palm trees crafted from scrap metal and a variety of colorful Mexican folk art. Much of this décor, including all of the wooden fish and painted tiles, is sourced from vendors in Mexican villages that have partnered with us for decades. Additionally, virtually all restaurants feature a complimentary self-serve “Nacho Car,” a hollowed-out, customized classic car trunk filled with fresh chips, salsa and chile con queso.

Combined with attentive service from our friendly and energetic employees, we believe these signature elements create an upbeat feeling with a funky, eclectic and somewhat irreverent atmosphere. Our restaurants feature a fun mix of rock and roll rather than traditional Mexican-style music, which we believe helps to provide an energetic customer experience. We also believe that each restaurant reflects the character and history of its individual community. Many of our restaurants have added unique, local elements such as a special wall of photos featuring customers with their friends, families and dogs. We believe this has allowed our customers to develop a strong sense of pride and ownership in their local Chuy’s.

Deep Rooted and Inspiring Company Culture. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and restaurant experience. Since our founding in 1982, we believe we have developed close personal relationships with our customers, employees and vendors. We emphasize a fun, passionate and authentic culture and support active social responsibility and involvement in local communities. We regularly sponsor a variety of community events including our annual Chuy’s Children Giving to Children Parade, Chuy’s Hot to Trot 5K and other local charitable events. We believe our employees and customers share an energy and passion for our concept that differentiates us in the restaurant industry. This is evidenced by our low annual turnover rate, which as of June 26, 2011, was 9.2% for managers and 47.2% for hourly employees, and our goal of promoting 40% of restaurant-level managers from within, as well as our solid base of repeat customers.

In order to retain our unique culture as we grow, we invest significant time and capital into our training programs. We devote substantial resources to identifying, selecting and training our restaurant-level employees. We typically have ten in-store trainers at each existing location who provide both front- and back-of-the-house training on site. We also have an approximately 20-week training program for all of our restaurant managers, which consists of an average of 11 weeks of restaurant training and eight to nine weeks of “cultural” training, in which managers observe our established restaurants’ operations and customer interactions. We believe our focus on cultural training is a core aspect of our company and reinforces our commitment to the Chuy’s brand identity. In conjunction with our training activities, we hold “Culture Clubs” four or more times per year, as a means to fully impart the Chuy’s story through personal appearances by our founders Mike Young and John Zapp.

Proven, Flexible Business Model with Industry Leading Unit Economics. We have a long standing track record of consistently producing high average unit volumes relative to competing Mexican concepts, as well as established casual dining restaurants. For the twelve months ended June 26, 2011, our comparable restaurants generated average unit volumes of $5.0 million, with our highest volume restaurant generating $7.4 million and our lowest volume restaurant generating $3.6 million. We maintain strong Restaurant-Level EBITDA margins at our comparable restaurants, which for the twelve months ended June 26, 2011 represented 21.6% of revenues. For a reconciliation of Restaurant-Level EBITDA, a non-GAAP term, to net

 

 

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income, see footnote 4 to “—Summary Historical Financial and Operating Data.” We have successfully opened and operated restaurants in Texas, the Southeast and the Midwest and achieved attractive rates of return on our invested capital, providing a strong foundation for expansion in both new and existing markets. Under our investment model, our new restaurant openings have historically required a net cash investment of approximately $1.7 million. For our new unit openings, we estimate that each ground-up buildout of our prototype will require a total cash investment of $1.7 million to $2.5 million (net of estimated tenant incentives of between zero and $0.8 million). We estimate that each conversion will require a total cash investment of $2.0 million to $2.2 million. We target a cash-on-cash return beginning in the third operating year of 40.0%, and a sales to investment ratio of 2:1 for our new restaurants. On average, returns on new units opened since 2001 have exceeded these target returns in the second year of operations.

Seasoned Management Team with Significant Operational Experience. We are led by a seasoned management team with significant experience in all aspects of restaurant operations. Our senior management team has an average of approximately 28 years of restaurant industry experience and our 27 general managers have an average tenure at Chuy’s of more than eight years. In 2007, we hired our CEO and President, Steve Hislop. Mr. Hislop is the former President of O’Charley’s Restaurants, where he spent 19 years performing a variety of functions, including serving as Concept President and a member of the board of directors, and helped grow the business from 12 restaurants to a multi-concept company with 347 restaurants during his tenure. Since Mr. Hislop’s arrival in 2007, we have accelerated our growth plan and successfully opened 19 new restaurants, as of June 26, 2011, and entered six new markets.

Our Business Strategies

Pursue New Restaurant Development. We plan to open new restaurants in both established and adjacent markets across Texas, the Southeast and the Midwest where we believe we can achieve high unit volumes and attractive unit level returns. We believe the broad appeal of the Chuy’s concept, strong unit economics and flexible real estate strategy enhance the portability of our concept and provide us significant opportunity for expansion. Our new restaurant development will consist primarily of conversions of existing structures, with ground up construction of our prototype in select locations.

We have built a scalable infrastructure and have successfully grown our restaurant base through a challenging economic environment. In 2009, we opened five new restaurants, including our first restaurant outside of Texas in Nashville, Tennessee, as well as our first small market restaurant in Waco, Texas. In 2010, we opened six new restaurants including three locations outside of Texas: Murfreesboro, Tennessee; Birmingham, Alabama; and Louisville, Kentucky. Each of these restaurants opened at high unit volumes with attractive returns and provides us a platform to continue our growth. Our restaurants opened since 2001 that have been in operations for more than two years have generated average cash-on-cash returns of greater than 40.0% in the second year of operations. In 2011, we opened four new restaurants in the first half of the year, including our first restaurant in Indiana, and we plan to open four additional new restaurants by the end of the year. Further, we expect to open an additional 35 to 40 new restaurants over the next five years.

Leverage Scalable Infrastructure and Increase Our Margins. In preparation for our new restaurant development plan, we have made significant investments in infrastructure over the past several years. We believe we now have the corporate and supervisory personnel in place to support our growth plan for the foreseeable future without significant additional investments in infrastructure. We believe that as the restaurant base grows, our general and administrative costs will increase at a slower growth rate than our revenue. Additionally, we foresee relatively minimal increases in marketing spend as we enter new markets, as the majority of our marketing is done through non-traditional channels such as community events, charity sponsorships, social media and word-of-mouth from our devoted followers, as well as partnerships with local public relations firms.

Deliver Consistent Comparable Restaurant Sales Through Providing High-Quality Food and Service. We believe we will be able to generate comparable restaurant sales growth by consistently providing an attractive price/value proposition for our customers with excellent service in an upbeat atmosphere. We will remain

 

 

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focused on delivering freshly prepared, authentic, high-quality Mexican and Tex Mex inspired cuisine at a significant value to our customers. Though the core menu will remain unchanged, we will continue to explore potential additions as well as limited time food and drink offerings. Additionally, we will continue to promote our brand while protecting the unique culture that defines the Chuy’s experience. Grassroots marketing efforts, such as local “Redfish Rallies,” which are parties where we serve our food and margaritas and give away free Chuy’s merchandise in advance of opening a new restaurant, and charity events, as well as our line of eclectic t-shirts, will assist us in building the Chuy’s brand and driving traffic in our restaurants.

Additionally, we prioritize customer service in our restaurants, and will continue to invest significantly in ongoing training of our employees. In addition to our new manager training program and at least quarterly “Culture Clubs,” 20 to 24 of our trainers are dispatched to open new restaurants and ensure a solid foundation of customer service, food preparation and our cultured environment. We believe these initiatives will help enhance customer satisfaction, minimize wait times and help us serve our customers more efficiently during peak periods, which we believe is particularly important at our restaurants that operate at or near capacity.

Our Challenges

Before you invest in our stock, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.” Risks relating to our business include, among others, that our financial results depend significantly upon the success of our existing and new restaurants and our long-term success is highly dependent on our ability to successfully develop and expand our operations.

At June 26, 2011, after giving effect to this offering, we would have had $                     million of outstanding indebtedness. There is no guarantee that we will be successful in servicing our indebtedness while implementing aspects of our growth strategy, including with respect to the rate at which we open new restaurants or our ability to improve margins and increase earnings. See “Risk Factors” in this prospectus for risks associated with our ability to service our indebtedness and execute our growth strategy.

Refinancing Transactions

On May 24, 2011, we entered into a $67.5 million senior secured credit facility. All borrowings from our previous credit agreements were retired with the proceeds from this new senior secured credit facility. We used the proceeds from the new senior secured credit facility to, among other things, pay a special dividend totaling approximately $19.0 million on all outstanding shares of our common stock and preferred stock. We refer to the new senior secured credit facility and related transactions as the “Refinancing Transactions.” See “Description of Indebtedness.”

Our History

We were founded in Austin, Texas in 1982 by Michael Young and John Zapp. Our company was incorporated in Delaware in November 2006 in connection with the majority investment in our company by Goode Partners LLC, which we refer to as our Sponsor. In connection with our acquisition, our Sponsor acquired our predecessor entities, which include MY/ZP on Hwy 183, Ltd., a Texas limited partnership, MY/ZP of SA-281, Ltd., a Texas limited partnership, MY/ZP of Round Rock, Ltd., a Texas limited partnership, MY/ZP of Shenandoah, Ltd., a Texas limited partnership, MY/ZP Central Texas, Ltd., a Texas limited partnership, MY/ZP North Lamar, Ltd., a Texas limited partnership, MY/ZP on McKinney, Ltd., a Texas limited partnership, and MY/ZP of River Oaks, Ltd., a Texas limited partnership. As a result of the investment, Goode Chuy’s Holdings, LLC, an affiliate of Goode Partners LLC became our controlling stockholder.

Our Principal Stockholders

Upon the completion of this offering, Goode Chuy’s Holdings, LLC, our controlling stockholder, and its affiliates and Mike Young and John Zapp, our founders, are expected to own approximately     %, and     %, respectively, of our outstanding common stock, or     %, and     %, respectively, if the underwriters’ option to purchase additional shares is fully exercised. As a result, our controlling stockholder and our founders will be able to exert significant voting influence over fundamental and significant corporate matters and transactions and may have interests that differ from yours. See “Risk Factors—Our Sponsor will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control. Our

 

 

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founders may also continue to exert significant influence over us” and “Risk Factors—Conflicts of interest may arise because some of our directors are principals of our principal stockholders.”

Goode Partners LLC is a New York based private equity firm with a $225.0 million fund. They invest primarily in the consumer sector, specifically consumer brands and services, retail, restaurants and direct marketing/selling. Goode Partners LLC has no plans to provide additional funding to us and there is no guarantee that it ever will provide funding in the future.

Company Information

Our principal executive office is located at 1623 Toomey Road, Austin, Texas 78704 and our telephone number is 1-888-HEY-CHUY. Our website address is www.chuys.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

 

 

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THE OFFERING

 

Shares of common stock offered by us

             shares.

 

Shares of common stock offered by the selling stockholders

             shares, or              shares if the underwriters exercise their over-allotment option in full.

 

Over-allotment option

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to             additional shares of our common stock to cover overallotments.

 

Ownership after offering

Upon completion of this offering, our executive officers, directors and affiliated entities will own approximately     % of our outstanding common stock, or     % if the underwriters exercise their over-allotment option in full, and will as a result have significant control over our affairs.

 

Common stock to be outstanding after this offering

            shares.

 

Use of proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus. We intend to use the net proceeds of this offering, to:

 

  n  

make a mandatory prepayment of $     to the outstanding balance under our term A loan and to pay the Libor funding breakage costs under our new senior credit facility that we entered into on May 24, 2011; and

 

  n  

pay a fee of $2.0 million to terminate our advisory agreement with our Sponsor.

 

Any remaining net proceeds will be used for working capital and general corporate purposes.

 

  We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds” and “Principal and Selling Stockholders.”

 

Dividend policy

We did not declare or pay any dividends on our common stock during fiscal years 2009 and 2010. We declared and paid a one-time dividend of $0.6347 per share on shares of our common stock and our series A preferred stock, series B preferred stock and series X preferred stock during May 2011, totaling $19.0 million. See “Dividend Policy.”

 

 

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  We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future.

 

  Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements and such other factors as our board of directors deems relevant. In addition, our new senior secured credit facility restricts our ability to pay dividends. See “Description of Indebtedness.”

 

Proposed Nasdaq Global Market symbol

“CHUY”

 

Risk factors

Investment in our common stock involves substantial risks. You should read this prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus before investing in our common stock.

After giving effect to our             :              reverse stock split, the adjustment of the terms of our outstanding preferred stock and option awards and the conversion of our series A preferred stock, our series B preferred stock and our series X preferred stock into common stock prior to this offering, the number of shares of our common stock to be outstanding after this offering is based on      shares of common stock outstanding as of     , 2011 and excludes                  shares of our common stock, as adjusted in connection with our reverse stock split, issuable upon exercise of outstanding options under our 2006 Stock Option Plan at a weighted average exercise price of $             per share, as adjusted. See “Compensation Discussion and Analysis—2006 Stock Option Plan.”

Unless otherwise noted, all information in this prospectus:

 

  n  

assumes that the underwriters do not exercise their over-allotment option; and

 

  n  

reflects (1) the amendment and restatement of our certificate of incorporation to give effect to a         :         reverse stock split of our outstanding common stock, (2) the adjustment of the terms of our series A preferred stock, series B preferred stock, series X preferred stock and outstanding option awards to reflect the stock split and (3) the exchange of all shares of our issued and outstanding series A preferred stock, series B preferred stock and series X preferred stock for              shares of common stock at an exchange ratio of     :     immediately prior to the consummation of this offering.

 

 

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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and dates indicated, our summary historical financial and operating data. We have derived the statement of operations data for the fiscal years ended December 28, 2008, December 27, 2009 and December 26, 2010 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the statement of operations data for the twenty-six weeks ended June 27, 2010 and June 26, 2011 and balance sheet data as of June 26, 2011 from our unaudited interim consolidated financial statements appearing elsewhere in this prospectus. You should read this information in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

 

 

 

    YEAR ENDED (1)     TWENTY-SIX WEEKS
ENDED
 
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 
    (Dollars in thousands, except per share data)  

Statement of Operations Data:

         

Revenue

  $ 51,868      $ 69,394      $ 94,908      $ 43,066      $ 62,206   

Cost of Sales

    14,399        18,196        25,626        11,779        17,342   

Labor

    14,956        21,186        30,394        13,703        19,412   

Operating

    8,021        10,482        14,292        6,456        9,023   

Occupancy

    3,248        4,314        5,654        2,609        3,503   

General and administrative

    6,342        4,617        5,293        2,517        4,242   

Marketing

    389        533        655        330        468   

Restaurant pre-opening

    867        1,673        1,959        603        1,659   

Depreciation and amortization

    785        1,549        2,732        1,215        1,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    49,007        62,550        86,605        39,212        57,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    2,861        6,844        8,303        3,854        4,590   

Interest expense

    2,823        3,114        3,584        1,812        1,920   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    38        3,730        4,719        2,042        2,670   

Income tax provision (benefit)

    (113     1,077        1,428        643        732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings allocated to participating interests

  $ 149      $ 2,620      $ 5,617      $ 5,129      $ 1,916   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ 2      $ 33      $ (2,326   $ (3,730   $ 22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

         

Basic net income per share

  $        $        $        $        $     

Diluted net income per share

  $        $        $        $        $     

Weighted average common stock outstanding

         

Basic

         

Diluted

         

Pro Forma Per Share Data: (2)

         

Basic pro forma net income per share

      $             $        

Diluted pro forma net income per share

      $             $        

Pro forma weighted average common stock outstanding

         

Basic

         

Diluted

         

 

 

 

 

 

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     ACTUAL
AS OF

JUNE 26, 2011
    PRO FORMA
AS OF

JUNE 26, 2011 (3)
 

Balance Sheet Data (at end of period):

    

Cash and cash equivalents

   $ 4,085      $                    

Working capital (deficit)

     (1,103  

Total assets

     97,363     

Total debt

     52,875     

Common stock subject to put option

    
426
  
 

Total stockholders’ equity

     23,822     

 

    YEAR ENDED (1)     TWENTY-SIX WEEKS
ENDED
 
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 
    (Dollars in thousands, except per share data)  

Other Financial Data:

         

Net cash provided by operating activities

  $ 3,111      $ 6,292      $ 11,752      $ 3,625      $ 9,136   

Net cash used in investing activities

    (6,287     (15,588     (16,646     (6,334     (9,804

Net cash provided by financing activities

    4,030        9,750        6,169        3,783        1,416   

Capital expenditures

    6,029        15,395        16,370        6,337        9,749   

Restaurant-Level EBITDA (4)

  $ 10,855      $ 14,683      $ 18,287      $ 8,189      $ 12,458   

Restaurant-Level EBITDA margin (4)

    20.9     21.2     19.3     19.0     20.0

Adjusted EBITDA (4)

  $ 7,321      $ 10,349      $ 13,369      $ 5,860      $ 9,423   

Adjusted EBITDA margin (4)

    14.1     14.9     14.1     13.6     15.1

Operating Data:

         

Total restaurants (at end of period)

    12        17        23        18        27   

Total comparable restaurants (at end of period)

    8        8        13        11        15   

Average sales per comparable restaurant

  $ 5,400      $ 5,292      $ 4,985      $ 2,355      $ 2,494   

Change in comparable restaurant sales (5)

    2.9     (2.0 )%      0.7     (2.4 )%      5.9

Average check (6)

  $ 12.66      $ 12.77      $ 12.74      $ 12.72      $ 13.05   

 

 

(1) 

We utilize a 52- or 53-week accounting period which ends on the Sunday immediately preceding December 31. The fiscal years ended December 28, 2008, December 27, 2009 and December 26, 2010 had 52 weeks.

(2) 

Pro forma per share data gives effect to (i) the Refinancing Transactions, (ii) the conversion of our series A preferred stock, series B preferred stock and series X preferred stock into shares of common stock prior to the consummation of this offering, (iii) the                  shares of our common stock to be issued by us in this offering at an initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, and (iv) the use of proceeds therefrom, as if each of these events occurred on December 28, 2009. Pro forma basic net income per share consists of pro forma net income divided by the pro forma basic weighted average common stock outstanding. Pro forma diluted net income per share consists of pro forma net income divided by the pro forma diluted weighted average common stock outstanding.

Pro forma net income per share reflects: (i) the elimination of the annual management fee to our Sponsor and reimbursement of our Sponsor’s out-of-pocket expenses, (ii) net decreases in interest expense resulting from the Refinancing Transactions and the prepayment of outstanding loans under our new senior secured credit facility with the net proceeds of this offering, as described in “Use of Proceeds” and (iii) increases in income tax expense due to higher income before income taxes resulting from the elimination of the annual management fee as a result of the termination of the advisory agreement with our Sponsor described in (i) above and a decrease in interest expense as a result of our prepayments of loans under our new senior secured credit facility as described in (ii) above.

Pro forma per share data does not give effect to (i) the termination fee of $2.0 million to be paid to our Sponsor upon consummation of this offering, (ii) the write-off of deferred financing fees of $             million in connection with the use of the proceeds from this offering and (iii) a $             million charge resulting from the acceleration of vesting of stock options of our Chief Executive Officer as a result of this offering.

 

 

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The following is a reconciliation of historical net income to pro forma net income for year ended December 26, 2010 and the twenty-six weeks ended June 26, 2011:

 

 

 

     YEAR
ENDED
DECEMBER 26, 2010
     TWENTY-SIX
WEEKS ENDED

JUNE 26, 2011
 

Net income as reported

   $                        $                    

Management fees and expenses (a)

     

Decrease in interest expense (b)

     

Increase in income tax expense (c)

     
  

 

 

    

 

 

 

Pro forma net income (d)

   $         $     

Pro forma weighted average common stock outstanding

     

Basic

     

Diluted

     

Pro forma Basic net income per share

     

Pro forma Diluted net income per share

     

 

 

  (a)

Reflects the elimination of the management fees and expenses paid and reimbursed to our Sponsor for the periods presented. On November 7, 2006, in connection with our Sponsor’s investment, we entered into an advisory agreement with our Sponsor, pursuant to which our Sponsor agreed to provide us with certain financial advisory services. In exchange for these services, we pay our Sponsor an aggregate annual management fee equal to $350,000, and we reimburse our Sponsor for out-of-pocket expenses incurred in connection with the provision of services. Upon the completion of this offering, we and our Sponsor have agreed to terminate the advisory agreement in exchange for a termination fee of $2.0 million.

  (b)

Reflects adjustments to interest expense resulting from the Refinancing Transactions and our prepayment, with the net proceeds of this offering, of $     million of aggregate principal amount of outstanding loans under our new senior secured credit facility.

  (c)

Reflects adjustments to historical income tax expense to reflect increases in income tax expense due to higher income before income taxes resulting from a decrease in management fees and expenses as a result of termination of the advisory agreement with our Sponsor as described in (a) above and a decrease in interest expense as a result of our prepayment of loans under our new senior secured credit facility as described in (b) above, assuming a statutory tax rate of 34.0% for each period presented.

  (d) 

Pro forma net income for the twenty-six weeks ended June 26, 2011 is not adjusted for a special one-time cash bonus payment made to certain members of management.

The following is a reconciliation of historical interest expense to pro forma interest expense for the year ended December 26, 2010 and the twenty-six weeks ended June 26, 2011:

 

 

 

     YEAR
ENDED
DECEMBER 26, 2010
     TWENTY-SIX
WEEKS ENDED

JUNE 26,  2011
 

Interest expense as reported

   $                        $                    

Increase resulting from Refinancing Transactions (e)

     

Decrease resulting from use of proceeds of this offering (f)

     

Decrease resulting from decrease in interest rate (g)

     
  

 

 

    

 

 

 

Pro forma interest expense

   $         $     

 

 

  (e)

Reflects the increase in interest expense resulting from our higher outstanding borrowings following the Refinancing Transactions, at an assumed interest rate of 8.5%, which was the actual interest rate in effect on July 1, 2011 and an increase in interest expense related to an increase in the amortization of deferred financing costs associated with our new credit facility.

  (f) 

Reflects the difference between the borrowings under our senior secured credit facility of $             million and $             million pre-and post-offering, respectively at the assumed interest rate of 8.5%.

  (g)

Reflects a change in the interest rate from the assumed interest rate of 8.5% to an assumed interest rate of     % due to the reduction in our total leverage ratio to below 2.0 to 1.0. The assumed interest rate will take effect on July 1, 2012, pursuant to the terms of our new senior secured credit facility provided that we maintain our 2.0 to 1.0 total leverage ratio.

 

(3)

Pro forma balance sheet data as of June 26, 2011, gives effect to this offering and the use of proceeds therefrom, as if this offering was consummated on June 26, 2011 at an initial public offering price of $    , the midpoint of the range on the cover of this prospectus.

(4)

Restaurant-Level EBITDA represents net income plus the sum of general and administrative expenses, restaurant pre-opening costs, depreciation and amortization, interest and taxes. Adjusted EBITDA represents net income before interest, taxes, depreciation and amortization plus the sum of restaurant pre-opening costs, deferred compensation and management fees and expenses.

