Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
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“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):
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, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to such section 8(a) may determine.
Noodles & Company is an “emerging growth company” as defined under the federal securities laws and, as such, may continue to elect to comply with certain reduced public company reporting requirements in future reports after the closing of this offering.reports.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.
Our quarterly operating results may fluctuate significantly because of several factors, including:
restaurant operating costs for our newly-opened restaurants, which are often materially greater during the first several months of operation than thereafter;
fluctuations in commodity prices.
our operating performance and the performance of our competitors or restaurant companies in general;
changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;
global, national or local economic, legal and regulatory factors unrelated to our performance;
future sales of our common stock by our officers, directors and significant stockholders;
other developments affecting us, our industry or our competitors.
In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our Class A common stock. The price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition or results of operations, and those fluctuations could materially reduce the price of our Class A common stock price.following the completion of this offering.
Future sales of our common stock, or the perception that such sales may occur, could depress our Class A common stock price.
Our principal stockholders and their affiliates own a substantial portion of our outstanding equity,common stock, and their interests may not always coincide with the interests of the other holders.
We do not intend to pay dividends for the foreseeable future.
Provisions in our charter documents and Delaware law may delay or prevent our acquisition by a third party.
Our amended and restated certificate of incorporation and bylaws, and Delaware law, contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. For example, we have a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change membership of a majority of our board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding equity interests.common stock. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. See “Description of Capital Stock.”
We may use the proceeds of this offering in ways with which you may disagree.
We intend to use the net proceeds from this offering, in conjunction with the proceeds received from the private placement, to satisfy the Restaurant Closing Liabilities and the Data Breach Liabilities and to fund, in part, certain capital expenditures related to business initiatives in our restaurants. Any remaining proceeds are expected to be used for general corporate purposes. Accordingly, we will have significant discretion in our use of the net proceeds of this offering, and it is possible that we may allocate the proceeds differently than investors in this offering desire, or that we will fail to maximize our return on these proceeds. You will be relying on the judgment of our management with regard to the use of the net proceeds from this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. For more information, see the section of this prospectus entitled “Use of Proceeds.”
25
This offering may limit our ability to use some or all of our net operating loss carryforwards in the future.
Under Section 382 of the Code, a corporation that undergoes an “ownership change” may be subject to limitations on its ability to utilize its pre‑change net operating loss carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5.0% stockholders, applying certain look‑through and aggregation rules) increases by more than 50.0% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Also, even if this offering does not cause an ownership change, it could increase the likelihood that we may undergo an ownership change for purposes of Section 382 of the Code in the future. Limitations imposed on our ability to utilize net operating loss carryforwards could cause U.S. federal income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such net operating loss carryforwards to expire unused, in each case reducing or eliminating the benefit of such net operating loss carryforwards.
Risks Related to the Private Placement
Upon the closing of this offering, provided that certain conditions are met, we intend to convert the PIPE securities into shares of Class A common stock, causing significant incremental dilution to stockholders.
If we raise at least $50.0 million in gross proceeds from equity offerings (including the private placement and the proceeds of this offering) within six months of the issuance of the PIPE securities and if the volume-weighted average price per share of our Class A common stock for a thirty-day period prior to the conversion exceeds the conversion price, then after such time we may elect, and currently intend, to convert the PIPE securities into Class A common stock. Our conversion of 18,500 shares of PIPE securities at a conversion price of $4.35 per share would result in the issuance of 4,252,873 new shares of Class A common stock and would cause significant incremental dilution to stockholders. However, there can be no assurance that the conditions upon which we may convert the PIPE securities will be satisfied.
Significant incremental dilution may result from the exercise of the PIPE warrants.
Pursuant to the private placement, L Catterton will be issued PIPE warrants, which entitle the holder thereof, upon exercise of such PIPE warrants, to purchase 1,913,793 shares of Class A common stock. The PIPE warrants are exercisable beginning six months after the date of issuance and from time to time thereafter. Additionally, under the terms of the PIPE warrants, the exercise price and the number of shares of Class A common stock for which the PIPE warrants are exercisable will be adjusted upon certain corporate events, including stock splits, reverse stock splits, combinations, stock dividends, recapitalizations and reorganizations and certain other events. The exercise by L Catterton of the PIPE warrants could cause significant incremental dilution to stockholders.
Redemption of the PIPE warrants upon a change of control may result in substantial dilution of our stockholders or may result in our making substantial cash payments to the holders of the PIPE warrants.
Upon a change of control (as defined in the PIPE warrants), holders of the PIPE warrants are entitled to cause us to redeem the PIPE warrants for cash or Class A common stock, at our option, at their fair value, based on the Black-Scholes method of valuation. The amount of shares issuable or the amount of cash payable upon such a redemption may exceed the amounts that would be issuable or payable, respectively, under alternative valuation methods. As a result, in the event of a change of control, a redemption of the PIPE warrants for Class A common stock may result in substantial dilution to our stockholders and a redemption for cash may result in our paying a substantial amount of cash to the holders of the PIPE warrants.
If we do not elect to convert the PIPE securities into shares of Class A common stock, the holders of PIPE securities may be entitled, among other rights of preferred stockholders to which they are entitled, to accrue significant dividend payments on an ongoing basis.
We currently intend to convert the PIPE securities into Class A common stock upon the satisfaction of the following conditions: (i) we generate aggregate gross proceeds to us of at least $50.0 million (including proceeds from the private placement and the proceeds of this offering) prior to the six month anniversary of our issuing the PIPE securities and (ii) the volume-weighted average price per share of our Class A common stock for the prior thirty-day period is greater than the conversion price. However, if such conditions are not satisfied, or if such conditions are satisfied but we do not elect to convert the PIPE securities into shares of Class A common stock, the PIPE securities may accrue significant dividends.
The PIPE securities will accrue dividends beginning on the earlier of (i) the six-month anniversary of our issuing the PIPE securities and (ii) the date on which we complete specified equity offerings generating aggregate gross proceeds to us of at least $50.0 million. If we complete specified equity offerings generating aggregate gross proceeds to us of at least $50.0 million (including proceeds from the private placement and the proceeds of this offering) prior to the six-month anniversary of our issuing the PIPE securities, and if the volume-weighted average price per share of our Class A common stock for the prior 30-day period is equal to or less than the conversion price, dividends on the PIPE securities will stop accruing. In addition, the PIPE securities are also entitled to participate in cash and in-kind distributions to holders of shares of our common stock on an as-converted basis. The dividend rate of the PIPE securities is 8.0% per annum and will increase by 0.5% per month beginning on the date that is the six-month anniversary of our issuing the PIPE securities, up to a maximum of 18.0% per annum. Dividends on the PIPE securities will be payable only in cash, when, as, and if declared by our board of directors, out of legally available funds and if, after such payment, we would be in compliance with the covenants under our outstanding indebtedness for borrowed money.
Redemption of the PIPE securities may occur (a) following the 15-month anniversary of our issuing the PIPE securities, at our election, if the volume-weighted average price per share of our Class A common stock for the prior 30-day period is equal to or less than the conversion price, (b) following the 15-month anniversary of our issuing the PIPE securities, at the direction of the holders of a majority of the PIPE securities, (c) upon a change of control (as defined in the Certificate of Designations), unless otherwise waived by the holders of a majority of the PIPE securities, and (d) at any time, at our election in connection with a conversion of the PIPE securities, if L Catterton would have beneficial ownership of more than 45.0% of our common stock. Any redemption is subject to certain conditions, including that after such redemption we are in compliance with the covenants under our indebtedness for borrowed money.
Due to compounded accrued dividends, the payment of an increased amount of cash needed at the time of any conversion or redemption could substantially reduce our available liquidity and could materially and adversely affect our business, financial condition or results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, such asincluding but not limited to risks and uncertainties discussed in the number of restaurants we intend to open, projected capital expenditures,sections entitled “Prospectus Summary” and estimates of our effective tax rates, among others,“Risk Factors” and are contained principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and “Business.”the documents incorporated by reference herein. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "design," "estimate," "predict," "potential," "plan"“may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptionscurrently available operating, financial and subject to riskscompetitive information. Examples of forward-looking statements include all matters that are not historical facts, such as statements regarding costs associated with our closure of underperforming restaurants, the implementation and uncertainties. results of strategic initiatives, costs associated with our data security incident, the use of proceeds of the private placement and this offering and our future financial performance.
Our actual results may differ materially from those anticipated in these forward-looking statements due to reasons including, but not limited to, those discussed in "Special Note Regarding Forward-Looking Statements" and "Risk Factors" included in this prospectus. Forward-looking statements include, but are not limited to, statements about:to:
our ability to execute our strategies to close underperforming restaurants, reduce restaurant growth and refranchise restaurants in certain of our markets;
our ability to improve the operational and financial performance of our restaurant portfolio;
costs associated with our data security incident, including legal fees, investigative fees, other professional fees and the cost of communications with customers, as well as potential losses associated with settling payment card networks’ expected claims and litigation associated with the data security breach;
our ability to achieve and maintain increases in comparable restaurant sales and to successfully execute our growth strategy;business strategy, including the restaurant initiatives and operational strategies set forth in this prospectus;
the success of our efforts to obtain additional sources of liquidity, including pursuant to this offering;
the success of our marketing efforts;
our ability to open new restaurants on schedule;
current economic conditions;
price and availability of commodities;
our ability to adequately staff our restaurants;
changes in labor costs;
consumer confidence and spending patterns;
the assumptions usedchanges in the adjustment of interest expenseconsumer tastes and the adjustments for certain incremental legal, accounting, insurancelevel of acceptance of our restaurant concepts (including consumer acceptance of prices and other compliance costs used in the calculationsuccess of adjusted net income;
our catering offerings);
consumer reaction to public health issues and perceptions of food safety;
changes in consumer tastes and the level of acceptance of the company's restaurant concepts (including consumer acceptance of prices,
seasonal factors;
weather; and
those discussed in “Risk Factors” included in this prospectus, in “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 29, 2015 and in the other documents incorporated by reference herein.
weather.
TheseWe discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and in the documents incorporated by reference herein. The forward-looking statements contained in this prospectus involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, thesethe forward-looking statements contained herein represent our estimates and assumptions only as of the date of this prospectus. Unless required by United States federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.
The market data and certain other statistical information used throughout this prospectus or incorporated by reference herein are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information attributed to these third-party sources and cannot guarantee its accuracy and completeness. Similarly, our estimates have not been verified by any independent source.
You should read this prospectus, the documents that we incorporate by reference in this prospectus and the documents that we reference in this prospectus and have filed as exhibits to documents incorporated by reference and to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
USE OF PROCEEDS
We estimate that we will receivethe net proceeds to us from this offering, of approximately $ , based on an offering price of $ per share, the mid-point of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed offering price of $ per share would increase (decrease) the net proceeds to us, from this offering bywill be approximately $ , assumingmillion, or $ million if the numberunderwriter exercises in full its option to purchase $4,800,000 of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.
The principal purpose for the offering of shares by the Company is to provide capital to repurchaseadditional shares of Class A common stock, from certain officersbased on $ per share, the last reported sales price of our common stock on , 2017. We intend to use the Company.
We will not receive anynet proceeds from this offering, in conjunction with the saleproceeds received from the private placement, to satisfy the Restaurant Closing Liabilities, which are estimated to be between $24.0 million to $29.0 million (see “Prospectus Summary—Our Operational Strategy—Rationalized restaurant portfolio”), to satisfy the Data Breach Liabilities, for which we recorded a charge of shares ofapproximately $11.0 million (see “Prospectus Summary—Data Breach Liabilities”) and to fund, in part, certain capital expenditures related to business initiatives in our restaurants (see “Prospectus Summary—Our Operational Strategy—Restaurant initiatives”). Any remaining proceeds will be used for general corporate purposes.
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
Our Class A common stock by the selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock hasis traded on the Nasdaq Global Select Market under the symbol NDLS since it began trading on June 28, 2013. Our initial public offering was priced at $18.00 per share on June 27, 2013.
NDLS. The following table sets forth, for the periods indicated, the high and low sales prices per share of our Class A common stock as reported on the Nasdaq Global Select Market.
|
| | | | | | | | |
| | | High | | Low |
| | | | | |
| Fiscal Year 2013 | | |
| | |
| Second quarter (June 28, 2013 - July 2, 2013) | | $ | 51.97 |
| | $ | 32.00 |
|
| Third quarter (July 3, 2013 - October 1, 2013) | | $ | 51.40 |
| | $ | 38.90 |
|
| Fourth quarter to date (October 2, 2013 - November 15, 2013) | | $ | 49.75 |
| | $ | 41.14 |
|
|
| | | | | | | | |
| | | High | | Low |
| Fiscal Year 2017 | | | | | |
| First quarter (January 4, 2017 – February 8, 2017) | | $ | 4.80 | | | $ | 4.05 | |
| | | | | | |
| Fiscal Year 2016 | | | | | |
| First quarter (December 30, 2015 – March 29, 2016) | | $ | 13.65 | | | $ | 9.32 | |
| Second quarter (March 30, 2016 – June 28, 2016) | | $ | 12.55 | | | $ | 9.28 | |
| Third quarter (June 29, 2016 – September 27, 2016) | | $ | 10.47 | | | $ | 4.91 | |
| Fourth quarter to date (September 28, 2016 – January 3, 2017) | | $ | 5.10 | | | $ | 3.51 | |
|
| | | | | | | | |
| Fiscal Year 2015 | | | | | |
| First quarter (December 31, 2014 – March 31, 2015) | | $ | 28.02 | | | $ | 17.18 | |
| Second quarter (April 1, 2015 – June 30, 2015) | | $ | 21.41 | | | $ | 14.28 | |
| Third quarter (July 1, 2015 – September 29, 2015) | | $ | 15.88 | | | $ | 11.20 | |
| Fourth quarter (September 30, 2015 – December 29, 2015) | | $ | 14.95 | | | $ | 10.02 | |
On November 15, 2013,February 8, 2017, the closing price per share of our Class A common stock on the Nasdaq Global Select Market was $43.43$4.40 and there were approximately 10743 stockholders of record of our Class A common stock.
DIVIDEND POLICY
No dividends have been declared or paid on our shares of equity interests, except for the Class C common stock dividend paid to the previous holder of the one outstanding share of our Class C common stock. The dividend paid to Argentia, as the holder of the one outstanding share of Class C common stock, was paid pursuant to the terms of the Class C Dividend Side Letter among us, Argentia and Catterton. Catterton did not receive dividends of any kind. We do not anticipate paying any cash dividends on shares of our Class A common stock, or any of our equity interests,shares of common stock in the foreseeable future. We currently intend to retain any earnings to finance the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our earnings, capital requirements, results of operations, financial condition, business prospects and other factors that our board of directors considers relevant. Further, our credit agreement contains provisions that limit our ability to pay dividends on our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Relationships and Related Transactions”Operation” in our quarterly report on Form 10-Q for the quarter ended September 27, 2016 incorporated into this prospectus by reference for additional information regarding our financial condition.
CAPITALIZATION
The following table sets forth our capitalization as of October 1, 2013:
on an actual basis;
on an as adjusted basis, giving effect to the following transactions as if they occurred on October 1, 2013:
| |
▪ | The sale by us of shares of common stock in the offering based on the public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; |
| |
▪ | The issuance of shares of common stock upon the net exercise of options subsequent to October 1, 2013 which will be sold in this offering by certain selling stockholders; |
| |
▪ | The purchase by the Company of shares of common stock from certain of our officers; |
excludes (i) 3,472,437 shares of our common stock issuable upon the exercise of stock options outstanding as of October 1, 2013, and (ii) 3,262,482 shares of our common stock reserved for future grants under our stock incentive plan and 735,673 shares reserved for purchase under our employee stock purchase plan;
no exercise of the warrant to purchase up to 57,700 shares of our Class B common stock held by Fahrenheit 212, LLC, and no change to the 6,315,929 shares of Class B common stock outstanding as of October 1, 2013; and
no exercise by the underwriters of their option to purchase up to additional shares from us.
You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included in this prospectus.
|
| | | | | | |
| | | As of October 1, 2013 |
| | | Actual | | As Adjusted |
| | | (in thousands, except share and per share data, unaudited) |
| Debt, including current portion: | | | | |
| Credit facility | | 1,714 |
| | |
| Total long-term debt | | 1,714 |
| | |
| Stockholders’ Equity: | | | | |
| Preferred stock, $0.01 par value per share (1,000,000 shares authorized, zero and zero shares issued and outstanding, zero shares issued and outstanding, as adjusted) | | — |
| | |
| Class A common stock, $0.01 par value per share (150,000,000 shares authorized, 23,107,010 shares issued and outstanding, actual and shares authorized, shares issued and outstanding, as adjusted) | | 231 |
| | |
Class B common stock, $0.01 par value per share; (30,000,000 shares authorized, 6,315,929 shares issued and outstanding, and shares authorized, shares issued and outstanding, as adjusted)(1) | | 63 |
| | |
| Additional paid-in capital | | 114,318 |
| | |
| Retained earnings | | 7,900 |
| | |
| Total stockholders’ equity | | 122,512 |
| | |
| Total capitalization | | $ | 124,226 |
| |
|
| |
(1) | The rights of the holders of our Class A common stock and our Class B common stock are identical in all respects, except that our Class B common stock does not vote on the election or removal of directors unless converted on a share-for-share basis into Class A common stock. |
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes the consolidated historical financial and operating data for the periods indicated. The statements of income data for the fiscal years ended January 1, 2013, January 3, 2012 and December 28, 2010 and the balance sheet data as of January 1, 2013 and January 3, 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, and the statements of income data from the fiscal years ended December 29, 2009 and December 30, 2008 and the balance sheet data as of December 28, 2010, December 29, 2009 and December 30, 2008 have been derived from our audited consolidated financial statements not included in this prospectus. The statements of income data for the three quarters ended October 1, 2013 and October 2, 2012 and the balance sheet data as of October 1, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The balance sheet data as of October 2, 2012 have been derived from our unaudited consolidated financial statements not included in this prospectus. The reclassification of restaurant-level marketing costs, as discussed in the accompanying notes to our unaudited consolidated financial statements, is reflected in all periods presented in this prospectus. The financial data presented includes all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations for such periods.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.
We operate on a 52 or 53 week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2011, which ended on January 3, 2012, contained 53 weeks, and all other fiscal years presented below contained 52 weeks. We refer to our fiscal years as 2012, 2011, 2010, 2009 and 2008. Our fiscal quarters each contain thirteen weeks, with the exception of the fourth quarter of a 53 week fiscal year, which contains fourteen weeks.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | December 29, 2009 | | December 30, 2008 | | October 1,
2013
(unaudited) | | October 2,
2012
(unaudited) |
| | | (in thousands, except share and per share data) |
| Statements of Income Data: | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | |
| Restaurant revenue | | $ | 297,264 |
| | $ | 253,467 |
| | $ | 218,560 |
| | $ | 190,175 |
| | $ | 168,534 |
| | $ | 256,744 |
| | $ | 220,261 |
|
| Franchising royalties and fees | | 3,146 |
| | 2,599 |
| | 2,272 |
| | 2,293 |
| | 1,908 |
| | 2,711 |
| | 2,220 |
|
| Total revenue | | 300,410 |
| | 256,066 |
| | 220,832 |
| | 192,468 |
| | 170,442 |
| | 259,455 |
| | 222,481 |
|
| Costs and Expenses: | | | | | | | | | | | | | | |
| Restaurant Operating Costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | | | | | | | |
| Cost of sales | | 78,997 |
| | 66,419 |
| | 56,869 |
| | 51,487 |
| | 45,707 |
| | 67,524 |
| | 58,423 |
|
| Labor | | 89,435 |
| | 75,472 |
| | 64,942 |
| | 56,581 |
| | 49,775 |
| | 77,464 |
| | 66,002 |
|
| Occupancy | | 29,323 |
| | 25,208 |
| | 21,650 |
| | 18,652 |
| | 15,707 |
| | 25,824 |
| | 21,669 |
|
Other restaurant operating costs(1) | | 36,380 |
| | 32,031 |
| | 27,403 |
| | 23,620 |
| | 36,372 |
| | 32,962 |
| | 27,449 |
|
General and administrative(1)(2) | | 29,081 |
| | 26,463 |
| | 27,302 |
| | 21,713 |
| | 21,285 |
| | 27,808 |
| | 21,426 |
|
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 13,932 |
| | 13,315 |
| | 11,283 |
| | 15,074 |
| | 12,165 |
|
| Pre-opening | | 3,145 |
| | 2,327 |
| | 2,088 |
| | 1,780 |
| | 2,401 |
| | 2,873 |
| | 2,000 |
|
| Asset disposals, closure costs and restaurant impairments | | 1,278 |
| | 1,629 |
| | 2,815 |
| | 1,070 |
| | 1,273 |
| | 837 |
| | 663 |
|
| Total costs and expenses | | 284,358 |
| | 244,050 |
| | 217,001 |
| | 188,218 |
| | 183,803 |
| | 250,366 |
| | 209,797 |
|
| Income from operations | | 16,052 |
| | 12,016 |
| | 3,831 |
| | 4,250 |
| | 2,038 |
| | 9,089 |
| | 12,684 |
|
| Debt extinguishment expense | | 2,646 |
| | 275 |
| | — |
| | — |
| | — |
| | — |
| | 2,646 |
|
| Interest expense | | 5,028 |
| | 6,132 |
| | 1,819 |
| | 1,840 |
| | 1,342 |
| | 2,199 |
| | 3,894 |
|
| Income before income taxes | | 8,378 |
| | 5,609 |
| | 2,012 |
| | 2,410 |
| | 696 |
| | 6,890 |
| | 6,144 |
|
| Provision (benefit) for income taxes | | 3,215 |
| | 1,780 |
| | (366 | ) | | 1,343 |
| | 553 |
| | 2,633 |
| | 2,540 |
|
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
| | $ | 1,067 |
| | $ | 143 |
| | $ | 4,257 |
| | $ | 3,604 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | December 29, 2009 | | December 30, 2008 | | October 1,
2013
(unaudited) | | October 2,
2012
(unaudited) |
| | | (in thousands, except share and per share data) |
| Earnings per Class A and Class B common share, combined: | | | | | | | | | | | | | | |
| Basic | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.10 |
| | $ | 0.04 |
| | * | | $ | 0.17 |
| | .16 |
| Diluted | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.09 |
| | $ | 0.04 |
| | * | | $ | 0.16 |
| | .16 |
| Weighted average Class A and Class B common shares outstanding, combined: | | | | | | | | | | | | | | |
| Basic | | 23,238,984 |
| | 23,237,698 |
| | 24,386,059 |
| | 24,360,855 |
| | 24,252,814 |
| | 25,382,805 |
| | 23,238,984 |
|
| Diluted | | 23,265,542 |
| | 23,237,698 |
| | 25,226,989 |
| | 24,396,296 |
| | 24,426,941 |
| | 26,528,004 |
| | 23,250,745 |
|
| Selected Operating Data: | | | | | | | | | | | | | | |
| Company-owned restaurants at end of period | | 276 |
| | 239 |
| | 212 |
| | 186 |
| | 166 |
| | 310 |
| | 261 |
|
| Franchise-owned restaurants at end of period | | 51 |
| | 45 |
| | 43 |
| | 43 |
| | 37 |
| | 58 |
| | 48 |
|
| Company-owned: | | | | | | | | | | | | | | |
Average unit volumes(3) | | $ | 1,178 |
| | $ | 1,147 |
| | $ | 1,126 |
| | $ | 1,098 |
| | $ | 1,125 |
| | $ | 1,181 |
| | $ | 1,174 |
|
Comparable restaurant sales(4) | | 5.2 | % | | 4.2 | % | | 3.2 | % | | 0.4 | % | | 5.6 | % | | 3.1 | % | | 5.6 | % |
Restaurant contribution(5) | | $ | 63,129 |
| | $ | 54,337 |
| | $ | 47,697 |
| | $ | 39,835 |
| | $ | 36,372 |
| | $ | 52,970 |
| | $ | 46,718 |
|
| as a percentage of restaurant revenue | | 21.2 | % | | 21.4 | % | | 21.8 | % | | 20.9 | % | | 21.6 | % | | 20.6 | % | | 21.2 | % |
EBITDA(6) | | $ | 30,125 |
| | $ | 26,242 |
| | $ | 17,763 |
| | $ | 17,565 |
| | $ | 13,321 |
| | $ | 24,163 |
| | $ | 22,203 |
|
Adjusted EBITDA(6) | | $ | 36,283 |
| | $ | 30,488 |
| | $ | 26,472 |
| | $ | 20,375 |
| | $ | 16,681 |
| | $ | 32,040 |
| | $ | 27,183 |
|
| as a percentage of revenue | | 12.1 | % | | 11.9 | % | | 12.0 | % | | 10.6 | % | | 9.8 | % | | 12.3 | % | | 12.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | December 29, 2009 | | December 30, 2008 | | October 1,
2013 (unaudited) | | October 2,
2012 (unaudited) |
| | | (in thousands) |
Balance Sheet Data(7): | | | | | | | | | | | | | | |
| Total current assets | | $ | 16,154 |
| | $ | 12,879 |
| | $ | 214,498 |
| | $ | 8,727 |
| | $ | 11,174 |
| | $ | 18,512 |
| | $ | 12,904 |
|
| Total assets | | 156,995 |
| | 126,325 |
| | 311,148 |
| | 95,764 |
| | 88,579 |
| | 181,810 |
| | 144,002 |
|
| Total current liabilities | | 23,760 |
| | 20,557 |
| | 213,664 |
| | 17,342 |
| | 16,128 |
| | 27,562 |
| | 25,009 |
|
| Total long-term debt | | 93,731 |
| | 77,523 |
| | 77,030 |
| | 33,838 |
| | 34,488 |
| | 1,714 |
| | 83,557 |
|
| Total liabilities | | 142,987 |
| | 118,802 |
| | 309,070 |
| | 67,214 |
| | 64,931 |
| | 59,298 |
| | 131,922 |
|
| Temporary equity | | 3,601 |
| | 2,572 |
| | 2,572 |
| | — |
| | — |
| | — |
| | — |
|
| Total stockholders' equity | | 10,407 |
| | 4,951 |
| | (494 | ) | | 28,550 |
| | 23,648 |
| | 122,512 |
| | 12,080 |
|
| |
(1) | In the third quarter of 2013 we changed the manner in which we report marketing expenses between general and administrative expenses and other restaurant operating costs to more appropriately reflect only those costs directly related to restaurant-level marketing in other restaurant operating costs. Marketing costs previously reported as restaurant operating costs, that were not directly related to restaurant-level marketing, have been reclassified to general and administrative expense in our consolidated financial statements in all periods presented. In 2012, 2011, 2010, 2009 and 2008 and in the first two quarters of 2013 and the first two quarters of 2012, $2.9 million, $2.6 million, $2.4 million, $2.5 million and $2.5 million, and $1.0 million and $1.3 million, respectively, have been reclassified from restaurant operating costs to general and administrative expense. The change has no impact on income from operations. |
| |
(2) | 2010 included $3.7 million of non-cash stock-based compensation expense and $0.3 million of expense for our portion of payroll taxes related to the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. 2012 and 2011 each included $1.0 million of management fee expense and the first three quarters of 2013 and 2012 included $500,000 and $750,000 respectively, of management fee expense, in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed. In the second quarter of 2013, we incurred $ 5.7 million of IPO related expenses: $ 2.0 million of stock-based compensation related to accelerated vesting of outstanding stock options, $ 1.2 million of stock-based compensation related to stock options granted to our Chief Executive Officer and President and Chief Operating Officer of which 50% were vested at grant, $ 1.7 million of transaction bonuses and related payroll taxes and $ 0.8 million in transaction payments to our Equity Sponsors. |
| |
(3) | AUVs consist of average annualized sales of all company-owned restaurants over the trailing 12 periods in a typical operating year. |
| |
(4) | Comparable restaurant sales represent year-over-year sales for restaurants open for at least 18 full periods. |
| |
(5) | Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. |
| |
(6) | EBITDA and adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income or cash flow from operations, as determined by US GAAP, and our calculation thereof may not be comparable to that reported by other companies. These measures are presented because we believe that investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for evaluating our ongoing results of operations. |
EBITDA is calculated as net income before interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and eliminations described in the table below.