 

 

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   We are presenting Restaurant-Level EBITDA and Adjusted EBITDA, which are not prepared in accordance with GAAP, because we believe that they provide an additional metric by which to evaluate our operations and, when considered together with our GAAP results and the reconciliation to our net income, we believe they provide a more complete understanding of our business than could be obtained absent this disclosure. We use Restaurant-Level EBITDA and Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as revenue, income from operations, net income and cash flows from operations, to assess our historical and prospective operating performance and to enhance our understanding of our core operating performance. Restaurant-Level EBITDA and Adjusted EBITDA are presented because: (i) we believe they are useful measures for investors to assess the operating performance of our business without the effect of non-cash depreciation and amortization expenses; (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness; and (iii) we use Restaurant-Level EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant level, and restaurant pre-opening costs, which are non-recurring at the restaurant level. The use of Restaurant-Level EBITDA thereby enables us and our investors to compare our operating performance between periods and to compare our operating performance to the performance of our competitors. The measure is also widely used within the restaurant industry to evaluate restaurant level productivity, efficiency and performance. The use of Restaurant-Level EBITDA and Adjusted EBITDA as performance measures permits a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. Companies within our industry exhibit significant variations with respect to capital structures and cost of capital (which affect interest expense and tax rates) and differences in book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management believes that Restaurant-Level EBITDA and Adjusted EBITDA facilitate company-to-company comparisons within our industry by eliminating some of the foregoing variations.

 

   Restaurant-Level EBITDA and Adjusted EBITDA are not determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Neither Restaurant-Level EBITDA nor Adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies and our presentation of Restaurant-Level EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items.

Our management recognizes that Restaurant-Level EBITDA and Adjusted EBITDA have limitations as analytical financial measures, including the following:

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect our current capital expenditures or future requirements for capital expenditures;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, associated with our indebtedness;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor do Restaurant-Level EBITDA and Adjusted EBITDA reflect any cash requirements for such replacements;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect restaurant pre-opening costs; and

 

  n  

Restaurant-Level EBITDA does not reflect general and administrative expenses.

 

 

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A reconciliation of Restaurant-Level EBITDA, Adjusted EBITDA and EBITDA to our net income is provided below.

 

 

 

    YEAR ENDED (1)     TWENTY-SIX
WEEKS ENDED
 
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
        JUNE 27,    
2010
        JUNE 26,    
2011
 
    (Dollars in thousands)  

Adjusted EBITDA:

         

Net income

  $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   

Income tax provision (benefit)

    (113     1,077        1,428        643        732   

Interest expense

    2,823        3,114        3,584        1,812        1,920   

Depreciation and amortization

    785        1,549        2,732        1,215        1,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 3,646      $ 8,393      $ 11,035      $ 5,069      $ 6,557   

Deferred compensation (a)

    2,438        (100                     

Management fees and expenses (b)

    370        383        375        188        188   

Restaurant pre-opening (c)

    867        1,673        1,959        603        1,659   

Special one-time bonus payment (d)

                                1,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 7,321      $ 10,349      $ 13,369      $ 5,860      $ 9,423   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-Level EBITDA:

         

Net income

  $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   

Income tax provision (benefit)

    (113     1,077        1,428        643        732   

Interest expense

    2,823        3,114        3,584        1,812        1,920   

General and administrative

    6,342        4,617        5,293        2,517        4,242   

Restaurant pre-opening (c)

    867        1,673        1,959        603        1,659   

Depreciation and amortization

    785        1,549        2,732        1,215        1,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-Level EBITDA

  $ 10,855      $ 14,683      $ 18,287      $ 8,189      $ 12,458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (a)

In connection with our acquisition by our Sponsor, we entered into employment agreements with certain employees pursuant to which we agreed to pay bonuses monthly over a two or three year period. The payment of the bonuses under certain of these employment agreements was subject to continued employment with us. For bonus payments subject to continued employment, we recognized the bonus payments as compensation expense on a straight-line basis over the requisite service period. With respect to certain agreements that were not subject to continued employment, we recognized the bonus payments as compensation expense at the time the expense was incurred. All required payments under these employment agreements have been made as of December 27, 2009. In accordance with these employment agreements, the entity owned by our Founders assumed the obligations to make future payments under the employment agreements. See “Certain Relationships and Related Party Transactions—Bonus Payments and Related Note.”

  (b) 

For a discussion of our management fees and expenses, see footnote (a) to the reconciliation of pro forma net income to net income as set forth in footnote 3 above.

  (c) 

Restaurant 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 1 to our audited consolidated financial statements for additional details.

  (d) 

In connection with our Refinancing Transactions, we paid a special one-time cash bonus payment to certain members of management.

Adjusted EBITDA margin is defined as the ratio of Adjusted EBITDA to revenues. We present Adjusted EBITDA margin because it is used by management as a performance measurement to judge the level of Adjusted EBITDA generated from revenues and we believe its inclusion is appropriate to provide additional information to investors.

 

(5)

We consider a restaurant to be comparable in the first full quarter following the eighteenth month of operations. Change in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time.

(6)

Average check is calculated by dividing revenue by customer counts for a given period of time. Customer count is measured by the number of entrees sold.

 

 

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Table of Contents
     The following is a reconciliation of total stockholders’ equity to pro forma total stockholders’ equity as of June 26, 2011:

 

 

 

     AT
JUNE 26, 2011
 

Total stockholders’ equity as reported

   $                    

Net proceeds from this offering

  

Payment of advisory agreement termination fee, net of tax

  

Write-off of deferred financing fees, net of tax

  
  

 

 

 

Pro forma total stockholders’ equity

   $     

 

 

 

 

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Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the following risk factors and the other information in this prospectus, including our consolidated financial statements and related notes to those statements, before you decide to invest in our common stock. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Relating to Our Business and Industry

Our financial results depend significantly upon the success of our existing and new restaurants.

Future growth in our revenues and profits will depend on our ability to develop profitable new restaurants, maintain or grow sales and efficiently manage costs in our existing and new restaurants. As of June 26, 2011, we operated 27 restaurants, of which nine restaurants were opened within the preceding twelve months. The results achieved by these restaurants may not be indicative of longer-term performance or the potential market acceptance of restaurants in other locations.

The success of our restaurants revolves principally around customer traffic and average check per customer and customer experience. Significant factors that might adversely affect the average customer traffic and average check include, without limitation:

 

  n  

declining economic conditions, including housing market downturns, rising unemployment rates, lower disposable income, credit conditions, fuel prices and consumer confidence and other events or factors that adversely affect consumer spending in the markets we serve;

 

  n  

increased competition in the restaurant industry, particularly in the Mexican cuisine and casual and fast-casual dining segments;

 

  n  

changes in consumer preferences;

 

  n  

customers’ budgeting constraints;

 

  n  

customers’ failure to accept menu price increases that we may make to offset increases in key operating costs;

 

  n  

our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambience and service; and

 

  n  

customer experiences from dining in our restaurants.

Our restaurants are also susceptible to increases in certain key operating expenses that are either wholly or partially beyond our control, including, without limitation:

 

  n  

food and other raw materials costs, many of which we do not or cannot effectively hedge;

 

  n  

labor costs, including wage, workers’ compensation, health care and other benefits expenses;

 

  n  

rent expenses and construction, remodeling, maintenance and other costs under leases for our new and existing restaurants;

 

  n  

compliance costs as a result of changes in regulatory or industry standards;

 

  n  

energy, water and other utility costs;

 

  n  

costs for insurance (including health, liability and workers’ compensation);

 

  n  

information technology and other logistical costs; and

 

  n  

expenses due to litigation against us.

Certain of our restaurants operate at or near capacity. As a result, we may be unable to grow or maintain same store sales at those restaurants, particularly if additional restaurants are opened near the existing location. The failure of our existing or new restaurants to perform as expected could have a significant negative impact on our financial condition and results of operations.

 

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Our long-term success is highly dependent on our ability to successfully identify appropriate sites and develop and expand our operations.

We intend to develop new restaurants in our existing markets, and selectively enter into new markets. Since the start of 2008, we have expanded from 8 restaurants to 27 restaurants as of June 26, 2011, and we plan to open 4 additional restaurants for a total of 8 restaurants in 2011. There can be no assurance that any new restaurant that we open will have similar operating results to those of existing restaurants. We may not be able to open our planned new restaurants on a timely basis, if at all, and, if opened, these restaurants may not be operated profitably. The number and timing of new restaurants opened during any given period, and their associated contribution to operating growth, may be negatively impacted by a number of factors including, without limitation:

 

  n  

identification and availability of appropriate locations that will drive high levels of customer traffic and sales per unit;

 

  n  

inability to generate sufficient funds from operations or to obtain acceptable financing to support our development;

 

  n  

recruitment and training of qualified operating personnel in the local market;

 

  n  

availability of acceptable lease arrangements, including sufficient levels of tenant allowances;

 

  n  

the financial viability of our landlords, including the availability of financing for our landlords and our landlords ability to pay tenant incentives on a timely basis;

 

  n  

construction and development cost management;

 

  n  

timely delivery of the leased premises to us from our landlords and punctual commencement of our buildout construction activities;

 

  n  

delays due to the customized nature of our restaurant concepts and decor, construction and pre-opening processes for each new location;

 

  n  

obtaining all necessary governmental licenses and permits, including our liquor licenses, on a timely basis to construct or remodel and operate our restaurants;

 

  n  

inability to comply with certain covenants under our new senior secured credit facility that could limit our ability to open new restaurants;

 

  n  

consumer tastes in new geographic regions and acceptance of our restaurant concept;

 

  n  

competition in new markets, including competition for restaurant sites;

 

  n  

unforeseen engineering or environmental problems with the leased premises;

 

  n  

adverse weather during the construction period;

 

  n  

anticipated commercial, residential and infrastructure development near our new restaurants; and

 

  n  

other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Such actions may limit our growth opportunities. We cannot assure you that we will be able to successfully expand or acquire critical market presence for our brand in new geographical markets, as we may encounter well-established competitors with substantially greater financial resources. We may be unable to find attractive locations, build name recognition, successfully market our brand or attract new customers. Competitive circumstances and consumer characteristics in new market segments and new geographical markets may differ substantially from those in the market segments and geographical markets in which we have substantial experience. If we are unable to expand in existing markets or penetrate new markets, our ability to increase our revenues and profitability may be harmed.

Changes in economic conditions, including continuing effects from the recent recession, could materially affect our business, financial condition and results of operations.

The restaurant industry depends on consumer discretionary spending. The recent recession, coupled with high unemployment rates, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, rising fuel prices and reduced access to credit and reduced consumer confidence, has impacted consumers’ ability and willingness to spend discretionary dollars. Economic conditions may remain volatile and may continue to repress consumer confidence and discretionary spending for the near term. If the weak economy continues for a prolonged period of time or worsens, customer traffic could be adversely impacted if our customers choose to dine out less frequently or reduce the amount they spend on meals while dining out. We believe that if the

 

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current negative economic conditions persist for a long period of time or become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a permanent basis. If restaurant sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales. There can be no assurance that the macroeconomic environment or the regional economics in which we operate will improve significantly or that government stimulus efforts will improve consumer confidence, liquidity, credit markets, home values or unemployment, among other things.

Damage to our reputation or lack of acceptance of our brand in existing or new markets could negatively impact our business, financial condition and results of operations.

We believe we have built our reputation on the high quality of our food, service and staff, as well as on our unique culture and the ambience in our restaurants, and we must protect and grow the value of our brand to continue to be successful in the future. Any incident that erodes consumer affinity for our brand could significantly reduce its value and damage our business. For example, our brand value could suffer and our business could be adversely affected if customers perceive a reduction in the quality of our food, service or staff, or an adverse change in our culture or ambience, or otherwise believe we have failed to deliver a consistently positive experience.

In addition, our ability to successfully develop new restaurants in new markets may be adversely affected by a lack of awareness or acceptance of our brand in these new markets. To the extent that we are unable to foster name recognition and affinity for our brand in new markets, our new restaurants may not perform as expected and our growth may be significantly delayed or impaired.

We may be adversely affected by news reports or other negative publicity regardless of their accuracy, regarding food quality issues, public health concerns, illness, safety, injury or government or industry findings concerning our restaurants, restaurants operated by other foodservice providers, or others across the food industry supply chain. The risks associated with such negative publicity cannot be completely eliminated or mitigated and may materially harm our results of operations and result in damage to our brand.

Also, there has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase, and may act on such information without further investigation or authentication. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for dissemination of trade secret information, compromising valuable company assets. In sum, the dissemination of information online could harm our business, prospects, financial condition and results of operations, regardless of the information’s accuracy.

Our brand could also be confused with brands that have similar names, including Baja Chuy’s Mesquite Broiler, Inc. (“Baja Chuy’s”), an unaffiliated restaurant chain with whom we have entered into a settlement agreement regarding use of the Chuy’s name. As a result, our brand value may be adversely affected by any negative publicity related to Baja Chuy’s or any other restaurant that may use brand names, trademarks or trade dress that are similar to ours.

We are susceptible to economic and other trends and developments, including adverse weather conditions, in the local or regional areas in which our restaurants are located.

Our financial performance is highly dependent on restaurants located in Texas and the Southeastern and Midwestern United States. As a result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of operations. In recent years, certain of these states have been more negatively impacted by the housing decline, high unemployment rates and the overall economic crisis than other geographic areas. In addition, given our geographic concentrations, particularly in Texas, negative publicity regarding any of our restaurants in these areas could have a material adverse effect on our business and operations, as could other regional occurrences

 

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such as local strikes, terrorist attacks, increases in energy prices, adverse weather conditions, hurricanes, droughts or other natural or man-made disasters. For example, during September 2011, a bridge, which served as a key traffic conduit near our Clarksville, Indiana restaurant, was closed for repairs for a period that may extend up to one year or longer. As a result of the change in traffic patterns, this restaurant has experienced a material reduction in customer traffic. Adverse weather conditions may also impact customer traffic at our restaurants, cause the temporary underutilization of outdoor patio seating, and, in more severe cases, cause temporary restaurant closures, sometimes for prolonged periods.

Our business is subject to seasonal fluctuations, with restaurant sales typically higher during the spring and summer months as well as in December. Adverse weather conditions during our most favorable months or periods may exacerbate the effect of adverse weather on customer traffic and may cause fluctuations in our operating results from quarter-to-quarter within a fiscal year. In addition, outdoor patio seating is available at all but one of our restaurants and may be impacted by a number of weather-related factors. Our inability to fully utilize our restaurants’ seating capacity as planned may negatively impact our revenues and results of operations.

The impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants could negatively affect our financial results.

Negative effects on our existing and potential landlords due to the inaccessibility of credit and other unfavorable economic factors may, in turn, adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to us. In addition, if our landlords are unable to obtain sufficient credit to continue to properly manage their retail sites, we may experience a drop in the level of quality of such retail centers. Our development of new restaurants may also be adversely affected by the negative financial situations of developers and potential landlords. Landlords may try to delay or cancel recent development projects (as well as renovations of existing projects) due to the instability in the credit markets and recent declines in consumer spending, which could reduce the number of appropriate locations available that we would consider for our new restaurants. Furthermore, the failure of landlords to obtain licenses or permits for development projects on a timely basis, which is beyond our control, may negatively impact our ability to implement our development plan.

Changes in food availability and costs could adversely affect our operating results.

Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. We rely on two regional distributors, Labatt Foodservice in Texas and Merchants Distributors in the Southeastern United States, and various suppliers to provide our beef, cheese, beans, soybean oil, beverages and our groceries. For our chicken products, we rely on two suppliers for our Southeast locations and a sole supplier in Texas. For our green chiles, we contract to buy, through our supplier, Bueno Foods of Albuquerque, New Mexico, chiles from a group of farmers in New Mexico each year, which we have the right to select under our agreement. If and to the extent the farmers are unable or do not supply a sufficient amount of green chiles or if we need chiles out of season, we purchase the excess amount from the general supply of Bueno Foods. Each restaurant, through its general manager and kitchen manager, purchases its produce locally. We are currently evaluating entering into an agreement to purchase our produce through a produce buying group. Any increase in distribution prices, increase in the prices charged by suppliers or failure to perform by these third-parties could cause our food costs to increase or us to experience short-term unavailability of certain products. Failure to identify an alternate source of supply for these items may result in significant cost increases and an inability to provide certain of the items on our menu. If these events occur, it may reduce the profitability of certain of our offerings and may cause us to increase our prices. In addition, any material interruptions in our supply chain, such as a material interruption of ingredient supply due to the failures of third-party distributors or suppliers, or interruptions in service by common carriers that ship goods within our distribution channels, may result in significant cost increases and reduce sales. For example, during fiscal 2010, we experienced an increase in our cost of goods sold as a result of a temporary increase in the cost of avocados, tomatoes and limes as a result of insufficient supply in the marketplace caused by adverse weather during the year. This increase in our cost of goods sold was not offset by equivalent price increases and as a result reduced our profitability. Changes in the price or availability of certain food products could affect the profitability of certain food items, our ability to maintain existing prices and our ability to purchase sufficient amounts of items to satisfy our customers’ demands, which could materially adversely affect our profitability and reputation.

The type, variety, quality, availability and price of produce, beef, chicken and cheese are more volatile than other types of food and are subject to factors beyond our control, including weather, governmental regulation, availability

 

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and seasonality, each of which may affect our food costs or cause a disruption in our supply. Our food distributors and suppliers also may be affected by higher costs to produce and transport commodities used in our restaurants, higher minimum wage and benefit costs and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although we are able to contract for the majority of the food commodities used in our restaurants for periods of up to one year, the pricing and availability of some of the commodities used in our operations, such as our produce, cannot be locked in for periods of longer than one week or at all. We do not use financial instruments to hedge our risk to market fluctuations in the price of our ingredients and other commodities at this time. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.

Increases in our labor costs, including as a result of changes in government regulation, could slow our growth or harm our business.

We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of revenues, higher than other industries, we may be significantly harmed by labor cost increases. Unfavorable fluctuations in market conditions, availability of such insurance or changes in state and/or federal regulations could significantly increase our insurance premiums. In addition, we are subject to the risk of employment-related litigation at both the state and federal levels, including claims styled as class action lawsuits which are more costly to defend. Also, some employment related claims in the area of wage and hour disputes are not insurable risks.

Significant increases in health care costs may continue to occur, and we can provide no assurance that we will be able to contain those costs. Further, we are continuing to assess the impact of recently-adopted federal health care legislation on our health care benefit costs, and significant increases in such costs could adversely impact our operating results. There is no assurance that we will be able to contain our costs related to such legislation in a manner that will not adversely impact our operating results.

In addition, many of our restaurant personnel are hourly workers subject to various minimum wage requirements or changes to tip credits. Mandated increases in minimum wage levels and changes to the tip credit, which are the amounts an employer is permitted to assume an employee receives in tips when calculating the employee’s hourly wage for minimum wage compliance purposes, have recently been and continue to be proposed and implemented at both federal and state government levels. For example, in Kentucky our wait staff is not permitted to pool tips in order to share those tips with bartenders and bussing staff. As a result, we must pay our bartenders and bussing staff in our Kentucky locations additional amounts to ensure they receive minimum wage. Continued minimum wage increases or changes to allowable tip credits may further increase our labor costs or effective tax rate.

Various states in which we operate are considering or have already adopted new immigration laws, and the U.S. Congress and Department of Homeland Security from time to time consider or implement changes to Federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees that unbeknownst to us were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. Our financial performance could be materially harmed as a result of any of these factors.

Labor shortages could increase our labor costs significantly or restrict our growth plans.

Our restaurants are highly dependent on qualified management and operating personnel. Qualified individuals have historically been in short supply and an inability to attract and retain them would limit the success of our existing restaurants as well as our development of new restaurants. We place a heavy emphasis on the qualification and training of our personnel and spend significantly more on training our employees than our competitors. We can make no assurances that we will be able to attract and retain qualified individuals in the future which may have a more significant effect on our operation than those of our competitors. Additionally, the cost of attracting and retaining qualified individuals may be higher than we anticipate, and as a result, our profitability could decline.

 

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Customer traffic at our restaurants could be significantly affected by competition in the restaurant industry in general and, in particular, within the dining segments of the restaurant industry in which we compete.

The restaurant industry is highly competitive with respect to food quality, ambience, service, price and value and location, and a substantial number of restaurant operations compete with us for customer traffic. The main competitors for our brand are other operators of mid-priced, full service concepts in the multi-location casual dining and Tex Mex/Mexican food segments in which we compete most directly for real estate locations and customers. Some of our competitors have significantly greater financial, marketing, personnel and other resources than we do, and many of our competitors are well established in markets in which we have existing restaurants or intend to locate new restaurants. Any inability to successfully compete with the other restaurants in our markets will place downward pressure on our customer traffic and may prevent us from increasing or sustaining our revenues and profitability. We may also need to evolve our concept in order to compete with popular new restaurant formats or concepts that develop from time to time, and we cannot offer any assurance that we will be successful in doing so or that modifications to our concept will not reduce our profitability. In addition, with improving product offerings at fast casual restaurants, quick-service restaurants and grocery stores and the influence of negative economic conditions and other factors, consumers may choose less expensive alternatives, which could also negatively affect customer traffic at our restaurants.

Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings. For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information available to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Furthermore, the Patient Protection and Affordable Care Act of 2010 (the “PPACA”) establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to require chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information.

The PPACA further permits the United States Food and Drug Administration (the “FDA”) to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans fat content. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. The FDA published proposed regulations to implement the menu labeling provisions of the PPACA in April 2011, and has indicated that it intends to issue final regulations by mid-2012 and will begin enforcing the regulations by the end of 2012. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium from our menu offerings, switch to higher cost ingredients or may hinder our ability to operate in certain markets. If we fail to comply with these laws or regulations, our business could experience a material adverse effect.

We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our

 

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menu offerings to trends in eating habits. The imposition of menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general.

Multiple jurisdictions in which we operate have recently enacted new requirements that require us to adopt and implement a Hazard Analysis and Critical Control Points (“HACCP”) System for managing food safety and quality. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. We expect to incur certain costs to comply with these regulations and these costs may be more than we anticipate. If we fail to comply with these laws or regulations, our business could experience a material adverse effect.

Federal, state and local beer, liquor and food service regulations may have a significant adverse impact on our operations.

We are required to operate in compliance with federal laws and regulations relating to alcoholic beverages administered by the Bureau of Alcohol, Tobacco, Firearms and Explosives of the U.S. Department of Justice, as well as the laws and licensing requirements for alcoholic beverages of states and municipalities where our restaurants are or will be located. In addition, each restaurant must obtain a food service license from local authorities. Failure to comply with federal, state or local regulations could cause our licenses to be revoked and force us to cease the sale of alcoholic beverages at our certain locations. Any difficulties, delays or failures in obtaining such licenses, permits or approvals could delay or prevent the opening of a restaurant in a particular area or increase the costs associated therewith. In addition, in certain states, including states where we have existing restaurants or where we plan to open a restaurant, the number of liquor licenses available is limited, and licenses are traded on the open market. Liquor, beer and wine sales comprise a significant portion of our revenues. If we are unable to maintain our existing licenses, our customer patronage, revenues and results of operations could be adversely affected. Or, if we choose to open a restaurant in those states where the number of licenses available is limited, the cost of a new license could be significant.

We apply for our liquor licenses with the advice of outside legal and licensing consultants. Because of the many and various state and federal licensing and permitting requirements, there is a significant risk that one or more regulatory agencies could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within its jurisdiction. Any changes in the application or interpretation of existing laws may adversely impact our restaurants in that state, and could also cause us to lose, either temporarily or permanently, the licenses, permits and regulations necessary to conduct our restaurant operations, and subject us to fines and penalties.