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 charges such as depreciation and amortization expenses and asset disposals, closure costs and restaurant impairments and (ii) we use adjusted EBITDA internally as a benchmark for certain of our cash incentive plans and to evaluate our operating performance or compare our performance to that of our competitors. The use of adjusted EBITDA as a performance measure permits a comparative assessment of our operating performance relative to our performance based on our US 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 income tax rates) and differences in book depreciation of property, plant and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management believes that adjusted EBITDA facilitates company-to-company comparisons within our industry by eliminating some of these foregoing variations. Adjusted EBITDA as presented may not be comparable to other similarly-titled measures of other companies, and our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by excluded or unusual items.
Because of these limitations, EBITDA and adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with US GAAP. We compensated for these limitations by relying primarily on our US GAAP results and using EBITDA and adjusted EBITDA only supplementally. Our management recognizes that EBITDA and adjusted EBITDA have limitations as analytical financial measures, including the following:
EBITDA and adjusted EBITDA do not reflect our capital expenditures or future requirements for capital expenditures;
EBITDA and adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, associated with our indebtedness;
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, and do not reflect cash requirements for such replacements;
Adjusted EBITDA does not reflect the cost of stock-based compensation; and
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs.
A reconciliation of net income to EBITDA and adjusted EBITDA is provided below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | December 29, 2009 | | December 30, 2008 | | October 1,
2013 (unaudited) | | October 2,
2012 (unaudited) |
| | | (in thousands) |
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
| | $ | 1,067 |
| | $ | 143 |
| | $ | 4,257 |
| | $ | 3,604 |
|
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 13,932 |
| | 13,315 |
| | 11,283 |
| | 15,074 |
| | 12,165 |
|
| Interest expense | | 5,028 |
| | 6,132 |
| | 1,819 |
| | 1,840 |
| | 1,342 |
| | 2,199 |
| | 3,894 |
|
| Provision for income taxes | | 3,215 |
| | 1,780 |
| | (366 | ) | | 1,343 |
| | 553 |
| | 2,633 |
| | 2,540 |
|
| EBITDA | | $ | 30,125 |
| | $ | 26,242 |
| | $ | 17,763 |
| | $ | 17,565 |
| | $ | 13,321 |
| | $ | 24,163 |
| | $ | 22,203 |
|
| Debt extinguishment expense | | 2,646 |
| | 275 |
| | — |
| | — |
| | — |
| | — |
| | 2,646 |
|
| Asset disposals, closure costs and restaurant impairment | | 1,278 |
| | 1,629 |
| | 2,815 |
| | 1,070 |
| | 1,273 |
| | 837 |
| | 663 |
|
| Management fees(a) | | 1,000 |
| | 1,014 |
| | — |
| | — |
| | — |
| | 500 |
| | 750 |
|
| Stock-based compensation expense(b) | | 1,234 |
| | 1,328 |
| | 5,894 |
| | 1,740 |
| | 2,087 |
| | 873 |
| | 921 |
|
| IPO related expenses(c) | | — |
| | — |
| | — |
| | — |
| | — |
| | 5,667 |
| | — |
|
| Adjusted EBITDA | | $ | 36,283 |
| | $ | 30,488 |
| | $ | 26,472 |
| | $ | 20,375 |
| | $ | 16,681 |
| | $ | 32,040 |
| | $ | 27,183 |
|
| |
(a) | Fiscal years 2012 and 2011 each included $1.0 million of management fee expense and the first three quarters of 2013 and 2012 included $500,000 and $750,000 of management fee expense, in accordance with our management services agreement and through |
the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed.
| |
(b) | 2010 included $3.7 million of non-cash stock-based compensation expense and $0.3 million of expense for our portion of payroll taxes related to the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. |
| |
(c) | Reflects certain expenses incurred in conjunction with the closing of our initial public offering. Amount includes $2.0 million of stock-based compensation related to accelerated vesting of outstanding stock options, $1.2 million of stock-based compensation related to stock options granted to our Chief Executive Officer and President and Chief Operations Officer of which 50% were vested at grant, $1.7 million of transaction bonuses and related payroll tax and $0.8 million in transaction payments to our Equity Sponsors.
|
| |
(7) | As of December 28, 2010 the consolidated balance sheet included $189.4 million in restricted cash and current liabilities that were temporarily held due to timing of the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Special Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus.
We operate on a 52 or 53 week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2012 and 2010, which ended on January 1, 2013 and December 28, 2010, respectively, each contained 52 weeks. Fiscal year 2011, which ended on January 3, 2012, contained 53 weeks. We refer to our fiscal years as 2012, 2011 and 2010. Our fiscal quarters each contained 13 operating weeks, with the exception of the fourth quarter of 2011, which had 14 operating weeks.
NOODLES & COMPANY
A World of Flavors Under One Roof
Highlights and Trends
Restaurant Development. New restaurants have contributed substantially to our revenue growth and, through November 15, 2013, we opened 35 company-owned and 10 franchise restaurants for a total of 372 restaurants open system-wide. During 2012, we opened 39 company-owned restaurants and six franchise restaurants, which represented a 15.1% growth rate. Our annual restaurant growth rate for each of the past 10 years is over 10%. In 2013 we anticipate opening between 41 and 42 company-owned restaurants, net of one closure in the first quarter of 2013, and 10 franchise restaurants, including the restaurants opened year to date.
Comparable Restaurant Sales. Comparable restaurant sales increased by 2.1% system-wide in the third quarter of 2013 and 2.7% system-wide in the first three quarters of 2013. Comparable restaurant sales growth in the third quarter was the result of both increases in traffic and per person spend. Comparable restaurant salesrepresent year-over-year sales comparisons for restaurants open for at least 18 full periods.
Your World Kitchen. We completed installation of "Your World Kitchen" interior signage in all of our company-owned restaurants during the second quarter of 2013. Installations in our company-owned restaurants began in 2012, and we began using the phrase to describe the breadth of our offering and our customers' dining experience.
Initial Public Offering. On July 2, 2013, we completed our IPO of Class A common stock at $18.00 per share. We issued 6,160,714 shares, including 803,571 shares of Class A common stock sold to the underwriters in the IPO pursuant to their over-allotment option. After underwriter discounts and commissions and estimated offering expenses, net proceeds from the offering were $100.2 million. We used these proceeds to repay all but $0.2 million of our outstanding debt as of July 2, 2013, including the full repayment of our term loan.
As a result of the IPO and the repayment of nearly all our outstanding debt, we now benefit from savings on interest expense and management fees that we incurred as a private company, but we also incur incremental costs as a public company including incremental legal, accounting, insurance and other compliance costs. We will continue to use our operating cash flows and borrowings on our revolving line of credit to fund capital expenditures to support restaurant growth as well as to invest in our existing restaurants and infrastructure and information technology. See "—Liquidity and Capital Resources."
Further, in connection with the IPO, we incurred $5.7 million of IPO related expenses, which includes $3.2 million of stock-based compensation expenses related to stock option grants and accelerated stock option vesting related to the IPO, $1.7 million of transaction bonuses and payroll tax, and $0.8 million paid to our Equity Sponsors. Additionally, the financial impact of the IPO will affect the comparability of our post-IPO financial performance to our pre-IPO financial performance.
Key Measures We Use to Evaluate Our Performance
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, average unit volumes ("AUVs"), comparable restaurant sales, restaurant contribution, EBITDA and adjusted EBITDA.
Revenue
Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per restaurant sales.
Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important part of our financial success.
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and higher in the second and third quarters. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly.
Average Unit Volumes ("AUVs")
AUVs consist of the average annualized sales of all company-owned restaurants for the trailing 12 periods. AUVs are calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by 361, which is equal to the number of operating days we have in a typical year. This measurement allows management to assess changes in consumer traffic and per person spending patterns at our restaurants.
Comparable Restaurant Sales
Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. As of 2012, 2011 and 2010, there were 216, 192 and 174 restaurants, respectively, in our comparable restaurant base. As of October 1, 2013 and October 2, 2012, there were 236 and 211, respectively, restaurants in our comparable restaurant base. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Comparable restaurant sales growth is generated by increases in traffic, which we calculate as the number of entrees sold, or changes in per person spend, calculated as sales divided by traffic. Per person spend can be influenced by changes in menu prices and the mix and number of items sold per person.
Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
consumer recognition of our brand and our ability to respond to changing consumer preferences;
overall economic trends, particularly those related to consumer spending;
our ability to operate restaurants effectively and efficiently to meet consumer expectations;
pricing;
per person spend and average check amount;
marketing and promotional efforts;
local competition;
trade area dynamics;
introduction of new and seasonal menu items and limited time offerings; and
opening of new restaurants in the vicinity of existing locations.
As a result of the 53-week fiscal year 2011, our fiscal year 2012 began one week later than our fiscal year 2011. Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. Since opening new company-owned restaurants will be a significant component of our revenue growth, comparable restaurant sales are only one measure of how we evaluate our performance.
Since opening new company-owned and franchise restaurants is an important part of our growth strategy, and we anticipate new restaurants will be a significant component of our revenue growth, comparable restaurant sales are only one measure of how we evaluate our performance.
Restaurant Contribution
Restaurant contribution is defined as restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. We expect restaurant contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth. Fluctuations in restaurant contribution margin can also be attributed to those factors discussed above for the components of restaurant operating costs.
EBITDA and Adjusted EBITDA
We define EBITDA as net income before interest expense, provision (benefit) for income taxes and depreciation and amortization. We define adjusted EBITDA as net income before interest expense, debt extinguishment expense, provision (benefit) for income taxes, asset disposals, closure costs and restaurant impairments, depreciation and amortization, stock-based compensation, management fees and IPO related expenses.
EBITDA and Adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-cash expenses that are not reflective of the underlying business performance. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period and to analyze the factors and trends affecting our business.
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | December 29, 2009 | | December 30, 2008 | | October 1, 2013 (unaudited) | | October 2, 2012 (unaudited) |
| | | (in thousands) |
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
| | $ | 1,067 |
| | $ | 143 |
| | $ | 4,257 |
| | $ | 3,604 |
|
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 13,932 |
| | 13,315 |
| | 11,283 |
| | 15,074 |
| | 12,165 |
|
| Interest expense | | 5,028 |
| | 6,132 |
| | 1,819 |
| | 1,840 |
| | 1,342 |
| | 2,199 |
| | 3,894 |
|
| Provision (benefit) for income taxes | | 3,215 |
| | 1,780 |
| | (366 | ) | | 1,343 |
| | 553 |
| | 2,633 |
| | 2,540 |
|
| EBITDA | | $ | 30,125 |
| | $ | 26,242 |
| | $ | 17,763 |
| | $ | 17,565 |
| | $ | 13,321 |
| | $ | 24,163 |
| | $ | 22,203 |
|
| Debt extinguishment expense | | 2,646 |
| | 275 |
| | — |
| | — |
| | — |
| | — |
| | 2,646 |
|
| Asset disposals, closure costs and restaurant impairment | | 1,278 |
| | 1,629 |
| | 2,815 |
| | 1,070 |
| | 1,273 |
| | 837 |
| | 663 |
|
Management fees(a) | | 1,000 |
| | 1,014 |
| | — |
| | — |
| | — |
| | 500 |
| | 750 |
|
Stock-based compensation expense(b) | | 1,234 |
| | 1,328 |
| | 5,894 |
| | 1,740 |
| | 2,087 |
| | 873 |
| | 921 |
|
IPO related expenses(c) | | — |
| | — |
| | — |
| | — |
| | — |
| | 5,667 |
| | — |
|
| Adjusted EBITDA | | $ | 36,283 |
| | $ | 30,488 |
| | $ | 26,472 |
| | $ | 20,375 |
| | $ | 16,681 |
| | $ | 32,040 |
| | $ | 27,183 |
|
| |
(a) | Fiscal years 2012 and 2011 each included $1.0 million of management fee expense and the first three quarters of 2013 and 2012 included $500,000 and $750,000 of management fee expense, in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed. |
| |
(b) | 2010 included $3.7 million of non-cash stock-based compensation expense and $0.3 million of expense for our portion of payroll taxes related to the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. |
| |
(c) | Reflects certain expenses incurred in conjunction with the closing of our initial public offering. Amount includes $2.0 million of stock-based compensation related to accelerated vesting of outstanding stock options, $1.2 million of stock-based compensation related to stock options granted to our Chief Executive Officer and President and Chief Operations Officer of which 50% were vested at grant, $1.7 million of transaction bonuses and related payroll tax and $0.8 million in transaction payments to our Equity Sponsors.
|
Key Financial Definitions
Cost of Sales
Cost of sales includes the direct costs associated with the food, beverage and packaging of our menu items. Cost of sales also includes any costs related to discounted menu items. Cost of sales is a substantial expense and can be expected to grow proportionally as our restaurant revenue grows. Fluctuations in cost of sales are caused primarily by volatility in the cost of commodity food items and related contracts for such items. Other important factors causing fluctuations in cost of sales include seasonality, discounting activity and restaurant level management of food waste.
Labor Costs
Labor costs include wages, payroll taxes, workers' compensation expense, benefits and bonuses paid to our management teams. Like other expense items, we expect labor costs to grow proportionally as our restaurant revenue grows. Factors that influence fluctuations in our labor costs include minimum wage and payroll tax legislation, the frequency and severity of workers' compensation claims, health care costs and the performance of our restaurants.
Occupancy Costs
Occupancy costs include rent, common area maintenance and real estate tax expense related to our restaurants and is expected to grow proportionally as we open new restaurants.
Other Restaurant Operating Costs
Other restaurant operating costs include the costs of utilities, restaurant-level marketing, credit card processing fees, restaurant supplies, repairs and maintenance and other restaurant operating costs. Like other costs, it is expected to grow proportionally as restaurant revenue grows.
General and Administrative Expense
General and administrative expense is composed of payroll, other compensation, travel, marketing, accounting fees, legal fees and other expenses related to the infrastructure required to support our restaurants. General and administrative expense also includes the non-cash stock compensation expense related to our employee stock incentive plan. General and administrative expense can be expected to grow as we grow, including incremental legal, accounting, insurance and other expenses incurred as a public company.
Depreciation and Amortization
Our principal depreciation and amortization charges relate to depreciation of fixed assets, including leasehold improvements and equipment, from restaurant construction and ongoing maintenance.
Pre-Opening Costs
Pre-opening costs relate to the costs incurred prior to the opening of a restaurant. These include management labor costs, staff labor costs during training, food and supplies utilized during training, marketing costs and other related pre-opening costs. Pre-opening costs also include rent recorded between date of possession and opening date for our restaurants.
Asset Disposals, Closure Costs and Restaurant Impairments
Asset disposals, closure costs and restaurant impairments include the loss on disposal of assets related to retirements and replacement of leasehold improvements or equipment, non-cash restaurant closure and impairment charges.
Debt Extinguishment
In July 2012, we amended our credit facility to extend the maturity date and to reduce interest rates on borrowings. As a result of this amendment, a portion of the existing and new fees were treated as debt extinguishment. In 2011, we wrote off debt issuance costs related to our credit facility.
Interest Expense
Interest expense consists primarily of interest on our outstanding indebtedness. Debt issuance costs are amortized at cost over the life of the related debt.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists of federal, state and local taxes on our income.
Restaurant Openings, Closures and Relocations
The following table shows restaurants opened, closed or relocated in the years indicated.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | October 1,
2013 | | October 2,
2012 |
| Company-Owned Restaurant Activity | | | | | | | | | | |
| Beginning of period | | 239 |
| | 212 |
| | 186 |
| | 276 |
| | 239 |
|
| Openings | | 39 |
| | 28 |
| | 28 |
| | 35 |
| | 22 |
|
Closures and relocations(1) | | (2 | ) | | (1 | ) | | (2 | ) | | (1 | ) | | — |
|
| Restaurants at end of period | | 276 |
| | 239 |
| | 212 |
| | 310 |
| | 261 |
|
| Franchise Restaurant Activity | | | | | | | | | | |
| Beginning of period | | 45 |
| | 43 |
| | 43 |
| | 51 |
| | 45 |
|
| Openings | | 6 |
| | 2 |
| | — |
| | 7 |
| | 3 |
|
Closures and relocations(1) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Restaurants at end of period | | 51 |
| | 45 |
| | 43 |
| | 58 |
| | 48 |
|
| Total restaurants | | 327 |
| | 284 |
| | 255 |
| | 368 |
| | 309 |
|
| |
(1) | We account for relocated restaurants under both restaurant openings and closures and relocations. During both 2012 and 2010 we closed one restaurant and relocated another restaurant. In fiscal 2011 and the first quarter of 2013, we closed one restaurant at the end of its lease term. |
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue. The reclassification of restaurant-level marketing costs, as discussed in the accompanying notes to our unaudited financial statements, is reflected in all periods presented in this prospectus. Fiscal years 2012 and 2010 contained 52 operating weeks and fiscal year 2011 contained 53 operating weeks. Each fiscal quarter contained 13 weeks.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | October 1,
2013 | | October 2,
2012 |
| Revenue: | | | | | | | | | | |
| Restaurant revenue | | 99.0 | % | | 99.0 | % | | 99.0 | % | | 99.0 | % | | 99.0 | % |
| Franchising royalties and fees | | 1.0 |
| | 1.0 |
| | 1.0 |
| | 1.0 |
| | 1.0 |
|
| Total revenue | | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Costs and Expenses: | | | | | | | | | | |
Restaurant Operating Costs (exclusive of depreciation and amortization shown separately below):(1) | | | | | | | | | | |
| Cost of sales | | 26.6 |
| | 26.2 |
| | 26.0 |
| | 26.3 |
| | 26.5 |
|
| Labor | | 30.1 |
| | 29.8 |
| | 29.7 |
| | 30.2 |
| | 30.0 |
|
| Occupancy | | 9.9 |
| | 9.9 |
| | 9.9 |
| | 10.1 |
| | 9.8 |
|
| Other restaurant operating costs | | 12.2 |
| | 12.6 |
| | 12.5 |
| | 12.8 |
| | 12.5 |
|
General and administrative(2) | | 9.7 |
| | 10.3 |
| | 12.4 |
| | 10.7 |
| | 9.6 |
|
| Depreciation and amortization | | 5.6 |
| | 5.7 |
| | 6.3 |
| | 5.8 |
| | 5.5 |
|
| Pre-opening | | 1.0 |
| | 0.9 |
| | 0.9 |
| | 1.1 |
| | 0.9 |
|
| Asset disposals, closure costs and restaurant impairments | | 0.4 |
| | 0.6 |
| | 1.3 |
| | 0.3 |
| | 0.3 |
|
| Total costs and expenses | | 94.7 |
| | 95.3 |
| | 98.3 |
| | 96.5 |
| | 94.3 |
|
| Income from operations | | 5.3 |
| | 4.7 |
| | 1.7 |
| | 3.5 |
| | 5.7 |
|
| Debt extinguishment expense | | 0.9 |
| | 0.1 |
| | — |
| | — |
| | 1.2 |
|
| Interest expense | | 1.7 |
| | 2.4 |
| | 0.8 |
| | 0.8 |
| | 1.8 |
|
| Income before income taxes | | 2.8 |
| | 2.2 |
| | 0.9 |
| | 2.7 |
| | 2.8 |
|
| Provision (benefit) for income taxes | | 1.1 |
| | 0.7 |
| | (0.2 | ) | | 1.0 |
| | 1.1 |
|
| Net income | | 1.7 | % | | 1.5 | % | | 1.1 | % | | 1.6 | % | | 1.6 | % |
| |
(1) | As a percentage of restaurant revenue. |
| |
(2) | 2010 included $3.7 million of non-cash stock-based compensation expense and $0.3 million of our portion of payroll taxes related to the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. 2012 and 2011 each included $1.0 million of management fee expense and the first three quarters of 2013 and 2012 included $500,000 and $750,000 of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed.
|
Three Fiscal Quarters Ended October 1, 2013, compared to Three Fiscal Quarters Ended October 2, 2012
Our fiscal quarters each contain thirteen weeks with the exception of the fourth quarter of a 53 week fiscal year, which contains fourteen weeks. The table below presents our unaudited operating results for the first three quarters of 2013 and 2012, and the related quarter-over-quarter changes:
|
| | | | | | | | | | | | | | | |
| | | Three Fiscal Quarters Ended | | Increase/ (Decrease) |
| | | October 1,
2013 | | October 2,
2012 | | $ | | % |
| | | (in thousands, except percentages) |
| Statements of Income Data: | | | | | | | | |
| Revenue: | | | | | | | | |
| Restaurant revenue | | $ | 256,744 |
| | $ | 220,261 |
| | $ | 36,483 |
| | 16.6 | % |
| Franchising royalties and fees | | 2,711 |
| | 2,220 |
| | 491 |
| | 22.1 |
|
| Total revenue | | 259,455 |
| | 222,481 |
| | 36,974 |
| | 16.6 |
|
| Costs and expenses: | | | | | | | | |
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
| Cost of sales | | 67,524 |
| | 58,423 |
| | 9,101 |
| | 15.6 |
|
| Labor | | 77,464 |
| | 66,002 |
| | 11,462 |
| | 17.4 |
|
| Occupancy | | 25,824 |
| | 21,669 |
| | 4,155 |
| | 19.2 |
|
| Other restaurant operating costs | | 32,962 |
| | 27,449 |
| | 5,513 |
| | 20.1 |
|
General and administrative(1) | | 27,808 |
| | 21,426 |
| | 6,382 |
| | 29.8 |
|
| Depreciation and amortization | | 15,074 |
| | 12,165 |
| | 2,909 |
| | 23.9 |
|
| Pre-opening | | 2,873 |
| | 2,000 |
| | 873 |
| | 43.7 |
|
| Asset disposals, closure costs and restaurant impairments | | 837 |
| | 663 |
| | 174 |
| | 26.2 |
|
| Total costs and expenses | | 250,366 |
| | 209,797 |
| | 40,569 |
| | 19.3 |
|
| Income from operations | | 9,089 |
| | 12,684 |
| | (3,595 | ) | | (28.3 | ) |
| Debt extinguishment expense | | — |
| | 2,646 |
| | (2,646 | ) | | (100.0 | ) |
| Interest expense | | 2,199 |
| | 3,894 |
| | (1,695 | ) | | (43.5 | ) |
| Income before income taxes | | 6,890 |
| | 6,144 |
| | 746 |
| | 12.1 |
|
| Provision for income taxes | | 2,633 |
| | 2,540 |
| | 93 |
| | 3.7 |
|
| Net income | | $ | 4,257 |
| | $ | 3,604 |
| | $ | 653 |
| | 18.1 | % |
| |
(1)
| In the second quarter of 2013, we incurred $5.7 million of IPO related expenses: $2.0 million of stock-based compensation related to accelerated vesting of outstanding stock options, $1.2 million of stock-based compensation related to stock options granted to our Chief Executive Officer and President and Chief Operating Officer of which 50% were vested at grant, $1.7 million of transaction bonuses and related payroll taxes and $0.8 million in transaction payments to our Equity Sponsors. Additionally, the first three quarters of 2013 and 2012 included $500,000 and $750,000 of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed.
|
Revenue
Restaurant revenue increased by $36.5 million in the first three quarters of 2013 compared to the same period of 2012. Restaurants not in the comparable restaurant base accounted for $30.3 million of this increase, with the balance attributed to growth in comparable restaurant sales. Comparable restaurant sales increased by $6.2 million, or 3.1%, in first three quarters of 2013 compared to the same period of 2012, composed primarily of increases in traffic at our comparable base restaurants and a modest price increase we took during 2013.
Franchise royalties and fees increased by $0.5 million due to seven new restaurant openings and increased comparable franchise restaurant sales of 0.3% in the first three quarters of 2013.
Cost of Sales
Cost of sales increased by $9.1 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to the increase in restaurant revenue in the first three quarters of 2013. As a percentage of restaurant revenue, cost of sales decreased to 26.3% in the first three quarters of 2013 from 26.5% in the first three quarters of 2012. The decrease in cost of sales as a percentage of restaurant revenue was the result of an increase in restaurant menu pricing, partially offset by food cost inflation.
Labor Costs
Labor costs increased by $11.5 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to the increase in restaurant revenue in 2013. As a percentage of restaurant revenue, labor costs increased to 30.2% in the first three quarters of 2013 from 30.0% in the first three quarters of 2012. The increase in labor cost percentage was driven by an increased percentage of new restaurants, which on average have higher labor costs as a percentage of revenue.
Occupancy Costs
Occupancy costs increased by $4.2 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to new restaurants opened since the third quarter of 2012. As a percentage of restaurant revenue, occupancy costs increased to 10.1% for the first three quarters of 2013, compared to 9.8% in the first three quarters of 2012. The increase was due to an increase in the percentage of restaurants not in the comparable base restaurants which, due to not reaching mature volumes yet, on average have higher occupancy costs as a percentage of revenue.
Other Restaurant Operating Costs
Other restaurant operating costs increased by $5.5 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to the increase in restaurant revenue in the first three quarters of 2013. As a percentage of restaurant revenue, other restaurant operating costs increased to 12.8% in the first three quarters of 2013, compared to 12.5% in the first three quarters of 2012. The increase as a percentage of restaurant revenue was the result of increased restaurant-level marketing costs in the first three quarters quarters of 2013, as well as increased repair and maintenance costs.
General and Administrative Expense
General and administrative expense increased by $6.4 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to $5.7 million of one time expenses related to the closing of our IPO in the second quarter of 2013. We recognized $2.0 million of stock-based compensation related to accelerated vesting of outstanding stock options, $1.2 million of stock-based compensation related to stock options granted to our Chief Executive Officer and President and Chief Operating Officer of which 50% were vested at grant, $1.7 million of transaction bonuses and related payroll taxes and $0.8 million in transaction payments to our Equity Sponsors.
Excluding the impact of the $5.7 million of IPO related expense, general and administrative expense as a percentage of revenue decreased to 8.5% in the first three quarters of 2013 from 9.6% in the first three quarters of 2012. The decrease is due to increasing revenue without proportionate increases in general and administrative costs or administrative personnel. General and administrative expense includes $0.9 million of stock-based compensation expense in the first three quarters of 2013 and 2012, and $0.5 million and $0.8 million of management fees in the first three quarters of both 2013 and 2012, respectively.
Depreciation and Amortization
Depreciation and amortization increased by $2.9 million in the first three quarters of 2013 compared to the same period of 2012, due primarily to an increased number of restaurants. As a percentage of revenue, depreciation and amortization increased to 5.8% in the first three quarters of 2013 from 5.5% in the same period of 2012, due to depreciation on new restaurants and initiatives, partially offset by leverage of increased AUVs.
Pre-Opening Costs
Pre-opening costs increased by $0.9 million in the first three quarters of 2013 compared to the same period of 2012, due to 35 restaurants opened in the first three quarters of 2013, compared to 22 in the same period of 2012. As a percentage of revenue, pre-opening costs increased to 1.1% in first three quarters of 2013 compared to 0.9% in the same period of 2012 due to the timing of restaurant openings.
Debt Extinguishment Expense
Debt extinguishment expense was $2.6 million in the first three quarters of 2012, as a result of an amendment to our credit facility to extend the maturity date to July 2017 and reduce interest rates on borrowings. A portion of the new fees were treated as debt extinguishment, which resulted in a non-cash write-off of $2.3 million.
Interest Expense
Interest expense decreased by $1.7 million in the first three quarters of 2013 compared to the same period of 2012. The decrease was primarily due to lower average borrowings in the first three quarters of 2013 due to the payoff of the majority of our outstanding debt in conjunction with the IPO, and the favorable borrowing rates resulting from the 2012 amendment to our credit facility.
Provision for Income Taxes
Pre-tax net income increased $0.7 million in the first three quarters of 2013 compared to the same period of 2012. The decrease in pre-tax net income was driven by decreases in debt extinguishment expense and interest expense, offset by an increase in income from operations.
Fiscal Year Ended January 1, 2013 compared to Fiscal Year Ended January 3, 2012
Fiscal year 2012 contained 52 operating weeks and fiscal year 2011 contained 53 operating weeks. The table below presents our operating results for 2012 and 2011, and the related year-over-year changes:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Increase / (Decrease) |
| | | January 1,
2013 | | January 3,
2012 | | $ | | % |
| | | (in thousands, except percentages) |
| Statements of Income Data: | | | | | | | | |
| Revenue: | | | | | | | | |
| Restaurant revenue | | $ | 297,264 |
| | $ | 253,467 |
| | $ | 43,797 |
| | 17.3 | % |
| Franchising royalties and fees | | 3,146 |
| | 2,599 |
| | 547 |
| | 21.0 |
|
| Total revenue | | 300,410 |
| | 256,066 |
| | 44,344 |
| | 17.3 |
|
| Costs and Expenses: | | | | | | | | |
| Restaurant Operating Costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
| Cost of sales | | 78,997 |
| | 66,419 |
| | 12,578 |
| | 18.9 |
|
| Labor | | 89,435 |
| | 75,472 |
| | 13,963 |
| | 18.5 |
|
| Occupancy | | 29,323 |
| | 25,208 |
| | 4,115 |
| | 16.3 |
|
| Other restaurant operating costs | | 36,380 |
| | 32,031 |
| | 4,349 |
| | 13.6 |
|
General and administrative(1) | | 29,081 |
| | 26,463 |
| | 2,618 |
| | 9.9 |
|
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 2,218 |
| | 15.3 |
|
| Pre-opening | | 3,145 |
| | 2,327 |
| | 818 |
| | 35.2 |
|
| Asset disposals, closure costs and restaurant impairments | | 1,278 |
| | 1,629 |
| | (351 | ) | | (21.5 | ) |
| Total costs and expenses | | 284,358 |
| | 244,050 |
| | 40,308 |
| | 16.5 |
|
| Income from operations | | 16,052 |
| | 12,016 |
| | 4,036 |
| | 33.6 |
|
| Debt extinguishment expense | | 2,646 |
| | 275 |
| | 2,371 |
| | * |
|
| Interest expense | | 5,028 |
| | 6,132 |
| | (1,104 | ) | | (18.0 | ) |
| Income before income taxes | | 8,378 |
| | 5,609 |
| | 2,769 |
| | 49.4 |
|
| Provision for income taxes | | 3,215 |
| | 1,780 |
| | 1,435 |
| | 80.6 |
|
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 1,334 |
| | 34.8 | % |
| |
(1) | 2012 and 2011 each included $1.0 million of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. |
Revenue
Restaurant revenue increased by $43.8 million in 2012 compared to 2011. Restaurants not in the comparable restaurant base accounted for $30.8 million of this increase, with the balance attributed to growth in comparable restaurant sales. Comparable restaurant sales increased by $13.0 million or 5.2% in 2012, composed primarily of increases in traffic at our comparable base restaurants.
Franchise royalties and fees increased by $0.5 million due to six new restaurant openings and increased comparable restaurant sales of 6.2% during 2012.
The impact of 2011 having an additional operating week was approximately $4.8 million in total revenue.
Cost of Sales
Cost of sales increased by $12.6 million in 2012 compared to 2011, due primarily to the increase in restaurant revenue in 2012. As a percentage of restaurant revenue, cost of sales increased to 26.6% in 2012 from 26.2% in 2011. This increase was primarily the result of food cost inflation, partially offset by a minimal increase in menu pricing.
Labor Costs
Labor costs increased by $14.0 million in 2012 compared to 2011, due primarily to the increase in restaurant revenue in 2012. As a percentage of restaurant revenue, labor costs increased to 30.1% in 2012 from 29.8% in 2011. The increase in labor cost percentage was driven by increased workers' compensation expense and payroll tax rates, offset partially by increases in AUVs.
Occupancy Costs
Occupancy costs increased by $4.1 million in 2012 compared to 2011, due primarily to new restaurants opened in each of these years. As a percentage of restaurant revenue, occupancy costs remained constant year-over-year at 9.9%. Increases in common area maintenance, real estate tax and new restaurant occupancy costs relative to comparable base restaurants were offset by leverage from increased AUVs.
Other Restaurant Operating Costs
Other restaurant operating costs increased by $4.3 million in 2012 compared to 2011, due primarily to the increase in restaurant revenue in 2012. As a percentage of restaurant revenue, other restaurant operating costs declined to 12.2% in 2012 from 12.6% in 2011. The decrease in other restaurant operating cost percentage was the result of leverage of increased AUVs on partially fixed costs, as well as lower than typical utility costs due to a mild winter in early 2012.
General and Administrative Expense
General and administrative expense increased by $2.6 million in 2012 compared to 2011, due primarily to costs associated with supporting an increased number of restaurants. As a percentage of revenue, general and administrative expense decreased to 9.7% in 2012 from 10.3% in 2011 due to increasing revenue without proportionate increases in general and administrative expense or administrative personnel. General and administrative expense includes $1.2 million and $1.3 million of stock-based compensation expense in 2012 and 2011, respectively, and $1.0 million of management fees in both 2012 and 2011.
Depreciation and Amortization
Depreciation and amortization increased by $2.2 million in 2012 compared to 2011, due primarily to an increased number of restaurants. As a percentage of revenue, depreciation and amortization decreased to 5.6% in 2012 from 5.7% in 2011, due to leverage of increased AUVs.
Pre-Opening Costs
Pre-opening costs increased by $0.8 million in 2012 compared to 2011, due to 39 restaurant openings in 2012, compared to 28 in 2011. As a percentage of revenue, pre-opening costs increased to 1.0% in 2012 compared to 0.9% in 2011 due to the increased rate of restaurant unit growth.
Asset Disposals, Closure Costs and Restaurant Impairments
Asset disposals, closure costs and restaurant impairments decreased by $0.4 million in 2012 compared to 2011 due primarily to the impairment of one restaurant in 2011, resulting in $0.7 million of expense. The decrease was offset by the lease termination and other related closing costs of one restaurant closed in 2012.
Debt Extinguishment
Debt extinguishment expense was $2.6 million in 2012, as a result of an amendment to our credit facility to extend the maturity date to July 2017 and reduced interest rates on borrowings. A portion of the existing and new fees were treated as debt extinguishment, which resulted in a non-cash write-off of $2.3 million. In 2011, we wrote off $0.3 million of debt issuance costs related to our credit facility.
Interest Expense
Interest expense decreased by $1.1 million in 2012 compared to 2011. The decrease was primarily due to the favorable borrowing rates resulting from the 2012 amendment to our credit facility, partially offset by increased borrowings to fund our capital expenditures.
Provision for Income Taxes
Provision for income taxes increased by $1.4 million in 2012 compared to 2011, due to the increase in pre-tax net income in 2012 and an increase to our effective income tax rate.
Fiscal Year Ended January 3, 2012 compared to Fiscal Year Ended December 28, 2010
Fiscal year 2011 contained 53 operating weeks and fiscal year 2010 contained 52 operating weeks. The table below presents our operating results for 2011 and 2010, and the related year-over-year changes:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Increase / (Decrease) |
| | | January 3,
2012 | | December 28,
2010 | | $ | | % |
| | | (in thousands, except percentages) |
| Statements of Income Data: | | |
| | |
| | |
| | |
| Revenue: | | | | | | | | |
| Restaurant revenue | | $ | 253,467 |
| | $ | 218,560 |
| | $ | 34,907 |
| | 16.0 | % |
| Franchising royalties and fees | | 2,599 |
| | 2,272 |
| | 327 |
| | 14.4 |
|
| Total revenue | | 256,066 |
| | 220,832 |
| | 35,234 |
| | 16.0 |
|
| Costs and Expenses: | | | | | | | | |
| Restaurant Operating Costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
| Cost of sales | | 66,419 |
| | 56,869 |
| | 9,550 |
| | 16.8 |
|
| Labor | | 75,472 |
| | 64,942 |
| | 10,530 |
| | 16.2 |
|
| Occupancy | | 25,208 |
| | 21,650 |
| | 3,558 |
| | 16.4 |
|
| Other restaurant operating costs | | 32,031 |
| | 27,403 |
| | 4,628 |
| | 16.9 |
|
General and administrative(1) | | 26,463 |
| | 27,302 |
| | (839 | ) | | (3.1 | ) |
| Depreciation and amortization | | 14,501 |
| | 13,932 |
| | 569 |
| | 4.1 |
|
| Pre-opening | | 2,327 |
| | 2,088 |
| | 239 |
| | 11.4 |
|
| Asset disposals, closure costs and restaurant impairments | | 1,629 |
| | 2,815 |
| | (1,186 | ) | | (42.1 | ) |
| Total costs and expenses | | 244,050 |
| | 217,001 |
| | 27,049 |
| | 12.5 | % |
| Income from operations | | 12,016 |
| | 3,831 |
| | 8,185 |
| | * |
|
| Debt extinguishment expense | | 275 |
| | — |
| | 275 |
| | * |
|
| Interest expense | | 6,132 |
| | 1,819 |
| | 4,313 |
| | * |
|
| Income before income taxes | | 5,609 |
| | 2,012 |
| | 3,597 |
| | * |
|
| Provision (benefit) for income taxes | | 1,780 |
| | (366 | ) | | 2,146 |
| | * |
|
| Net income | | $ | 3,829 |
| | $ | 2,378 |
| | $ | 1,451 |
| | 61.0 | % |
| |
(1) | 2010 included $3.7 million of non-cash stock-based compensation expense and $0.3 million of expense for our portion of payroll taxes related to the 2010 Equity Recapitalization. See Note 2 of our consolidated financial statements, Equity Recapitalization. 2012 and 2011 each included $1.0 million of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one outstanding share of our Class C common stock. |
Revenue
Restaurant revenue increased by $34.9 million in 2011 compared to 2010. Restaurants not in the comparable restaurant base accounted for $25.8 million of this increase, with the balance attributed to growth in comparable restaurant sales. Comparable restaurant sales increased by $9.1 million, or 4.2% in 2011, composed primarily of increases in traffic at our comparable base restaurants. The impact of fiscal 2011 having an additional operating week was approximately $4.8 million in total revenue.
Franchise royalties and fees increased by $0.3 million due to two new restaurant openings and a 7.6% increase in comparable restaurant sales.
Cost of Sales
Cost of sales increased by $9.6 million in 2011 compared to 2010, due primarily to the increase in restaurant revenue in 2011. As a percentage of restaurant revenue, cost of sales increased to 26.2% in 2011 from 26.0% in 2010. This increase was primarily the result of food cost inflation, partially offset by a minimal increase in menu pricing.
Labor Costs
Labor costs increased by $10.5 million in 2011 compared to 2010, due primarily to the increase in restaurant revenue in 2011. As a percentage of restaurant revenue, labor costs increased to 29.8% in 2011 from 29.7% in 2010. The increase in labor cost percentage of restaurant revenue was driven by increased workers' compensation expense and payroll tax rates, offset partially by increased AUVs.
Occupancy Costs
Occupancy costs increased by $3.6 million in 2011 compared to 2010, due primarily to new restaurants opened in each year. As a percentage of restaurant revenue, occupancy costs remained constant year-over-year at 9.9%. Increases from common area maintenance, real estate tax and new restaurant occupancy costs relative to comparable base restaurants were offset by leverage from increased AUVs.
Other Restaurant Operating Costs
Other restaurant operating costs increased by $4.6 million in 2011 compared to 2010, due primarily to increased restaurant revenue. As a percentage of restaurant revenue, other restaurant operating costs increased to 12.6% in 2011 from 12.5% in 2010, due primarily to increased credit card processing fees partially offset by increased AUVs.
General and Administrative Expense
General and administrative expense decreased by $0.8 million in 2011 compared to 2010. The decrease is due primarily to $3.7 million in non-cash stock-based compensation charges which occurred in 2010 and did not repeat in 2011, offset by $1.0 million in management fee expense in 2011 which did not exist in 2010. Excluding these items, general and administrative expense increased by $1.9 million in 2011 compared to 2010, due primarily to costs associated with supporting an increased number of restaurants. As a percentage of revenue, general and administrative expense decreased to 10.3% in 2011 from 12.4% in 2010, primarily due to the decrease in stock-based compensation and increasing revenue without proportionate increases in general and administrative expense or administrative personnel.
Depreciation and Amortization
Depreciation and amortization expense increased by $0.6 million in 2011 compared to 2010, due primarily to the increase in number of restaurants. As a percentage of revenue, depreciation and amortization decreased to 5.7% in 2011 from 6.3% in 2010, primarily due to leverage of increased AUVs and certain assets being fully depreciated.
Pre-Opening Costs
Pre-opening costs increased by $0.2 million in 2011 compared to 2010. This increase was due to the recording of pre-opening rent in the fourth quarter of 2011 for those restaurants that opened in the first quarter of 2012. As a percentage of revenue, pre-opening costs were constant year-over-year at 0.9%.
Asset Disposals, Closure Costs and Restaurant Impairments
Asset disposals, closure costs and restaurant impairments decreased by $1.2 million in 2011 compared to 2010 due primarily to the impairment of three restaurants in 2010, compared to the impairment of one restaurant in 2011.
Debt Extinguishment Expense
We wrote off $0.3 million of debt extinguishment expense related to our credit facility.
Interest Expense
Interest expense increased by $4.3 million in 2011 compared to 2010. The increase was due to higher interest rates and higher average debt outstanding in 2011 compared to 2010. In February of 2011, we refinanced our credit facility, resulting in increased borrowing capacity and higher interest rates. We also received bridge financing in the 2010 Equity Recapitalization, resulting in non-cash paid-in-kind interest ("PIK") charges in 2011 of $0.9 million.
Provision for Income Taxes
Provision for income taxes increased by $2.1 million in 2011 compared to 2010 primarily due to the impact of the 2010 Equity Recapitalization on our income tax provision in 2010.
Quarterly Financial Data
The following table presents select historical quarterly consolidated statements of operations data and other operations data through October 1, 2013. This quarterly information has been prepared using our unaudited consolidated financial statements and includes all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the results of the interim periods.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | Oct. 1, 2013 | | July 2, 2013 | | April 2, 2013 | | Jan. 1,
2013 | | Oct. 2,
2012 | | July 3,
2012 | | April 3,
2012 | | Jan. 3,
2012 |
| | | (in thousands, unaudited) |
| Total revenue | | $ | 88,936 |
| | $ | 89,239 |
| | $ | 81,280 |
| | $ | 77,929 |
| | $ | 77,099 |
| | $ | 75,494 |
| | $ | 69,888 |
| | $ | 70,491 |
|
| Net income | | 3,265 |
| | 68 |
| | 924 |
| | 1,559 |
| | 133 |
| | 2,180 |
| | 1,291 |
| | (66 | ) |
| Selected Operating Data: | | | | | | | | | | | | | | | | |
| Company-owned restaurants at end of period | | 310 |
| | 295 |
| | 284 |
| | 276 |
| | 261 |
| | 253 |
| | 245 |
| | 239 |
|
| Franchise-owned restaurants at end of period | | 58 |
| | 53 |
| | 51 |
| | 51 |
| | 48 |
| | 46 |
| | 45 |
| | 45 |
|
| Company-owned: | | | | | | | | | | | | | | | | |
Average unit volumes(1) | | 1,181 |
| | 1,184 |
| | 1,180 |
| | 1,178 |
| | 1,175 |
| | 1,170 |
| | 1,161 |
| | 1,147 |
|
Comparable restaurant sales(2) | | 2.4 | % | | 4.7 | % | | 2.2 | % | | 4.2 | % | | 3.4 | % | | 6.8 | % | | 6.8 | % | | 5.4 | % |
Restaurant contribution as a percentage of restaurant revenue(3) | | 20.7 | % | | 22.4 | % | | 18.6 | % | | 21.3 | % | | 21.0 | % | | 21.8 | % | | 20.7 | % | | 21.3 | % |
| |
(1) | AUVs consist of average annualized sales of all company-owned restaurants over the trailing 12 periods in a typical operating year. |
| |
(2) | Comparable restaurant sales represent year-over-year sales for restaurants open for at least 18 full periods. |
| |
(3) | Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. |
Liquidity and Capital Resources
Potential Impacts of Market Conditions on Capital Resources
We have continued to experience positive trends in consumer traffic and increases in comparable restaurant sales, operating cash flows and restaurant contribution margin. However, the restaurant industry continues to be challenged and uncertainty exists as to the sustainability of these favorable trends. We have continued to implement various cost savings initiatives, including savings in our food costs through waste reduction and efficiency initiatives in our supply chain and labor costs. We have developed new menu items to appeal to consumers and used marketing campaigns to promote these items.
We believe that expected cash flow from operations and planned borrowing capacity are adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the next 12 periods. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow and our ability to manage costs and working capital successfully.
Summary of Cash Flows
Our primary sources of liquidity and cash flows are operating cash flows and borrowings on our revolving line of credit. We use this cash to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.
Cash flows from operating, investing and financing activities are shown in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarter Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | October 1, 2013 | | October 2, 2012 |
| | | (in thousands) | | (unaudited) |
| Net cash provided by operating activities | | $ | 32,069 |
| | $ | 27,922 |
| | $ | 24,605 |
| | $ | 32,462 |
| | $ | 25,377 |
|
| Net cash used in investing activities | | (47,384 | ) | | (30,047 | ) | | (26,933 | ) | | (39,788 | ) | | (30,525 | ) |
| Net cash provided by (used in) financing activities | | 15,373 |
| | (10,654 | ) | | 15,215 |
| | 7,334 |
| | 5,234 |
|
Cash and cash equivalents at the end of period(1) | | $ | 581 |
| | $ | 523 |
| | $ | 13,302 |
| | $ | 589 |
| | $ | 609 |
|
| |
(1) | Cash and cash equivalents for the year ended December 28, 2010 reflected cash received and unpaid related to the 2010 Equity Recapitalization. |
Operating Activities
Net cash provided by operating activities of $32.5 million for the first three quarters ended October 1, 2013 resulted primarily from net income, adjusted for items such as depreciation and amortization, stock-based compensation expense and the amortization of debt issuance costs. The $7.1 million increase in the first three quarters of 2013, from the first three quarters of 2012, was primarily driven by an increase in the change of deferred rent due to a larger restaurant base and a decrease in accounts payable due to a decreased number of restaurants under construction at the end of the third quarter of 2013.
Net cash provided by operating activities increased in 2012 from 2011 primarily due to an increase in cash generated from restaurant operations as a result of comparable restaurant sales increases, a decrease in cash paid for interest, which was $4.4 million in 2012 compared to $5.2 million in 2011 and also higher non-cash costs, such as depreciation and amortization, provision for income taxes and write-off of debt issuance costs.
In 2011, net cash provided by operating activities also increased from 2010, primarily due to an increase in cash generated from restaurant operations as a result of comparable restaurant sales increases and normal increases in operating assets and liabilities, offset by an increase in cash paid for interest, which was $5.2 million in 2011 and $1.6 million in 2010.
Investing Activities
Net cash flows used in investing activities increased $9.3 million from $30.5 million in the first three quarters of 2012 to $39.8 million in the first three quarters of 2013. The increase in the first three quarters of 2013, from the first three quarters of 2012 is primarily due to investments in new restaurant openings.
Net cash used in investing activities was related almost entirely to new restaurant capital expenditures in 2012, 2011 and 2010, for the opening of 39, 28 and 28 restaurants, respectively. In addition to our standard refresh and remodel investments in 2012, we also invested additional funds in our existing restaurant base as we rolled out our “Your World Kitchen” merchandising.
We currently estimate capital expenditures for the fourth quarter of 2013 to be between approximately $6.2 million and $10.2 million, for a total of $46 million to $50 million for the year. This is primarily related to the anticipated opening of seven to eight additional restaurants in the last quarter of 2013, the start of construction of restaurants to be opened in early 2014, and normal maintenance related capital expenditures for our existing restaurants.
Financing Activities
Net cash provided by financing activities was $7.3 million and $5.2 million in the first three quarters of 2013 and 2012, respectively. We used borrowings in both fiscal years to fund new restaurant capital expenditures. In addition, on July 2, 2013, we closed our IPO in which we sold 6,160,714 shares of Class A common stock at $18.00 per share and received net proceeds of approximately $100.2 million (after underwriting discounts, commissions and offering expenses). These net proceeds were used to pay off our outstanding term loan and repay all but $0.2 million of our revolving line of credit.
Net cash provided by financing activities was $15.4 million in 2012, driven by increased borrowings on our credit facility to fund capital expenditures. In February 2011, we refinanced our credit facility to increase our borrowing capacity to $120.0 million,
and in August 2012, we amended the credit facility to provide more favorable borrowing rates and extend borrowing capacity through July 2017.
During 2011, net cash used in financing activities was $10.7 million due to cash payments made related to the 2010 Equity Recapitalization. In connection with our February 2011 refinancing, we repaid $46.0 million of bridge financing and PIK interest on borrowings from new investors in the 2010 transaction, as well as $4.2 million in refinancing fees. Additionally, $6.6 million of employee and employer payroll taxes related to the 2010 Equity Recapitalization were remitted in the first quarter of 2011.
During 2010, net cash provided by financing activities was $15.2 million due primarily to the timing of our equity recapitalization. We received a bridge loan of $45.0 million, offset by a net payment of transaction proceeds and expenses of approximately $28.1 million.
Credit Facility
We maintain a $45.0 million revolving line of credit under our credit facility. The revolving line of credit includes a swing line loan of $5.0 million used to fund everyday working capital requirements. In August 2012, we amended the credit facility to provide more favorable borrowing rates and to extend borrowing capacity through July 2017. In connection with the IPO, the Company repaid the entire $75.0 million senior term loan under our credit facility and the majority of the revolving line of credit. We had $1.7 million of outstanding indebtedness, $2.0 million of outstanding letters of credit and $41.3 million available for borrowing under our revolving line of credit as of October 1, 2013.
Borrowings under the credit facility bear interest, at our option, at either (i) LIBOR plus 2.00 to 4.25%, based on the lease-adjusted leverage ratio or (ii) the highest of the following rates plus 1.00 to 3.25%: (a) the federal funds rate plus 0.50%; (b) the Bank of America prime rate or (c) the one month LIBOR plus 1.00%. Prior to the August 2012 amendment, borrowings under the credit facility bore interest, at our option, at either (i) LIBOR plus 4.00 to 5.00%, based on the lease-adjusted leverage ratio or (ii) at the highest of the following rates plus 3.00 to 4.00%: (a) the federal funds rate plus 0.50%; (b) the Bank of America prime rate or (c) the one month LIBOR plus 1.00%. The August 2012 amendment eliminated a 1.25% LIBOR floor on all borrowings. The facility includes a commitment fee of 0.50% per year on any unused portion of the facility. The term loan commitment required quarterly principal payments of $187,500 through December 2015. We also maintain outstanding letters of credit to secure obligations under our workers’ compensation program and certain lease obligations. The letters of credit reduce the amount of future borrowings available under the agreement and aggregated $2.0 million as of October 1, 2013.
Availability of borrowings under the revolving line of credit is conditioned on our compliance with specified covenants, including a maximum lease-adjusted leverage ratio, a maximum leverage ratio and a minimum consolidated fixed charge coverage ratio. We are subject to a number of other customary covenants, including limitations on additional borrowings, acquisitions, dividend payments and lease commitments. As of October 1, 2013, we were in compliance with all of our debt covenants.
Our credit facility is secured by a pledge of stock of substantially all of our subsidiaries and a lien on substantially all of the personal property assets of us and our subsidiaries.
As required by our credit facility, we entered into two variable-to-fixed interest rate swap agreements covering a portion of its borrowings under the senior term loan in February 2011, see Note 5 of our consolidated financial statements, Derivative Instruments.
Bridge Financing
In conjunction with the February 2011 debt refinancing, we repaid $45.0 million of bridge financing, as well as $977,000 of 12% PIK interest. Noncash PIK interest of $947,000 and $30,000 was accrued and reported as other noncash in the consolidated statements of cash flows in 2011 and 2010, respectively.