Restaurant companies have been the target of class-actions and other litigation alleging, among other things, violations of federal and state law.

We are subject to a variety of lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. In recent years, a number of restaurant companies have been subject to claims by customers, employees and others regarding issues such as food safety, personal injury and premises liability, employment-related claims, harassment, discrimination, disability and other operational issues common to the foodservice industry. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. An adverse judgment or settlement that is not insured or is in excess of insurance coverage could have an adverse impact on our profitability and could cause variability in our results compared to expectations. We carry insurance policies for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, employer’s liability, health benefits and other insurable risks. Regardless of whether any claims that may be brought against us are valid or whether we are ultimately determined to be liable, we could also be adversely affected by negative publicity, litigation costs resulting from the defense of these claims and the diversion of time and resources from our operations.

We are subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages, under such “dram shop” statutes. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage,

 

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and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable, we may be adversely affected by publicity resulting from such laws.

Our marketing programs may not be successful.

We expend resources in our marketing efforts using a variety of media, including social media. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than we are able to. Should our competitors increase spending on marketing and advertising or our marketing funds decrease for any reason, or should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.

The impact of new restaurant openings could result in fluctuations in our financial performance.

Quarterly results have been, and in the future may continue to be, significantly impacted by the timing of new restaurant openings (often dictated by factors outside of our control), including associated restaurant pre-opening costs and operating inefficiencies, as well as changes in our geographic concentration due to the opening of new restaurants. We typically incur the most significant portion of restaurant pre-opening expenses associated with a given restaurant within the five months immediately preceding and the month of the opening of the restaurant. As the regional and national economies in which we operate improve, we may encounter more competition in obtaining lease sites and, as a result, may be unable to negotiate similar levels of tenant incentives under our new leases. If we are unable to obtain similar levels of tenant incentives for a particular unit, we would expect to incur increased capital expenditures in advance of opening and pay lower rent with respect to the restaurant. Our experience has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Our new restaurants commonly take nine months to one year to reach planned operating levels due to inefficiencies typically associated with new restaurants, including the training of new personnel, lack of market awareness, inability to hire sufficient qualified staff and other factors. Accordingly, the volume and timing of new restaurant openings has had, and may continue to have, a meaningful impact on our profitability. Due to the foregoing factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and these fluctuations may cause our operating results to be below expectations of public market analysts and investors.

Opening new restaurants in existing markets may negatively affect sales at our existing restaurants.

The consumer target area of our restaurants varies by location, depending on a number of factors such as population density, local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we already have existing restaurants could adversely impact the sales of new or existing restaurants. Our core business strategy does not entail opening new restaurants that materially impact sales at our existing restaurants but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity. There can be no assurance that sales cannibalization between our restaurants will not occur or become more significant in the future as we continue to expand our operations.

Our business operations and future development could be significantly disrupted if we lose key members of our management team.

The success of our business continues to depend to a significant degree upon the continued contributions of our senior officers and key employees, both individually and as a group. Our future performance will be substantially dependent in particular on our ability to retain and motivate Steve Hislop, our Chief Executive Officer, and our other senior officers. We currently have an employment agreement in place with Mr. Hislop and plan to enter into a formal employment agreement with Jon Howie, our Chief Financial Officer. We may also enter into employment agreements with other senior officers in the future. The loss of the services of our CEO, other senior officers or other key employees could have a material adverse effect on our business and plans for future development. We have no reason to believe that we will lose the services of any of these individuals in the foreseeable future; however, we currently have no effective replacement for any of these individuals due to their experience, reputation in the industry and special role in our operations. We also do not maintain any key man life insurance policies for any of our employees.

 

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Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely affect our ability to manage our existing restaurants.

We opened six, five and four restaurants in 2010, 2009 and 2008, respectively. As of June 26, 2011, we have opened four restaurants and we expect to open an additional four restaurants before the end of the year. Our future growth may strain our administrative staff, management systems and resources, financial controls and information systems. Those demands on our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our operating results could be materially and adversely affected. Likewise, if sales decline, we may be unable to reduce our infrastructure quickly enough to prevent sales deleveraging, which would adversely affect our profitability.

Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.

We believe our insurance coverage is 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 commercially reasonable to insure. These losses, if they occur, could have a material and adverse effect on our business and results of operations. In addition, the cost of workers’ compensation insurance, general liability insurance and directors’ and officers’ liability insurance fluctuates based on our historical trends, market conditions and availability. Additionally, health insurance costs in general have risen significantly over the past few years and are expected to continue to increase. These increases, as well as recently-enacted federal legislation requiring employers to provide specified levels of health insurance to all employees, could have a negative impact on our profitability, and there can be no assurance that we will be able to successfully offset the effect of such increases with plan modifications and cost control measures, additional operating efficiencies or the pass-through of such increased costs to our customers.

Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with our financial covenants, our liquidity and results of operations could be adversely affected.

At June 26, 2011, after giving effect to this offering, we would have had $         million of outstanding indebtedness under our new senior secured credit facility. We may, from time to time, incur additional indebtedness under this existing credit facility. See “Description of Indebtedness.”

Our new senior secured credit facility places certain conditions on us, including that it:

 

  n  

requires us to utilize a substantial portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity and other general corporate purposes;

 

  n  

increases our vulnerability to adverse general economic or industry conditions;

 

  n  

limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;

 

  n  

makes us more vulnerable to increases in interest rates, as borrowings under our new senior secured credit facility are at variable rates;

 

  n  

limits our ability to obtain additional financing in the future for working capital or other purposes; and

 

  n  

places us at a competitive disadvantage compared to our competitors that have less indebtedness.

Our new senior secured credit facility places certain limitations on our ability to incur additional indebtedness. However, subject to the qualifications and exceptions in our new senior secured credit facility, we may incur substantial additional indebtedness under that facility and may incur obligations that do not constitute indebtedness under that facility. The new senior secured credit facility also places certain limitations on, among other things, our ability to enter into certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure and to guarantee certain indebtedness. The new senior secured credit facility also places certain restrictions on the payment of dividends and distributions and certain management fees. These restrictions limit or prohibit, among other things, our ability to:

 

  n  

pay dividends on, redeem or repurchase our stock or make other distributions;

 

  n  

incur or guarantee additional indebtedness;

 

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  n  

sell stock in our subsidiaries;

 

  n  

create or incur liens;

 

  n  

make acquisitions or investments;

 

  n  

transfer or sell certain assets or merge or consolidate with or into other companies;

 

  n  

make certain payments or prepayments of indebtedness subordinated to our obligations under our new senior secured credit facility; and

 

  n  

enter into certain transactions with our affliates.

Failure to comply with certain covenants or the occurrence of a change of control under our new senior secured credit facility could result in the acceleration of our obligations under the new senior secured credit facility, which would have an adverse affect on our liquidity, capital resources and results of operations.

Our new senior secured credit facility also requires us to comply with certain financial covenants regarding our capital expenditures, fixed charge coverage ratio, total leverage ratio and our lease adjusted leverage ratio. Changes with respect to these financial covenants may increase our interest rate and failure to comply with these covenants could result in a default and an acceleration of our obligations under the new senior secured credit facility, which would have an adverse affect on our liquidity, capital resources and results of operations. Upon the receipt of funds from our initial public offering, we will be required to repay the amount of the term loans under the new senior secured credit facility that would be required to reduce the total leverage ratio (as defined in the new senior secured credit facility ) to 2.0 to 1.0. See “Description of Indebtedness.”

We may be unable to obtain debt or other financing on favorable terms or at all.

There are inherent risks in our ability to borrow. Our lenders may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy, increased financial instability of many borrowers and the declining value of their assets. As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our new senior secured credit facility, refinance our existing indebtedness or to obtain other financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our new senior secured credit facility because of a lender default or to obtain other cost-effective financing.

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business can be arranged. Such measures could include deferring capital expenditures (including the opening of new restaurants) and reducing or eliminating other discretionary uses of cash.

We may be required to record asset impairment charges in the future.

In accordance with accounting guidance as it relates to the impairment of long-lived assets, we review long-lived assets, such as property and equipment and intangibles subject to amortization, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level and primarily includes an assessment of historical cash flows and other relevant factors and circumstances. Negative restaurant-level cash flow (defined as restaurant net income plus depreciation, gain and/or loss on assets and pre-opening expense) over the previous 12-month period in a stabilized location is considered a potential impairment indicator. In such situations, the Company evaluates future cash flow projections in conjunction with qualitative factors and future operating plans. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the restaurant to the estimated undiscounted future cash flow expected to be generated by the restaurant. If the carrying amount of the restaurant exceeds estimated future cash flow, an impairment charge is recognized for the amount by which the assets carrying amount exceeds its fair value.

Continued economic weakness within our respective markets may adversely impact consumer discretionary spending and may result in lower restaurant sales. Unfavorable fluctuations in our commodity costs, supply costs and labor rates, which may or may not be within our control, may also impact our operating margins. Any of these factors could

 

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as a result affect the estimates used in our impairment analysis and require additional impairment tests and charges to earnings. We continue to assess the performance of our restaurants and monitor the need for future impairment. There can be no assurance that future impairment tests will not result in additional charges to earnings.

Security breaches of confidential customer information in connection with our electronic processing of credit and debit card transactions may adversely affect our business.

The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their customers has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information. In addition, most states have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim, proceeding, or mandatory notification could cause us to incur significant unplanned expenses, which could have an adverse impact on our financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and our restaurants.

We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brand and adversely affect our business.

Our ability to implement our business plan successfully depends in part on our ability to build brand recognition in the areas surrounding our locations using our trademarks and other proprietary intellectual property, including our brand names, logos and the unique ambience of our restaurants. We have registered or applied to register a number of our trademarks. We cannot assure you that our trademark applications will be approved. Also, as a result of the settlement agreement with an unaffiliated entity, Baja Chuy’s, we may not use “Chuy’s” in Nevada, California or Arizona, which may have an adverse effect on our growth plans in these states. Additionally, our brand value may be diluted as a result of their use of “Chuy’s” in these states. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our goods and services, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands.

We enforce our rights through a number of methods, including the issuance of cease-and-desist letters or making infringement claims in federal court. If our efforts to register, maintain and protect our trademarks or other intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes on our intellectual property, the value of our brand may be harmed, which could have a material adverse effect on our business and might prevent our brand from achieving or maintaining market acceptance. We may also face the risk of claims that we have infringed third parties’ intellectual property rights. A successful claim of infringement against us could result in our being required to pay significant damages or enter into costly licensing or royalty agreements in order to obtain the right to use a third party’s intellectual property, any of which could have a negative impact on our results of operations and harm our future prospects. If such royalty or licensing agreements are not available to us on acceptable terms or at all, we may be forced to stop the sale of certain products or services. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend, require us to rebrand our services, if feasible, and divert management’s attention.

We also rely on trade secrets and proprietary know-how, to protect our brand. Our methods of safeguarding this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and may result in a judgment or monetary damages. We do not maintain confidentiality agreements with all of our team members or suppliers. Even with respect to the confidentiality agreements we have, we cannot assure you that those agreements will not be breached, that they will provide meaningful protection, or that adequate remedies will be available in the event of an unauthorized use or disclosure of our proprietary information. If competitors independently develop or otherwise obtain access to our trade secrets or proprietary know-how, the appeal of our restaurants could be reduced and our business could be harmed. In addition, if we default under our lease agreements with our landlord, Young/Zapp GP, LLC (“Young/Zapp”) and its subsidiaries, at certain of our locations, our landlord may have the right to operate a Tex Mex or Mexican food restaurant at that location using our recipes and our trade dress. If such default were to occur, the brand value of our recipes and our trade dress might suffer.

 

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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. Although we employ both internal resources and external consultants to audit our systems, and test them for vulnerability, have implemented firewalls, data encryption and other security controls and intend to maintain and upgrade our security technology and operational procedures to prevent such damage, breaches or other disruptive problems, these security measures may not eliminate all risks.

A major natural or man-made disaster could have a material adverse effect on our business.

Most of our corporate systems, processes and corporate support for our restaurant operations are centralized at our headquarters in Austin, Texas, with certain systems and processes being concurrently stored at an offsite storage facility in accordance with our disaster recovery plan. As part of our new disaster recovery plan, we are currently finalizing the backup processes for our core systems at our co-location facility. If we are unable to fully implement this new disaster recovery plan, we may experience failures or delays in recovery of data, delayed reporting and compliance, inability to perform necessary corporate functions and other breakdowns in normal operating procedures that could have a material adverse effect on our business and create exposure to administrative and other legal claims against us.

We will incur increased costs and obligations as a result of being a public company.

As a privately held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly traded company. As a publicly traded company, we will incur significant legal, accounting and other expenses that we were not required to incur in the recent past. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the Nasdaq Global Market, have created uncertainty for public companies and increased our costs and time that our board of directors and management must devote to complying with these rules and regulations. We expect these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and attention from revenue generating activities. We estimate that we will incur approximately $1.5 to $2.0 million of incremental costs per year associated with being a publicly traded company; however, it is possible that our actual incremental costs of being a publicly-traded company will be higher than we currently estimate. In estimating these costs, we took into account expenses related to insurance, legal, accounting and compliance activities.

Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a publicly traded company. However, the measures we take may not be sufficient to satisfy our obligations as a publicly traded company.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC after the consummation of our initial public offering, and will require in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we are not in compliance with Section 404. Furthermore, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and share price and could limit our ability to report our financial results accurately and timely.

 

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Federal, state and local tax rules may adversely impact our results of operations and financial position.

We are subject to federal, state and local taxes in the U.S. If the Internal Revenue Service (“IRS”) or other taxing authority disagrees with the positions we have taken on our tax returns, we could face additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position. In addition, complying with new tax rules, laws or regulations could impact our financial condition, and increases to federal or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective tax rate. Any increase in our effective tax rate could have a material impact on our financial results.

Risks Relating to Our Common Stock

We are a “controlled company” within the meaning of the Nasdaq Marketplace rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. Our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, Goode Partners LLC (our “Sponsor”), which is the managing member of Goode Chuy’s Holdings, LLC (our “Controlling Stockholder”), will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the Nasdaq Global Market. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

  n  

the requirement that a majority of the board of directors consist of independent directors;

 

 

  n  

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors;

 

  n  

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  n  

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our nominating and corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Additionally, we only are required to have one independent audit committee member upon the listing of our common stock on the Nasdaq Global Market, a majority of independent audit committee members within 90 days from the date of listing and all independent audit committee members within one year from the date of listing. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Global Market.

Our Sponsor, however, is not subject to any contractual obligation to retain their controlling interest, except that they have agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of our underwriters in this initial public offering. Except for this brief period, there can be no assurance as to the period of time during which our Sponsor will maintain their ownership of our common stock following the offering. As a result, there can be no assurance as to the period of time during which we will be able to avail ourselves of the controlled company exemptions.

The price of our common stock may be volatile and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The market price of our common stock could fluctuate significantly for various reasons, which include:

 

  n  

our quarterly or annual earnings or those of other companies in our industry;

 

  n  

changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;

 

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  n  

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

  n  

changes in accounting standards, policies, guidance, interpretations or principles;

 

  n  

additions or departures of our senior management personnel;

 

  n  

sales of our common stock by our directors and executive officers;

 

  n  

sales or distributions of our common stock by our Sponsor or its affiliates;

 

  n  

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

  n  

actions by shareholders;

 

  n  

the level and quality of research analyst coverage for our common stock, changes in financial estimates or investment recommendations by securities analysts following our business or failure to meet such estimates;

 

  n  

the financial disclosure we may provide to the public, any changes in such disclosure or our failure to meet such disclosure;

 

  n  

various market factors or perceived market factors, including rumors, whether or not correct, involving us, our distributors or suppliers or our competitors;

 

  n  

acquisitions or strategic alliances by us or our competitors;

 

  n  

short sales, hedging and other derivative transactions in our common stock;

 

  n  

the operating and stock price performance of other companies that investors may deem comparable to us; and

 

  n  

other events or factors, including changes in general conditions in the United States and global economies or financial markets (including those resulting from acts of God, war, incidents of terrorism or responses to such events).

In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.

In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.

Future sales of our common stock in the public market could lower our share price, and the exercise of stock options and any additional capital raised by us through the sale of our common stock may dilute your ownership in us.

Sales of substantial amounts of our common stock in the public market following this offering by our existing shareholders, upon the exercise of outstanding stock options or stock options granted in the future or by persons who acquire shares in this offering may adversely affect the market price of our common stock. Such sales could also create public perception of difficulties or problems with our business. These sales might also make it more difficult for us to sell securities in the future at a time and price that we deem appropriate.

Upon the completion of this offering, we will have outstanding      shares of common stock, of which:

 

  n  

     shares are shares that we and the selling stockholders are selling in this offering and, unless purchased by affiliates, may be resold in the public market immediately after this offering; and

 

  n  

     shares will be “restricted securities,” as defined under Rule 144 under the Securities Act, and eligible for sale in the public market subject to the requirements of Rule 144, of which      shares are subject to lock-up agreements and will become available for resale in the public market beginning 180 days after the date of this prospectus.

In addition, at     , 2011, we have reserved      shares of common stock for issuance under the 2011 Omnibus Equity Incentive Plan. See “Compensation Discussion and Analysis—2011 Plan.” Upon consummation of this offering, we expect to have      shares of common stock issuable upon exercise of outstanding options (     of which will be fully vested at the time of this offering).

 

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With limited exceptions as described under the caption “Underwriting,” the lock-up agreements with the underwriters of this offering prohibit a shareholder from selling, contracting to sell or otherwise disposing of any common stock or securities that are convertible or exchangeable for common stock or entering into any arrangement that transfers the economic consequences of ownership of our common stock for at least 180 days from the date of the prospectus filed in connection with our initial public offering, although the lead underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. The lead underwriters have advised us that they have no present intent or arrangement to release any shares subject to a lock-up and will consider the release of any lock-up on a case-by-case basis. Upon a request to release any shares subject to a lock-up, the lead underwriters would consider the particular circumstances surrounding the request including, but not limited to, the length of time before the lock-up expires, the number of shares requested to be released, reasons for the request, the possible impact on the market for our common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of ours. As a result of these lock-up agreements, notwithstanding earlier eligibility for sale under the provisions of Rule 144, none of these shares may be sold until at least 180 days after the date of this prospectus.

Pursuant to our stockholder agreement, we have granted certain registration rights to our Controlling Stockholder, MY/ZP Equity, LLC, an entity wholly-owned by Michael Young and John Zapp (jointly, our “Founders”), and certain other stockholders. Should these stockholders exercise their registration rights under our stockholder agreement, the shares registered would no longer be restricted securities and would be freely tradable in the open market. See “Certain Relationships and Related Party Transactions—Registration Rights”.

As restrictions on resale expire or as shares are registered, our share price could drop significantly if the holders of these restricted or newly registered shares sell them or are perceived by the market as intending to sell them. These sales might also make it more difficult for us to sell securities in the future at a time and at a price that we deem appropriate.

If securities analysts or industry analysts downgrade our shares, publish negative research or reports, or do not publish reports about our business, our share price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our shares or our competitors’ stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

  n  

authorize our board of directors to issue, without further action by the stockholders, up to      shares of undesignated preferred stock;

 

  n  

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

  n  

specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;

 

  n  

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

  n  

establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;

 

  n  

prohibit cumulative voting in the election of directors;

 

  n  

provide that our directors may be removed only for cause;

 

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  n  

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

  n  

require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder (any stockholder with 15% or more of our capital stock) for a period of three years following the date on which the stockholder became an “interested” stockholder.

Since we do not expect to pay any dividends for the foreseeable future, investors in this offering may be forced to sell their stock in order to realize a return on their investment.

Since we do not expect to pay any dividends for the foreseeable future, investors may be forced to sell their shares in order to realize a return on their investment. Other than the dividend paid in connection with the Refinancing Transactions, we have not declared or paid any dividends on our common stock. We do not anticipate that we will pay any dividends to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends is restricted by the terms of our new senior secured credit facility and might be restricted by the terms of any indebtedness that we incur in the future. Consequently, you should not rely on dividends in order to receive a return on your investment. See “Dividend Policy.”

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us. Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

Our ability to raise capital in the future may be limited.

Our ability to raise capital in the future may be limited. Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common shareholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing shareholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future securities offerings, diluting their interest and reducing the market price of our common stock.

Our Sponsor will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control. Our Founders may also continue to exert significant influence over us.

We are currently controlled, and after this offering is completed will continue to be controlled, by our Sponsor. Upon completion of this offering, investment funds affiliated with our Sponsor will beneficially own     % of our outstanding common stock (    % if the underwriters exercise in full the option to purchase additional shares from us). For as long as our Sponsor continues to beneficially own shares of common stock and other equity securities representing more

 

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than 50% of the voting power of our common stock, they will be able to direct the election of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, these entities will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to them. Even if their ownership falls below 50%, our Sponsor will continue to be able to strongly influence or effectively control our decisions. See “Certain Relationships and Related Party Transactions.”

Upon completion of this offering, our Founders will continue to serve on our board of directors and will beneficially own     % of our outstanding common stock (    % if the underwriters exercise in full the option to purchase additional shares from our selling stockholders). Our Founders may be able to exert significant influence over certain of our decisions.

Additionally, our Sponsor is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complimentary to our business and, as a result, those acquisition opportunities may not be available to us.

Conflicts of interest may arise because some of our directors are principals of our principal stockholders.

Upon the completion of this offering, representatives of our Sponsor and our Founders will occupy a majority of the seats on our board of directors. Our Sponsor or our Founders could invest in entities that directly or indirectly compete with us. As a result of these relationships, when conflicts arise between the interests of our Sponsor and our Founders and the interests of our stockholders, these directors may not be disinterested.

Risks Related to this Offering

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity.

Prior to this offering, there has not been a public market for our common stock. An active market for our common stock may not develop following the completion of this offering, or if it does develop, may not be maintained. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares of our common stock will be determined by negotiations between us, the selling shareholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

You will suffer immediate and substantial dilution.

The initial public offering price per share is substantially higher than the pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liability. Assuming an offering price of $     per share, you will incur immediate and substantial dilution in the amount of $     per share. If outstanding options to purchase our common stock are exercised, you will experience additional dilution. Any future equity issuances will result in even further dilution to holders of our common stock.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus may include forward-looking statements. These statements reflect the current views of our senior management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.

Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

 

  n  

the success of our existing and new restaurants;

 

  n  

our ability to identify appropriate sites and develop and expand our operations;

 

  n  

changes in economic conditions, including continuing effects from the recent recession;

 

  n  

damage to our reputation or lack of acceptance of our brand in existing or new markets;

 

  n  

economic and other trends and developments, including adverse weather conditions, in the local or regional areas in which our restaurants are located;

 

  n  

the impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants;

 

  n  

changes in food availability and costs;

 

  n  

labor shortages and increases in our labor costs, including as a result of changes in government regulation;

 

  n  

increased competition in the restaurant industry and the segments in which we compete;

 

  n  

the impact of legislation and regulations regarding nutritional information, and new information or attitudes regarding diet and health or adverse opinions about the health of consuming our menu offerings;

 

  n  

the impact of federal, state and local beer, liquor and food service regulations;

 

  n  

the success of our marketing programs;

 

  n  

the impact of new restaurant openings, including on the effect on our existing restaurants of opening new restaurants in the same markets;

 

  n  

the loss of key members of our management team;

 

  n  

strain on our infrastructure and resources caused by our growth;

 

  n  

the impact of litigation;

 

  n  

the inadequacy of our insurance coverage and fluctuating insurance requirements and costs;

 

  n  

the impact of our indebtedness on our ability to invest in the ongoing needs of our business;

 

  n  

our ability to obtain debt or other financing on favorable terms or at all;

 

  n  

the impact of a potential requirement to record asset impairment charges in the future;

 

  n  

the impact of security breaches of confidential customer information in connection with our electronic processing of credit and debit card transactions;

 

  n  

inadequate protection of our intellectual property;

 

  n  

the failure of our information technology system or the breach of our network security;

 

  n  

a major natural or man-made disaster;

 

  n  

our increased costs and obligations as a result of being a public company;

 

  n  

the impact of federal, state and local tax;

 

  n  

the impact of our election to avail ourselves of the controlled-company exemptions from corporate governance requirements of the Nasdaq Marketplace rules;

 

  n  

volatility in the price of our common stock;

 

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  n  

the impact of future sales of our common stock in the public market, and the exercise of stock options and any additional capital raised by us through the sale of our common stock;

 

  n  

the impact of a downgrade of our shares by securities analysts or industry analysts, the publication of negative research or reports, or lack of publication of reports about our business;

 

  n  

the effect of anti-takeover provisions in our charter documents and under Delaware law;

 

  n  

the effect of our decision to not pay dividends for the foreseeable future;

 

  n  

the effect of changes in accounting principles applicable to us;

 

  n  

our ability to raise capital in the future;

 

  n  

the significant influence our Sponsor will continue to have over us after this offering, including control over decisions that require the approval of stockholders, and the significant influence our Founders may continue to exert over us;

 

  n  

the conflicts of interest that may arise because some of our directors are principals of our principal stockholders;

 

  n  

the lack of an existing market for our common stock and uncertainty as to whether one will develop to provide you with adequate liquidity;

 

  n  

the potential that you will suffer immediate and substantial dilution; and

 

  n  

other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this prospectus reflect our views as of the date of this prospectus with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Before making a decision to purchase our common stock, you should carefully consider all of the factors identified in this prospectus that could cause actual results to differ.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares by us in this offering will be approximately $     million, after deducting underwriting discounts and commissions and estimated expenses, based upon an assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover of this prospectus. We will not receive any proceeds from the sale of common stock by the selling stockholders, including with respect to any sale of shares from the exercise of the underwriters of their option to purchase additional shares from the selling stockholders. A $1.00 increase (decrease) in the assumed initial public offering price of $     per share would increase (decrease) the net proceeds to us of this offering by $     million, assuming the sale by us of      shares of our common stock and after deducting underwriting discounts and commissions and estimated expenses.

We intend to use the net proceeds received by us from this offering:

 

  n  

to make a mandatory prepayment of $     to the outstanding balance under our term A loan and to pay the Libor funding breakage costs under our new senior secured credit facility, which were incurred to finance the dividend paid to our common and preferred stockholders, which is the amount sufficient to reduce the total leverage ratio (as defined in our new senior secured credit facility) to 2.0:1.0;

 

  n  

to pay a $2.0 million termination fee with respect to the termination of our Advisory Agreement with our Sponsor; and

 

  n  

for working capital and other general corporate purposes.

On May 24, 2011, we entered into our new senior secured credit facility, which bears interest at a variable rate based on the prime, federal funds or Libor rate plus an applicable margin based on our total leverage ratio. Our interest rate at July 1, 2011 was 8.5%. The new senior secured credit facility matures on May 24, 2016 or sooner upon the occurrence of an event of default.

We used the following amounts of the net proceeds from our new senior secured credit facility as follows:

 

  n  

approximately $20.8 million to repay all outstanding loans and accrued and unpaid interest, servicing fees, commitment fees and letter of credit fees under our credit facility with Wells Fargo Capital Finance, Inc.;

 

  n  

approximately $10.1 million to repay the outstanding principal, interest and expenses under our credit facility with HBK Investments L.P.;

 

  n  

approximately $1.6 million to pay the expenses of the lenders; and

 

  n  

approximately $20.0 million to pay a dividend of $19.0 million to our common and preferred stockholders and other special cash bonus payments to certain members of management.

For additional information regarding our new senior secured credit facility, see “Description of Indebtedness.”

We may also use a portion of the net proceeds to develop additional restaurants and acquire potential restaurant sites. Pending the uses described above, we intend to invest the net proceeds in short-term, investment grade, interest bearing securities.

The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our expansion efforts, sales and marketing activities and competition. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering.

 

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DIVIDEND POLICY

We did not declare or pay any dividends on our common stock during fiscal years 2009 and 2010. We declared and paid a dividend of $0.6347 per share on shares of our common stock and our series A preferred stock, series B preferred stock and series X preferred stock during May 2011, totaling $19.0 million. We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements and such other factors as our board of directors deems relevant. In addition, our new senior secured credit facility restricts our ability to pay dividends. See “Description of Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of                     , 2011:

 

  n  

on an actual basis; and

 

  n  

on an as adjusted basis to give effect to (1) our     :     reverse stock split, (2) the conversion of all of our classes of preferred stock into common stock immediately before the offering, (3) the sale of shares of common stock in this offering at an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated fees and expenses payable by us and (4) the application of the net proceeds of this offering as described under “Use of Proceeds,” as if the events had occurred on                     , 2011.

You should read this information in conjunction with “Use of Proceeds,” “Selected Consolidated Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

AS ADJUSTED AS ADJUSTED
     AS OF     , 2011  
     ACTUAL      AS ADJUSTED  
     (In thousands)  

Cash and cash equivalents

   $         $     

Debt:

     

Revolving Credit Facility (1)

   $         $     

Term A Loan Facility

     

Other debt

     

Total debt

     

Stockholders’ Equity (2):

     

Common Stock (3)

     

Series A Preferred Stock (3)

          

Series B Preferred Stock (3)

          

Series X Preferred Stock (3)

          

Paid-in Capital

     

Total stockholders’ equity (3) (4)

     

Total capitalization

   $         $     

 

 

(1) The revolving credit facility is a part of our new senior secured credit facility and provides for borrowings of up to $5.0 million, of which $     million was available as of                     , 2011 for working capital and general corporate purposes.
(2) A $1.00 increase (decrease) in the assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) cash and cash equivalents and total stockholders’ equity by $     million, assuming in each case the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3) At                     , 2011, after giving effect to our     :      reverse stock split, our authorized capital stock consisted of      shares of common stock and     ,     and      shares of our series A preferred stock, series B preferred stock and series X preferred stock, respectively. Immediately preceding this offering, assuming an initial offering price in excess of the series X preferred stock liquidation preference, all shares of our series A preferred stock, series B preferred stock and series X preferred stock will be converted into issued and outstanding common stock at a fixed exchange ratio of     :    . Subject to the consummation of this offering, we will amend and restate our certificate of incorporation to, among other things, eliminate the authorized shares of series A preferred stock, series B preferred stock and series X preferred stock. Immediately following the conversion of our preferred stock but prior to the consummation of this offering, we will have              shares of common stock outstanding. In connection with this offering, we will issue an additional              shares of new common stock and, immediately following this offering, we will have              total shares of common stock outstanding.
(4) As adjusted total stockholders’ equity reflects the write off of $         million in deferred financing costs in connection with this offering and the $2.0 million termination fee to be paid with respect to the termination of the advisory agreement with our Sponsor.

 

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DILUTION

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the offering price per share and the pro forma as adjusted net tangible book value per share after this offering. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the consummation of this offering.

Our historical net tangible book value as of                     , 2011 was $     million, or $     per share, not taking into account the conversion of our outstanding preferred stock. Our pro forma net tangible book value as of                     , 2011 was approximately $     million, or $     per share, after giving effect to the conversion of all outstanding shares of our preferred stock into      shares of our common stock.

After giving effect to the     :     reverse stock split, conversion of all of our preferred stock and the sale by us of the      shares of our common stock in this offering at an assumed initial public offering price of $     per share, which is the midpoint of the price range on the cover page of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of                     , 2011 would have been approximately $     million, or approximately $     per share. This represents an immediate increase in net tangible book value of $     per share to existing stockholders and an immediate dilution in net tangible book value of $     per share to new investors of common stock in this offering. The following table illustrates this per share dilution:

 

 

 

Assumed initial public offering price per share

      $        

Historical net tangible book value per share as of                     , 2011

   $           

Pro forma increase in net tangible book value per share attributable to conversion of preferred stock

     

Pro forma net tangible book value per share as of                     , 2011

     

Increase in pro forma net tangible book value per share attributable to this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

      $        
     

 

 

 

Dilution per share to new investors

      $        
     

 

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $     million, or $     per share, and the dilution per share to investors in this offering by approximately $     per share, assuming no change to the number of shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. The pro forma as adjusted information discussed above is illustrative only.

The following table sets forth, on a pro forma as adjusted basis, as of                     , 2011, the differences between the number of shares of common stock purchased from us, the total consideration paid and the weighted average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering, before deducting underwriting discounts and commissions and estimated expenses payable by us at an assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

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Table of Contents

 

 

     SHARES PURCHASED     TOTAL CONSIDERATION     WEIGHTED AVERAGE
PRICE

PER SHARE
 
     NUMBER    PERCENT     AMOUNT      PERCENT    

Existing stockholders

                       $                                     $                    

New investors

            

 

 

A $1.00 increase (or decrease) in the assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease), respectively, total consideration paid by new investors and total consideration paid by all stockholders 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 the underwriting discounts and commissions and estimated expenses payable by us.

The discussion and tables above assume the conversion of all our outstanding shares of preferred stock into      shares of common stock immediately prior to the consummation of this offering simultaneously with the consummation of this offering and excludes, as of                     , 2011:

 

  n  

shares of common stock issuable upon the exercise of options outstanding as of                     , 2011 at a weighted average exercise price of $     per share; and

 

  n  

shares of common stock reserved for future issuance under our equity plans.

Because the exercise prices, as adjusted in connection with the reverse stock split, of the outstanding options to purchase shares of our common stock are significantly below the assumed initial offering price of $     per share, which is the midpoint of the price range on the cover page of this prospectus, investors purchasing common stock in this offering will suffer additional dilution when and if these options are exercised. Assuming the exercise in full of the      outstanding options, pro forma net tangible book value before this offering at                     , 2011 would be $     per share, representing an immediate increase of $     per share to our existing stockholders, and, after giving effect to the sale of      shares of common stock in this offering, there would be an immediate dilution of $     per share to new investors in this offering.

 

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SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and dates indicated, our summary historical consolidated financial and operating data. We have derived the statement of operations data for the fiscal years ended December 28, 2008, December 27, 2009 and December 26, 2010 and the balance sheet data as of December 27, 2009 and December 26, 2010 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the statement of operations data for the fiscal years ended December 31, 2006 and December 30, 2007 from unaudited consolidated financial statements not included elsewhere in this prospectus. We have derived the balance sheet data as of December 31, 2006, December 30, 2007 and December 30, 2008 from our unaudited consolidated financial statements not included elsewhere in this prospectus. We have derived the statement of operations data for the twenty-six weeks ended June 27, 2010 and June 26, 2011 and balance sheet data as of June 26, 2011 from our unaudited interim consolidated financial statements appearing elsewhere in this prospectus. We have derived the balance sheet data as of June 27, 2010 from our unaudited interim consolidated financial statements not included elsewhere in this prospectus. On November 7, 2006, Goode Chuy’s Holdings, LLC through Chuy’s Opco, Inc. acquired our predecessor entities. All periods prior to the acquisition are referred to as Predecessor and all periods including and after the acquisition are referred to as Successor. You should read this information in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus.

 

    PREDECESSOR
COMPANY
         SUCCESSOR COMPANY  
                   YEAR ENDED (1)     TWENTY-SIX
WEEKS ENDED
 
    JANUARY 1,
2006 -
NOVEMBER 6,
2006
         NOVEMBER 7,
2006 -
DECEMBER 31,
2006
    DECEMBER 30,
2007
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 
               (Dollars in thousands, except per share data)  

Statement of Operations Data:

                   

Revenue

  $ 34,346          $ 5,885      $ 42,092      $ 51,868      $ 69,394      $ 94,908      $ 43,066      $ 62,206   

Cost of Sales

    10,637            1,761        13,132        14,399        18,196        25,626        11,779        17,342   

Labor

    9,727            1,682        11,713        14,956        21,186        30,394        13,703        19,412   

Operating

    5,028            786        5,640        8,021        10,482        14,292        6,456        9,023   

Occupancy

    2,223            345        2,659        3,248        4,314        5,654        2,609        3,503   

General and administrative

    2,175            1,460        6,134        6,342        4,617        5,293        2,517        4,242   

Marketing

    334            75        314        389        533        655        330        468   

Restaurant pre-opening

                      5        867        1,673        1,959        603        1,659   

Depreciation and amortization

    339            70        518        785        1,549        2,732        1,215        1,967   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    30,463            6,179        40,115        49,007        62,550        86,605        39,212        57,616   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    3,883            (294     1,977        2,861        6,844        8,303        3,854        4,590   

Interest expense

    1            414        2,832        2,823        3,114        3,584        1,812        1,920   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    3,882            (708     (855     38        3,730        4,719        2,042        2,670   

Income tax provision (benefit) expense

               (219     26        (113     1,077        1,428        643        732   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 3,882          $ (489   $ (881   $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings allocated to participating interests

  $          $      $      $ 149      $ 2,620      $ 5,617      $ 5,129      $ 1,916   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $          $      $      $ 2      $ 33      $ (2,326   $ (3,730   $ 22   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

                   

Basic net income (loss) per share

  $            $        $        $        $        $        $        $     

Diluted net income (loss) per share

  $            $        $        $        $        $        $        $     

Weighted average common stock outstanding

                   

Basic

                   

Diluted

                   
 

Balance Sheet Data (at end of period):

                   

Cash and cash equivalents

             $ 1,328      $ 754      $ 1,608      $ 2,062      $ 3,337      $ 3,136      $ 4,085   

Net working capital (deficit)

               (1,235     (3,060     (6,865     (2,817     861        964        (1,103

Total assets

               48,006        47,760        58,120        70,164        88,642        78,408        97,363   

Total debt

               17,527        16,514        20,364        29,914        30,732        28,697        52,875   

Common stock subject to put option

                                                         426   

Total stockholders’ equity

               24,690        27,345        28,691        31,920        40,968        38,528        23,822   
 

Other Financial Data:

                   

Net cash provided by operating activities

  $ 4,380          $ 813      $ 1,108      $ 3,111      $ 6,292      $ 11,752      $ 3,625      $ 9,136   

Net cash used in investing activities

    (287         (40,085     (654     (6,287     (15,588     (16,646     (6,334     (9,804

Net cash provided by (used in) financing activities

    (4,056         40,600        (1,028     4,030        9,750        6,169        3,783        1,416   

Capital expenditures

    287            116        654        6,029        15,395        16,370        6,337        9,749   

Restaurant-Level EBITDA (2)

    6,397            1,236        8,634        10,855        14,683        18,287        8,189        12,458   

Restaurant-Level EBITDA margin (2)

    18.6         21.0     20.5     20.9     21.2     19.3     19.0     20.0

Adjusted EBITDA (2)

    4,522            831        5,731        7,321        10,349        13,369        5,860        9,423   

Adjusted EBITDA margin (2)

    13.2         14.1     13.6     14.1     14.9     14.1     13.6     15.1

 

 

 

 

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    PREDECESSOR
COMPANY
         SUCCESSOR COMPANY  
                   YEAR ENDED (1)     TWENTY-SIX
WEEKS ENDED
 
    JANUARY 1,
2006 -
NOVEMBER 6,
2006
         NOVEMBER 7,
2006 -
DECEMBER 31,
2006
    DECEMBER 30,
2007
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 
               (Dollars in thousands, except per share data)  

Operating Data:

                   

Total restaurants (at end of period)

                      8        12        17        23        18        27   

Total comparable restaurants (at end of period)

                      8        8        8        13        11        15   

Average sales per comparable restaurant (3)

                    $ 5,247      $ 5,400      $ 5,292      $ 4,985      $ 2,355      $ 2,494   

Change in comparable restaurant
sales (3)

                      7.1     2.9     (2.0 )%      0.7     (2.4 )%      5.9

Average check (4)

                    $ 12.14      $ 12.66      $ 12.77      $ 12.74      $ 12.72      $ 13.05   

 

 

 

(1)

We utilize a 52- or 53-week accounting period which ends on the Sunday immediately preceding December 31. The fiscal years ended December 30, 2007, December 28, 2008, December 27, 2009 and December 26, 2010 all had 52 weeks. The fiscal year ended December 31, 2006 had 53 weeks.

(2) 

Restaurant-Level EBITDA represents net income (loss) plus the sum of general and administrative expenses, restaurant pre-opening costs, depreciation and amortization, interest and taxes. Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation and amortization plus the sum of management fees and expenses, predecessor company adjustments, deferred compensation and restaurant pre-opening costs.

We are presenting Restaurant-Level EBITDA and Adjusted EBITDA, which are not prepared in accordance with U.S. generally accepted accounting principles, or GAAP. We present these measures because we believe that they provide an additional metric by which to evaluate our operations and, when considered together with our GAAP results and the reconciliation to our net income (loss), we believe they provide a more complete understanding of our business than could be obtained absent this disclosure. We use Restaurant-Level EBITDA and Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as revenue, income from operations, net income and cash flows from operations, to assess our historical and prospective operating performance and to enhance our understanding of our core operating performance. Restaurant-Level EBITDA and Adjusted EBITDA are presented because: (i) we believe they are useful measures for investors to assess the operating performance of our business without the effect of non-cash depreciation and amortization expenses; (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness; and (iii) we use Restaurant-Level EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant level, and restaurant pre-opening costs, which are non-recurring at the restaurant level. The use of Restaurant-Level EBITDA thereby enables us and our investors to compare our operating performance between periods and to compare our operating performance to the performance of our competitors. The measure is also widely used within the restaurant industry to evaluate restaurant level productivity, efficiency and performance. The use of Restaurant-Level EBITDA and Adjusted EBITDA as performance measures permits a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. Companies within our industry exhibit significant variations with respect to capital structures and cost of capital (which affect interest expense and tax rates) and differences in book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management believes that Restaurant-Level EBITDA and Adjusted EBITDA facilitate company-to-company comparisons within our industry by eliminating some of the foregoing variations.

Restaurant-Level EBITDA and Adjusted EBITDA are not determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Restaurant-Level EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies and our presentation of Restaurant-Level EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items.

Our management recognizes that Restaurant-Level EBITDA and Adjusted EBITDA have limitations as analytical financial measures, including the following:

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect our current capital expenditures or future requirements for capital expenditures;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, associated with our indebtedness;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor do Restaurant-Level EBITDA and Adjusted EBITDA reflect any cash requirements for such replacements;

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and

 

  n  

Restaurant-Level EBITDA and Adjusted EBITDA do not reflect restaurant pre-opening costs.

 

  n  

Restaurant-Level EBITDA does not reflect general and administrative expenses.

 

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A reconciliation of Restaurant-Level EBITDA, Adjusted EBITDA and EBITDA to our net income (loss) is provided below.

 

 

 

    PREDECESSOR
COMPANY
         SUCCESSOR COMPANY  
                   YEAR ENDED (1)     TWENTY-SIX WEEKS ENDED  
    JANUARY 1,
2006 -
NOVEMBER 6,
2006
         NOVEMBER 7,
2006 -
DECEMBER 31,
2006
    DECEMBER 30,
2007
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 
               (Dollars in thousands)  

Adjusted EBITDA:

                   

Net income (loss)

  $ 3,882          $ (489   $ (881   $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   

Income tax provision (benefit) expense

               (219     26        (113     1,077        1,428        643        732   

Interest expense

    1            414        2,832        2,823        3,114        3,584        1,812        1,920   

Depreciation and amortization

    339            70        518        785        1,549        2,732        1,215        1,967   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 4,222          $ (224   $ 2,495      $ 3,646      $ 8,393      $ 11,035      $ 5,069      $ 6,557   

Deferred compensation (a)

               845        2,660        2,438        (100                     

Management fees and expenses (b)

               158        571        370        383        375        188        188   

Predecessor company adjustments (c)

    300            52                                             

Restaurant pre-opening costs (d)

                      5        867        1,673        1,959        603        1,659   

Special one-time bonus payment (e)

                                                         1,019   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 4,522          $ 831      $ 5,731      $ 7,321      $ 10,349      $ 13,369      $ 5,860      $ 9,423   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Restuarant-Level EBITDA:

                   

Net Income (loss)

  $ 3,882          $ (489   $ (881   $ 151      $ 2,653      $ 3,291      $ 1,399      $ 1,938   

Income tax provision (benefit) expense

               (219     26        (113     1,077        1,428        643        732   

Interest expense

    1            414        2,832        2,823        3,114        3,584        1,812        1,920   

General and administrative

    2,175            1,460        6,134        6,342        4,617        5,293        2,517        4,242   

Restaurant pre-opening (d)

                      5        867        1,673        1,959        603        1,659   

Depreciation and amortization

    339            70        518        785        1,549        2,732        1,215        1,967   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-Level EBITDA

  $ 6,397          $ 1,236      $ 8,634      $ 10,855      $ 14,683      $ 18,287      $ 8,189      $ 12,458   
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (a)

In connection with our acquisition by our Sponsor, we entered into employment agreements with certain employees pursuant to which we agreed to pay bonuses monthly over a two or three year period. The payment of the bonuses under certain of these employment agreements was subject to continued employment with us. For bonus payments subject to continued employment, we recognized the bonus payments as compensation expense on a straight-line basis over the requisite service period. With respect to certain agreements that were not subject to continued employment, we recognized the bonus payments as compensation expense at the time the expense was incurred. All required payments under these employment agreements have been made as of December 27, 2009. In accordance with these employment agreements, the entity owned by our Founders assumed the obligations to make future payments under the employment agreements. See “Certain Relationships and Related Party Transactions – Bonus Payments and Related Note.”

  (b)

On November 7, 2006, in connection with the Sponsor’s investment, we entered into an advisory agreement with our Sponsor, pursuant to which our sponsor agreed to provide us with certain financial advisory services. In exchange for these services, we pay the sponsor an aggregate annual management fee equal to $350,000, and we reimburse our sponsor for out-of-pocket expenses incurred in connection with the provision of services pursuant to the agreement. Upon the completion of this offering, we and our sponsor have agreed to terminate the advisory agreement in exchange for a termination fee of $2.0 million.

  (c)

Predecessor company adjustments include legal and management fees related to the acquisition of our predecessor, Chuy’s Comida Deluxe, by our Sponsor.

  (d)

Restaurant 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 1 to our audited consolidated financial statements for additional details.

  (e) 

In connection with our Refinancing Transactions, we paid a special one-time cash bonus payment to certain members of management.

Adjusted EBITDA margin is defined as the ratio of Adjusted EBITDA to revenues. We present Adjusted EBITDA margin because it is used by management as a performance measurement to judge the level of Adjusted EBITDA generated from revenues and we believe its inclusion is appropriate to provide additional information to investors.

 

(3)

We consider a restaurant to be comparable in the first full quarter following the eighteenth month of operations. Change in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time.