Contractual Obligations
Our contractual obligations at January 1, 2013 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Period |
| | | Total | | 1 Year | | 2 - 3 Years | | 4 - 5 Years | | After 5 Years |
| | | (in thousands) |
Lease obligations(1) | | $ | 204,403 |
| | $ | 29,528 |
| | $ | 56,120 |
| | $ | 48,361 |
| | $ | 70,394 |
|
Purchase commitments(2) | | 7,893 |
| | 4,044 |
| | 3,849 |
| | — |
| | — |
|
Credit Facility(3) | | 2,250 |
| | 750 |
| | 1,500 |
| | — |
| | — |
|
Long-term debt(3) | | 92,231 |
| | — |
| | — |
| | 92,231 |
| | — |
|
| | | $ | 306,777 |
| | $ | 34,322 |
| | $ | 61,469 |
| | $ | 140,592 |
| | $ | 70,394 |
|
| |
(1) | We are obligated under non-cancelable leases for our restaurants, administrative offices and equipment. Some restaurant leases provide for contingent rental payments based on sales thresholds, which are excluded from this table. |
| |
(2) | We enter into various purchase obligations in the ordinary course of business. Those that are binding primarily relate to volume commitments for beverage products. |
| |
(3) | As of January 1, 2013 we were required to make quarterly principal payments on the term loan portion of our credit facility of $187,500 through December 2015. In connection with our IPO, we paid off our outstanding term loan. We have reflected full payment of long-term debt at maturity of our credit facility in 2017. See “Use of Proceeds.” |
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations as of October 1, 2013.
Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt, which bears interest at variable rates. As of October 1, 2013, there was $1.7 million in outstanding borrowings under our credit facility. A plus or minus 1.0% in the effective interest rate applied on these loans would have resulted in a pre-tax interest expense fluctuation of $17,000 on an annualized basis.
We manage our interest rate risk through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.
As required by our credit facility and to mitigate exposure to fluctuations in interest rates we entered into two variable-to-fixed interest rate swap agreements covering a portion of the borrowings under our credit facility. The new interest rate swaps were effective April 4, 2011 and matured on April 4, 2013. The swaps were designated as cash flow hedges at inception and were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during their respective term. In conjunction with the August 2012 amendment to our credit facility, we ceased the application of hedge accounting on both interest swaps. Fluctuations in market value now flow through interest expense rather than the balance sheet. We are required to make payments based on a fixed rate of 1.59% calculated on a notional amount of $20.0 million and 3.06% calculated on a notional amount of $17.5 million. The fair value of the $20.0 million swap was zero at designation, while the fair value of the $17.5 million swap was a liability of $466,000 at designation, which is reflective of the fair value of the previously terminated swap. In exchange, we receive interest on $20.0 million of notional at a variable rate based on the greater of 1.25% or one-month LIBOR and will receive interest on a notional amount of $17.5 million a variable rate based on the greater of 1.25% or one-month LIBOR. See Note 5 of our consolidated financial statements, Derivative Instruments.
In 2008, we entered into two variable-to-fixed interest rate swap agreements which were subsequently terminated in 2011. A swap with a notional amount of $15.0 million matured at the end of the swap agreement in February 2011. A second interest rate swap on a notional amount of $14.0 million was terminated by us in March 2011. The fair value of the interest rate swap on the date of termination was $466,000 and is being settled through payments on a new interest rate swap with an effective date of April 4, 2011 and a notional amount of $17.5 million. The deferred loss accumulated in other comprehensive income as of the date of termination was amortized over the life of the terminated swap through November 2012, the original term of the terminated swap.
Commodity Price Risk
We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of company-owned restaurant revenue.
Inflation
The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has not significantly affected our operating results.
Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of October 1, 2013. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We have not engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act and therefore, our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for the year ending December 30, 2014. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company.”TRANSACTIONS WITH RELATED PERSONS
Stock-Based Compensation Expense
We account for stock-based compensation arrangements with our employees and non-employee directors using fair value measurement guidance for all share-based payments, including stock options and awards. All of our option awards are exercisable for common stock. For option awards, expense is recognized over the requisite service period in an amount equal to the fair value of the stock-based awards on the date of grant, determined using the Black-Scholes option-pricing model. Warrants are valued with reference to the fair value of the common stock as of the measurement date. The fair value is then recognized as stock-based compensation expense on a straight-line basis over the requisite service period.
We estimate the fair market value of each option granted using the Black-Scholes option-pricing method, in addition to the estimated value of our equity interests at each reporting date. The Black-Scholes model requires various judgmental assumptions including fair value of the underlying stock, anticipated volatility and expected option life. We calculate expected volatility based on our historical volatility and future plans, as well as reported data for selected reasonably similar publicly traded companies within the restaurant industry for which the historical information is available. When selecting the public companies within the restaurant industry, we select companies with comparable characteristics to us, including enterprise value, financial leverage,
business model, stage of growth and financial risk. The expected life of options granted is management’s best estimate using recent and expected transactions.
The assumed dividend yield is based on our expectation that we will not pay dividends in the foreseeable future, which is consistent with our history of not paying dividends. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options that we expect to vest. We estimate the forfeiture rate based on our historical experience. To the extent our actual forfeiture rate is different from our estimated rate, our stock-based compensation expense is accordingly adjusted using the following weighted-average assumptions, in addition to the estimated value of our common stock for the periods presented in the table below.
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2012 | | 2011 | | 2010 |
| Risk-free interest | | 0.4 | % | | 1.1 | % | | 1.9 | % |
| Expected life (years) | | 3.4 |
| | 3.7 |
| | 4.5 |
|
| Expected dividend yield | | — |
| | — |
| | — |
|
| Volatility | | 32.7 | % | | 26.2 | % | | 29.5 | % |
| Weighted-average Black-Scholes fair value per share at date of grant | | $ | 2.84 |
| | $ | 1.89 |
| | $ | 1.72 |
|
In 2012, 2011 and 2010, non-cash stock-based compensation expense of $1.2 million, $1.3 million and $5.6 million, respectively, is included in general and administrative expense. Stock-based compensation of $81,000, $75,000 and $83,000 is included in capitalized internal costs in 2012, 2011 and 2010, respectively. We recognized $3.7 million of non-cash stock-based compensation expense in 2010 related to the acceleration of unvested options in accordance with the terms of a merger with a newly organized Delaware subsidiary owned by affiliates of Catterton and PSPIB. In the merger, options covering a total of 4,939,389 shares of Class A common stock were settled for the right to receive cash consideration of $8.67 per share, net of exercise price and income taxes withheld, or equity interests in the surviving entity of equivalent value. The merger provided for acceleration of unvested options immediately prior to the transaction. Accordingly, options to purchase 2,393,725 shares were accelerated.
Determination of the Fair Value of Common Stock
The following table sets forth all stock option grants since December 30, 2009 through the date of this prospectus:
|
| | | | | | | | | | | |
| Grant Date | | Number of Options Granted(1) | | Exercise Price(1) | | Common Stock Fair Value Per Share at Grant Date(1) |
| February 23, 2010 | | 15,318 |
| | $ | 5.81 |
| | $ | 5.81 |
|
| March 22, 2010 | | 696,033 |
| | 5.81 |
| | 5.81 |
|
| May 11, 2010 | | 13,968 |
| | 6.38 |
| | 6.38 |
|
| August 10, 2010 | | 11,416 |
| | 7.80 |
| | 7.80 |
|
| December 27, 2010 | | 2,420,861 |
| | 8.67 |
| | 8.67 |
|
| January 21, 2011 | | 173,100 |
| | 8.67 |
| | 8.67 |
|
| June 21, 2011 | | 25,965 |
| | 8.67 |
| | 8.67 |
|
| September 7, 2011 | | 84,242 |
| | 8.67 |
| | 8.67 |
|
| April 10, 2012 | | 15,868 |
| | 9.53 |
| | 9.53 |
|
| May 14, 2012 | | 152,328 |
| | 9.53 |
| | 9.53 |
|
| September 20, 2012 | | 8,655 |
| | 10.40 |
| | 10.40 |
|
| December 6, 2012 | | 339,622 |
| | 12.13 |
| | 12.13 |
|
| May 9, 2013 | | 48,295 |
| | 12.48 |
| | 12.48 |
|
| June 27, 2013 | | 489,979 |
| | 18.00 |
| | 18.00 |
|
| |
(1) | Exercise price and common stock fair value per share at grant date data prior to December 27, 2010 are reflected as converted. |
These estimates of the fair value of our common stock were made based on information from the following valuation dates:
|
| | | |
Valuation Date(1) | Fair Value per Share(2) |
| February 23, 2010 | $ | 5.81 |
|
| May 11, 2010 | 6.38 |
|
| August 10, 2010 | 7.80 |
|
| December 27, 2010 | 8.67 |
|
| March 6, 2012 | 9.53 |
|
| July 11, 2012 | 10.40 |
|
| September 20, 2012 | 10.40 |
|
| December 6, 2012 | 12.13 |
|
| April 10, 2013 | 12.48 |
|
| June 27, 2013 | 18.00 |
|
| |
(1) | Each valuation date shown, other than December 27, 2010 and June 27, 2013 were the dates of action by our Board of Directors reflecting its valuation of our common stock as of such dates. |
| |
(2) | Fair value of our common stock grants prior to December 27, 2010 are reflected as converted. |
Because our common stock was not publicly traded until June 28, 2013, we considered numerous objective and subjective factors in valuing our common stock at each valuation date in accordance with the guidance in the American Institute of Certified Public Accountants Practice Aid Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“Practice Aid”). These objective and subjective factors included, but were not limited to:
recent arm’s-length sales of our common stock in privately negotiated transactions;
our financial performance and financial position;
our future financial projections;
valuations of comparable public companies; and
the likelihood of achieving a liquidity event for shares of our common stock at a specific time, such as an initial public offering of our common stock or sale of our company, given prevailing market conditions.
The Company did not obtain a contemporaneous valuation by an unrelated valuation specialist in determining fair value for grants made at the time of the 2010 Equity Recapitalization, or at any time thereafter. The majority of these grants occurred at or immediately following the date of the 2010 Equity Recapitalization, for which the Company determined that the fair value of the shares was established by an actual, third-party transaction. The Company believes it has followed a consistent and reasonable methodology in determining the fair value of the shares since that time, and it believed that an independent, third-party valuation was not necessary to establish an appropriate valuation and would not have provided a benefit to the Company commensurate with its cost.
Our management estimated our enterprise value as of the various valuation dates using the market approach, which is an acceptable valuation method in accordance with the Practice Aid. The market approach uses the comparable company methodology based on comparable public companies’ equity pricing. Each valuation shown in the table above also reflects a marketability discount, resulting from the illiquidity of our common stock at the time the options were granted. The marketability discount applied in these valuations ranged from a low of 3.5% to a high of 15%, and the discount applied at each point in time was reflective of the Company’s assessment of an appropriate discount to be applied, given the anticipated likelihood of a liquidity event. The discount rate applied was generally reduced as the Company began considering a potential initial public offering of its common stock.
We determined the fair value of our common stock as of February 23, 2010 to be $5.81 per share and as of May 11, 2010 to be $6.38 per share. We considered objective and subjective factors including a valuation performed by our audit committee in which the fair value of our common stock was determined using a market approach. The market approach considered multiples of financial metrics, consisting of revenue and EBITDA, based on trading prices of a peer group of companies that are publicly traded. These multiples were then applied to our financial metrics to derive an indication of value. The resulting fair value obtained by applying the market approach was then discounted for the lack of marketability of the common stock because we are a private company.
On August 10, 2010, we determined the fair value of our common stock to be $7.80 per share. We considered objective and subjective factors including a valuation performed by our audit committee in which the fair value of our common stock was determined using a market approach, as used in the February 23, 2010 and May 11, 2010 valuations. The audit committee also took into account an expression of interest we had received from Catterton to acquire a controlling interest in us. The Practice Aid indicates that a third-party transaction between a willing buyer and a willing seller is the best indication of fair value of an enterprise.
On December 27, 2010, we completed the 2010 Equity Recapitalization through a merger, in which shares of our common stock were converted into the right to receive cash consideration of $8.67 or equity of equivalent value in the surviving entity. On the grant date that was contemporaneous with the completion of the 2010 Equity Recapitalization, options were granted at the per share purchase price of $8.67. At each grant date thereafter until the valuation we performed on March 6, 2012, we considered objective and subjective factors and determined that the $8.67 value remained a reasonable approximation of fair value. Among the objective and subjective factors considered were our historic financial performance, our projected financial performance, trading prices of comparable publicly traded firms and macro-economic conditions.
For the grants made in September 2012, December 2012 and May 2013, we considered objective factors, including a valuation performed by our audit committee using a market approach, which took into account our historic financial performance and trading prices of comparable publicly traded companies. Our evaluation of these factors was conducted consistently with our evaluation of the same factors in connection with our earlier valuations: we evaluated trailing twelve period revenue and EBITDA trading multiples of publicly traded peer group companies. These multiples were then applied to our financial metrics to derive an indicative value. We then applied the market approach to obtain the fair value of the common stock. This figure was discounted for the lack of marketability of the common stock because we are a private company. The discount percentage was reduced as the valuation dates approached the time of our anticipated offering and consisted of a 15% discount in the September 2012 valuation, an 8% discount in the December 2012 valuation and a 2.5% discount in the May 2013 valuation. These discount rates were determined by our audit committee in their valuation and reflected their assessment of the prospects for a liquidity event between September 2012 and May 2013, which the audit committee determined to be increasing based on a number of factors including
the performance and stability of our business, the strength of the initial public offering market, and our projected compliance with regulatory and legal requirements applicable to public companies. The difference in value between the valuation used in each of the foregoing grants and $16.00 per share, the midpoint of the range on the cover page of this prospectus, is attributable to an increase in our trailing twelve period revenue and EBITDA between the date of each such valuation and the date hereof and the discount rate used in such valuation, which decreased in each successive valuation.
The grants made on June 27, 2013 had an exercise price equal to the IPO price of $18.00 per share.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with US GAAP. 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
We record revenue from the operation of company-owned restaurants when sales occur. In the case of gift card sales, we record revenue when: (i) the gift card is redeemed by the customer and (ii) we determine the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). We record royalties from franchise restaurant sales based on a percentage of restaurant revenues in the period the related franchised restaurants’ revenues are earned. Area development fees and franchise fees are recognized as income when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by us. Both franchise fees and area development fees are generally recognized as income upon the opening of a franchise restaurant or upon termination of the agreement(s).
Property and Equipment
We state the value of our property and equipment, including primarily leasehold improvements and restaurant equipment, furniture and fixtures at cost, minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method of accounting over the estimated useful lives of the related assets. We amortize our leasehold improvements using the straight-line method of accounting over the shorter of the lease term (including reasonably assured renewal periods) or the estimated useful lives of the related assets. We expense repairs and maintenance as incurred, but capitalize major improvements and betterments. We make judgments and estimates related to the expected useful lives of these assets that are affected by factors such as changes in economic conditions and changes in operating performance. If we change those assumptions in the future, we may be required to record impairment charges for these assets.
Rent
We record rent expense for our leases, which generally have escalating rentals over the term of the lease, on a straight-line basis over the lease term. The lease term includes renewal options that are reasonably assured. Rent expense begins when we have the right to control the use of the property, which is typically before rent payments are due under the lease. We record the difference between the rent expense and rent paid as deferred rent in the consolidated balance sheet. Rent expense for the period prior to the restaurant opening is reported as pre-opening rent expense in the consolidated statements of income. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of rent expense over the term of the lease.
Certain of our operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. We recognize contingent rent expense when the achievement of specified targets is considered probable.
Recent Accounting Pronouncements
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation, shareholder advisory votes on golden parachute compensation and the extended transition period for complying with the new or revised accounting standards.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
BUSINESS
NOODLES & COMPANY
A World of Flavors Under One Roof
Noodles & Company is a high growth, fast casual restaurant concept offering lunch and dinner within a fast growing segment of the restaurant industry. Our company was founded by Aaron Kennedy when we opened our first location in Denver, Colorado in 1995, offering noodle and pasta dishes, staples of many cuisines, with the goal of delivering fresh ingredients and flavors from around the world under one roof-from Pad Thai to Mac & Cheese. Today, our globally inspired menu includes a wide variety of high quality, cooked-to-order dishes, including noodles and pasta, soups, salads and sandwiches, which are served on china by our friendly team members. We believe we offer our customers value with per person spend of approximately $8.00 for the twelve months ended October 1, 2013. We have 372 restaurants, comprised of 311 company-owned and 61 franchised locations, across 29 states and the District of Columbia, as of November 15, 2013. Our revenue and income from operations have grown from $170 million and $2 million in 2008 to $300 million and $16 million in 2012.
YOUR WORLD KITCHEN
Our Differentiated Offering
Your World Kitchen captures the breadth of our differentiated offering and defines our customers’ experience. Our company was founded on the core principle that food can be served quickly and conveniently in an inviting environment without sacrificing quality, freshness or flavor.
“Your” . . . On trend with our world today, where customization is commonplace, we put control into our customers’ hands. Each dish is cooked-to-order and can be customized to each customer’s personal tastes. Customers can add a protein, such as grilled chicken or organic tofu, or swap out a vegetable in their entrées. “Your” also represents the control our customers have over their dining experience, whether they want a meal to go, a quick sit-down lunch or a leisurely dinner with friends or family.
“World” . . . We offer more than 25 globally inspired Asian, Mediterranean and American dishes together on a single menu. We believe we will continue to benefit from trends in consumer preferences, wider availability of international cuisines and increasingly adventurous consumer tastes. At many restaurants, people are limited to a particular ethnic cuisine or type of dish, such as a sandwich, burrito or burger. At Noodles & Company, we aim to eliminate the “veto vote” by satisfying the preferences of a wide range of customers, whether a mother with kids, a group of coworkers, an individual or a large party.
“Kitchen” . . . Open kitchens are the focal point of our restaurants. Our customers can see the freshness of our ingredients and watch their food being cooked. “Kitchen” says “cooking” and emphasizes that we cook each dish to order.
From 2004 to 2012, we increased the number of our total restaurants from 100 to 327, representing a CAGR of 16.0%. If we continue to grow at our current rate, we believe we have the opportunity to grow to 2,500 restaurants across the United States over the next 15-20 years, although this growth rate is not guaranteed.
LEADING RESTAURANT GROWTH AND PERFORMANCE
From 2004 to 2012, we increased the number of our total restaurants from 100 to 327, representing a CAGR of 16.0%. If we continue to grow at our current rate, we believe we have the opportunity to grow to 2,500 restaurants across the United States over the next 15-20 years, although this growth rate is not guaranteed.
Total Restaurants at End of Fiscal Year
We have experienced steady growth in comparable restaurant sales (at restaurants open for at least 18 full periods) in 30 of the last 31 quarters, due primarily to an increase in customer traffic. System-wide comparable restaurant sales growth for 2010, 2011 and 2012 was 3.7%, 4.8% and 5.4%, respectively. Our company-owned restaurant AUVs grew from $1,098,000 at the beginning of 2010 to $1,178,000 at the end of 2012. In 2012, our company-owned restaurant contribution margin was 21.2% for all restaurants and 23.2% for restaurants in the comparable base, which we believe places us in the top-tier of the restaurant industry.
Our new restaurant investment model calls for a total cash investment of approximately $725,000, net of tenant allowances. Our current target cash-on-cash return on investments we make in restaurant development for a new company-owned restaurant is 30% in its third full-year of operations. Company-owned restaurants that were open a full three years by January 1, 2013, achieved an average cash-on-cash return on investments made in restaurant development of 35.1% in their third full year of operations. There can be no guarantee the Company’s comparable restaurant sales growth and cash-on-cash return rates will continue at similar rates in future periods.
OUR INDUSTRY
We operate in the fast casual segment of the restaurant industry. According to Technomic, in 2012, fast casual concepts in the 500 overall largest restaurant chains grew sales by 13.2% to $24.2 billion, compared with 4.9% for all of the 500 overall largest restaurant chains in the United States. While the fast casual segment of the restaurant industry has grown faster than the restaurant industry as a whole in recent years, there can be no guarantee that this trend will continue.
We believe we are the only national fast casual restaurant concept offering a menu with a wide variety of noodle and pasta dishes, soups, salads and sandwiches inspired by global flavors. We believe our attributes-global flavors, variety and fast service-allow us to compete against multiple segments throughout the restaurant industry and provide us a larger addressable market for lunch and dinner than competitors who focus on a single cuisine. We believe we provide a pleasant dining experience by quickly delivering fresh food with friendly service at a price point we believe is attractive to our customers. You do not have to jostle your gear or carry trays of food to or from your table. Grab a drink, have a seat and we will deliver your food to your table-all without the need to tip.
Our Strengths
We believe the following strengths set us apart from our competitors:
Variety Makes Togetherness Possible
We have purposefully chosen a range of healthy to indulgent dishes to satisfy carnivores and vegetarians. Our menu encourages customers to customize their meals to meet their tastes and nutritional preferences with our selection of 14 fresh vegetables and six proteins-beef, pork, chicken, meatballs, shrimp and organic tofu. We believe our variety ensures that even the pickiest of eaters can find something to crave, which eliminates the “veto vote” and encourages people with different tastes to enjoy a meal together.
All of our dishes are cooked-to-order with fresh, high quality ingredients sourced from our carefully selected suppliers. Our commitment to the freshness of our ingredients is further demonstrated by our use of seasonal ingredients and healthy add-in options, such as organic tofu, and by the freshness inspection of our ingredients. Our culinary team strives to develop new dishes and LTOs to further reinforce our Your World Kitchen positioning and regularly provide our guests additional options . For example, we recently introduced a Winter World Tour menu featuring three new dishes from different parts of the world: Thai Hot Pot soup, Adobo Flatbread, with flavors from Latin America, and Alfredo MontAmore. This focus on culinary innovation, combined with our commitment to classic cooking methods, allows us to prepare and serve high quality food.
Value That Is Greater Than Our Competitive Price Point
The value we offer, the quality of our food and the warmth of our restaurants create an overall customer experience that we believe is second-to-none. Our per person spend of approximately $8.00 for the twelve months ended October 1, 2013 is competitive not only within the fast casual segment, but also within the quick-service segment. We believe the speed of our service and the quality of our food contributes to a value proposition that enables us to take market share from casual dining restaurants. We deliver value by combining a family-friendly dining environment with the opportunity to enjoy many dishes containing ingredients like our award-winning slow-braised, naturally raised pork.
Everything Is a Little Nicer Here
We design each location individually, which we believe creates an inviting restaurant environment. We believe the ambience is warm and welcoming, with muted lighting and colors, comfortable seating and our own custom music mix, which is intended to make our customers feel relaxed and at home. We also enhance the experience by featuring new Coca-Cola Freestyle machines in all our restaurants, offering our customers over 100 drink choices to complement their meal-again putting control in the customers’ hands, so that they can match their drink to their meal.
We believe we deliver an exceptional overall dining experience. We think that our customers should expect not only great food from our restaurants, but also warm hospitality and attentive service. Whether you are a mother with kids or a businessperson with a laptop, you simply order your food, grab a drink and take a seat. We cook each dish to order in approximately five minutes and bring the food right to your table. Our customers may enjoy a relaxed meal or just eat and run.
Consistent with our culture of enhanced customer service, we seek to hire individuals who will deliver prompt, attentive service by engaging customers the moment they enter our restaurants. Our training philosophy empowers both our restaurant managers and team members to add a personal touch when serving our customers, such as coming out from behind the counter to explain our menu and guide customers to the right dish. Our restaurant managers are critical to our success, as we believe that their entrepreneurial spirit and outreach efforts build our brand in our communities. We call our cashiers “Noodle Ambassadors” to highlight their role in helping our customers explore our global menu.
After our customers order at the counter, their food is served on china by our friendly team members. To further enhance our customers’ dining experience, we check on them throughout their meal. We offer them drink refills, a glass of wine or dessert, so they do not have to leave their seats. No trash cans are visible to our customers in our restaurants: following the meal, our team quickly clears the table.
Desirable and Loyal Consumer Base
A report that we commissioned based on customer data and surveys estimates that approximately 40% of our customers visit our restaurants at least once each month. Our customers skew slightly younger and more affluent than the general population, and according to a recent Gallup survey, this demographic spends more on dining than others. We believe the variety of our food and our ability to accomodate a customer’s desire to eat quickly or to enjoy a longer meal enable us to draw sales almost equally between lunch and dinner. Our broad appeal and customer loyalty have led to industry and media recognition:
Nation's Restaurant News, MenuMasters Award, 2013, Golden Chain Winner, 2010, awarded on the basis of the impact of menu items on the restaurant industry.
The International Foodservice Manufacturers Association, COEX Innovator Award, 2013, awarded annually to a national chain shaping the restaurant industry through innovation.
DigitalCoco, Top 10 "Most Loved" food and beverage brands in social media, 2012, awarded on the basis of positive comments made by customers on social media.
Restaurant Social Media Index, Top Social Media Brands and Top Social Consumer Sentiment, 2012, awarded on the basis of comments made by customers on social media.
Parents Magazine, Parents Top 10 Family-Friendly Restaurant Chains, 2011 and 2009, awarded on the basis of the healthfulness and quality of ingredients of menu items.
Health Magazine, America's Top 10 Healthiest Fast Food Restaurants, 2009, America's Healthiest Restaurants, 2008, awarded on the basis of healthfulness of dishes and use of organic produce, among other factors.
Consistent Restaurant Economics and a Flexible Footprint
Our restaurant model generates strong cash flow, consistent restaurant-level financial results and a high return on investments we make in restaurant development. Our restaurants have been successful in diverse geographic regions, with a broad range of population densities and real estate settings. We believe we are an attractive tenant to the owners and developers of a wide variety of real estate development types, which allows us to be highly selective in our evaluation of potential new sites. Our disciplined approach to site selection is grounded in an analytical data-driven model with strict criteria including population density,
demographics and traffic generators. We take pride in selecting sites where we can design and construct a comfortable, warm environment for our customers.
Experienced Leadership
Our strategic vision and culture have been developed and nurtured by our senior management team under the stewardship of our Chairman and Chief Executive Officer, Kevin Reddy, and our President and Chief Operating Officer, Keith Kinsey. Kevin and Keith joined Noodles in 2005 after working at McDonald’s and, more recently, Chipotle. At Chipotle, they were instrumental in growing the concept from a small number of restaurants to more than 400 across the country between 2000 and 2005 with the financial backing of McDonald’s. They delivered a similar growth trajectory when they joined Noodles eight years ago, increasing the restaurant base from 100 to 327 between 2005 and 2012, a CAGR of 16.0%. Kevin and Keith have assembled a talented senior management team with restaurant experience across a broad range of disciplines, including menu innovation, marketing, restaurant operations, real estate, finance and accounting, supply chain management and information technology. We believe our management team is integral to our success and has positioned us well for long-term growth.