(4)

Average check is calculated by dividing revenue by customer counts for a given period of time. Customer count is measured by the number of entrees sold.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with “Selected Historical Consolidated Financial and Operating Data” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this prospectus.

General

We are a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex Mex inspired food. We were founded in Austin, Texas in 1982 by Mike Young and John Zapp, and as of June 26, 2011, we operated 27 Chuy’s restaurants across Texas, Tennessee, Kentucky, Alabama and Indiana.

We are committed to providing value to our customers through offering generous portions of made-from-scratch, flavorful Mexican and Tex Mex inspired dishes. We also offer a full-service bar in all of our restaurants providing our customers a variety of value-priced beverage offerings. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and our customers’ restaurant experience.

Our restaurants have a common décor, but we believe each location is unique in format, offering an “unchained” look and feel, as expressed by our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” We believe our restaurants have an upbeat, funky, eclectic, somewhat irreverent atmosphere while still maintaining a family-friendly environment. For additional information on our restaurants, see “Business.”

Our Growth Strategies and Outlook

Our growth is based primarily on the following strategies:

 

  n  

Pursue new restaurant development;

 

  n  

Leverage scalable infrastructure and increase our margins; and

 

  n  

Deliver consistent same store sales through providing high-quality food and service.

We plan to open a total of 8 new restaurants in 2011 and an additional 35 to 40 new restaurants over the next five years. We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. Our growth plan over the next five years focuses on developing additional locations in our existing core markets, new core markets and in smaller markets surrounding each of those core markets. For additional discussion of our growth strategies and outlook, see “Business—Our Business Strategies.”

Performance Indicators

 

We use the following performance indicators in evaluating our performance:

 

  n  

Average Check. Average check is calculated by dividing revenue by total entrees sold for a given time period. Average check reflects menu price influences as well as changes in menu mix. Our management team uses this indicator to analyze trends in customers’ preferences, effectiveness of menu changes and price increases and per customer expenditures.

 

  n  

Average Weekly Customers. Average weekly customers is measured by the number of entrees sold per week. Our management team uses this metric to measure changes in customer traffic.

 

  n  

Average Unit Volume. Average unit volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales by total number of comparable restaurants within a period by the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand.

 

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  n  

Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 11 and 15 restaurants at June 27, 2010 and June 26, 2011, respectively, and 8, 8 and 13 restaurants at December 28, 2008, December 27, 2009 and December 26, 2010, respectively.

 

  n  

Operating Margin. Operating margin represents income from operations as a percentage of our revenue. By monitoring and controlling our operating margins, we can gauge the overall profitability of our company.

Our Fiscal Year

We operate on a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2008, 2009 and 2010 fiscal years each consisted of 52 weeks.

Key Financial Definitions

Revenue. Revenue primarily consists of food and beverage sales, net of any discounts, such as management and employee meals, associated with each sale as well as merchandise sales, which includes sales of our t-shirts, sweatshirts and hats. To-go sales are included within food revenue. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and comparable restaurant sales growth.

Cost of Sales. Cost of sales consists primarily of food, beverage and merchandise related costs. The components of cost of sales are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in commodity costs.

Labor Costs. Labor costs include restaurant management salaries, front- and back-of-house hourly wages and restaurant-level manager bonus expense, employee benefits and payroll taxes.

Operating Costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel costs, general liability and workers compensation insurance, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but decline as a percentage of revenue.

Occupancy Costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property insurance and taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These costs generally increase with sales volume but decline as a percentage of revenue.

General and Administrative Expenses. General and administrative expenses include costs associated with corporate and administrative functions that support our operations, including senior and supervisory management and staff compensation (including stock-based compensation) and benefits, travel, financial advisory fees paid to our Sponsor, legal and professional fees, information systems, corporate office rent and other related corporate costs. As a public company, we expect our stock-based compensation expense to increase. In addition, we estimate that we will incur approximately $1.5 to $2.0 million of incremental general and administrative expenses as a result of being a public company.

Marketing. Marketing costs include costs associated with our local restaurant marketing programs, community service and sponsorship activities, our menus and other promotional activities.

Restaurant Pre-opening Costs. Restaurant pre-opening costs consist of costs incurred during the five months before opening a restaurant, including manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities, employee payroll and related training costs for new employees. Restaurant pre-opening costs also include rent recorded during the period between date of possession and the restaurant opening date for our leased restaurant locations.

 

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Depreciation and Amortization. Depreciation and amortization principally include depreciation on fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for restaurants.

Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness. Our debt issuance costs are recorded at cost and are amortized over the lives of the related debt under the effective interest method.

Income Tax Expense. This represents liabilities related to taxable income at the federal, state and local levels.

Results of Operations

The following table presents the consolidated statement of operations for the years ended December 28, 2008, December 27, 2009 and December 26, 2010, and the twenty-six weeks ended June 27, 2010 and June 26, 2011, as well as, for the periods indicated, each line item as a percentage of revenue.

 

 

 

    YEAR ENDED     TWENTY-SIX WEEKS ENDED  
    DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
    JUNE 27,
2010
    JUNE 26,
2011
 

REVENUE

    100.0     100.0     100.0     100.0     100.0

OPERATING COSTS:

         

Cost of sales

    27.8     26.2     27.0     27.4     27.9

Labor

    28.8     30.5     32.0     31.8     31.2

Operating

    15.5     15.1     15.1     15.0     14.5

Occupancy

    6.3     6.2     6.0     6.1     5.6

General and administrative

    12.2     6.7     5.6     5.8     6.8

Marketing

    0.7     0.8     0.7     0.8     0.8

Restaurant pre-opening

    1.7     2.4     2.1     1.4     2.7

Depreciation and amortization

    1.5     2.2     2.9     2.8     3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    94.5     90.1     91.3     91.1     92.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS

    5.5     9.9     8.7     8.9     7.4

INTEREST EXPENSE

    5.4     4.5     3.8     4.2     3.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

    0.1     5.4     5.0     4.7     4.3

INCOME TAX PROVISION (BENEFIT) EXPENSE

    (0.2 )%      1.6     1.5     1.5     1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

    0.3     3.8     3.5     3.2     3.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Potential Fluctuations in Quarterly Results and Seasonality

Our quarterly operating results may fluctuate significantly as a result of a variety of factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, weather, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, changes in food costs, changes in labor costs and rising gas prices. In the past, we have experienced significant variability in restaurant pre-opening costs from quarter to quarter primarily due to the timing of restaurant openings. We typically incur restaurant pre-opening costs in the five months preceding a new restaurant opening. In addition, our experience to date has been that labor and direct operating and occupancy costs associated with a newly opened restaurant during the first three to four months of operation are often materially greater than what will be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the number and timing of new restaurant openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly restaurant pre-opening costs, labor and direct operating and occupancy costs.

Our business also is subject to fluctuations due to season and adverse weather. Our results of operations have historically been impacted by seasonality. The spring and summer months as well as December have traditionally had higher sales volume than other periods of the year. Holidays, severe winter weather, hurricanes, thunderstorms and similar conditions may impact restaurant unit volumes in some of the markets where we operate and may have a greater impact should they occur during our higher volume months. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

 

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Twenty-Six Weeks Ended June 26, 2011 Compared to Twenty-Six Weeks Ended June 27, 2010

Revenue. Revenue increased $19.1 million, or 44.3%, to $62.2 million for the twenty-six weeks ended June 26, 2011, as compared to $43.1 million for the twenty-six weeks ended June 27, 2010. This increase was driven by $17.1 million in incremental revenue from our non-comparable restaurants, which included an additional 186 operating weeks provided by four new restaurants opened in the first twenty-six weeks of 2011 and six new restaurants opened in 2010. Additionally, during this period, comparable restaurant sales increased 5.9% over the same period the prior year. Of this 5.9% increase, 3.5% of the increase resulted from an increase in average weekly customers and 2.4% of the increase resulted from changes in average check and mix. Our revenue attributed to food, bar and merchandise sales remained steady at approximately 78.9%, 20.0% and 1.1% of total revenue, respectively.

Cost of Sales. Cost of sales increased $5.5 million, or 46.6%, to $17.3 million for the twenty-six weeks ended June 26, 2011, as compared to $11.8 million for the twenty-six weeks ended June 27, 2010. As a percentage of revenue, cost of sales increased to 27.9% in the first twenty-six weeks of 2011, from 27.4% in the same period in 2010. This percentage increase resulted primarily from inflation in dairy/cheese and produce costs due to adverse weather conditions. During that same period, beverage and merchandise costs remained flat.

Labor Costs. Labor costs increased $5.7 million, or 41.6%, to $19.4 million for the twenty-six weeks ended June 26, 2011, as compared to $13.7 million for the twenty-six weeks ended June 27, 2010. This increase is primarily due to additional employee related expenses for staff for the four additional restaurants operating during the twenty-six weeks ended June 26, 2011, as compared to the same period the prior year. As a percentage of revenue, labor costs decreased to 31.2% in the first twenty-six weeks of 2011, from 31.8% in the same period in 2010, primarily as a result of improved labor efficiency in our established restaurants, partially offset by inefficiencies at our new restaurants and an increase in benefits and payroll taxes related to an increase in our headcount.

Operating Costs. Operating costs increased $2.5 million, or 38.5%, to $9.0 million for the twenty-six weeks ended June 26, 2011, as compared to $6.5 million for the twenty-six weeks ended June 27, 2010. This increase was primarily related to operating costs for incremental restaurants added between periods. As a percentage of revenue, operating costs decreased to 14.5% in the first twenty-six weeks of 2011, compared to 15.0% in the same period in 2010 as a result of operating leverage.

Occupancy Costs. Occupancy costs increased $0.9 million, or 34.6%, to $3.5 million for the twenty-six weeks ended June 26, 2011, as compared to $2.6 million for the twenty-six weeks ended June 27, 2010. This increase resulted from four additional restaurants that were open in the twenty-six weeks ended June 26, 2011, as compared to the same period in 2010. As a percentage of revenue, occupancy costs decreased to 5.6% in the first twenty-six weeks of 2011, from 6.1% in the same period in 2010.

General and Administrative Expenses. General and administrative expenses increased $1.7 million, or 68.0%, to $4.2 million for the twenty-six weeks ended June 26, 2011, as compared to $2.5 million for the twenty-six weeks ended June 27, 2010. During this period, we paid a one-time cash bonus of $1.0 million to certain members of management in May 2011 in conjunction with the Refinancing Transactions. As a percentage of revenue, general and administrative expenses increased to 6.8% for the twenty-six weeks ended June 26, of 2011, as compared to 5.8% for the same period in 2010. Had we not paid the one-time cash bonus, general and administrative expenses would have decreased to 5.1% of revenue for the twenty-six weeks ended June 26, 2011. We expect general and administrative expenses to increase during the remainder of 2011 due to additional supervisory and corporate staff to support our new restaurants and the costs associated with the implementation of our new back office software. We expect that our improvements in operating leverage will more than offset this increase in expenses.

Marketing Costs. As a percentage of revenue, marketing costs remained flat at approximately 0.8%. Our marketing costs in a particular period are generally limited to the period’s proportionate amount of our marketing budget of 0.8% of sales.

Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $1.1 million, or 183.3%, to $1.7 million for the twenty-six weeks ended June 26, 2011, as compared to $0.6 million for the twenty-six weeks ended

 

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June 27, 2010. This increase resulted primarily from eight restaurants in development during the twenty-six week period ended June 26, 2011 compared to two restaurants in development during the twenty-six week period ended June 27, 2010.

Depreciation and Amortization. Depreciation and amortization increased $0.8 million from $1.2 million to $2.0 million, due to an increase in equipment and leasehold improvements as a result of additional restaurant openings. As a percentage of revenue, depreciation and amortization expenses increased to 3.2% for the twenty-six weeks ended June 26, 2011, from 2.8% for the twenty-six weeks ended June 27, 2010.

Interest Expense. Interest expense increased $0.1 million for the twenty-six weeks ended June 26, 2011, as compared to the twenty-six weeks ended June 27, 2010. We entered into our new $67.5 million senior secured credit facility during May 2011. Under this new facility, we expect our interest rate to be lower than under our prior facilities. See “Description of Indebtedness” for more information about our credit facilities, including our new senior secured credit facility.

Income Tax Expense. Income tax expense was approximately $0.7 million for the first twenty-six weeks of 2011, as compared to approximately $0.6 million for the comparable period in 2010. For the twenty-six weeks ended June 26, 2011, the effective tax rate was 27.4% as compared to 31.5% for the twenty-six weeks ended June 27, 2010. The effective tax rates differ from the statutory rate of 34.0% primarily due to tax credits attributable to payroll taxes on employee tips.

Year Ended December 26, 2010 Compared to Year Ended December 27, 2009

Revenue. Revenue increased $25.5 million, or 36.7%, to $94.9 million in 2010, from $69.4 million in 2009. This increase was driven by $25.1 million in additional revenue related to an additional 283 operating weeks provided by the six new restaurants opened in 2010 and the full year of operations of the five new restaurants opened in 2009. In addition, comparable store sales for 2010 increased 0.7% as compared to 2009. Our revenue attributed to food, bar and merchandise sales remained at approximately 79.1%, 19.7% and 1.2% of total revenue for 2010, respectively.

Cost of Sales. Cost of sales increased $7.4 million, or 40.7%, to $25.6 million in 2010, from $18.2 million in 2009. As a percent of revenue, cost of sales increased to 27.0% in 2010, from 26.2% in 2009. This percentage increase was primarily a result of an increase in dairy, cheese and produce costs. Beverage and merchandise costs remained flat.

Labor Costs. Labor costs increased $9.2 million, or 43.4%, to $30.4 million in 2010, from $21.2 million in 2009. This increase was primarily a result of an additional $9.3 million of labor costs incurred with respect to six new restaurants opened during 2010 and the full year of operations of the five restaurants opened in 2009. As a percentage of revenue, labor costs increased to 32.0% in fiscal 2010, from 30.5% in the same period in 2009, primarily as a result of increase in payroll, benefits and payroll taxes related to an increase in our headcount and inefficiencies at our new restaurants, partially offset by improved labor efficiency in our established restaurants.

Operating Costs. Operating costs increased $3.8 million, or 36.2%, to $14.3 million in 2010, from $10.5 million in 2009. This percentage increase resulted in part from the increase in credit card fees and supplies as a result of the increase in revenue in 2010, as compared to 2009. This increase was also a result of increases in utilities, repairs and maintenance and insurance associated with the additional restaurants in 2010, as compared to 2009. As a percentage of revenue, operating costs remained flat at 15.1%.

Occupancy Costs. Occupancy costs increased $1.4 million, or 32.6%, to $5.7 million in 2010, from $4.3 million in 2009. This increase resulted from six new restaurants opened in 2010 and the full year of operations of the five new restaurants opened in 2009. As a percentage of revenue, occupancy costs decreased to 6.0% in 2010, from 6.2% in 2009.

General and Administrative Expenses. General and administrative expenses increased $0.7 million, or 15.2%, to $5.3 million for 2010, as compared to $4.6 million for 2009. This increase was primarily the result of hiring additional management to support new restaurants. As a percent of revenue, general and administrative expenses decreased to 5.6% in 2010, from 6.7% in 2009, due to improved operating leverage.

Marketing Costs. As a percentage of revenue, marketing costs decreased to 0.7% in 2010 from 0.8% in 2009. Marketing costs remained relatively flat as our marketing budget is generally limited to 0.8% of sales.

 

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Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $0.3 million, or 17.6%, to $2.0 million in 2010, from $1.7 million in 2009. The increase in restaurant pre-opening costs was due to the impact of opening six new restaurants in 2010, as compared to five new restaurants opened in 2009.

Depreciation and Amortization. Depreciation and amortization increased $1.2 million, or 80.0%, to $2.7 million in 2010, as compared to $1.5 million in 2009. As a percent of revenue, depreciation and amortization expenses increased to 2.9% in 2010 from 2.2% in 2009. This percentage increase primarily resulted from additional depreciation associated with new equipment and leasehold improvements associated with our new restaurants.

Interest Expense. Interest expense increased $0.5 million, or 16.1%, to $3.6 million in 2010, from $3.1 million in 2009. The increase was due to higher outstanding balances under our credit facilities. See “Description of Indebtedness” for additional information regarding our credit facilities.

Income Tax Expense. Income tax expense increased $0.3 million to $1.4 million in 2010, from $1.1 million in 2009. This increase was primarily due to an increase in taxable income in fiscal year 2010, as compared to the year ended December 27, 2009. For the year ended December 26, 2010, the effective tax rate was 30.3% as compared to 28.9% for the year ended December 27, 2009. The effective tax rate differs from the statutory rate of 34.0% primarily due to tax credits attributable to payroll taxes on employee tips.

Year Ended December 27, 2009 Compared to Year Ended December 28, 2008

Revenue. Revenue increased $17.5 million, or 33.7%, to $69.4 million in 2009 from $51.9 million in 2008. This increase was driven by $18.4 million in additional revenue related to an additional 217 operating weeks provided by the five new restaurants opened in 2009 and the full year of operations of the four restaurants opened in 2008. This increase was partially offset by a $0.9 million, or 2.0%, decline in comparable restaurant sales, driven by a decline in average weekly customers at our comparable restaurants. Our revenue attributed to food, bar and merchandise sales remained at approximately 78.7%, 19.9% and 1.4% of total revenue for 2009, respectively.

Cost of Sales. Cost of sales increased $3.8 million, or 26.4%, to $18.2 million in fiscal 2009, from $14.4 million in fiscal 2008. As a percent of revenue, cost of sales declined to 26.2% in 2009 compared to 27.8% in 2008. The decrease in cost of sales as a percentage of revenue primarily resulted from our decrease in food costs during 2009 as a result of significant price decreases in certain of our key products such as meat, dairy and cheese.

Labor Costs. Labor costs increased $6.2 million, or 41.3%, to $21.2 million in 2009, from $15.0 million in 2008. This increase was a result of an additional $5.1 million of labor costs incurred with respect to five new restaurants opened during 2009 and the full year of operations of the four restaurants opened in 2008, as well as increases in support staff at our existing restaurants. As a percent of revenue, labor costs increased to 30.5% in 2009 from 28.8% in 2008, primarily as a result of increase in payroll, benefits and payroll taxes related to an increase in our headcount and inefficiencies at our new restaurants, partially offset by improved labor efficiency in our established restaurants.

Operating Costs. Operating costs increased $2.5 million, or 31.3%, to $10.5 million in 2009, from $8.0 million in 2008. This increase was primarily due to increases in credit card fees and supplies resulting from an increase in revenue. As a percent of revenue, operating costs decreased to 15.1% in 2009 compared to 15.5% in 2008.

Occupancy Costs. Occupancy costs increased $1.1 million, or 34.4%, to $4.3 million in 2009, from $3.2 million in 2008. This increase resulted from five new restaurants opened in 2009 and the full year of operations of the four new restaurants opened in 2008. As a percentage of revenue, occupancy costs remained flat in 2009 as compared to 2008.

General and Administrative Expenses. General and administrative expenses decreased $1.7 million, or 27.0%, to $4.6 million in 2009 from $6.3 million for 2008. This decrease was driven by the non-recurrence of our deferred compensation expenses and our greater operating leverage. The decrease was partially offset by an increase in salaries. As a percent of revenue, general and administrative expenses decreased to 6.7% in 2009 from 12.2% in 2008.

 

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Marketing Costs. As a percentage of revenue, marketing costs remained flat at approximately 0.8%. Our marketing costs in a particular period are generally limited to the period’s proportionate amount of our marketing budget of 0.8% of sales.

Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $0.8 million, or 88.9%, to $1.7 million in 2009 from $0.9 million in 2008. The increase resulted primarily from opening five new restaurants in 2009, as compared to four new restaurants in 2008. The increase was also due in part to the increase in restaurant pre-opening costs in 2009 associated with opening our first restaurant outside of Texas in Nashville, Tennessee, which resulted in increases in training and travel expenses and the incurrence of expenses for management relocation and public relations services.

Depreciation and Amortization. As a percent of revenue, depreciation and amortization expenses increased slightly to 2.2% in 2009, as compared to 1.5% in 2008 due to increases in purchases of property and equipment for new restaurants.

Interest Expense. Interest expense increased $0.3 million, or 10.7%, to $3.1 million in 2009 from $2.8 million in 2008. The increase was due to greater outstanding borrowings under our credit facilities during 2009, as compared to 2008.

Income Tax Expense. Income tax expense increased $1.2 million to $1.1 million in 2009 from a $0.1 million benefit in 2008. This increase was primarily the result of an increase in income before taxes in 2009, as compared to 2008. For the year ended December 27, 2009, the effective tax rate was 28.9%. The effective tax rate differs from the statutory rate of 34.0% primarily due to tax credits attributable to payroll taxes on employee tips.

Liquidity

Our principal sources of cash are net cash provided by operating activities and borrowings under our new $67.5 million senior secured credit facility, which we entered into on May 24, 2011. As of June 26, 2011, we had approximately $4.1 million in cash and cash equivalents. At June 26, 2011, we had approximately $15.0 million of availability under our new senior secured credit facility. Our need for capital resources is driven by our restaurant expansion plans, ongoing maintenance of our restaurants, investment in our corporate and information technology infrastructure, obligations under our operating leases and interest payments on our debt. Based on our current growth plans, we believe our expected cash flows from operations, available borrowings under our new senior secured credit facility and expected tenant incentives will be sufficient to finance our planned capital expenditures and other operating activities for the next twelve months.

Consistent with many other restaurant and retail chain store operations, we use operating lease arrangements for our restaurants. We believe that these operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. We have entered into operating leases with certain related parties with respect to six of our restaurants and our corporate headquarters. See “Certain Relationships and Related Party Transactions” for additional information about these operating leases. Currently, operating lease obligations are not reflected as indebtedness on our consolidated balance sheet.

Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic or average check per customer due to changes in economic conditions, as described elsewhere in this prospectus under the heading “Risk Factors.”

 

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Cash Flows for Twenty-Six Weeks Ended June 27, 2010 and June 26, 2011

The following table summarizes the statement of cash flows for the twenty-six weeks ended June 27, 2010 and June 26, 2011:

 

 

 

     JUNE 27,
2010
    JUNE 26,
2011
 
    

(In thousands)

 

Cash flows provided by operating activities

   $ 3,625      $ 9,136   

Cash flows used in investing activities

     (6,334     (9,804

Cash flows provided by financing activities

     3,783        1,416   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,074        748   
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     2,062        3,337   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,136      $ 4,085   
  

 

 

   

 

 

 

 

 

Operating Activities. Net cash provided by operating activities was $9.1 million for the twenty-six weeks ended June 26, 2011, compared to $3.6 million for the twenty-six weeks ended June 27, 2010. Our business is almost exclusively a cash business. Almost all of our receipts come in the form of cash and cash equivalents and a large majority of our expenditures are paid within a 30 day period. The increase in net cash provided by operating activities in the first twenty-six weeks of 2011 compared to the same period in 2010 was primarily due to an increase in net income of $0.6 million, an increase of $1.8 million in lease incentives, higher non-cash expenses, including depreciation and amortization and an increase in accrued liabilities associated with nine additional restaurants.

Investing Activities. Net cash used in investing activities was $9.8 million for the twenty-six weeks ended June 26, 2011, compared to $6.3 million for the twenty-six weeks ended June 27, 2010. The increase in net cash used in investing activities resulted from a $3.4 million increase in capital expenditures related to equipment and the buildout or conversion of our new restaurants. During the first twenty-six weeks of 2011, we opened four restaurant and had four new restaurants under development, while in the first twenty-six weeks of 2010, we opened one restaurant and had five new restaurants under development.