Steady, Reliable Financial Performance
Our globally inspired flavors and differentiated dining experience have resonated with our customers and have resulted in our track record of building profitable restaurants. We achieved our sales growth through a combination of new restaurant openings and comparable restaurant sales increases. Our approach has resulted in stable gross margins despite minimal price increases and allows us to stay true to our principle of quality food at a price we believe is attractive to our customers. By design, our selection of dishes is comprised of a diverse collection of ingredients, mitigating exposure to commodity price inflation.
A Clear Path Forward
We believe we have significant growth potential because of our brand positioning, strong unit economics, financial results and broad customer appeal. We believe there are significant opportunities to expand our business, strengthen our competitive position and enhance our brand through the continued implementation of the following strategies:
Continuing to Grow Our Restaurant Base
We have more than doubled our restaurant base in the last six years to 372 locations in 29 states and the District of Columbia, as of November 15, 2013, including the 35 company-owned restaurants and ten franchise restaurants opened in 2013. In 2012, we opened 39 company-owned restaurants and six franchise restaurants. In 2013, we have or plan to open between 41 and 42 company-owned restaurants and 10 franchise restaurants. For 2014, we anticipate increasing our company owned restaurant count by 13-15% and our franchise restaurant count by 15-20%. We believe we are at an early stage of nationwide expansion, and that we can grow to 2,500 restaurants over the next 15-20 years across the United States based on our scalable infrastructure, broad appeal and flexible and portable real estate model, but this growth rate is not guaranteed. Our restaurants are typically 2,600 to 2,700 square feet and are located in end-cap, inline or free-standing locations across a variety of urban and suburban markets. Our near-term growth strategy will involve opening units in mature markets and expanding into new markets.
Although we expect the majority of our expansion to continue to be from company-owned restaurants, we are strategically expanding our base of franchise restaurants. Our franchise program is a low cost and high return model that allows us to expand our footprint and build brand awareness in markets that we do not plan to enter in the short to medium term. As of November 15, 2013, we have 61 franchise units in 13 states operated by 10 franchisees. We look for experienced, well-capitalized franchise partners who are able to leverage their existing infrastructure and local knowledge in a manner that benefits both our franchisees and ourselves. As of November 15, 2013, a total of 13 area developers have signed development agreements providing for the opening of 190 restaurants in their respective territories.
Improving Our Performance
Our system-wide comparable restaurant sales growth for the first three quarters of 2013 was 2.7%. We plan to build on our growth performance by increasing brand awareness, customer frequency, new customer visits, per person spend and sales outside our restaurants. The following is our plan to achieve these goals:
Heighten brand awareness. We believe that our food is our best currency and that once people try it they become loyal and repeat customers; however, before customers can try our food, they need to know about us. We differentiate Noodles & Company through an innovative, community-based marketing strategy at the corporate and restaurant level to build brand awareness and customer loyalty. We engage media outlets in our communities to execute locally tailored marketing programs. Our restaurant managers engage in local relationship marketing where they approach nearby businesses, groups and individuals for appreciation days, tastings and hero lunches to introduce our neighbors to our food. We also communicate directly to the 825,000 members in our Noodlegram club, which provides the latest Company news and special offers. We
also use our other social media outlets to promote brand awareness and were named among the Top 10 “Most Loved” food and restaurant brands in social media in a survey conducted by DigitalCoco.
Increase existing customer frequency. In the past twelve months we refreshed the interior signage in all of our restaurants to encourage menu exploration, which we believe will increase customer frequency. Our new Welcome Wall menu board, placed at the entrance of each of our company-owned restaurants, shows pictures of our dishes in an easily understandable layout so customers can fully grasp our world of flavors without feeling overwhelmed. We believe this merchandising enables our customers to peruse our offerings without feeling the pressure of holding up a line of hungry people. This new merchandising has already resulted in meaningful improvements to AUVs in the restaurants where it has been implemented, and we expect similar results in the rest of our restaurant base. We encourage customers to explore their tastes and make adventurous selections of items that are either new to the menu or new to them by promising to serve them their favorite dish at no charge if they do not enjoy their adventurous selection.
Increase new customer visits. We would like to be top-of-mind for customers whenever they need to eat, drink or simply find a place where they feel welcome. Although we serve our food quickly, we would like customers to view our restaurants as places to dine and enjoy the company of friends and family. To further drive customer visits at dinner, we have recently enhanced our beer and wine offerings and expanded our appetizer selection.
Improve our per person spend. While we have generally implemented modest price increases to offset rising costs, we also strive to increase the per person spend by offering additional items, including our expanded beverage selection and appetizers. Our menu development team periodically creates LTOs, which we believe are innovative and sometimes become permanent menu items, such as our Spinach & Fresh Fruit Salad. In October 2012, we successfully introduced slow-braised naturally raised pork included on our BBQ Mac & Cheese, Peppery Pork Sandwich and as an add on protein. This strategy allows us to offer our customers greater variety and entices them to “opt-up” to a premium menu offering.
Grow sales outside of our restaurants. We are taking steps to sell more food outside our restaurants. We currently offer our larger Square Bowls to families and local business, and we believe the convenience and price point of these offerings will drive take-out sales. In addition, we believe our commitment to freshly prepared food and variety provides us with an opportunity to expand catering sales.
Properties
As of November 15, 2013, we and our franchisees operated 372 restaurants in 29 states and the District of Columbia. Our restaurants are typically 2,600 to 2,700 square feet and are located in a variety of suburban, urban and small markets. We lease the property for our central support office and all of the properties on which we operate restaurants.
The map and chart below show the locations of our company-owned and franchised restaurants as of November 15, 2013.
|
| | | | | | | | | |
| State | | Company- owned | | Franchise | | Total |
| California | | 7 |
| | — |
| | 7 |
|
| Colorado | | 53 |
| | — |
| | 53 |
|
| Connecticut | | — |
| | 1 |
| | 1 |
|
| Delaware | | 2 |
| | — |
| | 2 |
|
| District of Columbia | | 3 |
| | — |
| | 3 |
|
| Idaho | | 3 |
| | — |
| | 3 |
|
| Illinois | | 44 |
| | 4 |
| | 48 |
|
| Indiana | | 3 |
| | 16 |
| | 19 |
|
| Iowa | | 9 |
| | 1 |
| | 10 |
|
| Kansas | | 8 |
| | — |
| | 8 |
|
| Kentucky | | 1 |
| | — |
| | 1 |
|
| Maryland | | 21 |
| | — |
| | 21 |
|
| Michigan | | — |
| | 16 |
| | 16 |
|
| Minnesota | | 33 |
| | — |
| | 33 |
|
| Missouri | | 4 |
| | 7 |
| | 11 |
|
| Nebraska | | — |
| | 5 |
| | 5 |
|
| New Jersey | | — |
| | 2 |
| | 2 |
|
| New York | | — |
| | 1 |
| | 1 |
|
| North Carolina | | 8 |
| | — |
| | 8 |
|
| North Dakota | | — |
| | 3 |
| | 3 |
|
| Ohio | | 14 |
| | — |
| | 14 |
|
| Oregon | | 5 |
| | — |
| | 5 |
|
| Pennsylvania | | 7 |
| | — |
| | 7 |
|
| South Dakota | | — |
| | 1 |
| | 1 |
|
| Tennessee | | 5 |
| | 1 |
| | 6 |
|
| Texas | | 8 |
| | — |
| | 8 |
|
| Utah | | 11 |
| | — |
| | 11 |
|
| Virginia | | 28 |
| | — |
| | 28 |
|
| Washington | | 1 |
| | — |
| | 1 |
|
| Wisconsin | | 33 |
| | 3 |
| | 36 |
|
| | | 311 |
| | 61 |
| | 372 |
|
We are obligated under non-cancelable leases for our restaurants and our central support office. Our restaurant leases generally have initial terms of 10 years with two or more five-year extensions. Our restaurant leases generally have renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds, although we generally do not expect to pay significant contingent rent on these properties based on the thresholds in those leases.
In 2012, we opened 39 company-owned restaurants and six franchise restaurants. In 2013, we have or plan to open between 41 and 42 company-owned restaurants and 10 franchise restaurants, which includes the 35 company-owned restaurants and ten franchise restaurant opened through November 15, 2013. The following table shows the growth in our network of company-owned and franchise restaurants for 2012, 2011, 2010, and the first three fiscal quarters of 2013:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended | | Three Fiscal Quarters Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 | | October 1, 2013 |
| Company-Owned Restaurant Activity | | | | | | | | |
| Beginning of period | | 239 |
| | 212 |
| | 186 |
| | 276 |
|
| Openings | | 39 |
| | 28 |
| | 28 |
| | 35 |
|
Closures and relocations(1) | | (2 | ) | | (1 | ) | | (2 | ) | | (1 | ) |
| Restaurants at end of period | | 276 |
| | 239 |
| | 212 |
| | 310 |
|
| Franchise Restaurant Activity | | | | | | | | |
| Beginning of period | | 45 |
| | 43 |
| | 43 |
| | 51 |
|
| Openings | | 6 |
| | 2 |
| | — |
| | 7 |
|
Closures and relocations(1) | | — |
| | — |
| | — |
| | — |
|
| Restaurants at end of period | | 51 |
| | 45 |
| | 43 |
| | 58 |
|
| Total restaurants | | 327 |
| | 284 |
| | 255 |
| | 368 |
|
| |
(1) | We account for relocated restaurants under both openings and closures and relocations. During both 2012 and 2010 we closed one restaurant and relocated another restaurant. In fiscal 2011 and the first three quarters of 2013, we closed one restaurant at the end of its lease term. |
Site Development and Expansion
We consider our site selection and development process critical to our long-term success. We use a combination of our own development team and outside real estate consultants to locate, evaluate and negotiate new sites using various criteria. Each member of our in-house real estate team has at least 15 years of experience with one or more high growth restaurant or retail concepts, such as Chipotle, Panera, Potbelly, Sonic, EB Games and Luxottica. In addition, because we offer a mix of dishes and a dining experience that differs from many other restaurant concepts, we believe our restaurants are highly sought after by real estate owners and developers. We often are made aware of opportunities early in their development process, allowing us to secure optimal locations.
In making site selection decisions, we also use several analytical tools designed to uncover the key site, demographic, business, retail, competitive and traffic characteristics that drive successful locations. These tools have been customized to leverage existing real estate information to project sales of a potential location and to assist in the development of local marketing plans.
Our ability to succeed in several different kinds of trade areas and real estate types has allowed us flexibility in our market development strategy. While we typically target end cap or freestanding locations, we also have seen success in inline locations. Moreover, we perform well in various market sizes, from smaller markets to suburbs to central business districts. This flexibility also allows us to manage risk in our development portfolio by balancing higher cost locations-typically seen in urban areas-with those that are lower cost-typically seen in smaller markets.
Once a location has been approved by our executive level selection committee, we begin a design process to match the characteristics and feel of the location to the trade area. For example, in a trade area with a high percentage of families we will utilize additional booth seating in the dining room, and in an urban location we will typically alter our kitchen design to enhance throughput for the busy lunch hours.
Restaurant Management and Operations
Friendly People. We believe our genuine, nice people separate us from our competitors. We value the individuality of our team members, which we believe results in a management, operations and training philosophy distinct from that of our competitors. We make an effort to hire team members who share a passion for food, have a competitive spirit and will operate our restaurants in a way that is consistent with our high standards. We seek to hire individuals who will deliver prompt, attentive service by engaging customers the moment they enter our restaurants. We empower our team members to enrich the experience of our customers and directly address any concerns that may arise in a manner that contributes to the success of our business.
Restaurant Management and Employees. Each restaurant typically has a restaurant manager, an assistant manager and as many as 15 to 25 team members. We cross-train our employees in an effort to create a depth of competency in our critical restaurant functions. Consistent with our emphasis on customer interaction, we encourage our restaurant managers and team members to welcome and interact with customers throughout the day. To lead our restaurant management teams, we have area managers (each of whom is responsible for between five and 12 restaurants), as well as market directors (each of whom is responsible for between 50 and 80 restaurants).
Training and Career Development. We believe that our training efforts create a culture of continuous learning and professional growth that allows our team members to continue their career development with us. Within each restaurant, two to four team members are designated to lead the training efforts and ensure a consistent approach to team member development. We produce training materials that encourage individual contributions and participation on the part of our team members, rather than providing rote, step-by-step scripts or rigid and extensively detailed policy manuals.
Food Preparation and Quality. Our teams use classic professional cooking methods, including hand-chopping, par boiling and sautéing many of our vegetables, in full kitchens resembling those of full service restaurants. All team members, including our restaurant managers, spend their first several days working solely with food and learning these techniques, and we spend a significant amount of time ensuring that each team member learns how to prepare and cook our food properly. Despite our more labor-intensive method of food preparation, we believe that we produce food with an efficiency that enables us to compete effectively.
We have over 200 company-owned restaurants with exhibition-style kitchens. This design demonstrates our commitment to cooking fresh food in an accessible manner. We provide each customer with individual attention and make every effort to respond to customer suggestions and concerns in a personal and hospitable way.
We have designed our food safety and quality assurance programs to maintain high standards for our food and food preparation procedures. Our quality assurance manager oversees comprehensive restaurant and supplier audits based upon the potential food safety risk of each food. 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. We regularly inspect our suppliers to ensure that the ingredients we buy conform to our quality standards and that the prices we pay are competitive. We also rely on our own recipes, specifications and protocols to ensure that our food is consistently the best quality possible when served, including a physical examination of ingredients when they arrive at our restaurants. We train our employees to pay detailed attention to food quality at every stage of the food preparation cycle and have developed a daily checklist that our employees use to assess the freshness and quality of food supplies. Finally, we encourage our customers to provide feedback regarding our food quality so that we can identify and resolve problems or concerns as quickly as possible.
Restaurant Marketing
Our marketing efforts seek to increase sales through a variety of channels and initiatives. Community-based restaurant marketing, as well as online, social and other media tools, highlights our competitive strengths, including our varied and healthy menu offerings and the value we offer our customers.
Local Relationship Marketing. We differentiate our business through an innovative, community-based approach to building brand awareness and customer loyalty. We use a wide range of local marketing initiatives to increase the frequency of and occasions for visits, and to encourage people to get to know us better, try our food and bring their friends. We empower our local restaurant managers to selectively organize events to bring new customers into our restaurants. For example, our team members will invite a customer to bring a group of his or her friends for a “hero lunch,” an exclusive menu tasting at their local Noodles location.
Our Menu Offerings.We focus some of our marketing efforts on new menu offerings to broaden our appeal to our customers. We offer LTOs and featured items like the BBQ Pork Mac, a twist on our core Wisconsin Mac & Cheese, which include ingredients and flavors that maintain customer interest. We promote these items through a variety of formats including market-wide public relations events, direct mailings, social media marketing, radio promotions, tastings, billboard and bus board advertising and targeted print advertising. In addition to increasing brand awareness, these promotions also encourage prompt consumer action, resulting in more immediate increases in our customer traffic.
Creating New Meal Occasions. We also focus on ways Noodles & Company can serve customers at different times and in new places. For example, customers who want to feed a large group can enjoy our Square Bowls, which are family-style take-out offerings of our noodles, pastas and salads that generally feed up to four people. We market this new offering in a variety of ways, including in-restaurant posters, as well as Noodlegrams, Facebook posts and other communications outside our restaurants.
Making Noodles & Company Easier to Use. Some of our marketing efforts focus on making our restaurants easier to use. We seek to deliver superior customer service at every opportunity, generating consumer awareness of menu offerings with in-restaurant communications by providing displays of our menu offerings and beer and wine selection visible upon entry, chalkboards featuring new menu offerings and fresh ingredients and table top cards that highlight healthy food offerings. By providing multiple points of access to our wide variety of menu offerings, we seek to optimize our customers’ in-restaurant experience in order to increase the frequency of our customers’ visits. Our efforts also make use of tools like online ordering.
Online, Social and Other Media Tools. We rely on our website, www.noodles.com, to promote our business and increase brand awareness. The information on or available through our website is not, and should not be considered, a part of this prospectus. Our customers are encouraged to sign up to receive email Noodlegrams updating them on new menu offerings, LTOs and promotional opportunities. As of November 15, 2013, more than 833,000 of our customers have signed up to receive Noodlegrams. We also communicate with our customers using social media, such as our Facebook page, our YouTube channel and our Twitter feed. Our media tools also include placements in local, regional and national print media.
Suppliers
Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We carefully select suppliers based on quality and their understanding of our brand, and we seek to develop mutually beneficial long-term relationships with them. We work closely with our suppliers and use a mix of forward, fixed and formula pricing protocols. We have tried to increase, in some cases, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we monitor industry news, trade issues, weather, crises and other world events that may affect supply prices.
Seasonality
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and higher in the second and third quarters.
Franchising
We had ten franchise area developers who operated 61 franchise restaurants in 13 states as of November 15, 2013. A total of 13 area developers have signed area development agreements providing for the opening of 190 additional restaurants in their respective territories. We expect to continue to offer development rights in markets where we do not intend to build company-owned restaurants. We may offer such rights to larger developers who commit to open 10 or more units, or to smaller developers who may commit to open significantly fewer restaurants. We do not currently intend to offer single-unit franchises. We believe the strength and attractiveness of our brand and unit growth opportunities in attractive undeveloped markets will attract experienced and well-capitalized area developers.
Intellectual Property and Trademarks
We own a number of trademarks and service marks registered or pending with the U.S. Patent and Trademark Office (“PTO”). We have registered the following marks with the PTO: Noodles & Company, the Noodles & Company logo, Your World Kitchen, Square Bowl, Noodlegram, Crave Card and Wisconsin Mac & Cheese. We also have certain trademarks registered or pending in certain foreign countries. In addition, we have registered the Internet domain name www.noodles.com. The information on, or that can be accessed through, our website is not part of this prospectus.
We believe that our trademarks, service marks and other intellectual property rights have significant value and are important to the marketing of our brand, and it is our policy to protect and defend vigorously our rights to such intellectual property. However, we cannot predict whether steps taken to protect such rights will be adequate. See “Risk Factors—Risks Related to Our Business and Industry-We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.”
Governmental Regulation and Environmental Matters
We are subject to extensive and varied federal, state and local government regulation, including regulations relating to public and occupational health and safety, sanitation and fire prevention. We operate each of our restaurants in accordance with standards and procedures designed to comply with applicable codes and regulations. However, an inability to obtain or retain health department or other licenses would adversely affect our operations. Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular restaurant or group of restaurants.
In addition, in order to develop and construct restaurants, we need to comply with applicable zoning, land use and environmental regulations. Federal and state environmental regulations have not had a material effect on our operations to date, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or even prevent construction and increase development costs for new restaurants. We are also required to comply with the accessibility standards mandated by the U.S. Americans with Disabilities Act, which generally prohibits discrimination in accommodation or employment based on disability. We may in the future have to modify restaurants, for example by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. While these expenses could be material, our current expectation is that any such actions will not require us to expend substantial funds.
A small amount of our revenues is attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. We are also subject in certain states to “dram shop” statutes, 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. We carry liquor liability coverage as part of our existing comprehensive general liability insurance. A small number of our restaurants do not have liquor licenses, typically because of the cost of a liquor license in jurisdictions having liquor license quotas.
In addition, we are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986, the Occupational Safety and Health Act and various other federal and state laws governing similar matters including minimum wages, overtime, workplace safety and other working conditions. We are also subject to various laws and regulations relating to our current and any future franchise operations. See “Risk Factors—Risks Related to Our Business and Industry-Governmental regulation may adversely affect our ability to open new restaurants or otherwise adversely affect our business, financial condition or results of operations.”
We are subject to federal, state and local environmental laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, or exposure to, hazardous or toxic substances (“environmental laws”). These environmental laws can provide for significant fines and penalties for non-compliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. We are not aware of any environmental laws that will materially affect our earnings or competitive position, or result in material capital expenditures relating to our restaurants. However, we cannot predict what environmental laws will be enacted in the future, how existing or future environmental laws will be administered, interpreted or enforced, or the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating to, environmental laws. It is possible that we will become subject to environmental liabilities at our properties, and any such liabilities could materially affect our business, financial condition or results of operations. See “Risk Factors—Risks Related to Our Business and Industry-Compliance with environmental laws may negatively affect our business.”
Management Information Systems
All of our restaurants use computerized management information systems, which we believe are scalable to support our future growth plans. We use point-of-sale computers designed specifically for the restaurant industry. The system provides a touch screen interface, a graphical order confirmation display and integrated, high-speed credit card and gift card processing. The point-of-sale system is used to collect daily transaction data, which generates information about daily sales, product mix and average check that we actively analyze. All products sold and prices at our company-owned restaurants are programmed into the system from our central support office.
Our in-restaurant back office computer system is designed to assist in the management of our restaurants and provide labor and food cost management tools. These tools provide corporate and restaurant operations management quick access to detailed business data and reduces restaurant managers’ administrative time. The system provides our restaurant managers the ability to submit orders electronically with our distribution network. The system also supplies sales, bank deposit and variance data to our accounting department on a daily basis. We use this data to generate daily sales information and weekly consolidated reports regarding sales and other key measures, as well as preliminary weekly detailed profit and loss statements for each location with final reports following the end of each period.
Franchisees use similar point of sale systems and are required to report sales on a daily basis through an on-line reporting network and submit their restaurant-level financial statements on a quarterly or annual basis.
Employees
As of November 15, 2013, we had approximately 8,300 employees, including 760 salaried employees and 7,600 hourly employees. None of our employees are unionized or covered by a collective bargaining agreement, and we consider our current employee relations to be good.
Legal Proceedings
We are currently involved in various claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition and results of operations.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our board of directors and executive officers.
|
| | | | |
Name | | Age(1)
| | Position |
Kevin Reddy | | 55 | | Chairman and Chief Executive Officer |
Keith Kinsey | | 59 | | President, Chief Operating Officer and Director |
Dave Boennighausen | | 35 | | Chief Financial Officer |
Dan Fogarty | | 52 | | Executive Vice President of Marketing |
Phil Petrilli | | 44 | | Executive Vice President of Operations |
Paul Strasen | | 57 | | Executive Vice President, General Counsel and Secretary |
Kathy Lockhart | | 49 | | Vice President and Controller |
Scott Dahnke | | 48 | | Director |
Stuart Frenkiel | | 33 | | Director |
Jeffrey Jones | | 51 | | Director |
James Pittman | | 50 | | Director |
James Rand | | 70 | | Director |
Andrew Taub | | 45 | | Director |
| |
(1) | As of November 15, 2013 |
Kevin Reddy has served as our Chief Executive Officer since April 2006. He became a member of our board of directors in May 2006, and Chairman of the Board in May 2008. Mr. Reddy was our President and Chief Operating Officer from April 2005 to April 2006, continuing to serve as our President until July 2012. Prior to joining us, he was the Chief Operating Officer, Chief Operations Officer and Restaurant Support Officer for Chipotle Mexican Grill. Mr. Reddy began his professional career with McDonald’s Corporation in 1983 as a regional controller and progressed into positions of escalating responsibility. Mr. Reddy has received a number of awards in connection with his role as our Chief Executive Officer, including being named “Entrepreneur of the Year” by Restaurant Business Magazine in 2009 and, most recently, a 2012 “All-Star CEO” by Restaurant Finance Monitor. He currently serves on the executive advisory board to the Daniels School of Business at the University of Denver. He received a BS in Accounting from Duquesne University. He brings to our Board of Directors leadership skills, strategic guidance and operational vision from prior experience in our industry.
Keith Kinsey has served as our President since July 2012 and our Chief Operating Officer since November 2007. Mr. Kinsey also served as our Chief Financial Officer from July 2005 to July 2012. He became a member of our board of directors in November 2008. Prior to joining us, he was the Pacific Regional Director for Chipotle Mexican Grill. Prior to that time, he held various management roles at McDonald’s Corporation, PepsiCo Restaurant Group and Checkers Drive-In Restaurants. He received a BS in Accounting from the University of Illinois, and is a Certified Public Accountant. He brings to our Board of Directors leadership skills, strategic guidance and operational vision from prior experience in our industry.
Dave Boennighausen has served as our Chief Financial Officer since July 2012. Mr. Boennighausen has been with the Company since 2004, and served as our Vice President of Finance from October 2007 to March 2011, and as our Executive Vice President of Finance from April 2011 to February 2012. He began his career with May Department Stores. He received a BS in Finance and Marketing from Truman State University and holds an MBA from the Stanford Graduate School of Business.
Dan Fogarty has served as our Executive Vice President of Marketing since October 2010. Mr. Fogarty has been with the Company since 2009, serving as Vice President of Marketing from June 2009 to October 2010. Prior to joining us, Mr. Fogarty was Vice President of Marketing for The Pump Energy Food from May 2008 until May 2009. Prior to that time, he worked at Potbelly Sandwich Works and Chipotle Mexican Grill. Mr. Fogarty began his career working for a number of advertising agencies and had his own brand consulting firm for five years. He received a BA in Journalism and Advertising from the University of Kansas.
Phil Petrilli has served as our Executive Vice President of Operations since May 2012. Prior to joining us, he worked for Chipotle Mexican Grill in multiple operations positions from June 1999 to May 2012, most recently as Regional Director—
Northeast Region from 2008 to 2012, where he led a region of 268 restaurants. He received a degree in Industrial Psychology from the University of Illinois-Chicago.
Paul Strasen has served as our Executive Vice President, Secretary and General Counsel since January 2008. Prior to joining our company, Mr. Strasen was the Vice President, General Counsel and Secretary of Houlihan’s Restaurants, Inc. and served as the General Counsel of Einstein/Noah Bagel Corp. He began his career at Bell Boyd & Lloyd, now part of K & L Gates. Mr. Strasen received a BA in Humanities and Political Science from Valparaiso University and received a JD from The University of Chicago Law School.
Kathy Lockhart has served as our Vice President and Controller since August 2006. Prior to joining us, Ms. Lockhart served as the Vice President and Controller of several public and private restaurant and retail companies, including Einstein/Noah Bagel Corp, Boston Market, VICORP (parent company of Village Inn and Bakers Square restaurants) and Ultimate Electronics. She received a BA in Business Administration and Political Science from Western State College, and is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Scott Dahnke has been a member of our board of directors since September 2011. Mr. Dahnke has been a Managing Partner of Catterton for the last decade, and has a broad range of business experience in private equity, consulting, management and finance. Prior to joining Catterton, he was a Managing Director at Deutsche Bank Capital Partners and at AEA Investors, where he led AEA’s consumer products investing efforts. Previously, Mr. Dahnke was the Chief Executive Officer of infoUSA, a leading publicly traded provider of business and consumer marketing products and services. Prior to joining infoUSA, Mr. Dahnke served clients on an array of strategic and operational issues as a Partner at McKinsey & Company. His early career also includes experience in the Merger Department of Goldman, Sachs & Co. and with General Motors. Mr. Dahnke received a BS, magna cum laude, in Mechanical Engineering from the University of Notre Dame. He also received academic honors while earning an MBA from the Harvard Business School. Mr. Dahnke brings expertise in the retail and consumer industry from previous business experience.