Financing Activities. Net cash provided by financing activities was $1.4 million for the first twenty-six weeks of 2011, compared to $3.8 million of cash provided in the first twenty-six weeks of 2010. On May 24, 2011, we replaced our $20.0 million credit facility with Wells Fargo Capital Finance, Inc. (“Wells Fargo Credit Facility”) and $10.0 million credit facility with HBK Investments L.P. (“HBK Credit Facility”) with a new $67.5 million senior secured credit facility with GCI Capital Markets, General Electric Capital Corporation and a syndicate of other financial institutions. Among other things, we used the proceeds from our new senior secured credit facility to repay the Wells Fargo Credit Facility and the HBK Credit Facility, to pay a $19.0 million dividend to our stockholders and to pay a $1.0 million special one-time cash bonus to certain members of our management. For more information about our credit facilities, see “Description of Indebtedness.” In May 2010, we received $5.0 million in proceeds from the sale of series X preferred stock.

As of June 26, 2011, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

 

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Cash Flows For Year Ended December 28, 2008, Year Ended December 27, 2009 and Year Ended December 26, 2010

The following table summarizes the statement of cash flows for the years ended December 28, 2008, December 27, 2009 and December 26, 2010:

 

 

 

     FISCAL YEAR ENDED  
     DECEMBER 28,
2008
    DECEMBER 27,
2009
    DECEMBER 26,
2010
 
     (In thousands)  

Cash flows provided by operating activities

   $ 3,111      $ 6,292      $ 11,752   

Cash flows used in investing activities

     (6,287     (15,588     (16,646

Cash flows provided by financing activities

     4,030        9,750        6,169   
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     854        454        1,275   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     754        1,608        2,062   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,608      $ 2,062      $ 3,337   
  

 

 

   

 

 

   

 

 

 

 

 

Operating Activities. Net cash provided by operating activities was $11.8 million in 2010, compared to $6.3 million in 2009 and $3.1 million in 2008. The increase in net cash provided by operating activities in 2010, as compared to 2009 was $5.5 million. This increase was primarily due to $3.0 million increase in lease incentives, as compared to the prior year and also higher non-cash costs, such as depreciation and amortization and deferred income taxes. The increase in net cash provided by operating activities in 2009, as compared to 2008 was $3.2 million. This increase was primarily due to a $0.9 million increase in lease incentives, as compared to prior year and also higher non-cash costs, such as depreciation and amortization and deferred income taxes.

Investing Activities. Net cash used in investing activities was $16.6 million in 2010, $15.6 million in 2009 and $6.3 million in 2008. We used cash primarily to purchase property and equipment and to make leasehold improvements related to our restaurant expansion plans. During 2009, we used $3.8 million to make the final contingent purchase price payment for Chuy’s Arbor Trails. For additional information, see “Certain Relationships and Related Party Transactions—Purchase of Arbor Trails Restaurant.” The fluctuations in net cash used in investing activities for the periods presented is directly related to the number of new restaurants opened and in development during each period. In fiscal 2010, we opened six new restaurants and, in fiscal years 2009 and 2008, opened five and four restaurants, respectively.

Financing Activities. Net cash provided by financing activities was $6.2 million in 2010, $9.8 million in 2009 and $4.0 million in 2008. Net cash provided by financing activities in 2010 was primarily the result of $5.0 million in proceeds from the sale of our series X preferred stock in May 2010 and $0.4 million in proceeds from the sale of our common stock in December 2010 and $0.8 million in borrowings under the Wells Fargo Credit Facility. Net cash provided by financing in 2010 decreased, as compared to 2009 due to a substantial reduction in our borrowings under our prior credit facilities, partially offset by the increase in capital contribution from the sale of our series X preferred stock and common stock in 2010. For additional information about the sales of our securities during 2010, see “Certain Relationships and Related Party Transactions – 2010 Stock Sale.” Net cash provided by financing activities in 2009 was primarily the result of borrowings, net of payments, of $9.5 million under the Wells Fargo Credit Facility. Net cash provided by financing activities in 2008 was primarily the result of borrowings, net of payments, of $3.8 million under the Wells Fargo Credit Facility.

Capital Resources

Long-Term Capital Requirements. Our capital requirements are primarily dependent upon the pace of our growth plan and resulting new restaurants. Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and nature of lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance and capacity addition in our existing restaurants as well as information technology and other general corporate capital expenditures.

 

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The capital resources required for a new restaurant depend on whether the restaurant is a ground-up buildout or a conversion. We estimate that each ground-up buildout restaurant will require a total cash investment of $1.7 million to $2.5 million (net of estimated tenant incentives of between zero and $0.8 million). We estimate that each conversion will require a total cash investment of $2.0 million to $2.2 million. In addition to the cost of the conversion or ground-up buildout, we expect to spend approximately $300,000 to $350,000 per restaurant for restaurant pre-opening costs. We target a cash-on-cash return beginning in the third operating year of 40.0%, and a sales to investment ratio of 2:1 for our new restaurants. On average, returns on units opened since 2008 have exceeded these target returns in the second year of operations.

We expect that our capital expenditure outlays for 2011 will be approximately $16.4 million, net of $4.6 million in agreed upon tenant incentives and excluding approximately $2.6 million of restaurant pre-opening costs for new restaurants that are not capitalized, of which we had spent $1.7 million at June 26, 2011. These capital expenditure projections include $14.7 million for the opening of eight new restaurants, $0.2 million for information technology infrastructure and $1.5 million for capacity addition expenditures and improvements to our existing restaurants and general corporate capital expenditures.

For 2012, we currently estimate capital expenditure outlays will range between $16.3 million and $20.7 million, net of agreed upon tenant incentives and excluding approximately $2.3 million to $2.9 million of restaurant pre-opening costs for new restaurants that are not capitalized. These capital expenditure projections are primarily related to $2.1 million each for the opening of seven to nine new restaurants and $1.7 million for capacity addition expenditures and improvements to our existing restaurants and general corporate capital expenditures.

Based on our growth plans, we believe our combined expected cash flows from operations, available borrowings under our new senior secured credit facility and expected tenant incentives will be sufficient to finance our planned capital expenditures and other operating activities in fiscal 2011 and 2012.

Short-Term Capital Requirements. Our operations have not required significant working capital and, like many restaurant companies, we operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth. We had a net working capital deficit of $1.1 million at June 26, 2011, compared to net working capital of $0.9 million at December 26, 2010.

On May 24, 2011, our wholly owned subsidiary, Chuy’s Opco, Inc., entered into a $67.5 million senior credit facility with GCI Capital Markets LLC, as administrative agent and sole bookrunner, General Electric Capital Corporation, as syndication agent, and a syndicate of financial institutions and other entities with respect to a new senior secured credit facility. The senior secured credit facility provides for (a) a revolving credit facility, (b) a term A loan, (c) a delayed draw term B loan, and (d) an incremental term loan. Except for the incremental term loan, all borrowings under our senior secured credit facility bear interest at a variable rate based on the prime, federal funds or Libor rate plus an applicable margin based on our total leverage ratio. Interest is due at the end of each month if Chuy’s Opco, Inc. has selected to pay interest based on the Index Rate or at the end of each Libor period if Chuy’s Opco, Inc. has selected to pay interest based on the Libor rate. As of July 1, 2011, we had borrowings under only our term A loan and have elected a variable rate of interest based on Libor under our term A loan. Prior to that election, we paid a fixed rate of 10.0%. Following that election, our interest rate became 8.5%. As of July 1, 2012, provided our total leverage ratio falls below 2.0 to 1.0, our interest rate will be 7.0%.

Our senior secured credit facility requires us to comply with certain financial tests, including:

 

  n  

a maximum capital expenditures limitation per year in an aggregate amount of $18.5 million in 2011, $21.7 million in 2012, $23.8 million in 2013, $26.3 million in 2014, $26.3 million in 2015 and $13.2 million in 2016; provided, however, that up to 50% of any unutilized portion of such capital expenditures, may be utilized in the immediately succeeding year;

 

  n  

a minimum fixed charge coverage ratio for the four quarters then ended on or about June 30, 2011 of not less than 1.90:1.00, which ratio varies from 1.90:1.00 to 1.55:1.00 over the term of the loan;

 

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  n  

a maximum total leverage ratio for the four quarters then ended on or about June 30, 2011 of not more than 4.00:1.00, which ratio varies from 4.00:1.00 to 2.25:1.00 over the term of the loan and

 

  n  

a maximum lease adjusted leverage ratio for the four quarters then ended on or about June 30, 2011 of not more than 5.50:1.00, which ratio varies from 5.50:1.00 to 4.25:1.00 over the term of the loan.

As of June 26, 2011, we were in compliance with all covenants under our senior secured credit facility. Based on our capital expenditure plans, contractual commitments and cash flow from operations, we expect to be able to comply with these covenants in the near and long term.

Off-Balance Sheet Arrangements

As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 26, 2011, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.

Commitments and Contingencies

The following table summarizes contractual obligations at December 26, 2010 on an actual basis.

 

 

 

     PAYMENT DUE BY PERIOD  
     TOTAL      LESS THAN
1 YEAR
     1-3 YEARS      3-5 YEARS      MORE THAN 5
YEARS
 
Contractual Obligations               

Long-Term Debt Obligations (1)

   $ 32,568,963       $ 32,568,963       $       $       $   

Operating Lease Obligations (2)

     74,335,001         5,811,641         12,474,817         12,954,952         43,093,591   

Purchase Obligations (3)

     8,376,321         8,376,321                           

Total

   $ 115,280,284       $ 46,756,924       $ 12,474,817       $ 12,954,952       $ 43,093,591   

 

 

(1)

Reflects our long-term obligations under the original scheduled repayments of our obligations under the Wells Fargo Credit Facility and HBK Credit Facility. In May 2011, in connection with entering into our new senior secured credit facility, we repaid all outstanding principal and interest under the Wells Fargo Credit Facility and HBK Credit Facility. Long-term debt obligations does not reflect our obligations under our new senior secured credit facility that we entered into in May 2011. Under our new senior secured credit facility, we will be obligated to pay $2.9 million, $10.3 million and $12.4 million in the periods of less than one year, one to three years and three to five years, respectively. Additionally, upon consummation of this offering, we will be required to make a mandatory prepayment of $     under our new senior secured credit facility.

(2)

Reflects the aggregate minimum lease payments for our restaurant operations and corporate office. Operating lease obligations excludes contingent rent payments that may be due under certain of our leases based on a percentage of sales.

(3) 

Includes contractual purchase commitments for the purchase of goods related to system restaurant operations and commitments for construction of new restaurants.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. The following is a description of what we consider to be our most significant critical accounting policies.

Leases. We currently lease all of our restaurant locations. We evaluate each lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. All of our existing leases are classified

 

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as operating leases. We record the minimum lease payments for our operating leases on a straight-line basis over the lease term, including option periods which in the judgment of management are reasonably assured of renewal. The lease term commences on the date that we obtain control of the property, which is normally when the property is ready for tenant improvements. Contingent rent expense is based on either a percentage of restaurant sales or as a percentage of restaurant sales in excess of a defined amount. We use sales trends to estimate achievement of these defined amounts. We accrue contingent rent expense based on these estimated sales. Our lease costs will change based on the lease terms of our lease renewals as well as leases that we enter into with respect to our new restaurants.

Impairment of Long-Lived Assets. We review long-lived assets, such as property and equipment and intangibles, subject to amortization, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level and primarily includes an assessment of historical cash flows and other relevant factors and circumstances. The other factors and circumstances include changes in the economic environment, changes in the manner in which assets are used, unfavorable changes in legal factors or business climate, incurring excess costs in construction of the asset, overall restaurant operating performance and projections for future performance. These estimates result in a wide range of variability on a year to year basis due to the nature of the criteria. Negative restaurant-level cash flow over the previous 12-month period is considered a potential impairment indicator. In such situations, we evaluate future undiscounted cash flow projections in conjunction with qualitative factors and future operating plans. Our impairment assessment process requires the use of estimates and assumptions regarding future undiscounted cash flows and operating outcomes, which are based upon a significant degree of management’s judgment.

Based on this analysis, if the carrying amount of the assets is less than the estimated future cash flows, an impairment charge is recognized. In performing our impairment testing, we forecast our future undiscounted cash flows by looking at recent restaurant level performance, restaurant level operating plans, sales trends, and cost trends for cost of sales, labor and operating expenses. We believe that this combination of information gives us a fair benchmark to estimate future undiscounted cash flows. We compare this cash flow forecast to the asset’s carrying value at the restaurant. If the predicted future undiscounted cash flow does not exceed the long-lived asset’s carrying value, we impair the assets related to that restaurant on a pro-rata basis of the relative carrying values of the long-lived assets.

Continued economic deterioration within our respective markets may adversely impact consumer discretionary spending and may result in lower restaurant sales. Unfavorable fluctuations in our commodity costs, supply costs and labor rates, which may or may not be within our control, may also impact our operating margins. Any of these factors could as a result affect the estimates used in our impairment analysis and require additional impairment tests and charges to earnings. We continue to assess the performance of our restaurants and monitor the need for future impairment. There can be no assurance that future impairment tests will not result in additional charges to earnings.

Goodwill and Other Intangible Assets. Goodwill and indefinite life intangible assets are not amortized but are tested annually on the first day of the fourth quarter, or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, the Company must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets.

For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit (including goodwill) to that reporting unit’s fair value. If the operating unit’s estimated fair value exceeds the reporting unit’s carrying value, no impairment of goodwill exists. If the fair value of the unit does not exceed the unit’s carrying value, then an additional analysis is performed to allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if that unit had been acquired in a business combination and the fair value of the unit was the purchase price. If the excess of the fair value of the reporting unit over the fair value of the identifiable assets and liabilities is less than the carrying value of the unit’s goodwill, an impairment charge is recorded for the difference.

 

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Similarly, the impairment evaluation for indefinite life intangible assets includes a comparison of the asset’s carrying value to the asset’s fair value. Fair value is estimated primarily using future discounted cash flow projections in conjunction with qualitative factors and future operating plans. When the carrying value exceeds fair value, an impairment charge is recorded for the amount of the difference. An intangible asset is determined to have an indefinite useful life when there are no legal, regulatory, contractual, competitive, economic or any other factors that may limit the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company also annually evaluates intangible assets that are not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization.

At December 27, 2009 and December 26, 2010, none of the Company’s intangible assets or goodwill were impaired.

Income Tax. Income tax provisions consist of federal and state taxes currently due, plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized when management considers the realization of those assets in future periods to be more likely than not. Future taxable income, adjustments in temporary difference, available carryforward periods and changes in tax laws could affect these estimates.

Stock-Based Compensation. Compensation cost for stock options granted is determined based on the fair value of the option at the date of grant and is recognized, net of estimated forfeitures, over the award’s requisite service period on a straight-line basis. We use the Black-Scholes valuation model to determine the fair value of our stock options, which requires assumptions to be made regarding our stock price volatility, the expected life of the award, risk-free interest rate, and expected dividend rates. The volatility assumptions were derived from the volatilities of comparable public restaurant companies. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

One significant factor in determining the fair value of our options, when using the Black-Scholes option pricing model, is the fair value of the common stock underlying those stock options. We have been a private company with no active public market for our common stock. Therefore, the fair value of the common stock underlying our stock options was determined by our board of directors, which intended to grant all stock options with an exercise price per share not less than the per share fair value of our common stock underlying those options on the date of grant. We have determined the estimated per share fair value of our common stock on a quarterly basis using contemporaneous valuations by our board of directors based upon information available to it at the time of the valuations. The fair value of our common stock was based on an analysis of relevant metrics, including the following:

 

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the rights, privileges and preferences of our convertible preferred stock;

 

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our operating and financial performance;

 

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the hiring of key personnel;

 

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the risks inherent in the development and expansion of our restaurants;

 

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the fact that the option grants involve illiquid securities in a private company;

 

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the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company; and

 

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an estimated enterprise value determined by applying a consistent multiple to our earnings before interest, taxes, depreciation and amortization, or EBITDA.

 

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In addition, our board of directors has obtained periodic contemporaneous valuation studies from an independent third-party valuation firm. In performing its valuation analysis, the valuation firm engaged in discussions with management, analyzed historical and forecasted financial statements and reviewed our corporate documents. In addition, these valuation studies were based on a number of assumptions, including industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation. Third-party valuations were performed on each of December 31, 2010 and June 30, 2011 using generally accepted valuation methodologies.

Since June 27, 2010, we granted 150,625 options on January 1, 2011 at an exercise price of $3.93, which was equal to the estimated fair value of our underlying common stock at that date. In addition, immediately prior to the consummation of this offering, our board of directors intends to grant options to purchase approximately              additional shares of common stock with an exercise price equal to the initial public offering price.

Based upon the assumed initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of stock options outstanding as of          was approximately $             , of which approximately $             related to vested stock options and approximately $             million related to unvested stock options.

Recent Accounting Pronouncements

For information about recent accounting pronouncements that apply to us, see Note 1 to our consolidated financial statements.

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 other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant customers. The impact of inflation on food, labor, energy and occupancy costs can significantly affect the profitability of our restaurant operations.

Many of our restaurant staff members are paid hourly rates related to the federal minimum wage. In fiscal 2007, Congress enacted an increase in the federal minimum wage implemented in two phases, beginning in fiscal 2007 and concluding in fiscal 2009. In addition, numerous state and local governments increased the minimum wage within their jurisdictions, with further state minimum wage increases going into effect in fiscal 2010. Certain operating costs, such as taxes, insurance and other outside services continue to increase with the general level of inflation or higher and may also be subject to other cost and supply fluctuations outside of our control.

While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant customers without any resulting changes in their visit frequencies or purchasing patterns. A majority of the leases for our restaurants provide for contingent rent obligations based on a percentage of revenue. As a result, rent expense will absorb a proportionate share of any menu price increases in our restaurants. 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.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to loans outstanding under our new senior secured credit facility that we entered into in May 2011. As of July 1, 2011, we made an interest rate election and, as a result, all outstanding indebtedness under our new senior secured credit facility bears interest at a variable rate based on Libor. Assuming the prepayment of $     under our new senior secured credit facility in conjunction with the initial public offering and an initial public offering

 

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price of $     per share, which is the midpoint of the range set forth on the cover of this prospectus, each eighth point change in interest rates on the variable portion of indebtedness under our new senior secured credit facilities would result in a $     million annual change in our interest expense.

Commodity Price Risk

We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including produce, chicken, beef and cheese, these fluctuations can materially impact our food and beverage costs. While we have taken steps to enter into long term agreements for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control.

Consequently, such commodities can be subject to unforeseen supply and cost fluctuations. Dairy costs can also fluctuate due to government regulation. Because we typically set our menu prices in advance of our food product prices, we cannot immediately take into account changing costs of food items. To the extent that we are unable to pass the increased costs on to our customers through price increases, our results of operations would be adversely affected. We do not use financial instruments to hedge our risk to market price fluctuations in our food product prices at this time.

 

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BUSINESS

Business Overview

Chuy’s is a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex Mex inspired food. We were founded in Austin, Texas in 1982 by Mike Young and John Zapp and, as of June 26, 2011, we operated 27 Chuy’s restaurants across Texas, Tennessee, Kentucky, Alabama and Indiana, with an average unit volume of $5.0 million for our comparable restaurants for the twelve months ended June 26, 2011. Our restaurants have a common décor, but we believe each location is unique in format, offering an “unchained” look and feel, as expressed by our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” We believe our restaurants have an upbeat, funky, eclectic, somewhat irreverent atmosphere while still maintaining a family-friendly environment. We are committed to providing value to our customers through offering generous portions of made-from-scratch, flavorful Mexican and Tex Mex inspired dishes. We believe our employees are a key element of our culture and set the tone for a fun, family-friendly atmosphere with attentive service. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and our customers’ restaurant experience.

We have grown the total number of Chuy’s restaurants from eight locations as of December 30, 2007 to 27 locations as of June 26, 2011. In the first half of 2011, we opened four restaurants and plan to open an additional four by the end of the year, representing a compound annual growth rate of 41.8% since year-end 2007. From fiscal year 2007 to the twelve months ended June 26, 2011, our annual revenue increased from $42.1 million to $114.0 million and our Adjusted EBITDA increased from $5.7 million to $16.9 million, representing compounded annual growth rates of 33.1% and 36.8%, respectively. Over the same period, our net income (loss) increased from ($0.9 million) to $3.8 million. For a reconciliation of Adjusted EBITDA, a non-GAAP term, to net income, see footnote 4 to “—Summary Historical Financial and Operating Data.” Our change in comparable restaurant sales has outperformed the KNAPP-TRACK™ index of casual dining restaurants for each of the last five years. In our most recent quarterly period ended June 26, 2011, comparable restaurant sales increased 5.2% over the same period from the prior year. We believe the broad appeal of the Chuy’s concept, strong unit economics and flexible real estate strategy enhance the portability of our concept and provide us significant opportunity for expansion.

LOGO

Our core menu was established using original recipes from family and friends of our founders, and has remained relatively unchanged over the years. We offer the same menu during lunch and dinner, which includes enchiladas, fajitas, tacos, burritos, combination platters and daily specials, complemented by a variety of appetizers, soups and salads. Each of our restaurants also offers a variety of homemade sauces, including the signature Hatch green chile and creamy jalapeño sauces, all of which we make from scratch daily in each restaurant. These sauces are a key element of our offering and provide our customers with an added ability to customize their orders. Our menu offers significant value to our customers, with only three out of 49 menu items priced over $10.00. We also offer a full-service bar in all of our restaurants providing our customers a variety of value-oriented beverage offerings. We feature a distinctive selection of specialty cocktails including our signature on-the-rocks margaritas made with fresh, hand-squeezed lime juice and the Texas Martini, a made-to-order, hand-shaken cocktail served with jalapeño-stuffed

 

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olives. The bar represents an important aspect of our concept, where customers frequently gather prior to being seated. For the twelve months ended June 26, 2011, alcoholic beverages constituted 19.9% of our total restaurant sales.

We strive to create a unique and memorable customer experience at each of our locations. While the layout in each of our restaurants varies, we maintain distinguishable elements across our locations, including hand-carved, hand-painted wooden fish imported from Mexico, a variety of vibrant Mexican folk art, a “Nacho Car” that provides complimentary chips, salsa and chile con queso in the trunk of a classic car, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile and festive metal palm trees. Our restaurants range in size from 5,300 to 12,500 square feet, with seating for approximately 225 to 400 customers. Nearly all of our restaurants feature outdoor patios. We design our restaurants to have flexible seating arrangements that allows us to cater to families and parties of all sizes. Our brand strategy of having an “unchained” look and feel allows our restaurants to establish their own identity and provides us with a flexible real estate model. Our site selection process is focused on conversions of existing restaurants as well as new ground-up prototypes in select locations. Our restaurants are open for lunch and dinner seven days a week. We serve approximately 7,500 customers per location per week or 400,000 customers per location per year, on average, by providing high-quality, freshly prepared food at a competitive, compelling price point. We believe that many of Chuy’s frequent customers visit one of our restaurants multiple times per week.

Our Business Strengths

Over our 29-year operating history, we have developed and refined the following strengths:

Fresh, Authentic Mexican and Tex Mex Inspired Cuisine. Our goal is to provide unique, authentic Mexican and Tex Mex inspired food using only the freshest ingredients. Every day in each restaurant, we roast and hand pull whole chickens, hand roll fresh tortillas, squeeze fresh lime juice and prepare fresh guacamole from whole avocados. In addition, we make all nine to eleven of our homemade sauces daily using high-quality ingredients. We believe this commitment to made-from-scratch, freshly prepared cooking results in great tasting, high-quality food, a sense of pride among our restaurant employees and loyalty among our customers. Some of our kitchen managers travel to Hatch, New Mexico every summer to hand-select batches of our green chiles. We believe our commitment to serving the highest quality food is also evidenced by us serving only Choice quality beef. Our culture revolves around freshly-prepared food, as there are no walk-in freezers in our prototype kitchens. We believe our servers and kitchen staff are highly proficient in executing the core menu and capable of satisfying large quantities of custom orders, as the majority of our orders are customized.

Significant Dining Value with Broad Customer Appeal. We are committed to providing value to our customers through offering generous portions of flavorful Mexican and Tex Mex inspired dishes using fresh, high-quality ingredients. We believe our menu offers a considerable value proposition to our customers, with only three out of our 49 menu items priced over $10.00. For the twelve months ended June 26, 2011, our average check was $12.92, which we believe is lower than many of our primary competitors. Through our training programs, we train our employees to make sure that each plate is prepared according to our presentation and recipe standards.

Although our core demographic is ages 21 to 44, we believe our restaurants appeal to a broad spectrum of customers and will continue to benefit from trends in consumers’ preferences. We believe consumers are craving bold, “high taste profile” foods, like those featured in our core offering. Additionally, we believe our brand appeals to a wide demographic and will continue to benefit from the growing demand for fresh, authentic Mexican and Tex Mex inspired food and a fun, festive dining experience. We are also a popular venue for families and other large parties, and consider many of our restaurants to be destination locations, drawing customers from as far as 30 miles away. We locate our restaurants in high-traffic locations to attract primarily local patrons with limited reliance on business travelers.

Upbeat Atmosphere Coupled with Irreverent Brand Helps Differentiate Concept. As stated in our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” each of our restaurants is uniquely designed. However, most share a few common elements—hand-carved, hand-painted wooden fish, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile, palm trees crafted from scrap metal and a variety of colorful Mexican folk art. Much of this décor, including all of the wooden fish and painted tiles, is sourced from vendors in Mexican villages that have partnered with us for decades. Additionally, virtually all restaurants feature a complimentary self-serve “Nacho Car,” a hollowed-out, customized classic car trunk filled with fresh chips, salsa, chile con queso and more.

 

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Combined with attentive service from our friendly and energetic employees, we believe these signature elements create an upbeat feeling with a funky, eclectic and somewhat irreverent atmosphere. Our restaurants feature a fun mix of rock and roll rather than traditional Mexican-style music, which we believe helps to provide an energetic customer experience. We also believe that each restaurant reflects the character and history of its individual community. Many of our restaurants have added unique, local elements such as a special wall of photos featuring customers with their friends, families and dogs. We believe this has allowed our customers to develop a strong sense of pride and ownership in their local Chuy’s.

Deep Rooted and Inspiring Company Culture. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and restaurant experience. Since our founding in 1982, we believe we have developed close personal relationships with our customers, employees and vendors. We emphasize a fun, passionate and authentic culture and support active social responsibility and involvement in local communities. We regularly sponsor a variety of community events including our annual Chuy’s Children Giving to Children Parade, Chuy’s Hot to Trot 5K and other local charitable events. We believe our employees and customers share an energy and passion for our concept that differentiates us in the restaurant industry. This is evidenced by our low annual turnover rate, which as of June 26, 2011, was 9.2% for managers and 47.2% for hourly employees and our goal of promoting 40% of restaurant-level managers from within, as well as our solid base of repeat customers.

In order to retain our unique culture as we grow, we invest significant time and capital into our training programs. We devote substantial resources to identifying, selecting and training our restaurant-level employees. We typically have ten in-store trainers at each existing location who provide both front- and back-of-the-house training on site as well as two training coordinators that lead new restaurant training. We also have an approximately 20-week training program for all of our restaurant managers, which consists of an average of 11 weeks of restaurant training and eight to nine weeks of “cultural” training, in which managers observe our established restaurants’ operations and customer interactions. We believe our focus on cultural training is a core aspect of our company and reinforces our commitment to the Chuy’s brand identity. In conjunction with our training activities, we hold “Culture Clubs” four times or more per year, as a means to fully impart the Chuy’s story through personal appearances by our founders Mike Young and John Zapp.

Proven, Flexible Business Model with Industry Leading Unit Economics. We have a long standing track record of consistently producing high average unit volumes relative to competing Mexican concepts, as well as established casual dining restaurants. For the twelve months ended June 26, 2011, our comparable restaurants generated average unit volumes of $5.0 million, with our highest volume restaurant generating $7.4 million and our lowest volume restaurant generating $3.6 million. We maintain strong Restaurant-Level EBITDA margins at our comparable restaurants, which for the twelve months ended June 26, 2011 represented 21.6% of revenues. We have successfully opened and operated restaurants in Texas, the Southeast and the Midwest and achieved attractive rates of return on our invested capital, providing a strong foundation for expansion in both new and existing markets. Under our investment model, our new restaurant openings have historically required a net cash investment of approximately $1.7 million. For our new unit openings, we estimate that each ground-up buildout of our prototype will require a total cash investment of $1.7 million to $2.5 million (net of estimated tenant incentives of between zero and $0.8 million). We estimate that each conversion will require a total cash investment of $2.0 million to $2.2 million. We target a cash-on-cash return beginning in the third operating year of 40.0%, and a sales to investment ratio of 2:1. On average, returns on new units opened since 2001 have exceeded these target returns in the second year of operations.

Seasoned Management Team with Significant Operational Experience. We are led by a seasoned management team with significant experience in all aspects of restaurant operations. Our senior management team has an average of approximately 28 years of restaurant experience and our 27 general managers have an average tenure at Chuy’s of more than eight years. In 2007, we hired our CEO and President, Steve Hislop. Mr. Hislop is the former President of O’Charley’s Restaurants, where he spent 19 years performing a variety of functions, including serving as Concept President and a member of the board of directors, and helped grow the business from 12 restaurants to a multi-concept company with 347 restaurants during his tenure. Since Mr. Hislop’s arrival in 2007, we have accelerated our growth plan and successfully opened 19 new restaurants, as of June 26, 2011, and entered six new markets.

 

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Our Business Strategies

Pursue New Restaurant Development. We plan to open new restaurants in both established and adjacent markets across Texas, the Southeast and the Midwest where we believe we can achieve high unit volumes and attractive unit level returns. We believe the broad appeal of the Chuy’s concept, strong unit economics and flexible real estate strategy enhance the portability of our concept and provide us significant opportunity for expansion. Our new restaurant development will consist primarily of conversions of existing structures, with ground up construction of our prototype in select locations.

We have built a scalable infrastructure and have successfully grown our restaurant base through a challenging economic environment. In 2009, we opened five new restaurants, including our first restaurant outside of Texas in Nashville, Tennessee, as well as our first small market restaurant in Waco, Texas. In 2010, we opened six new restaurants including three locations outside of Texas: Murfreesboro, Tennessee; Birmingham, Alabama; and Louisville, Kentucky. Each of these restaurants opened at high unit volumes with attractive returns and provides us a platform to continue our growth. Our restaurants opened since 2001 that have been in operations for more than two years have generated average cash-on-cash returns of greater than 40.0% in the second year of operations. In 2011, we opened four new restaurants in the first half of the year, including our first restaurant in Indiana, and we plan to open four new restaurants by the end of the year. Further, we expect to open an additional 35 to 40 new restaurants over the next five years.

Leverage Scalable Infrastructure and Increase Our Margins. In preparation for our new restaurant development plan, we have made significant investments in infrastructure over the past several years. We believe we now have the corporate and supervisory personnel in place to support our growth plan for the foreseeable future without significant additional investments in infrastructure. We believe that as the restaurant base grows, our general and administrative costs will increase at a slower growth rate than our revenue. Additionally, we foresee relatively minimal increases in marketing spend as we enter new markets, as the majority of our marketing is done through non-traditional channels such as community events, charity sponsorships, social media and word-of-mouth from our devoted followers, as well as partnerships with local public relations firms.

Deliver Consistent Comparable Restaurant Sales Through Providing High-Quality Food and Service. We believe we will be able to generate comparable restaurant sales growth by consistently providing an attractive price/value proposition for our customers with excellent service in an upbeat atmosphere. We remain focused on delivering freshly prepared, authentic, high-quality Mexican and Tex Mex inspired cuisine at a significant value to our customers. Though the core menu will remain unchanged, we will continue to explore potential additions as well as limited time food and drink offerings. Additionally, we will continue to promote our brand while protecting the unique culture that defines the Chuy’s experience. Grassroots marketing efforts, such as local “Redfish Rallies,” which are parties where we serve our food and margaritas and give away free Chuy’s merchandise in advance of opening a new restaurant, and charity events, as well as our line of eclectic t-shirts, will assist us in building the Chuy’s brand and driving traffic in our restaurants.

Additionally, we prioritize customer service in our restaurants, and will continue to invest significantly in ongoing training of our employees. In addition to our new manager training program and at least quarterly “Culture Clubs,” 20 to 24 of our trainers are dispatched to open new restaurants and ensure a solid foundation of customer service, food preparation and our cultured environment. We believe these initiatives will help enhance customer satisfaction, minimize wait times and help us serve our customers more efficiently during peak periods, which we believe is particularly important at our restaurants that operate at or near capacity.

At June 26, 2011, after giving effect to this offering, we would have had $                 million of outstanding indebtedness. There is no guarantee that we will be successful in servicing our indebtedness while implementing aspects of our growth strategy, including with respect to the rate at which we open new restaurants or our ability to improve margins and increase earnings. See Risk Factors in this prospectus for risks associated with our ability to service our indebtedness and execute our growth strategy.

 

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Real Estate

As of June 26, 2011, we leased 31 locations, of which 26 are free-standing restaurants and five are end-cap or in-line restaurants in Class A locations. Of these locations, four are scheduled to open by the end of 2011. End-cap restaurants are highly visible locations at one of the ends of a retail development whereas in-line restaurants are locations that are between multiple retail locations within a development. Class A locations are upscale properties with strong, identifiable locations and convenient access that are surrounded by other upscale properties. Our restaurants range in size from approximately 5,300 to 12,500 square feet, averaging approximately 8,000 square feet with seating capacity for approximately 225 to 400 customers. Since the beginning of 2008, we have opened 19 new restaurants. Since our inception in 1982, we have moved two locations and closed three locations and we have not moved or closed a location since 2004. All of our leases provide for base (fixed) rent, plus the majority provide for additional rent based on gross sales (as defined in each lease agreement) in excess of a stipulated amount, multiplied by a stated percentage. A significant percentage of our leases also provide for periodic escalation of minimum annual rent either based upon increases in the Consumer Price Index or a pre-determined schedule. The initial lease terms range from 10 to 20 years, with renewal options for 5 to 20 additional years. Typically, our leases are 10 or 15 years in length with 2, 5-year extension options. The initial terms of our leases currently expire between 2011 and 2031. We are also generally obligated to pay certain real estate taxes, insurances, common area maintenance charges and various other expenses related to the properties. Our corporate headquarters is also leased and is located at 1623 Toomey Road, Austin, Texas 78704. For additional information about certain facilities, including our corporate headquarters and six of our restaurant locations, we rent from related parties, see “Certain Relationships and Related Party Transactions.” For additional information regarding our leases, see “—Properties.”

Site Selection Process

We have developed a targeted site acquisition and qualification process incorporating management’s experience as well as extensive data collection, analysis and interpretation. We are actively developing restaurants in both new and existing markets, and we will continue to expand in selected regions throughout the U.S. We have an agreement with a master broker, Foremark, which identifies and works with a local broker to conduct preliminary research regarding a location. The preliminary research includes an analysis of traffic patterns, parking, access, demographic characteristics, population density, level of affluence, consumer attitudes or preferences and current or expected co-retail and restaurant tenants. Foremark then presents potential sites to our Vice President of Real Estate and Development. If our financial criteria for the site are satisfied, our Vice Presidents of Operations and Chief Executive Officer visit the site and, subject to board approval, our management negotiates the lease. The key criteria we have for a site is that the population within a three mile radius of the restaurant has a high concentration of our target demographic, which is persons ages 21 to 44 and persons with income ranges between $60,000 and $85,000 per year that dine out frequently. We also prefer locations with high visibility, especially in a new market, and ample parking spaces.

We seek to identify sites that contribute to our “If you’ve seen one Chuy’s, you’ve seen one Chuy’s” vision, meaning no two restaurants are alike. As we do not have standardized restaurant requirements with respect to size, location or layout, we are able to be flexible in our real estate selection process. In line with this strategy, we prefer to identify a combination of conversion sites as well as ground-up prototypes.

Design

After identifying a lease site, we commence our restaurant buildout. We strive to create a unique and memorable customer experience at each of our locations. While the layout in each of our restaurants varies, we maintain certain distinguishable elements across virtually all locations – hand-carved, hand-painted wooden fish imported from Mexico, a variety of vibrant Mexican folk art, a “Nacho Car” that provides complimentary chips, salsa and chile con queso in the trunk of a classic car, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile and festive metal palm trees. Nearly all of our restaurants feature outdoor patios. Additionally, our flexible seating arrangements allow us to cater to families and parties of all sizes including larger groups, which we believe is a key differentiator from other casual dining operators.

Our new restaurants are either ground-up prototypes or conversions. We estimate that each ground-up buildout restaurant will require a total cash investment of $1.7 million to $2.5 million (net of estimated tenant incentives of

 

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between zero and $0.8 million). We estimate that each conversion will require a total cash investment of $2.0 million to $2.2 million. The flexibility of our concepts has enabled us to open restaurants in a wide variety of locations, including high-density residential areas and near shopping malls, lifestyle centers and other high-traffic locations. On average, it takes us approximately 12 to 18 months from identification of the specific site to opening the doors for business. In order to maintain consistency of food and customer service as well as the unique atmosphere at our restaurants, we have set processes and timelines to follow for all restaurant openings.

The development and construction of our new sites is the responsibility of our Vice President of Real Estate and Development. Several project managers are responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling and other related administrative functions.

New Restaurant Development

We have successfully opened 19 new locations since the beginning of 2008 through June 26, 2011, and our management believes we are well-positioned to continue this growth through our new restaurant pipeline, which includes locations currently under development and with respect to which we are actively negotiating letters of intent. We maintain a commitment to capitalizing on opportunities and realizing efficiencies in our existing markets while also pursuing attractive locations in new markets. We seek to identify new markets in which we believe there is capacity for us to open multiple restaurants. We aim to open between 35 and 40 new restaurants over the next five years.

Restaurant Operations

We currently have six supervisors that report directly to one of our two Vice Presidents of Operations, who in turn each report to our Chief Executive Officer. Each supervisor oversees the operations of four or five restaurants in their respective geographic areas. The staffing at our restaurants typically consists of a general manager, a kitchen manager and four to six assistant managers. In addition, each of our restaurants employs approximately 120 hourly employees.

Sourcing and Supply

Our procurement team consists of our Vice President of Real Estate and Development and our Director of Purchasing and his team, which have been sourcing and purchasing our food and other supply products for over 24 years. We rely on two regional distributors, Labatt Foodservice in Texas and Merchants Distributors in the Southeastern United States, and various suppliers to provide our beef, cheese, beans, soybean oil, beverages and our groceries. Our distributors deliver supplies to each restaurant two to three times each week. Our distributor relationships with Labatt Foodservice and Merchants have been in place for approximately ten and two years, respectively, and the distributors cover 22 and five locations, respectively, as of June 26, 2011. Labatt Foodservice serves as our lead distributor, including managing our distribution services from Merchants Distributors and, in certain cases, assisting us in entering into contracts with our suppliers to lock in prices for certain products for up to one year. For our chicken products, we rely on two suppliers for our Southeast locations and Martin Brothers Distributing, as our sole supplier in Texas. For our green chiles, we contract to buy, through our supplier, Bueno Foods of Albuquerque, New Mexico, chiles from a group of farmers in New Mexico each year, which we have the right to select under our agreement. If the farmers are unable or do not supply a sufficient amount of green chiles or if we need chiles out of season, we purchase the excess amount from the general supply of Bueno Foods. Each restaurant, through its general manager and kitchen manager, purchases its produce locally. We are currently evaluating entering into an agreement to purchase our produce through a produce buying group. Changes in the price or availability of certain food products could affect the profitability of certain food items, our ability to maintain existing prices and our ability to purchase sufficient amounts of items to satisfy our customers’ demands.

We are currently under contract with our principal non-alcoholic beverage provider through 2014. Our ability to arrange national distribution of alcoholic beverages is restricted by state law; however, where possible, we negotiate directly with spirit companies and/or regional distributors. We also contract with a third-party provider to source, maintain and remove our cooking shortening and oil systems.

 

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Food Safety

Providing a safe and clean dining experience for our customers is essential to our mission statement. We have taken steps to control food quality and safety risks, including designing and implementing a training program for our kitchen staff, employees and managers focusing on food safety and quality assurance. In addition, to minimize the risk of food-borne illness, we have implemented a Hazard Analysis and Critical Control Points (“HACCP”) system for managing food safety and quality. Currently, a few of the jurisdictions in which we operate have implemented these new guidelines and we expect that additional jurisdictions will implement these guidelines in the near future. We also consider food safety and quality assurance when selecting our distributors and suppliers. Our suppliers are inspected by federal, state and local regulators or other reputable, qualified inspection services, which helps ensure their compliance with all federal food safety and quality guidelines.

Building Our Brand

Our restaurants have generated broad appeal due to their flavorful food offering, friendly, attentive service and ambience. Our target demographic is persons ages 21 to 44 and persons within the income range of $60,000 to $85,000 per year that dine out frequently. We aim to build our brand image and awareness while retaining local neighborhood relationships by increasing the frequency of visits by our current customers and attracting new customers. We primarily foster relationships with local schools, chambers of commerce, businesses and sports teams through hosting tasting events and partnering in and sponsoring local charity events. Our marketing strategy also focuses on generating significant brand awareness at new restaurant openings.

Local Brand Building

A key aspect of our local restaurant marketing/branding strategy is developing community relationships with residents, local schools, hotels and chambers of commerce. Our restaurant managers are closely involved in developing and implementing the majority of our local restaurant marketing/branding programs.

Since our founding in 1982, Chuy’s success has stemmed from close personal relationships with our customers, employees and vendors. We believe the Chuy’s culture, which emphasizes fun and authenticity while fostering social responsibility and involvement in local communities, is one of our most valuable assets, and we are committed to preserving and continually investing in it.

We regularly hold a variety of community events. Each spring, we host the Chuy’s Annual Hot to Trot 5K and Kid’s K at our Arbor Trails location, which benefits the Special Olympics of Texas. During the winter holidays, we sponsor the Chuy’s Children Giving to Children Parade, which collects toys for the Blue Santa program. The Blue Santa program gives gifts and holiday meals to needy families in Central Texas. With respect to our locations outside of Texas, we participate in and sponsor several community events across all of our locations, specifically focusing on helping children’s charities. For example, we participated in the BrightStone Golf Benefit in Cool Springs, Tennessee, the Magic City Mile in Birmingham, Alabama and the Kosair Charities Circus in Louisville, Kentucky. To celebrate one of our signature ingredients, the Hatch green chile, we hold an annual Green Chile Festival in all of our restaurants during the August and September harvest, with special menu items featuring Hatch chiles and promotional give-aways.

New Restaurant Openings

We have developed a marketing/branding strategy that we use in connection with new restaurant openings to help build local brand recognition and create a “buzz.” We start off by establishing a visual presence through such means as installing one of our emblematic red fish on the top of our new location and staging Elvis sightings in the area surrounding our new location. During that time, we also try to become active in the local community by, for example, joining the chamber of commerce and meeting local community leaders. In new markets, we generally host a pre-opening party called a “Redfish Rally” after our emblematic red fish for our social media fans and local Texas Exes (University of Texas at Austin alumni group), a group that is generally familiar with and displays an affinity for our concept.

We use the pre-opening period for our new restaurants as an opportunity to reach out to various media outlets as well as the local community. We retain local, niche marketing groups to assist us with addressing the local market, establishing relationships with local charities and gaining brand recognition. To promote new openings, we employ a

 

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variety of marketing techniques in addition to issuing press releases, launching direct mail campaigns, and e-marketing, such as hosting concierge parties, training lunches and dinners and food tastings with local residents, media, community leaders and businesses.

E-Marketing & Social Media

We have increased our use of e-marketing tools, which enables us to reach a significant number of people in a timely and targeted fashion at a fraction of the cost of traditional media. We believe our customers are generally frequent Internet users and will use social media to share dining experiences. We have set up four Facebook pages, including our corporate page and three local market pages, that we use to engage with customers. We also have a mailing list that allows us to send customers updates about events at their local Chuy’s.

Training and Employee Programs

We devote significant resources to identifying, selecting and training restaurant-level employees, with an approximately 20-week training program for all of our restaurant managers that includes an average of 11 weeks of restaurant training and eight to nine weeks of “cultural” training, in which managers observe our established restaurants’ operations and customer interactions. We conduct comprehensive training programs for our management, hourly employees and corporate personnel. Our training program covers leadership, team building, food safety certification, alcohol safety programs, customer service philosophy training, sexual harassment training and other topics. In conjunction with our training activities, we hold “Culture Clubs” four times or more per year, as a means to fully impart the Chuy’s story through personal appearances by our Founders.

Our training process in connection with opening new restaurants has been refined over the course of our experience. Trainers oversee and conduct both service and kitchen training and are on site through the first two weeks of opening and remain on site for two to three additional weeks as needed and depending on unit volumes during the initial weeks. We have one front- and one back-of-the-house training coordinator, and these training coordinators remain on-site to manage the opening for approximately the same period as our other trainers. The lead and other trainers assist in opening new locations and lend support and introduce our standards and culture to the new team. We believe that hiring the best available team members and committing to their training helps keep retention high during the restaurant opening process.

Management Information Systems

At all of our restaurants, we use Hospitality Solutions International for our point-of-sale system, which manages our credit card transactions. This software communicates directly with our corporate headquarters and provides headquarters with near real-time information about restaurant level performance and sales. We are currently rolling out a new enterprise resource planning software program, Restaurant Magic, to all of our locations. This program will manage our scheduling, general ledger, accounts payable, payroll, inventory, purchasing and human resources information, and will communicate that information to our headquarters to provide visibility on restaurant level operations. Once Restaurant Magic is fully implemented, we will no longer use our back-office software that we license from Banana Peel, LLC. We expect that we will complete the implementation of Restaurant Magic during the second quarter of 2012. For additional information regarding our license agreement with Banana Peel, see “Certain Relationships and Related Party Transactions.”

Government Regulation

We are subject to numerous federal, state and local laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of government authorities, which may include alcoholic beverage control, nutritional information disclosure, health, sanitation, environmental, zoning and public safety agencies in the state or municipality in which the restaurant is located.