Stuart Frenkiel has been a member of our board of directors since December 2010. Mr. Frenkiel is a Senior Director at PSPIB. He joined PSPIB in March 2010. Mr. Frenkiel serves on the board of directors of Ferrara Candy Company and the board of managers of QCE Finance LLC (Quiznos). From August 2008 to March 2010, he was an Associate Director in the mergers and acquisitions group of UBS Investment Bank. Prior to that, Mr. Frenkiel worked in the Office of Strategic Management at BMO Financial Group and held several finance roles at General Electric Company. Mr. Frenkiel received a Bachelor of Commerce degree from McGill University, holds an MBA from the Kellogg School of Management at Northwestern University, which he received in June 2008, and is a CFA charterholder. He brings to our Board of Directors a long-standing familiarity with our business, including industry and operational experience.
Jeffrey Jones has been a member of our board of directors since September 2013. Mr. Jones is the former Chief Financial Officer for Vail Resorts, where he was also a member of the Board of Directors and President of Lodging, Retail and Real Estate. Mr. Jones is currently a member of the US Bank Advisory Board as well as an Executive in Residence at the Leeds School of Business, University of Colorado at Boulder. Prior to joining Vail Resorts, Mr. Jones held CFO positions with the Clark Retail Enterprises and Lids Corporation. Mr. Jones received a BA in Accounting and American Studies from Mercyhurst College. Mr. Jones provides our board with significant public company experience in financial positions including significant audit committee roles, as well as overall financial, operations and strategic development experience.
James Pittman has been a member of our board of directors since December 2010. Mr. Pittman is a Managing Director at PSPIB. From February 2005 until December 2012, he was Vice President Private Equity at PSPIB (the owner of Argentia) in Quebec, Canada. In this capacity, he has co-led the strategy and investment of the international private equity portfolio. From 2002 to 2005, he served as Executive Vice President and CFO of Provincial Aerospace. Mr. Pittman is also a director of Telesat Holdings, Inc., Haymarket Financial, Centaur Guernsey L.P. Inc. and Noranco Inc. He brings to our Board of Directors a long-standing familiarity with our business, including industry and operational experience.
James Rand has been a member of our board of directors since May 2008. Mr. Rand has served as an independent executive consultant in the retail and restaurant industries since his retirement as Senior Vice President of Worldwide Development at McDonald’s Corporation in 2005. Mr. Rand began his career at McDonald’s Corporation in 1973, where he gained experience in marketing research, marketing and real estate development, including leading the team that launched the Extra Value Meal strategy. Mr. Rand is also a director of Homemade Pizza Company and Chicago Apartment Finders, Inc. He received a BA in Mathematics from Saint Mary’s College. He provides our Board of Directors with seasoned business judgment and valuable insights relevant to our industry.
Andrew Taub has been a member of our board of directors since December 2010. Mr. Taub is a Senior Partner at Catterton. He joined Catterton in 1996 and has previously served as a Vice President and Principal prior to becoming a Partner in the firm. Mr. Taub has helped capitalize and grow over a dozen consumer companies including restaurants, retail, food and beverage and marketing services. Prior to joining Catterton, he spent three years as Vice President of Nantucket Holding Company, a merchant bank specializing in the acquisition and management of troubled companies, as well as the consolidation of fragmented industries. Previously he worked in Mergers and Acquisitions at Dean Witter Reynolds and Coopers & Lybrand. Mr. Taub received a BA from the University of Michigan and an MBA from Columbia Business School. Mr. Taub brings expertise in the retail and consumer industry from previous business experience.
Corporate Governance and Board Structure
Our board of directors currently consists of eight members.
In accordance with the amended and restated certificate of incorporation and the amended and restated bylaws, our board of directors will be divided into three classes with staggered three-year terms. At each annual general 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. The authorized number of directors may be changed by resolution of the board of directors. Vacancies on the board of directors can be filled by resolution of the board of directors. Kevin Reddy serves as the chairman of our board of directors. We believe that six of our directors are independent as required by the rules of the Nasdaq Global Select Market: Scott Dahnke, our lead independent director, Stuart Frenkiel, James Pittman, James Rand, Andrew Taub and Jeffrey Jones. Scott Dahnke and Andrew Taub are affiliated with Catterton and Stuart Frenkiel and James Pittman are affiliated with Argentia, and the interests of Catterton and Argentia may not always coincide with the interests of the other holders of our common stock. See “Risk Factors—Our principal stockholders and their affiliates own a substantial portion of our outstanding equity, and their interests may not always coincide with the interests of the other holders.”
James Pittman and James Rand are the Class I directors and their terms will expire in 2014. Andrew Taub, Stuart Frenkiel and Jeffrey W. Jones are the Class II directors and their terms will expire in 2015. Scott Dahnke, Kevin Reddy and Keith Kinsey are the Class III directors and their terms will expire in 2016. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.
Corporate Governance
We expect that our board of directors will fully implement our corporate governance initiatives at or prior to the closing of this offering. We believe these initiatives comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC adopted thereunder. In addition, we believe our corporate governance initiatives comply with the rules of the Nasdaq Global Select Market. After this offering, our board of directors will continue to evaluate, and improve upon as appropriate, our corporate governance principles and policies.
We expect our board of directors to adopt a code of business conduct, effective upon the closing of the offering, that applies to each of our directors, officers and employees. The code addresses various topics, including:
compliance with laws, rules and regulations;
conflicts of interest;
insider trading;
corporate opportunities;
competition and fair dealing;
fair employment practices;
record keeping;
confidentiality;
protection and proper use of company assets; and
payments to government personnel.
Board Committees
We have established an audit committee, a compensation committee (the “compensation committee”), and a nominating and corporate governance committee. We believe that the composition of these committees will meet the criteria for independence under, and the functioning of these committees will comply with the requirements of, the Sarbanes-Oxley Act, the rules of the Nasdaq Global Select Market and SEC rules and regulations that will become applicable to us upon closing of the offering. We intend to comply with the requirements of the Nasdaq Global Select Market with respect to committee composition of independent directors as they become applicable to us. Each committee has the composition and responsibilities described below.
Audit Committee
The audit committee provides assistance to the board of directors in fulfilling its oversight responsibilities regarding the integrity of financial statements, our compliance with applicable legal and regulatory requirements, the integrity of our financial reporting processes including its systems of internal accounting and financial controls, the performance of our internal audit function and independent auditor and our financial policy matters by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management.
Compensation Committee
The compensation committee oversees our overall compensation structure, policies and programs, and assesses whether our compensation structure establishes appropriate incentives for officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, sets the compensation of these officers based on such evaluations and reviews and recommends to the board of directors any employment-related agreements, any proposed severance arrangements or change in control or similar agreements with these officers. The compensation committee also grants stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members and the adequacy of the charter of the compensation committee.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee will be responsible for developing and recommending to the board of directors criteria for identifying and evaluating candidates for directorships and making recommendations to the board of directors regarding candidates for election or reelection to the board of directors at each annual stockholders’ meeting. In addition, the nominating and corporate governance committee will be responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board of directors concerning corporate governance matters. The nominating and corporate governance committee will be also responsible for making recommendations to the board of directors concerning the structure, composition and function of the board of directors and its committees.
Compensation Committee Interlocks
None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers currently serves or in the past year has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board or compensation committee.
Director Compensation
We did not provide any compensation to our non-employee directors in 2012. Directors who are also employees, such as Mr. Reddy and Mr. Kinsey, do not and will not receive any compensation for their services as directors. In addition, directors appointed by Catterton and Argentia have not received any compensation for their services as directors and for two years following the closing date of our IPO in June 2013. Thereafter, the Company shall pay the directors appointed by Catterton and Argentia an annual fee of $100,000 (or such other amount that may be determined by the board of directors to be payable to non-employee directors) for each such director serving on the board of directors; provided, that any fees otherwise payable to directors appointed by Catterton shall instead be paid directly to Catterton Management Company, L.L.C. and any fees otherwise payable to directors appointed by Argentia shall instead be paid directly to Argentia.
In October 2013, we adopted a non-employee director compensation plan covering non-employee directors other than directors affiliated with Catterton or PSPIB. Under the plan, each non-employee director covered by the plan receives an annual
cash retainer for board service, an annual cash retainer for committee service and an annual cash retainer for serving as chair of a committee. The board has currently fixed the retainer for board service at $50,000 per year, and it has fixed each of the retainers for committee service and committee chair at $10,000 per year. In addition, at the close of business on the date of the Company’s annual meeting of stockholders, each non-employee director covered by the plan will receive an annual retainer stock option under the plan, which shall vest on the date of the next annual meeting of stockholders. The annual retainer grant made in 2014 will have a value, as determined by the Board of Directors in good faith using the Black-Scholes valuation formula, of $62,500, consisting of a $50,000 annual retainer grant and a $12,500 pro rata grant for service beginning in the fourth fiscal quarter of 2013. Such grant will have the other terms provided for in the Plan, the Stock Plan and the award agreement providing for such grant.
Directors have been and will continue to be reimbursed for travel, food, lodging and other expenses directly related to their activities as directors. Directors are also entitled to the protection provided by their indemnification agreements and the indemnification provisions in our certificate of incorporation and bylaws, as well as the protection provided by director and office liability insurance provided by us.
EXECUTIVE COMPENSATION
Our named executive officers, or NEOs, for 2012, which consist of our principal executive officer and the next two most highly-compensated executives, are:
Kevin Reddy, our Chairman and Chief Executive Officer;
Keith Kinsey, our President and Chief Operating Officer; and
Dan Fogarty, our Executive Vice President of Marketing.
2012 Summary Compensation Table
The following table summarizes the compensation awarded to, earned by or paid to our NEOs for 2011 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary | | Bonus(1) | | Option Awards(2) | | All other Compensation | | Total |
| Kevin Reddy | | 2012 | | $ | 546,154 |
| | $ | 550,000 |
| | $ | — |
| | $ | 13,905 |
| | $ | 1,110,059 |
|
| Chairman and Chief Executive Officer | | 2011 | | 547,017 |
| | 575,000 |
| | — |
| | 15,250 |
| | 1,137,267 |
|
| Keith Kinsey | | 2012 | | 422,308 |
| | 322,500 |
| | 20,898 |
| | 7,439 |
| | 773,145 |
|
| President and Chief Operating Officer | | 2011 | | 400,963 |
| | 350,000 |
| | — |
| | 7,519 |
| | 758,482 |
|
| Dan Fogarty | | 2012 | | 238,077 |
| | 91,584 |
| | 166,523 |
| | 18,988 |
| | 515,172 |
|
| Executive Vice President of Marketing | | 2011 | | 234,038 |
| | 85,000 |
| | — |
| | 10,769 |
| | 329,807 |
|
| |
(1) | Amounts shown in this column represent cash bonus awards granted to our named executive officers for performance during 2012 and 2011. For each year, we maintained bonus plans that provided each NEO with the opportunity to earn a bonus based on achievement of adjusted EBITDA goals for the applicable year. The target bonuses were 100% of base salary for Mr. Reddy, 75% of base salary for Mr. Kinsey and 30% of base salary for Mr. Fogarty for 2012 and 2011. For both years, our actual performance equaled or exceeded target levels. The compensation committee reserves the right to exercise discretion to increase or decrease bonuses and did, in fact, pay higher bonuses for certain NEOs than the applicable plan formula provided for 2012 and 2011. |
| |
(2) | Amounts represent the aggregate grant date fair value of stock options awarded in 2012 and 2011, calculated in accordance with FASB Accounting Standards Codification Topic 718. A description of the methodologies and assumptions we use to value options awards and the manner in which we recognize the related expense are described in Note 10 to our consolidated financial statements, Stock-Based Compensation. These amounts may not correspond to the actual value eventually realized by each NEO because the value depends on the market value of our common stock at the time the option is exercised. |
Outstanding Equity Awards at January 1, 2013
The following table sets forth information regarding outstanding equity awards at the end of 2012 for each of the named executive officers.
|
| | | | | | | | | | | | |
| Name | | Number of securities underlying unexercised options exercisable | | Number of securities underlying unexercised options unexercisable | | Option exercise price | | Option expiration date |
| Kevin Reddy | | 461,023 |
| | 461,023 |
| (1) | $ | 8.67 |
| | 12/27/2020 |
| Keith Kinsey | | 264,270 |
| | 294,270 |
| (1) | $ | 8.67 |
| | 12/27/2020 |
| | | — |
| | 17,310 |
| (2) | $ | 9.53 |
| | 5/14/2022 |
| Dan Fogarty | | 73,568 |
| | 73,568 |
| (1) | $ | 8.67 |
| | 12/27/2020 |
| | | — |
| | 43,275 |
| (3) | $ | 12.13 |
| | 12/6/2022 |
| |
(1) | The unvested options became fully vested and exercisable upon the closing of our initial public offering. |
| |
(2) | The options vest in 25% increments on each of May 14, 2013, 2014, 2015 and 2016. The unvested options became fully vest and exercisable upon the closing of our initial public offering. |
| |
(3) | These options vest on December 6, 2015. |
Potential Payments and Acceleration of Equity upon Termination or Termination in Connection with a Change in Control
Employment and Severance Agreements
We are a party to employment agreements with each of the Messrs. Reddy and Kinsey (the “Employment Agreements”). Each of the Employment Agreements has a three-year term that commenced on the date of our initial public offering and continues for three years unless earlier terminated. The Employment Agreements automatically extend at the end of the initial term and annually thereafter in each case, for a one year term, unless either party provides at least ninety days’ prior written notice of nonextension.
Pursuant to the employment agreements, Mr. Reddy received a $1.0 million cash bonus, and Mr. Kinsey received a $500,000 cash bonus, upon the completion of our initial public offering. In addition, Mr. Reddy was granted 259,650 stock options and Mr. Kinsey 144,250 stock options upon completion of our initial public offering pursuant to our Amended and Restated 2010 Stock Incentive Plan, subject to the terms of that plan. One-half of those options were vested upon grant and the other half will vest in equal increments on the first through fourth anniversaries of the grant date. In the event Mr. Reddy or Mr. Kinsey is terminated without cause, resigns for good reason or dies or becomes disabled while employed by the Company, a pro rata portion of the next vesting installment will vest. In addition, if Mr. Reddy or Mr. Kinsey is terminated without cause or resigns for good reason within 12 months following a change in control, any remaining unvested portion of these options will vest.
Each Employment Agreement provides for the payment of base salary and bonus, as well as customary employee benefits. Under each of the Employment Agreements, if the executive’s employment is terminated by the Company without “cause” or by the executive with “good reason,” (as such terms are defined in the applicable Employment Agreement) the executive is entitled to receive compensation equal to 18 months of the executive’s then-current base salary, payable in equal installments over 18 months, a pro rata bonus for the year of termination and reimbursement of “COBRA” premiums for up to 18 months for the executive and his dependents. The severance payments are conditioned upon the executive entering into a mutual release of claims with us.
Each of the Employment Agreements also restricts the executive from engaging in a competitive business during his employment and for 18 months thereafter, or soliciting employees at or above the level of vice president or above during his employment and for 12 months thereafter. For this purpose, “competitive business” is defined as any business engaged in the fast casual restaurant business in North America that derives 20% or more of its revenues from the sale of noodle or pasta dishes.
In addition, we are a party to a Severance Agreement with Mr. Fogarty dated January 24, 2011 (the “Severance Agreement”). Pursuant to the Severance Agreement, Mr. Fogarty is an “at-will” employee. If the Company terminates Mr. Fogarty’s employment without “cause,” (as such term is defined in the Severance Agreement) Mr. Fogarty is entitled to receive compensation equal to nine months of his then-current base salary, payable in equal installments over nine months, a pro rata bonus for the year of termination and reimbursement of “COBRA” premiums for up to nine months for Mr. Fogarty and his dependents. The severance payments are conditioned upon Mr. Fogarty entering into a mutual release of claims with us. The Severance Agreement also includes similar noncompetition and nonsolicitation covenants as the Employment Agreements, except that the duration of the covenants apply to Mr. Fogarty during his employment and for nine months thereafter.
Payments Upon Termination or Change in Control
None of our NEOs is entitled to receive payments or other benefits upon termination of employment or a change in control, except as provided in the Employment Agreements and Severance Agreement described above, and the equity acceleration pursuant to the Equity Plans described below.
Employee Benefit Plans
The principal features of our equity incentive plans and our 401(k) plan are summarized below. These summaries are qualified in their entirety by reference to the actual text of the plans, which, other than the 401(k) plan, are filed as exhibits to the registration statement of which this prospectus is a part.
Stock Incentive Plan
The following is a summary of the material terms of our Noodles & Company Amended and Restated 2010 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan was initially adopted in December 2010 and was amended and restated on May 16, 2013.
General. The Stock Incentive Plan authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) and incentive bonuses to employees, officers, non-employee directors and other service providers. The number of shares of common stock available for issuance pursuant to awards granted under the Stock Incentive Plan on or after the closing of this offering shall not exceed 3,750,500. The number of shares issued or reserved pursuant to the Stock Incentive Plan (or pursuant to outstanding awards) is subject to adjustment as a result of mergers, consolidations, reorganizations, stock splits, stock dividends and other changes in our common stock. Shares subject to awards that have been terminated, expired unexercised, forfeited or settled in cash do not count as shares issued under the Stock Incentive Plan. In addition, (i) shares subject to awards that have been retained or withheld by us in payment or satisfaction of the exercise price, purchase price or tax withholding obligation of an award and (ii) shares subject to awards that otherwise do not result in the issuance of shares in connection with payment or settlement thereof do not count as shares issued under the Stock Incentive Plan. Further, shares that have been delivered to us in payment or satisfaction of the exercise price, purchase price or tax withholding obligation of an award will be available for awards under the Stock Incentive Plan.
Administration. The Stock Incentive Plan is administered by the Compensation Committee of the board or another committee designated by the board, or in the absence of any such committee, the board itself. The administrator of the plan has the discretion to determine the individuals to whom awards may be granted under the Stock Incentive Plan, the manner in which such awards will vest and the other conditions applicable to awards in accordance with the terms in the Stock Incentive Plan. Options, SARs, restricted stock, RSUs and incentive bonuses may be granted to participants in such numbers and at such times during the term of the Stock Incentive Plan as the administrator of the plan shall determine. The administrator is authorized to interpret the Stock Incentive Plan, to establish, amend and rescind any rules and regulations relating to the Stock Incentive Plan and to make any other determinations that it deems necessary or desirable for the administration of the Stock Incentive Plan. All decisions, determinations and interpretations by the administrator of the plan, and any rules and regulations under the Stock Incentive Plan and the terms and conditions of or operation of any award, are final and binding on all participants, beneficiaries, heirs, assigns or other persons holding or claiming rights under the Stock Incentive Plan or any award.
Options. The administrator will determine the exercise price and other terms for each option and whether the options are nonqualified stock options or incentive stock options. Incentive stock options may be granted only to employees and are subject to certain other restrictions provided that such exercise price shall not be less than the fair market value of the underlying stock on the date of the grant. To the extent an option intended to be an incentive stock option does not so qualify, it will be treated as a nonqualified option. A participant may exercise an option by written notice and payment of the exercise price in common stock, cash or a combination thereof, as determined by the administrator, including an irrevocable commitment by a broker to pay over such amount from a sale of the shares issuable under an option, the delivery of previously owned shares and withholding of shares deliverable upon exercise.
Stock Appreciation Rights. The administrator may grant SARs independent of or in connection with an option. The exercise price per share of a SAR will be an amount determined by the administrator, and the administrator will determine the other terms applicable to SARs. Generally, each SAR will entitle a participant upon exercise to an amount equal to: the excess of the fair market value on the exercise date of one share of common stock over the exercise price, times the number of shares of common stock covered by the SAR. Payment shall be made in common stock or in cash, or partly in common stock and partly in cash, all as shall be determined by the administrator.
Restricted Stock and Restricted Stock Units. The administrator may award restricted common stock and RSUs. Restricted stock awards consist of shares of stock that are transferred to the participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. RSUs result in the transfer of shares of common stock or cash to the participant only after specified conditions are satisfied. The administrator will determine the restrictions and conditions applicable to each award of restricted stock or RSUs, which may include performance vesting conditions.
Incentive Bonuses. An incentive bonus is an opportunity for a participant to earn a future payment tied to the level of achievement with respect to one or more performance criteria established for a performance period set by the administrator. The terms of any incentive bonus will be set forth in an award agreement that will include provisions regarding (i) the target and maximum amount payable to the participant, (ii) the performance criteria and level of achievement versus these criteria that shall determine the amount of such payment, (iii) the term of the performance period as to which performance shall be measured for determining the amount of any payment, (iv) the timing of any payment earned by virtue of performance, (v) restrictions on the
alienation or transfer of the incentive bonus prior to actual payment, (vi) forfeiture provisions and (vii) such further terms and conditions as determined by the compensation committee. Payment of the amount due under an incentive bonus may be made in cash or in common stock, as determined by the administrator.
Performance Criteria. Vesting of awards granted under the Stock Incentive Plan may be subject to the satisfaction of one or more performance goals established by the administrator. The performance goals may vary from participant to participant, group to group and period to period.
Adjustments. In the event of any reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends, extraordinary dividends or distributions or similar events, the administrator will appropriately adjust the number of shares available under and subject to outstanding awards under the Stock Incentive Plan.
Transferability. Unless otherwise determined by the administrator, awards granted under the 2010 Stock Plan generally are not transferable other than by will or by the laws of descent and distribution.
Change in Control. Unless otherwise expressly provided in the award agreement or another contract, including an employment agreement, the administrator may provide for the acceleration of the vesting and, if applicable, exercisability of any outstanding award, or portion thereof, or the lapsing of any conditions or restrictions on or the time for payment in respect of any outstanding award, or portion thereof upon a change in control or the termination of the participant’s employment following a change in control. In addition, unless otherwise expressly provided in the award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a change in control, the administrator may provide that any or all of the following shall occur in connection with a change in control: (a) the substitution for the common stock subject to any outstanding award, or portion thereof, stock or other securities of the surviving corporation or any successor corporation to us, or a parent or subsidiary thereof, in which event the aggregate purchase or exercise price, if any, of such award, or portion thereof, shall remain the same, (b) the conversion of any outstanding award, or portion thereof, into a right to receive cash or other property upon or following the completion of the change in control in an amount equal to the value of the consideration to be received by holders of our common stock in connection with such transaction for one share, less the per share purchase or exercise price of such award, if any, multiplied by the number of shares subject to such award, or a portion thereof, (c) the acceleration of the vesting (and, as applicable, the exercisability) of any and/or all outstanding awards and/or (d) the cancellation of any outstanding and unexercised awards upon or following the completion of the change in control.
The board may amend, alter or discontinue the Stock Incentive Plan in any respect at any time, but no amendment may diminish any of the rights of a participant under any awards previously granted, without his or her consent. In addition, stockholder approval is required for any amendment that would increase the maximum number of shares available for awards, reduce the price at which options may be granted, change the class of eligible participants, or otherwise when stockholder approval is required by law or under stock exchange listing requirements.
Effectiveness of the Stock Incentive Plan; Amendment and Termination. The amendment and restatement of the Stock Incentive Plan, which was approved by the Board of Directors on May 16, 2013, and become effective when it is was approved by our stockholders by written consent in accordance with applicable law on May 24, 2013. The Stock Incentive Plan will remain available for the grant of awards until the tenth anniversary of the effective date of the amendment and restatement.
Employee Stock Purchase Plan
On May 16, 2013, we adopted the Noodles & Company Employee Stock Purchase Plan (the “ESPP”) subject to stockholder approval. The purpose of the ESPP is to encourage and enable our eligible employees to acquire a proprietary interest in us through the ownership of our common shares. A maximum of 750,100 shares may be purchased under the ESPP. The ESPP, and the rights of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code of 1986, as amended (the “Code”).
Administration. The ESPP is administered by the Compensation Committee or another committee designated by the board to administer the ESPP, or in the absence of any such committee, the board itself. All questions of interpretation of the ESPP are determined by the ESPP Administrator, whose decisions are final and binding upon all participants. The ESPP Administrator may delegate its responsibilities under the ESPP to one or more other persons.
Eligibility / Participation. Each employee who has 30 days of continuous service as of the beginning of the applicable offering period, is customarily employed to work for more than 20 hours per week, and whose customary employment is more than five months in a calendar year is eligible to participate in the ESPP, except that highly compensated employees (as determined pursuant to Section 423 of the Code) are excluded. There are four offering periods in each fiscal year. Each offering period will
run for a fiscal quarter, except that the first offering period will commence upon the closing of this offering and end on the last day of the fiscal quarter in which it occurs (unless this offering occurs in the last 10 days of a fiscal quarter, in which case the offering period will run through the end of the next-following fiscal quarter).
An eligible employee may begin participating in the ESPP effective at the beginning of an offering period. Once enrolled in the ESPP, a participant is able to purchase our common shares with payroll deductions at the end of the applicable offering period. Once an offering period is over, a participant is automatically enrolled in the next offering period unless the participant chooses to withdraw from the ESPP.
Purchase Price. The price per share at which shares are purchased under the ESPP is determined by the compensation committee, but in no event will be less than 85% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. A participant may designate payroll deductions to be used to purchase shares equal to at least $50 and a maximum of the percentage of the participant’s compensation set by the ESPP Administrator (which rate may be changed from time to time, but in no event shall be greater than 15%). A participant may only change the percentage of compensation that is deducted to purchase shares under the ESPP (other than to withdraw entirely from the ESPP) effective at the beginning of a offering period. At the end of each offering period, unless the participant has withdrawn from the ESPP, payroll deductions are applied automatically to purchase common shares at the price described above. The number of shares purchased is determined by dividing the payroll deductions by the applicable purchase price.
Adjustments. In the event of any reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends, extraordinary dividends or distributions or similar events, the ESPP Administrator will appropriately adjust the number and class of shares available under the ESPP and the applicable purchase price of such shares.
Limitations on Participation. A participant is not permitted to purchase shares under the ESPP if the participant would own common stock possessing 5% or more of the total combined voting power or value of equity interests. A participant is also not permitted to purchase common stock with a fair market value in excess of $25,000 in any one calendar year (or more than 2,885 shares in any offering period). A participant does not have the rights of a shareholder until the shares are actually issued to the participant.
Transferability. Rights to purchase common stock under the ESPP may not be transferred by a participant and may be exercised during a participant’s lifetime only by the participant.
Amendment / Termination. The ESPP will become effective when it is approved by our stockholders prior to the completion of the offering described herein at a meeting of our stockholders in accordance with applicable law. The board may amend, alter or discontinue the ESPP in any respect at any time; however, stockholder approval is required for any amendment that would increase the number of shares reserved under the ESPP other than pursuant to an adjustment as provided in the ESPP or materially change the eligibility requirements to participate in the ESPP.
401(k) Plan
We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax-advantaged basis. Eligible employees are able to defer eligible compensation subject to applicable annual Code limits. No employer contributions were made to the 401(k) plan in 2012. Contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code.
Pension Benefits
Our NEOs did not participate in, or otherwise receive any benefits under, any pension or retirement plan we sponsored during 2012.
Nonqualified Deferred Compensation
On May 16, 2013 the Company adopted The Executive Non-qualified “Excess” Plan (the “Excess Plan”). The Excess Plan provides supplementary benefits to the eligible participants whose benefits under the Company’s 401(k) Plan are limited because of the restriction on annual additions that may be made to a qualified defined contribution plan and/or the limitation on compensation that may be taken into account in calculating contributions to such a plan. Our NEOs did not earn any nonqualified deferred compensation benefits from us during 2012 under the Excess Plan or otherwise.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information regarding beneficial ownership of our equity interests as of October 1, 2013, and as adjusted to reflect our sale of common stock in this offering, by:
each stockholder or group of stockholders known by us to be the beneficial owner of more than 5% of our outstanding equity interests;
each of our directors;
each of our named executive officers;
all of our directors and executive officers as a group; and
each of the selling stockholders.
Beneficial ownership is determined in accordance with the rules of the SEC, and thus figures in the table below represent voting or investment power with respect to our securities, except as otherwise indicated in the footnotes to the table. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all equity interests beneficially owned, subject to community property laws where applicable.
Percentage ownership of our equity interests before this offering is based on 23,107,010 shares of our Class A common stock and 6,315,929 shares of our Class B common stock outstanding as of October 1, 2013. The rights of the holders of our Class A common stock and our Class B common stock are identical in all respects, except that our Class B common stock does not vote on the election or removal of directors. Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of October 1, 2013 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. All outstanding shares of Class B common stock are held by Argentia Private Investments Inc. Unless otherwise indicated, the address of each individual listed in this table is c/o Noodles & Company, 520 Zang Street, Suite D, Broomfield, Colorado 80021.
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Before Offering and Repurchases | | Shares Being Offered | | Beneficial Ownership After Offering Assuming No Exercise of Over- Allotment Option | | Beneficial Ownership After Offering Assuming Full Exercise of Over- Allotment Option | | Shares to be Re-purchased | | Beneficial Ownership After Offering and Repurchase Assuming No Exercise of Over- Allotment Option | | Beneficial Ownership After Offering and Repurchase Assuming Full Exercise of Over- Allotment Option |
| Name | | Shares | | Percent | | | Shares | | Percent | | Shares | | Percent | | | Shares | | Percent | | Shares | | Percent |
| 5% Stockholders: | | | | | | | | | | | | | | | | | | | | | | | | |
Entities affiliated with Catterton Partners(1) | | 10,501,400 |
| | 35.69 | % | | | | | | | | | | | | | | | | | | | | |
Argentia Private Investments Inc(2) | | 10,386,000 |
| | 35.30 | % | | | | | | | | | | | | | | | | | | | | |
| Named Executive Officers and Directors | | | | | | | | | | | | | | | | | | | | | | | | |
Kevin Reddy(3) | | 1,038,509 |
| | 3.53 | % | | | | | | | | | | | | | | | | | | | | |
Keith Kinsey(4) | | 781,013 |
| | 2.65 | % | | | | | | | | | | | | | | | | | | | | |
Dave Boennighausen(5) | | 108,179 |
| | * | | | | | | | | | | | | | | | | | | | | |
Dan Fogarty(6) | | 154,072 |
| | * | | | | | | | | | | | | | | | | | | | | |
Phil Petrilli(7) | | 105,975 |
| | * | | | | | | | | | | | | | | | | | | | | |
Paul Strasen(8) | | 164,200 |
| | * | | | | | | | | | | | | | | | | | | | | |
Kathy Lockhart(9) | | 41,186 |
| | * | | | | | | | | | | | | | | | | | | | | |
Scott A. Dahnke(1) | | 10,501,400 |
| | 35.69 | % | | | | | | | | | | | | | | | | | | | | |
| Stuart Frenkiel | | 0 |
| | 0.00 | % | | | | | | | | | | | | | | | | | | | | |
| Jeff Jones | | 0 |
| | * | | | | | | | | | | | | | | | | | | | | |
| James Pittman | | 0 |
| | * | | | | | | | | | | | | | | | | | | | | |
James Rand(10) | | 42,471 |
| | * | | | | | | | | | | | | | | | | | | | | |
| Andrew Taub | | 0 |
| | * | | | | | | | | | | | | | | | | | | | | |
All Executive Officers and Director as a Group(11) | | 2,435,605 |
| | 8.28 | % | | | | | | | | | | | | | | | | | | | | |
* Indicates ownership of less than one percent.
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(1) | All of the shares of common stock are held by Catterton-Noodles, LLC, an entity affiliated with Catterton. Scott Dahnke is a Managing Partner of Catterton, and in such capacity has voting and investment control over the securities. Mr. Dahnke disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein. The principal business address of Catterton Partners is 599 West Putnam Avenue, Greenwich, CT 06830. The shares held by Catterton represent 45.45% of the outstanding voting shares, as shares held by another holder include our Class B common stock, which does not have voting rights in certain matters. The percentage of the outstanding voting shares would be % after the offering, assuming no exercise of the over-allotment option, % after the offering, assuming full exercise of the over-allotment option, % after the offering and the repurchase, assuming no exercise of the over-allotment option, and % after the offering and the repurchase, assuming full exercise of the over-allotment option. |
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(2) | Consists of 4,093,360 shares of common stock and 6,292,640 shares of Class B common stock held by Argentia Private Investments Inc., which is affiliated with PSPIB. Class B common stock has the same rights as the common stock except that holders of Class B common stock will not be entitled to vote in the election or removal of directors unless converted into common stock. Gordon J. Fyfe is President of Argentia, Derek Murphy is a director and Vice President of Argentia and John Valentini is director and Vice President of Argentia, and in such capacities they have investment control over such securities. Derek Murphy and Stephanie Lachance, Vice President, Responsible Investment and Corporate Secretary of PSP Investments, have voting control over such securities on behalf of Argentia. Mr. Fyfe, Mr. Murphy, Mr. Valentini and Ms. Lachance disclaim beneficial ownership of such securities. The principal business address of Argentia is 1250 Réne Lévesque Boulevard West, Suite 900, Montreal, Quebec, Canada H3B 4W8. The shares held by Argentia represent 17.61% of the voting shares, as some of the shares held by Argentia are our Class B common stock, which does not have the voting rights in certain matters. The percentage of the outstanding voting shares would be % after the offering, assuming no exercise of the over-allotment option, % after the offering, assuming full exercise of the over-allotment option, % after the offering and the repurchase, assuming no exercise of the over-allotment option, and % after the offering and the repurchase, assuming full exercise of the over-allotment option. |
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(3) | Includes options to purchase 936,615 shares of our common stock exercisable within 60 days. The shares held by Mr. Reddy represent 4.49% of the outstanding voting shares, as shares held by another holder include our Class B common stock, which does not have voting rights in certain matters. The percentage of the outstanding voting shares would be % after the offering, assuming no exercise of the over-allotment option, % after the offering, assuming full exercise of the over-allotment option, % after the offering and the repurchase, assuming no exercise of the over-allotment option, and % after the offering and the repurchase, assuming full exercise of the over-allotment option. |
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(4) | Includes options to purchase 677,975 shares of our common stock exercisable within 60 days. The shares held by Mr. Kinsey represent 3.38% of the voting shares, as shares held by another holder include our Class B common stock, which does not have voting rights in certain matters. The percentage of the outstanding voting shares would be % after the offering, assuming no exercise of the over-allotment option, % after the offering, assuming full exercise of the over-allotment option, % after the offering and the repurchase, assuming no exercise of the over-allotment option, and % after the offering and the repurchase, assuming full exercise of the over-allotment option. |
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(5) | Includes options to purchase 100,975 shares of our common stock exercisable within 60 days. |
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(6) | Includes options to purchase 147,135 shares of our common stock exercisable within 60 days. |
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(7) | Includes options to purchase 100,975 shares of our common stock exercisable within 60 days. |
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(8) | Includes options to purchase 147,135 shares of our common stock exercisable within 60 days. |
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(9) | Includes options to purchase 35,312 shares of our common stock exercisable within 60 days. |
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(10) | Includes options to purchase 30,600 shares of our common stock exercisable within 60 days. |
| |
(11) | Includes options to purchase 2,172,087 shares of our common stock exercisable within 60 days. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transactions
The following is a description of each transaction since December 30, 200931, 2014 to which we have been a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers, or beneficial holders of more than 5%5.0% of either our capital stockClass A or our Class B Common Stock, or any other related person had or will have a direct or indirect material interest.
We expect to enter into an agreement with the , to repurchase approximately $ million of common stock, or approximately shares (based on the closing price of our common stock on , 2013), directly from
, in a private, non-underwritten transaction at a price per share equal to the net proceeds per share the selling stockholders receive in this offering. The repurchase from is conditioned on completion of this offering and the satisfaction of certain other closing conditions.Stockholders Agreement
Merger Agreement. As part of the 2010 Equity Recapitalization, we entered into an Agreement and Plan of Merger with Catterton-Noodles, LLC, Red Isle Private Investments Inc., CP/PSP Merger Sub, Inc. and David R. Duncan. Pursuant to the agreement, at the effective time of the merger, the CP/PSP Merger Sub, Inc., an entity indirectly owned by Catterton and PSPIB was merged with and into the Company. As a result of the merger, Catterton, certain of its affiliated entities and Argentia, collectively, became our majority stockholders and own approximately 71% of the outstanding equity interests of the company.
Stockholders Agreement. In connection with the merger, we entered into a stockholders agreement with our Sponsors, which we refer to as the 2010 Stockholders Agreement. Under the 2010 Stockholders Agreement, each of Catterton and Argentia have agreed to vote its respective shares of common stock to elect two directors selected by Argentia. Furthermore, if the Public Sector Pension Investment Board Act ceases to prohibit PSPIB from investing in securities of a corporation to which are attached more than 30% of the votes that may be cast to elect directors, each of Catterton and Argentia will vote its respective shares of common stock to elect two directors selected by Catterton. Additionally, Catterton will not vote its shares to elect any three of the five directors not designated by Argentia, unless any such director has been approved by Argentia. Catterton and Argentia have further agreed not to vote their shares in favor of any of certain actions without the mutual consent of the other.
All of the provisions of the 2010 Stockholders Agreement terminated upon the Company’s initial public offering, in accordance with its terms. The Company made a transaction payment of $400,000 to Catterton and a special dividend of $400,000 on the one outstanding share of Class C common stock in connection with its initial public offering.
In connection with our initial public offering, we entered into a newamended and restated our stockholders agreement, dated as of July 2, 2013, with L Catterton and Argentia (our “Equity Sponsors”), which we refer to as the 2013 Stockholders Agreement, with our Sponsors thatamendment and restatement became effective upon the completion of theour initial public offering. The 2013 Stockholders Agreement contains agreements with respect to restrictions on the sale, issuance or transfer of shares that prevent either Sponsor from transferring its shares without the consent of the other Sponsor, except in connection with a tag along sale of common stock by both Sponsors or pursuant to the Registration Rights Agreement, until the earlier of the second anniversary of the offering and the time at which such Sponsor holds less than 25% of our outstanding common stock and Class B common stock. The 2013 Stockholders Agreementstockholders agreement also grants our Equity Sponsors the right, subject to certain conditions, to nominate representatives to our board of directors and committees of our board of directors. L Catterton and Argentia each will have the right to designate two members to our board of directors, and the parties to the 2013 Stockholders Agreementstockholders agreement will agree to vote to elect such director designees.
Additionally, L Catterton and Argentia have agreed to elect each other’s director nominees and to not take certain actions affecting us without the consent of the other.
If at any time aan Equity Sponsor owns more than 10%10.0% and less than 20%20.0% of our outstanding Class A and Class B common stock, such Equity Sponsor has the right to designate one nominee for election to our board of directors. If aan Equity Sponsor’s ownership level falls below 10%10.0% of our outstanding Class A and Class B common stock, such Equity Sponsor will no longer have a right to designate a nominee. In addition, for so long as L Catterton and Argentia hold, in the aggregate, at least 35%35.0% of the voting power of our outstanding common stock, certain actions may not be taken without the approval of L Catterton (so long as it holds at least 5.0% of the voting power of our outstanding common stock) and Argentia (so long as it holds at least 5.0% of the voting power of our outstanding common stock (for certain of which actions we have obtained a waiver from each of the Equity Sponsors in connection with our completion of the private placement)), including:
any merger, recapitalization or other adjustment in voting rights, if following such event, L Catterton and Argentia would not together have sufficient voting power or otherwise be entitled to elect a majority of the Board;our board of directors;
any sale of all or substantially all the assets of the Company;
the issuance of any capital stock or debt securities of us or any of our subsidiaries for consideration exceeding $50.0 million, other than certain issuances upon the grant of equity awards;
create any new class or series of shares of equity securities having rights, preferences or privileges senior to or on a parity with the Common Stock;common stock; or
any amendment of our certificate of incorporation, bylaws or equivalent organization documents of the Company or any Subsidiarysubsidiary of the Company in a manner that could reasonably be expected to adversely affect the rights of L Catterton or Argentia.
Private Placement
Management Services.On February 8, 2017, we entered into a securities purchase agreement with L Catterton, Management Company, LLC,pursuant to which we agreed, in return for aggregate gross proceeds to us of $18.5 million, to sell to L Catterton an affiliateaggregate of Catterton, provides certain management services18,500 shares of Series A Convertible Preferred Stock, par value $0.01 per share, convertible into 4,252,873 shares of Class A common stock, at a purchase price of $1,000 per share, plus warrants exercisable beginning six months following their issuance for the purchase of 1,913,793 shares of Class A common stock at a price per share of $4.35. For more information, see “Prospectus Summary—Recent Financing Transactions—Private placement” and “Risk Factors—Risks Relating to the Company. In connection with such services Catterton Management Company, LLC previously received an annual management feePrivate Placement—If we do not elect to convert the PIPE securities into shares of $500,000. Argentia held the sole share of our Class CA common stock, which entitled it to receive annual dividends of $500,000 payable at the same times and in the same amounts as the management fees payable to Catterton Management Company, LLC. In connection with the Company’s initial public offering, the share of Class C common stock was redeemed and the services arrangement with Catterton Management Company, LLC was terminated, in each case for no consideration. In both 2011 and 2012, the Company paid $1.1 million in management fees and Class C dividends, which included a prepayment for both the first quarter of 2012 and 2013.
Bridge Financing. In connection with the 2010 Equity Recapitalization we obtained bridge financing from the Sponsors in the amount of $45.0 million. Such amount was repaid, along with $0.9 million of PIK interest at 12%, when we completed the refinancing of our credit facility in February 2011.
Control Relationships. As discussed in Note 2 of our consolidated financial statements, Catterton and Argentia each own between 35% and 36% of our equity interests; however, the terms of the certificate of incorporation prevent control by either Sponsor acting on its own. However, under the 2013 Stockholders Agreement our Sponsors have agreed to elect each other’s director nominees and to not take certain actions affecting us without the consent of the other Sponsor. See “—Stockholders Agreement” for a description of the material provisions of the 2013 Stockholders Agreement. As a result, our Sponsors could potentially have significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change in control transactions. The interests of our Sponsors may not always coincide with the interests of the other holders of our common stock. See “Risk Factors—Our principalPIPE securities may be entitled, among other rights of preferred stockholders and their affiliates own a substantial portion of our outstanding equity, and their interests may not always coincide with the interests of the other holders.to which they are entitled, to accrue significant dividend payments on an ongoing basis.”
Registration Rights
Pursuant to the terms of a Registration Rights Agreement between us and certain holders of our stock, including Catterton, certain of its affiliates and Argentia, certain holders of our stock are entitled to demand and piggyback rights. The stockholders who are a party to the Registration Rights Agreement will hold an aggregate of shares, or %, of our equity interests upon completion of this offering.
Demand Registrations. Under the Registration Rights Agreement, both Catterton and Argentia are able to require us to file a registration statement (a “Demand Registration”) under the Securities Act, covering at least 10% of our equity interests, and we are required to notify holders of such securities in the event of such request (a “Demand Registration Request”). Each of Catterton and Argentia can issue unlimited Demand Registration Requests, unless we are ineligible to use Form S-3, in which case we will not be obligated to grant more than three Demand Registration Requests to each of Catterton and Argentia during such period of ineligibility. All eligible holders are currently entitled to participate in any Demand Registration upon proper notice to the surviving company and we are required to use our commercially reasonable efforts to effect such registration in accordance with the terms of the Demand Registration Request, subject to certain rights we will have to delay or postpone such registration. We have the right to include authorized but unissued shares of our common stock in such registrations. A holder of our common stock will only be able to withdraw its eligible securities from a Demand Registration with our prior written consent or in the event that we exercise our right to delay or postpone a Demand Registration Request. If sufficient holders withdraw such that the number of securities eligible to be registered does not meet the applicable 10% threshold, we can cease our efforts to effect the Demand Registration.
Piggyback Registrations. Under the Registration Rights Agreement, if at any time we propose or are required to register any of our equity securities under the Securities Act (other than a Demand Registration or pursuant to an employee benefit or dividend reinvestment plan) (a “piggyback registration”), we will be required to notify each eligible holder of its right to participate in such registration. We will use commercially reasonable efforts to cause all eligible securities requested to be included in the registration to be so included. We have the right to withdraw or postpone a registration statement in which eligible holders have elected to exercise piggyback registration rights, and eligible holders are entitled to withdraw their registration requests prior to the execution of an underwriting agreement or custody agreement with respect to any such registration.
Procedures for Approval of Related Party Transactions
Our policies on related party transactions, which are included in our Audit Committee charter, Nominating and Corporate Governance Committee charter, Director Code of Business Conduct and Ethics and our Employee Code of Business Conduct and Ethics address the policies and procedures for review and approval of related party transactions. These policies provide that, in determining whether or not to recommend the initial approval or ratification of a related party transaction, all relevant facts and circumstances available shall be considered.
DESCRIPTION OF CAPITAL STOCK
General
The following is a summary of our capital stock and provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and certain provisions of Delaware law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed with the SEC as exhibits to the registration statement, of which this prospectus forms a part. References in this section to “the company,” “we,” “us” and “our” refer to Noodles & Company and not to any of its subsidiaries.
Our authorized capital stock consists of 150,000,000 shares of Class A common stock, $0.01 par value per share, which we refer to in this prospectus as common stock, 30,000,000 shares of Class B common stock, $0.01 par value per share, and 1,000,000 shares of undesignated preferred stock, $0.01 par value per share. We sometimes refer to our common stock and Class B common stock as “equity interests” when described on an aggregate basis.
Class A Common Stock
As of October 1, 2013, there were 23,107,010 shares of common stock outstanding held by 105 stockholders of record.
There are 150,000,000 shares of our common stock authorized for issuance. Pursuant to our amended and restated certificate of incorporation, holders of our common stock will be entitled to one vote on all matters submitted to a vote of stockholders; provided, however, that, except as otherwise required by law, holders of common stock, as such, shall not be entitled to vote on any amendment to our amended and restated certificate of incorporation that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to our amended and restated certificate of incorporation. Pursuant to our amended and restated certificate of incorporation, holders of common stock will not be entitled to cumulative voting in the election of directors. This means that the holders of a majority of the common stock will be able to elect all of the directors then standing for election. Subject to the rights, if any, of the holders of any outstanding series of preferred stock, holders of our common stock shall be entitled to receive dividends out of any of our funds legally available when, as and if declared by the board of directors. Upon the dissolution, liquidation or winding up of the company, subject to the rights, if any, of the holders of our preferred stock, the holders of our equity interests shall be entitled to receive the assets of the company available for distribution to its stockholders ratably in proportion to the number of shares held by them. Holders of common stock will not have preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock.
Class B Common Stock
As of October 1, 2013, there were 6,315,929 shares of Class B common stock outstanding held by two stockholders of record.
There are 30,000,000 shares of our Class B common stock authorized for issuance. Pursuant to our amended and restated certificate of incorporation, our Class B common stock has the same rights as our Class A common stock except that holders of our Class B common stock will not be entitled to vote in the election or removal of directors unless converted into Class A common stock. Shares of our Class B common stock are convertible on a share-for-share basis into shares of our Class A common stock at the election of the holder. Subject to the rights, if any, of the holders of any outstanding series of preferred stock, holders of our Class B common stock shall be entitled to receive dividends out of any of our funds legally available when, as and if declared by our Board of Directors. Upon our dissolution, liquidation or winding up, subject to the rights, if any, of the holders of our preferred stock, the holders of shares of our equity interests shall be entitled to receive the assets of the company available for distribution to its stockholders ratably in proportion to the number of shares held by them. Holders of Class B common stock will not have preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our Class B common stock.
Argentia currently owns 6,292,640 shares of our Class B common stock. Contemporaneous with or shortly following the closing of this offering, Argentia may convert a portion of its Class B common stock into common stock.
Preferred Stock
As of October 1, 2013, there were no shares of preferred stock outstanding.
Our board of directors is authorized to issue not more than an aggregate of 1,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board of directors is authorized to issue not more than an aggregate of 1,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board of directors is authorized to establish, from time to time, the number of shares to be included in each series of preferred stock and to fix the designation, powers, privileges, preferences and relative participating, optional or other rights, if any, of the shares of each series of preferred stock and any of its qualifications, limitations or restrictions. Our board of directors also is able to increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that series of preferred stock then outstanding, without any further
vote or action by the stockholders, without any vote or action by stockholders. In the future, our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of our common stock, or that could decrease the amount of earnings and assets available for distribution to the holders of our common stock. The issuance of our preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other consequences, have the effect of delaying, deferring or preventing a change in our control and might harm the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.
Registration Rights
Pursuant to the terms of a registration rights agreement between us and certain holders of our stock, including L Catterton, certain of its affiliates and Argentia, certain holders of our stock are entitled to demand and piggyback rights:
Demand Registrations. Under the registration rights agreement, both L Catterton and Argentia are able to require us to file a registration statement under the Securities Act, covering at least 10.0% of our equity interests, and we are required to notify holders of such securities in the event of such request (a “Demand Registration Request”). Each of L Catterton and Argentia can issue unlimited Demand Registration Requests, unless we are ineligible to use Form S-3, in which case we will not be obligated to grant more than three Demand Registration Requests to each of L Catterton and Argentia during such period of ineligibility.
Piggyback Registrations. Under the Registration Rights Agreement, if at any time we propose or are required to register any of our equity securities under the Securities Act (other than a demand registration or pursuant to an employee benefit or dividend reinvestment plan), we will be required to notify each eligible holder of its right to participate in such registration and to use commercially reasonable efforts to cause all eligible securities requested to be included in the registration to be so included. We have obtained a waiver from each of the Equity Sponsors of these rights in connection with this offering.
Procedures for Approval of Related Party Transactions. Our policies on related party transactions, which are included in our Audit Committee charter and our Employee Code of Business Conduct and Ethics, address the policies and procedures for review and approval of related party transactions. These policies cover certain relationships and material obligations and interests. These policies provide that, in determining whether or not to recommend the initial approval or ratification of a related party transaction, all relevant facts and circumstances available shall be considered. The Audit Committee is responsible for approval and ratification of certain related person transactions pursuant to the applicable policies and procedures.
DESCRIPTION OF CAPITAL STOCK
General
The following is a summary of our capital stock and provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and certain provisions of Delaware law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed with the SEC as exhibits to the registration statement, of which this prospectus forms a part. References in this section to “the company,” “we,” “us” and “our” refer to Noodles & Company and not to any of its subsidiaries.
Our authorized capital stock consists of 150,000,000 shares of Class A common stock, par value $0.01 per share, which we refer to in this prospectus as Class A common stock, 30,000,000 shares of Class B common stock, par value $0.01 per share, which we refer to in this prospectus as Class B common stock, 18,500 shares of Series A Convertible Preferred Stock, par value $0.01 per share, which we refer to in this prospectus as the PIPE securities, and 981,500 shares of undesignated preferred stock, par value $0.01 per share, which we refer to in this prospectus as preferred stock. In addition, there are warrants outstanding to purchase 1,913,793 shares of our Class A common stock, which we refer to in this prospectus as the PIPE warrants, and warrants outstanding to purchase 28,850 shares of our Class B common stock. We refer to our Class A common stock and Class B common stock as “common stock” when described on an aggregate basis.
Class A Common Stock
As of January 31, 2017, there were 26,350,369 shares of Class A common stock outstanding held by 43 stockholders of record.
There are 150,000,000 shares of our Class A common stock authorized for issuance. Pursuant to our amended and restated certificate of incorporation, holders of our Class A stock will be entitled to one vote on all matters submitted to a vote of stockholders; provided, however, that, except as otherwise required by law, holders of Class A common stock, as such, are not entitled to vote on any amendment to our amended and restated certificate of incorporation that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to our amended and restated certificate of incorporation. Holders of Class A common stock are not entitled to cumulative voting in the election of directors. This means that the holders of a majority of the Class A common stock are able to elect all of the directors then standing for election. Subject to the rights, if any, of the holders of any outstanding series of preferred stock, holders of our Class A common stock will be entitled to receive dividends out of any of our funds legally available when, as and if declared by the board of directors. Upon the dissolution, liquidation or winding up of the company, subject to the rights, if any, of the holders of our preferred stock, the holders of our common stock shall be entitled to receive the assets of the company available for distribution to its stockholders ratably in proportion to the number of shares held by them. Holders of Class A common stock do not have preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our Class A common stock.
Class B Common Stock
As of January 31, 2017, there were 1,522,098 shares of Class B common stock outstanding held by one stockholder of record.
There are 30,000,000 shares of our Class B common stock authorized for issuance. Pursuant to our amended and restated certificate of incorporation, our Class B common stock has the same rights as our Class A common stock except that holders of our Class B common stock, in their capacity as such, are not entitled to vote in the election or removal of directors unless such Class B common stock is converted into Class A common stock. Shares of our Class B common stock are convertible on a share-for-share basis into shares of our Class A common stock at the election of the holder. Subject to the rights, if any, of the holders of any outstanding series of preferred stock, holders of our Class B common stock will be entitled to receive dividends out of any of our funds legally available when, as and if declared by our board of directors. Upon our dissolution, liquidation or winding up, subject to the rights, if any, of the holders of our preferred stock, the holders of shares of our common stock will be entitled to receive the assets of the company available for distribution to its stockholders ratably in proportion to the number of shares held by them. Holders of Class B common stock do not have preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our Class B common stock.