For the twelve months ended June 26, 2011, 19.9% of our total restaurant sales were attributable to alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county and municipal authorities, for licenses and permits to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. Alcoholic beverage control regulations impact many aspects of the

 

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daily operations of our restaurants, including the minimum ages of patrons and staff members consuming or serving these beverages, respectively; staff member alcoholic beverage training and certification requirements; hours of operation; advertising; wholesale purchasing and inventory control of these beverages; the seating of minors and the servicing of food within our bar areas; special menus and events, such as happy hours; and the storage and dispensing of alcoholic beverages. State and local authorities in many jurisdictions routinely monitor compliance with alcoholic beverage laws. We are subject to dram shop statutes in most of the states in which we operate, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

Various federal and state labor laws govern our operations and our relationships with our staff members, including such matters as minimum wages, breaks, overtime, fringe benefits, safety, working conditions and citizenship or work authorization requirements. We are also subject to the regulations of the U.S. Citizenship and Immigration Services and U.S. Customs and Immigration Enforcement. In addition, some states in which we operate have adopted immigration employment laws which impose additional conditions on employers. Even if we operate our restaurants in strict compliance with the laws, rules and regulations of these federal and state agencies, some of our staff members may not meet federal citizenship or residency requirements or lack appropriate work authorizations, which could lead to a disruption in our work force. Significant government-imposed increases in minimum wages, paid or unpaid leaves of absence, sick leave, and mandated health benefits, or increased tax reporting, assessment or payment requirements related to our staff members who receive gratuities, could be detrimental to the profitability of our restaurants operations. Further, we are continuing to assess the impact of recently-adopted federal health care legislation on our health care benefit costs. The imposition of any requirement that we provide health insurance benefits to staff members that are more extensive than the health insurance benefits we currently provide, or the imposition of additional employer paid employment taxes on income earned by our employees, could have an adverse effect on our results of operations and financial position. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us. In addition, while we carry employment practices insurance covering a variety of labor-related liability claims, a settlement or judgment against us that is uninsured or in excess of our coverage limitations could have a material adverse effect on our results of operations, liquidity, financial position or business.

The recent Patient Protection and Affordability Act of 2010 (the “PPACA”) federal legislation enacted in March 2010 requires chain restaurants with 20 or more locations in the United States to comply with federal nutritional disclosure requirements. The FDA published proposed regulations to implement the menu labeling provisions of the PPACA in April 2011, and has indicated that it intends to issue final regulations by the middle of 2012 and begin enforcing the regulations by the end of 2012. A number of states, counties and cities have also enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information available to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Although the federal legislation is intended to preempt conflicting state or local laws on nutrition labeling, until we are required to comply with the federal law we will be subject to a patchwork of state and local laws and regulations regarding nutritional content disclosure requirements. Many of these requirements are inconsistent or are interpreted differently from one jurisdiction to another. While our ability to adapt to consumer preferences is a strength of our concept, the effect of such labeling requirements on consumer choices, if any, is unclear at this time.

There is also a potential for increased regulation of food in the United States, such as the recent changes in the HACCP system requirements. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have adopted legislation or implemented regulations which require restaurants to develop and implement HACCP Systems. Similarly, the United States Congress and the FDA continue to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act (the “FSMA”) was signed into law in January 2011 and significantly expanded FDA’s authority over food safety. Among other requirements, the FSMA granted the FDA with new authority to proactively ensure the safety of the entire food system, including through new and additional hazard analysis, food safety planning, increased inspections, and permitting mandatory food recalls. Although restaurants are specifically exempted from some of the new requirements outlined in the FSMA and not directly implicated by other requirements, we anticipate that some of the FSMA provisions and FDA’s implementation of the new requirements

 

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may impact our industry. We cannot assure you that we will not have to expend additional time and resources to comply with new food safety requirements either required by the FSMA or future federal food safety regulation or legislation. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise harm our business.

We are subject to a variety of federal and state environmental regulations concerning the handling, storage and disposal of hazardous materials, such as cleaning solvents, and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations. During fiscal 2010, there were no material capital expenditures for environmental control facilities, and no such expenditures are anticipated.

Our facilities must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (“ADA”) and related federal and state statutes. The ADA prohibits discrimination on the basis of disability with respect to public accommodations and employment. Under the ADA and related federal and state laws, we must make access to our new or significantly remodeled restaurants readily accessible to disabled persons. We must also make reasonable accommodations for the employment of disabled persons.

We have a significant number of hourly restaurant staff members who receive income from gratuities. We rely on our staff members to accurately disclose the full amount of their tip income and we base our FICA tax reporting on the disclosures provided to us by such tipped employees.

Intellectual Property

We believe that having distinctive marks that are registered and readily identifiable is an important factor in identifying our brand and differentiating our brand from our competitors. We currently own registrations from the United States Patent and Trademark Office (“USPTO”) for the following trademarks: Chuy’s; Chuy’s Mil Pescados Bar (stylized lettering); Chuy’s Green Chile Festival; Fish with sunglasses (our emblematic fish design); and Chuy’s Children Giving to Children Parade, which we have the right to use under our Parade Sponsorship agreement with Young/Zapp. For more information on this agreement see “—Certain Relationships and Related Party Transactions.” We have also registered our chuys.com domain name. However, as a result of our settlement agreement with an unaffiliated entity, Baja Chuy’s, we may not use “Chuy’s” in Nevada, California or Arizona. An important part of our intellectual property strategy is the monitoring and enforcement of our rights in markets in which our restaurants currently exist or markets which we intend to enter in the future. We also monitor trademark registers to oppose the applications to register confusingly similar trademarks or to limit the expansion of the scope of goods and services covered by existing similar trademarks. We enforce our rights through a number of methods, including the issuance of cease-and-desist letters or making infringement claims in federal court.

Restaurant Industry Overview

According to the National Restaurant Association (the “NRA”), U.S. restaurant industry sales in 2010 were $583.2 billion and are projected to grow 3.6% to $604.2 billion in 2011, representing approximately 4.0% of the U.S. gross domestic product. These sales are generated by an estimated 960,000 locations and 12.8 million restaurant industry employees. According to the NRA, the U.S. restaurant industry has grown at a compound annual growth rate of 6.7% since 1970. Restaurant industry sales in the states in which we operate—Texas, Tennessee, Alabama, Kentucky and Indiana—are expected to be approximately $66.0 billion in 2011 with average sales growth of approximately 3.3% according to the NRA.

We believe we are well positioned to benefit from several fundamental trends in the restaurant industry and U.S. population. The NRA projects that 49% of total U.S. food expenditures will be spent at restaurants in 2011, up from 25% in 1955; however, this trend may not be representative of the areas in which we operate. Analysts believe that the increase in purchases of “food away from home” is attributable to demographic, economic and lifestyle trends, including the rise in the number of women in the workplace, an increase in average household income, an aging U.S. population and an increased willingness by consumers to pay for the convenience of meals prepared outside of their homes. Real disposable personal income, a key driver of restaurant industry sales, is projected to increase 3.4% in 2011, following an increase of 1.1% in 2010.

 

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According to the U.S. Census Bureau, the Hispanic population is projected to be the fastest growing demographic in the U.S., nearly tripling in size from 48.4 million people in 2009 to 132.8 million people by 2050. During this time, the Hispanic population’s share of the nation’s total population is projected to nearly double, from approximately 16% to 30%. We believe the projected growth in the Hispanic population will result in an increase in demand for Mexican/Hispanic foods. We expect to benefit from these long-term demographic trends as we believe the Hispanic influence on dining trends will continue to grow in tandem with the population growth.

The restaurant industry is divided into two primary segments including limited-service and full-service restaurants and is generally categorized by price, quality of food, service and location. Chuy’s competes in the full-service restaurant segment, which according to Technomic, Inc., a national consulting market research firm, had approximately $166.4 billion of sales in 2010, and is expected to grow 3.0% in 2011 to sales of $171.4 billion. The Mexican food component of the full-service restaurant segment is a highly fragmented sector, with the top five restaurants based on sales, representing approximately 17% of the category in 2010.

Competition

The restaurant business is intensely competitive with respect to food quality, price/value relationships, ambience, service and location, and is affected by many factors, including changes in consumer tastes and discretionary spending patterns, macroeconomic conditions, demographic trends, weather conditions, the cost and availability of raw materials, labor and energy and government regulations. Our main competitors are full service concepts in the multi-location, casual dining segment in which we compete most directly for real estate locations and customers, including Texas Roadhouse, Cheddar’s Casual Cafe and BJ’s Restaurants. We also compete with other providers of Tex Mex and Mexican fare and adjacent segments, including casual and fast casual segments. We believe we compete favorably for consumers on our food quality, price/value and unique ambience and experience of our restaurants.

Seasonality

Our business is subject to seasonal fluctuations with restaurant sales typically higher during the spring and summer months as well as in December. Adverse weather conditions during our most favorable months or periods may affect customer traffic. In addition, at all but one of our restaurants we have outdoor seating, and the effects of adverse weather may impact the use of these areas and may negatively impact our revenues.

Employees

As of June 26, 2011, we had approximately 3,608 employees, including 28 corporate management and staff personnel, 233 restaurant level managers and 3,347 hourly employees. None of our employees are unionized or covered by a collective bargaining agreement. We believe that we have good relations with our employees.

Properties

The following table sets forth our restaurant locations as of June 26, 2011.

 

 

 

LOCATION    NUMBER OF
RESTAURANTS
 

Alabama

     1   

Indiana

     1   

Kentucky

     1   

Tennessee

     2   

Texas

     22   
  

 

 

 

Total

     27   
  

 

 

 

 

 

In addition to the restaurant locations set forth above, as of June 26, 2011, we also had four restaurants currently in development in Denton, Texas; Nashville, Tennessee; Lexington, Kentucky; and Atlanta, Georgia that we expect to open in 2011. We have executed leases for all four of these locations. Since June 2011, we have entered into leases for restaurants in Bowling Green, Kentucky; Norman, Oklahoma; and Tulsa, Oklahoma.

 

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We lease all of the land, parking lots and buildings used in our restaurant operations under various long-term operating lease agreements. For additional information regarding our obligations under our leases, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”

All of our leases provide for base (fixed) rent, plus the majority provide for additional rent based on gross sales (as defined in each lease agreement) in excess of a stipulated amount, multiplied by a stated percentage. A significant percentage of our leases also provide for periodic escalation of minimum annual rent either based upon increases in the Consumer Price Index or a pre-determined schedule. The initial lease terms range from 10 to 20 years, with renewal options for 5 to 20 additional years. Typically, our leases are 10 or 15 years in length with 2, 5-year extension options. The initial terms of our leases currently expire between 2011 and 2031. We are also generally obligated to pay certain real estate taxes, insurances, common area maintenance charges and various other expenses related to the properties. Our corporate headquarters is also leased and is located at 1623 Toomey Road, Austin, Texas 78704. For additional information about certain facilities, including our corporate headquarters and six of our restaurant locations, we rent from related parties, see “Certain Relationships and Related Party Transactions.”

 

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LEGAL PROCEEDINGS

Occasionally we are a party to various legal actions arising in the ordinary course of our business including claims resulting from “slip and fall” accidents, employment related claims and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. None of these types of litigation, most of which are covered by insurance, has had a material effect on us, and as of the date of this prospectus, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

 

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MANAGEMENT

The following table sets forth certain information about our directors and executive officers as of the date of this prospectus:

 

 

 

NAMES

   AGE   

POSITIONS

Steve Hislop

   51    Director, President and Chief Executive Officer

Jon Howie

   44    Chief Financial Officer

Sharon Russell

   55    Chief Administrative Officer

Frank Biller

   54    Vice President of Operations, Southeast Region

Michael Hatcher

   50    Vice President of Real Estate and Development

Ted Zapp

   60    Vice President of Operations

Jose Ferreira, Jr.

   55    Chairman of the Board, Director (1), (2), (3)

David Oddi

   41    Director

Michael Stanley

   28    Director (2)

Mike Young

   62    Director (1), (3)

John Zapp

   58    Director (1), (3)

Ira Zecher

   59    Director (2)

 

 

 

(1) 

Member of compensation committee.

(2) 

Member of audit committee.

(3) 

Member of nominating and corporate governance committee.

Executive Officers Biographies

Steve Hislop has served as President, Chief Executive Officer and a member of our board of directors since July 2007. From July 2006 through June 2007, Steve was President and Chief Executive Officer of Sam Seltzer Steak House. Prior to that, Steve served as the Concept President and a member of the board of directors of O’Charley’s Restaurants for 18 years where he helped grow the business from 12 restaurants to a multi-concept company with 347 restaurants. We have concluded that Steve should serve on our board based upon his operational expertise, knowledge of the restaurant industry and leadership experience.

Jon Howie has served as our Chief Financial Officer since August 2011. From March 2007 to July 2011, Jon served as the Chief Financial Officer of Del Frisco’s Restaurant Group, LLC. Prior to that, he served 5 years as Controller and was then promoted to Chief Accounting Officer of the Lone Star Steakhouse & Saloon, Inc. Jon is a certified public accountant and prior to joining Lone Star Steakhouse & Saloon, Inc. was employed as an audit senior manager with Grant Thornton, LLP for one year and held various audit positions, including audit senior manager, at Ernst & Young LLP for ten years. At Grant Thornton and Ernst and Young, he served as an accounting and business advisor to both private and public companies and advised a number of these companies in conjunction with their initial and secondary public offerings.

Sharon Russell has served as our Chief Administrative Officer since August 2011. Prior to becoming our Chief Administrative Officer, she supervised our accounting department from 1987 to 2006 and served as our Chief Financial Officer from 2006 to August 2011 before assuming her current position.

Frank Biller has served as our Vice President of Operations for the Southeast Region since July 2008. Prior to joining us, Frank spent 18 years as the Vice President of Operations for O’Charley’s Restaurants with overall responsibility for 240 restaurants in 19 states.

Michael Hatcher has served as our Vice President of Real Estate and Development since November 2009. Michael joined Chuy’s as a restaurant manager in 1987 and was promoted to General Manager from 1989 to 2002. He was Director of Purchasing and Real Estate from 2002 to 2009.

Ted Zapp has served as our Vice President of Operations since November 2006. Ted has worked with us for almost 30 years. He worked in restaurant operations as a General Manager from 1992 to 1996 and was promoted to Operations Supervisor from 1996 to 2003. He was promoted to Director of Operations from 2003 to 2006 before assuming his current position. Ted Zapp is the brother of John Zapp, a member of our board.

 

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Director Biographies

Jose (“Joe”) Ferreira, Jr. has served as Chairman of our board and as Treasurer of the Company since November 2006. Joe is a co-founder, partner and managing member of Goode Partners LLC (our “Sponsor”). Joe is also a member of Goode Partners I, LLC, which is the general partner of Goode Chuy’s Holdings, LLC. Prior to the founding of Goode Partners, Joe founded and was President and Chief Executive Officer of Woodclyffe Group, an international business consulting and interim management firm. Prior to founding the Woodclyffe Group in 2001, Joe was Co-Chief Operating Officer, President of International and a member of the board of directors of Avon Products Inc., where he worked for over 20 years. Joe has served on the board of directors of various companies, public and private, and currently sits on the board of directors of Rosa Mexicano, Bowlmor Lanes and Princess House. Joe holds a B.S. from Central Connecticut State University and an M.B.A. from Fordham University. We have concluded that Joe should serve on our board based upon his experience as an executive, investor and board member of other companies.

David Oddi has served as a member of our board and as President and Secretary of the Company since November 2006. David is a co-founder, partner and managing member of our Sponsor. David is also a member of Goode Partners I, LLC, which is the general partner of Holdings. Additionally, David is a Vice President of Chuy’s Opco, Inc. and the Manager of Chuy’s Services LLC (our wholly owned subsidiary). Prior to the founding of Goode Partners, David was a partner of Saunders Karp & Megrue, a private equity firm. David previously served as an analyst in the leveraged finance group of Salomon Brothers. David has served on the board of directors of various companies, public and private, and currently sits on the board of All Saints, Bowlmor Lanes, Intermix and Luxury Optical Holdings. David holds a B.S. from the Wharton School at the University of Pennsylvania. We have concluded that David should serve on our board based upon his experience as an investor and board member of other companies.

Michael Stanley has served as a member of our board since May 2011. Michael was promoted from associate to Vice President of our Sponsor in January 2011. Prior to working at Goode Partners, Michael worked as an analyst at Wachovia Securities. Michael currently sits on the board of directors of Rosa Mexicano and is a board observer of Bowlmor Lanes. We have concluded that Michael should serve on our board based upon his experience as an investor and his intimate knowledge of our operations.

Michael Young, one of our founders, has served as a member of our board since November 2006. We have concluded that Michael should serve on our board based upon his experience as an investor and operator of restaurant businesses as well as his intimate knowledge of our operations and culture.

John Zapp, one of our founders, has served as a member of our board since November 2006. We have concluded that John should serve on our board based upon his experience as an investor and operator of restaurant businesses as well as his intimate knowledge of our operations and culture. John Zapp is the brother of Ted Zapp, our Vice President of Operations.

Ira Zecher, has served as a member of our board since June 2011. Ira has been a professor at Rutgers University in the Graduate Accounting program since September 2010. From 1974 through December 2010, Ira was employed by Ernst & Young, a registered public accounting firm, retiring as a partner. Previously, he was a senior transaction advisory services partner and Far East private equity leader for Ernst & Young, where he advised clients on mergers and acquisitions across a broad range of industries. Prior to joining the transaction advisory services group, Ira provided accounting, audit and business-advisory services to both public and private clients for Ernst & Young since 1974. He received his Bachelor’s degree from Queens College. He is also a certified public accountant, a member of the American Institute of Certified Public Accountants (AICPA) and the New York State Society of Certified Public Accountants. We have concluded that Ira should serve on our board based upon his extensive professional accounting and financial expertise, which allow him to provide key contributions to the Board on financial, accounting, corporate governance and strategic matters.

Board of Directors

Our board of directors currently consists of seven directors, all of whom except for Ira Zecher were elected as directors pursuant to our stockholders agreement. The provisions of the agreement regarding the right of our preferred stockholders to nominate and elect members of the board will terminate upon the consummation of the

 

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offering. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” We are actively searching for additional board members, some of whom we expect to join our board of directors prior to the consummation of this offering.

Upon consummation of this offering, our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors, and our amended and restated certificate of incorporation will divide our board into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or until their earlier death, resignation or removal.

Our amended and restated certificate of incorporation as amended upon consummation of the offering will provide that directors may only be removed for cause. To remove a director for cause, 66  2/3% of the voting power of the outstanding voting stock must vote as a single class to remove the director at an annual or special meeting. The certificate will also provide that, if a director is removed or if a vacancy occurs due to either an increase in the size of the board or the death, resignation, disqualification or other cause, the vacancy will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum remain.

This classification of the board of directors, together with the ability of the stockholders to remove our directors only for cause and the inability of stockholders to call special meetings, may have the effect of delaying or preventing a change in control or management. See “Description of Capital Stock—Anti-Takeover Provisions” for a discussion of other anti-takeover provisions found in our amended and restated certificate of incorporation.

Director Independence and Controlled Company

Commencing in fiscal year 2012, our board of directors will review at least annually the independence of each director. During these reviews, the board will consider transactions and relationships between each director (and his or her immediate family and affiliates) and our company and its management to determine whether any such transactions or relationships are inconsistent with a determination that the director is independent. This review will be based primarily on responses of the directors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Prior to the consummation of this offering, our board will meet to formally assess the independence of each of our directors. As required by the Nasdaq Global Market, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present. We intend to comply with future governance requirements to the extent they become applicable to us.

Since we intend to avail ourselves of the “controlled company” exception under the Nasdaq Marketplace rules, we will not have a majority of independent directors, and neither our compensation committee nor our nominating and corporate governance committee will be composed entirely of independent directors as defined under the Nasdaq Marketplace rules. After we become subject to Section 162(m) of the Internal Revenue Code (the “Code”), we intend to appoint at least two independent directors to our compensation committee who each qualify as outside directors to the extent necessary to maintain the deductibility of compensation we pay. See “Compensation Discussion and Analysis—Accounting and Tax Considerations (162(m)).” The controlled company exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act and the Nasdaq Marketplace rules.

Corporate Governance

We believe that good corporate governance is important to ensure that, as a public company, we will be managed for the long-term benefit of our stockholders. In preparation for the offering being made by this prospectus, we and our board of directors have been reviewing the corporate governance policies and practices of other public companies, as well as those suggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and the rules of the SEC and the Nasdaq Global Market.

Based on this review, we intend to establish and adopt charters for the audit committee, compensation committee and nominating and corporate governance committee, as well as a code of business conduct and ethics applicable to all of our directors, officers and employees.

 

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Board Committees

Upon consummation of this offering, our board of directors will have three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors.

Audit Committee

Our audit committee is a standing committee of our board of directors. Following the consummation of this offering, the functions of our audit committee will include:

 

  n  

appointing and determining the compensation for our independent auditors;

 

  n  

establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls; and

 

  n  

reviewing and overseeing our independent registered public accounting firm.

Our audit committee currently consists of Joe Ferreira, Michael Stanley and Ira Zecher, with Ira Zecher serving as chairman. The SEC and the Nasdaq Marketplace rules require us to have one independent audit committee member upon the listing of our common stock on the Nasdaq Global Market, a majority of independent audit committee members within 90 days from the date of listing and all independent audit committee members within one year from the date of listing. We expect to have one independent audit committee member upon the listing of our common stock on the Nasdaq Global Market, and we expect to have an entirely independent audit committee within one year from the date of listing. We will also be required to have at least one audit committee financial expert. Our board of directors has determined that Ira Zecher is an audit committee financial expert.

Prior to the consummation of this offering, our board of directors will adopt a written charter under which the audit committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and the Nasdaq Global Market, will be available on our website.

Compensation Committee

Our compensation committee is a standing committee of our board of directors. Following the consummation of this offering, the compensation committee will:

 

  n  

review and recommend to our board of directors the salaries and benefits for our executive officers;

 

  n  

recommend overall employee compensation policies; and

 

  n  

administer our equity compensation plans.

Our compensation committee currently consists of Joe Ferreira, Michael Young and John Zapp, with Joe Ferreira serving as chairman. We intend to avail ourselves of the “controlled company” exception under the Nasdaq Marketplace rules which exempts us from the requirement that we have a compensation committee composed entirely of independent directors.

Prior to the consummation of this offering, our board of directors will adopt a written charter under which the compensation committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and the Nasdaq Global Market, will be available on our website.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is a standing committee of our board of directors. Following the consummation of this offering, the nominating and corporate governance committee will:

 

  n  

identify individuals qualified to serve as members of our board of directors;

 

  n  

recommend to our board nominees for our annual meetings of stockholders;

 

  n  

evaluate our board’s performance;

 

  n  

develop and recommend to our board corporate governance guidelines; and

 

  n  

provide oversight with respect to corporate governance and ethical conduct.

 

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Table of Contents

Our nominating and corporate governance committee consists of Joe Ferreira, Mike Young and John Zapp, with John Zapp serving as the committee chairman. We intend to avail ourselves of the “controlled company” exception under the Nasdaq Marketplace rules which exempts us from the requirement that we have a nominating and corporate governance committee composed entirely of independent directors.

Prior to the consummation of this offering, our board of directors will adopt a written charter under which the nominating and corporate governance committee will operate. A copy of the charter, which will satisfy the applicable standards of the SEC and the Nasdaq Global Market, will be available on our website.

Other Committees

Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

Compensation Committee Interlocks and Insider Pa