Argentia currently owns all shares of our Class B common stock.
Preferred Stock
As of February 9, 2017, there were 18,500 shares of Series A Convertible Preferred Stock, convertible into 4,252,873 shares of Class A common stock outstanding.
Our board of directors is authorized to issue not more than an aggregate of 1,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board of directors is authorized to establish, from time to time, the number of shares to be included in each series of preferred stock and to fix the designation, powers, privileges, preferences and relative participating, optional or other rights, if any, of the shares of each series of preferred stock and any of its qualifications, limitations or restrictions. Our board of directors also is able to increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that series of preferred stock then outstanding, without any further vote or action by the stockholders. In the future, our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of our common stock, or that could decrease the amount of earnings and assets available for distribution to the holders of our common stock. The issuance of our preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other consequences, have the effect of delaying, deferring or preventing a change in our control and might harm the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue additional shares of preferred stock.
The specific rights of holders of the PIPE securities are set forth in a Certificate of Designations attached as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on February 9, 2017 and incorporated by reference herein.
Warrants
As of February 9, 2017, there were warrants outstanding to purchase 1,913,793 shares of our Class A common stock, or the PIPE warrants, and warrants outstanding to purchase 28,850 shares of our Class B common stock.
The exercise price of the PIPE warrants is $4.35 per share, which is equal to the closing bid price of our Class A common stock on February 7, 2017. The PIPE warrants will be exercisable for five years, beginning six months after issuance. Upon a change of control (as defined in the PIPE warrants), holders of the PIPE warrants shall be entitled to cause us to redeem the PIPE warrants for cash or Class A common stock, at our option, at the Black-Scholes fair value of the PIPE warrants at such time.
The specific rights of holders of the PIPE warrants are set forth in the Form of Warrant to Purchase Class A Common Stock attached as Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on February 9, 2017 and incorporated by reference herein.
Registration Rights
See “Certain Relationships andthe section of this prospectus entitled “Transactions with Related Transactions—Persons—Registration Rights.”
Under the terms of our PIPE securities, we are required to file a registration statement registering (i) the resale of the shares of common stock issuable upon conversion of the PIPE securities and (ii) all other shares of common stock held by the purchaser of the PIPE securities as soon as possible after, and in any event within 30 days after, the closing of this offering and cause the registration statement to be declared effective as soon as possible and in any event within 90 days of the closing of this offering, subject to certain customary qualifications and limitations. If we fail to file a registration statement or have a registration statement declared effective under the aforementioned time requirements, we will owe certain payments to the purchasers.
In connection with the private placement, we entered into the Letter Agreement with Argentia, which, among other things, provides for the registration by us of shares of common stock held by Argentia on terms substantially similar to the registration right that we agreed to provide to L Catterton in the Securities Purchase Agreement.
Anti-Takeover Effects of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our Amended and Restated Bylaws
Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws could make the acquisition of the company more difficult. These provisions of the Delaware General Corporation Law of the State of Delaware (the “DGCL”) could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and are designed to encourage persons seeking to acquire control of us to negotiate with our board of directors.
Stockholder meetings.meetings. Under our amended and restated certificate of incorporation, only the Boardboard of Directors,directors, or the chairman of the Boardboard of Directorsdirectors or the Chief Executive Officer with the concurrence of a majority of the Boardboard of Directorsdirectors may call special meetings of stockholders.
Requirements for advance notification of stockholder nominations and proposals.proposals. Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors.
Elimination of stockholder action by written consent.consent. Our amended and restated certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting, except for such period as when L Catterton and Argentia and their affiliates collectively own a majority of our outstanding common stock. This provision will, in certain situations make it more difficult for stockholders to take action opposed by the board of directors.
Election and removal of directors.directors. Our board of directors will beis divided into three classes, each serving staggered three-year terms. As a result, only a portion of our board of directors will beis elected each year. The board of directors will havehas the exclusive right to increase or decrease the size of the board and to fill vacancies on the board. This system of electing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes replacing a majority of directors more difficult for stockholders. Additionally, directors may be removed for cause only with the approval of the holders of a majority of the aggregate voting power of our outstanding Class A common stock.stock and any series of preferred stock entitled to vote generally in the election of directors. Directors may be removed without cause only with the approval of two-thirds of the aggregate voting power of our outstanding Class A common stock.stock and any series of preferred stock entitled to vote generally in the election of directors.
Undesignated preferred stock.stock. The authorization of undesignated preferred stock makes it possible for the board of directors, without stockholder approval, to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to obtain control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the company.
Amendment of provisions in the certificate of incorporation.incorporation. Our amended and restated certificate of incorporation will requirerequires the affirmative vote of the holders of at least two-thirds of the aggregate voting power of our outstanding Class A common stock and any series of preferred stock entitled to vote generally in the election of directors in order to amend any provision of our certificate of incorporation.
Amendment of provisions in the bylaws.bylaws. Our amended and restated bylaws will require the affirmative vote of the holders of at least two-thirds of of the aggregate voting power of our outstanding Class A common stock and any series of preferred stock entitled to vote generally in the election of directors in order to amend any provision of our bylaws.
We are not governed by Section 203 of the Delaware General Corporation Law.DGCL.
Transfer Agent and Registrar
Wells Fargo Bank, N.A. is the transfer agent and registrar for our common stock.
Listing
Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol NDLS.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market after this offering, or the perception that those sales may occur, could cause the prevailing market price for our Class A common stock to fall or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale in the public market for a period of several months after consummation of this offering due to contractual and legal restrictions on resale described below.resale. Future sales of our common stock in the public market either before (to the extent permitted) or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our Class A common stock at such time and our ability to raise equity capital at a time and price we deem appropriate.
SaleLock-Up Agreements
We, our stockholders and , who in the aggregate own % of Restrictedour outstanding common stock, and our executive officers and directors have each agreed, subject to certain exceptions, not to offer, sell, dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of the lock-up agreement continuing through the date 60 days after the date of the final prospectus relating to this offering, except with the prior written consent of Jefferies LLC.
Following the lock-up periods set forth in these agreements, and assuming that Jefferies LLC does not release any parties from these agreements, shares of the parties to the lock-ups will become eligible for sale in the public market (substantially all of which are expected to be subject to volume, manner of sale and other limitations in compliance with Rule 144 under the Securities Act).
Resales of Shares Sold in This Offering
Based on the number of shares of our equity interestscommon stock outstanding as of October 1, 2013,, 2017, upon the closing of this offering, and the repurchase of shares from certain officers, and assuming (a) no exercise of the underwriters’underwriter’s option to purchase $4,800,000 of additional shares of Class A common stock, to cover over-allotments and (b) no exercise of outstanding optionsstock awards or warrants and (c) no PIPE securities are converted into shares of Class A common stock, we will have outstanding an aggregate of approximately shares of equity interests.common stock. Of these shares, all of the shares of Class A common stock to be sold in this offering, and any shares sold upon exercise of the underwriters’underwriter’s option to purchase additional shares, to cover over-allotments, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our “affiliates” as such term is defined in Rule 144 of the Securities Act. All remaining shares of equity securities held by existing stockholders immediately prior to the closing of this offering will be “restricted securities” as such term is defined in Rule 144. These restricted securities were issued and sold by us, or will be issued and sold by us, in private transactions and are eligible for public sale only if registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701, which rules are summarized below.
Lock-Up Agreements
In connection with this offering, we, our sponsors, our directors, our executive officers and selling stockholders, have agreed, subject to certain exceptions, not to dispose of or hedge any shares of our equity interests or securities convertible into or exchangeable for our equity interests during the period from the date of the lock-up agreement continuing through the date 75 days after the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. LLC and UBS Securities LLC.
Following the lock-up periods set forth in the agreements described above, and assuming that the representatives of the underwriters do not release any parties from these agreements, all of the our equity interests that are restricted securities or are held by our affiliates as of the date of this prospectus will be eligible for sale in the public market in compliance with Rule 144 under the Securities Act.
Rule 144
In general, under Rule 144, as currently in effect, because we have been subject to the public company reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for at least 90 days, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our “affiliates” for purposes of Rule 144 at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our “affiliates,” is entitled to sell those shares in the public market (subject to the lock-up agreement referred to above, if applicable) without complying with the manner of sale, volume limitationslimitation or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than “affiliates,” then such person is entitled to sell such shares in the public market without complying with any of the requirements of Rule 144 (subject to the lock-up agreement referred to above, if applicable). In general, under Rule 144, as currently in effect, because we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, our “affiliates,” as defined in Rule 144, who have beneficially owned the shares proposed to be sold for at least six months are entitled to sell in the public market, upon expiration of any applicable lock-up agreements and within any three-month period, a number of those shares of our equity interests that does not exceed the greater of:
1%1.0% of the number of equity interestsshares of common stock then outstanding, which will equal approximately 285,961 shares of equity interestscommon stock immediately after this offering and the repurchase (calculated on the basis of the assumptions described above and assuming no exercise of the underwriter’s option to purchase additional shares and no exercise of outstanding options or warrants); or
the average weekly trading volume of our Class A common stock on the Nasdaq Global Select Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
Such sales under Rule 144 by our “affiliates” or persons selling shares on behalf of our “affiliates” are also subject to certain manner of sale provisions, notice requirements and to the availability of current public information about us. Notwithstanding the availability of Rule 144, certain holders have entered into lock-up agreements as referenced above and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.
Options, Equity Awards and Employee Stock Purchase Plan
We have filed registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock. As of , 2017 shares of our Class A common stock are reserved for future grants under our stock incentive plans and shares of our Class A common stock are reserved for future purchase under our employee stock purchase plan. Such registration statements became effective automatically upon filing. Shares of our Class A common stock granted or issued and registered pursuant to the Form S-8 registration statements will, subject to vesting provisions, lock-up restrictions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately. As of , 2017, a total of shares of our Class A common stock were subject to options outstanding under our stock incentive plans, and shares of our Class A common stock were otherwise vested under our equity incentive plans or our employee stock purchase plan.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who acquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 under the Securities Act before we became a public company (to the extent such common stock is not subject to a lock-up agreement) is entitled to rely on Rule 701 to resell such shares beginning 90 days after we became subject to the public company reporting requirements of the Exchange Act in reliance on Rule 144, but without compliance with the holding period requirements contained in Rule 144. Accordingly, subject to any applicable lock-up agreements, under Rule 701 persons who are not our “affiliates,” as defined in Rule 144, may resell those shares without complying with the minimum holding period or public information requirements of Rule 144, and persons who are our “affiliates” may resell those shares without compliance with Rule 144’s minimum holding period requirements (subject to the terms of the lock-up agreements, if applicable).
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion describesis a summary of certain material U.S. federal income tax consequences associated withto Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of shares of our Class A common stock which we referissued pursuant to in this prospectusoffering. The discussion does not purport to be a complete analysis of all potential tax consequences. The consequences of other U.S. federal tax laws, such as our “common stock.”estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion deals only with beneficial ownersis based on the U.S. Internal Revenue Code of shares1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder of our common stock that purchase the shares in this offeringstock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our common stock.
This discussion is limited to Non-U.S. Holders that hold sharesour common stock as capital assetsa “capital asset” within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”) (generally, property held for investment). Because this section isThis discussion does not address all U.S. federal income tax consequences relevant to a general summary,Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address all aspects of taxation that may beconsequences relevant to particular shareholders in light of their personal investment or tax circumstances, or to certain types of shareholders that areNon-U.S. Holders subject to special treatment underrules, including, without limitation:
U.S. expatriates and former citizens or long-term residents of the United States;
persons subject to the alternative minimum tax;
persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;
banks, insurance companies, and other financial institutions;
brokers, dealers or traders in securities;
“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax laws, including, but not limited to, brokerstax;
partnerships or dealers in securities, banks or other financial institutions, regulated investment companies, real estate investment trusts, insurance companies, tax-exempt entities, persons holding common stock as a part of a hedging, integrated, conversion or constructive sale transaction or a straddle, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, persons liable for alternative minimum tax, U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar, entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);
tax-exempt organizations or investors in such entities, persons who acquired our common stock through the exercise of employee stock options or otherwise as compensation for services, U.S. expatriates, “controlled foreign corporations,” “passive foreign investment companies,” and governmental organizations;
persons deemed to sell our common stock under the constructive sale provisions of the Code.Code;
This discussion is based upon
persons who hold or receive our common stock pursuant to the provisionsexercise of the Code, the existingany employee stock option or otherwise as compensation; and proposed U.S. Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. This discussion does not address any state, local or foreign tax consequences, or any U.S. federal tax consequences other than U.S. federal income tax consequences.
tax-qualified retirement plans.
If a partnership or otheran entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will generally depend uponon the status of the partner, and the activities of the partnership. Partners in a partnership purchasingand certain determinations made at the partner level. Accordingly, partnerships holding our common stock are encouraged toand the partners in such partnerships should consult their own tax advisors.advisors regarding the U.S. federal income tax consequences to them.
THIS SUMMARYDISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONSTITUTE A COMPLETE DESCRIPTION OF ALL TAX CONSEQUENCES RELATINGADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE PURCHASE, OWNERSHIP AND DISPOSITIONAPPLICATION OF OUR COMMON STOCK. PROSPECTIVE HOLDERS OF OUR COMMON STOCK ARE ENCOURAGEDTHE U.S. FEDERAL INCOME TAX LAWS TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THEPARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS) OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Consequences to U.S. HoldersDefinition of a Non-U.S. Holder
The followingFor purposes of this discussion, a “Non-U.S. Holder” is a summary of the U.S. federal income tax consequences that will apply to a U.S. Holder of shares of our common stock. A “U.S. Holder” of sharesany beneficial owner of our common stock meansthat is neither a beneficial owner of shares of common stock that is“U.S. person” nor an entity or arrangement treated as a partnership for U.S. federal income tax purposes:purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation) created or organized in the United States or under the laws of the United States, or any state thereof, or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxationtax regardless of its source; or
a trust if itthat (1) is subject to the primary supervision of a U.S. court withinand the United States andcontrol of one or more U.S. persons have“United States persons” (within the authority to control all substantial decisionsmeaning of Section 7701(a)(30) of the trustCode), or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person for U.S. person.federal income tax purposes.
Distributions
Dividends. If a U.S. Holder receives a distributionAs described in respect of sharesthe section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of our common stock it generallyin the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will be treated as a dividendconstitute dividends for U.S. federal income tax purposes to the extent that it is paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. A distribution that exceeds current and accumulated earnings and profits will beAmounts not treated as dividends for U.S. federal income tax purposes will constitute a nontaxable return of capital reducingand first be applied against and reduce a U.S.Non-U.S. Holder’s adjusted tax basis in theits common stock, and any remainingbut not below zero. Any excess will be treated as capital gain.gain and will be treated as described below under “Sale or Other Taxable Disposition.”
Under current law, dividend income may be taxed to an individual U.S. Holder at rates applicable to long term capital gains, provided that a minimum holding period and other limitations and requirements are satisfied. Any dividends that we pay to a U.S. Holder that is a U.S. corporation will qualify for a deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations equal to a portion of any dividends received, subject to generally applicable limitations on that deduction. In general, a dividend distribution to a corporate U.S. Holder may qualify for the 70% dividends received deduction if the U.S. Holder owns less than 20% of the voting power and value of our stock. U.S. Holders are encouraged to consult their own tax advisors regarding the holding period and other requirements that must be satisfied in order to qualify for the reduced tax rate on dividends and the dividends-received deduction.
Sale, Exchange, or Other Disposition of Common Stock. A U.S. Holder will generally recognize capital gain or loss on the sale, exchange or other disposition of our common stock. The amount of gain or loss will equal the difference between the amount realized on the sale and the tax basis of such U.S. Holder in the disposed common stock. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for the stock. The gain or loss recognized on a sale will be long-term capital gain or loss if the common stock had been held for more than one year. Long-term capital gains of non-corporate U.S. Holders are generally taxed at lower rates than those applicable to ordinary income. The deductibility of capital losses is subject to certain limitations.
Medicare Contribution Tax. U.S. Holders who are individuals, estates or certain trusts are required to pay a 3.8% tax on the lesser of (1) the U.S. person’s “net investment income” in the case of an individual, or undistributed “net investment income” in the case of an estate or trust, in each case for the relevant taxable year and (2) the excess of the U.S. person’s modified adjusted gross income in the case of an individual, or adjusted gross income in the case of an estate or trust, in each case for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000 depending on the individual’s circumstances). Net investment income generally includes, among other things, dividends and capital gains from the sale or other disposition of stock, unless such dividend income or gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). A U.S. Holder that is an individual, estate or trust is encouraged to consult its tax advisor regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our common stock.
As discussed above under “Consequences to U.S. Holders—Medicare Contribution Tax,” there is a 3.8% tax on the “net investment income” of certain U.S. Holders that are individuals, trusts or estates. It is unclear whether this tax will also apply to Non-U.S. Investors that are estates or trusts that have one or more U.S. beneficiaries. Such Non-U.S. Investors and their beneficiaries should consult their own tax advisors.
Information Reporting and Backup Withholding. U.S. Treasury regulations require information reporting and backup withholding on certain payments on common stock or on the sale thereof. When required, we will reportSubject to the Internal Revenue Service (the “IRS”) and to each U.S. Holder the amounts paiddiscussion below on or with respect to our common stock and the U.S. federal withholding tax, if any, withheld from such payments. A U.S. Holder will be subject to backup withholding on theeffectively connected income, dividends paid on the common stock and proceeds from the sale of the common stock at the applicable rate if the U.S. Holder (a) fails to provide us or our paying agent with a correct taxpayer identification number or certification of exempt status (such as a certification of corporate status), (b) has been notified by the IRS that it is subject to backup withholding as a result of the failure to properly report payments of interest or dividends, or (c) in certain circumstances, has failed to certify under penalty of perjury that it is not subject to backup withholding. A U.S. Holder may be eligible for an exemption from backup withholding by providing a properly completed IRS Form W-9 to us or our paying agent.
Backup withholding does not represent an additional U.S. federal income tax. Any amounts withheld from a payment to a U.S. Holder under the backup withholding rules will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information or returns are timely furnished by the holder to the IRS.
Consequences to Non-U.S. Holders
The following is a summary of the U.S. federal income tax consequences that will apply to a Non-U.S. Holder of shares of our common stock. A “Non-U.S. Holder” is a beneficial owner of common stock (other than an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder.
Dividends. Dividends paid to a Non-U.S. Holder, if any, generally will be subject to withholding of U.S. federal incomewithholding tax at a rate of 30% rate orof the gross amount of the dividends (or such lower rate as may be specified by an applicable income tax treaty.treaty, provided the Non-U.S. Holder furnishes the applicable withholding agent with a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder wishingthat does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to claim the benefits of an applicable income tax treaty for dividends will be required to complete IRS Form W-8BEN (or other applicable
forms) and certify under penalties of perjury that such Non-U.S. Holder is not a U.S. person and is entitled to the benefits of theany applicable income tax treaty.
DividendsIf dividends paid to a Non-U.S. Holder that are effectively connected with suchthe Non-U.S. Holder’s conduct of a trade or business within the United States or,(and, if certain treaties apply, are attributable torequired by an applicable income tax treaty, the Non-U.S. Holder maintains a U.S. permanent establishment in the United States to which such dividends are notattributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.
Any such effectively connected dividends will be subject to the withholding tax but instead are subject to regular graduated U.S. federal income tax on a net income basis at the regular graduated rates in the same manner as aapplicable to U.S. Holder. Special certification and disclosure requirements, including the completion of IRS Form W-8ECI (or any successor form), must be satisfied for effectively connected dividends to be exempt from withholding. In addition, a non-U.S.persons. A Non-U.S. Holder that is a foreign corporation also may be subject to an additionala branch profits tax at a 30% rate orof 30.0% (or such lower rate as may be specified by an applicable income tax treatytreaty) on anysuch effectively connected dividends, received by such non-U.S. Holder. In order to claim the benefit of an applicable income tax treaty, special certifications and other requirements may apply toas adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that are entities rather than individuals.may provide for different rules.
If a Non-U.S. Holder is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty, such Non-U.S. Holder may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale Exchange or Other Taxable Disposition of Common Stock. A
Subject to the discussion below regarding backup withholding and FATCA (as defined below), a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax with respect toon any gain recognized on arealized upon the sale exchange or other taxable disposition of shares of our common stock unless:
the gain is effectively connected with suchthe Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States or, if certain income tax treaties apply,to which such gain is attributable to a U.S. permanent establishment;attributable);
an individualthe Non-U.S. Holder holds shares of our common stock, is a nonresident alien individual present in the United States for 183 days or more induring the taxable year of the sale, exchange or other disposition and certain other conditionsrequirements are met; or
our common stock constitutes a U.S. real property interest, or USRPI, by reason of our status as a “U.S.U.S. real property holding corporation”corporation, or USRPHC, for U.S. federal income tax purposespurposes.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at any time within the shorterregular graduated rates applicable to U.S. persons. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30.0% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30.0% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the five-year period precedingNon-U.S. Holder (even though the disposition orindividual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such Non-U.S. Holder’s holding period of our common stock.losses.
WeWith respect to the third bullet point above, we believe that we currently are not, currently and willdo not becomeanticipate becoming, a U.S. real property holding corporation. However, becauseUSRPHC. Because the determination of whether we are a U.S. real property holding corporationUSRPHC depends, however, on the fair market value of our U.S. real property assetsUSRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance that we currently are not a USRPHC or will not become a U.S. real property holding corporationone in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of our common stock will not be subject to U.S. real property holding corporation, however, as long asfederal income tax if our common stock is regularly“regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such common stock will be treated as an interest in a U.S. real property holding corporation only if a Non-U.S. Holder owned, actually or constructively, holds more than 5% or less of our regularly traded common stock at any time duringthroughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable period as specified in the Code.income tax treaties that may provide for different rules.
An individual Non-U.S. Holder described in the first bullet aboveInformation Reporting and Backup Withholding
Payments of dividends on our common stock generally will be subject to tax onbackup withholding unless the net gain derived fromapplicable withholding agent does not have actual knowledge or reason to know the sale under regular graduated U.S. federal income tax rates in the same manner as if such Non-U.S. Holder were a U.S. Holder.
A foreign corporation Non-U.S. Holder described in the first bullet above will be subject to tax on the net gain under regular graduated U.S. federal income tax rates in the same manner as a U.S. Holder and, in addition, may be subject to the branch profits tax at a rate of 30% or at such lower rate as may be specified by an applicable income tax treaty.
A Non-U.S. Holder described in the second bullet above will be subject to a flat 30% tax on the gain derived from the sale, exchange or other disposition, which may be offset by U.S. source capital losses (even though such Non-U.S. Holder is not considered a resident of the United States). A Non-U.S. Holder that is an individual and eligible for the benefits of a tax treaty between the United States and such Non-U.S. Holder’s country of residence will be subject to United States federal income tax on the disposition of shares of our common stock in the manner specified by the treaty and generally will only be subject to such tax if the gain on such disposition is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United Statesperson and the Non-U.S. Holder claims the benefit of the treatycertifies its non-U.S. status by properly submitting anfurnishing a valid IRS Form W-8BEN, (or suitable successorW-8BEN-E, W-8ECI, or substitute form).
other applicable IRS Form, or otherwise establishes an exemption. Information Reporting and Backup Withholding. In general, we must report annuallyreturns are required to be filed with the IRS in connection with any dividends on our common stock paid to the IRS and to each Non-U.S. Holder, the amount of dividends paid to such holder and the U.S. federal withholding tax withheld with respect to those dividends, regardless of whether withholding is reduced or eliminated by an applicable incomeany tax treaty.was actually withheld. Copies of thisthese information reportingreturns may also be made available under the provisions of a specific taxan applicable treaty or agreement withto the tax authorities inof the country in which the Non-U.S. Holder resides or is established.
U.S. backup withholding tax is imposed on certain dividend payments to Non-U.S. Holders that fail to furnish the information required under the U.S. information reporting requirements. Dividends on common stock paid to a Non-U.S. Holder will generally be exempt from backup withholding, provided the Non-U.S. Holder meets applicable certification requirements, including providing a correct and properly executed IRS Form W-8BEN, or otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding generally will apply to the proceeds of athe sale or other taxable disposition of our common stock within the United States or conducted through certain United States-related financial intermediaries,U.S.-related brokers, unless the beneficial owner certifies under penalty of perjury that it is a Non-U.S. Holder (andapplicable withholding agent receives the payorcertification described above and does not have actual knowledge or reason to know that the beneficial ownerNon-U.S. Holder is a United States person, as defined underor the Code), or such ownerholder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Backup withholding doesis not represent an additional U.S. federal income tax. Any amounts withheld from a payment to a Non-U.S. Holder under the backup withholding rules willmay be allowed as a refund or a credit against such holder’sa Non-U.S. Holder’s U.S. federal income tax liability, and may entitle the holder to a refund, provided that the required information or returns areis timely furnished by the holder to the IRS.
Foreign Account LegislationTax Compliance Act
Certain provisionsWithholding taxes may be imposed under Sections 1471 to 1474 of the Code which will be phased in beginning after June 30, 2014, generally will impose(such Sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30.0% withholding tax of 30%may be imposed on any dividends on, our common stock paid to certain foreign financial institutions, unless (i) such institution enters into an agreement with the U.S. government to, among other things, collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) (ii) the government of the applicable institution's jurisdiction has entered into an intergovernmental agreement with the United States with respect to the foreign account tax compliance act (an "IGA"_ and the institution registers with the IRS and complies with the terms of the IGS or (iii) another exception applies. The legislation will also generally impose a withholding tax of 30% on any dividends on our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either certification that such entity does not have any substantial U.S. owners or identification of the direct and indirect substantial U.S. owners of the entity. Finally, beginning on January 1, 2017, withholding of 30% also generally will apply to the gross proceeds of afrom the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or to a non-financial foreign entity unlessotherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and certification requirements described abovewithhold 30.0% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have been met or another exception applies. an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under certain circumstances, a Non-U.S. Holderthe applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock, may be eligible for refundsand will apply to payments of gross proceeds from the sale or creditsother disposition of such taxes. Investors are encouraged tostock on or after January 1, 2019.
Prospective investors should consult with their tax advisors regarding the possible implicationspotential application of this legislation onwithholding tax under FATCA to their investment in our common stock.
UNDERWRITING
Under
Subject to the terms and subject toconditions set forth in the conditions in an underwriting agreement, dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co., 2017, between us and Jefferies LLC, and UBS Securities LLC are acting as representatives, have severally agreed to purchase, andunderwriter, we and the selling stockholders have agreed to sell to them, severally, the underwriter, and the underwriter has agreed to purchase from us, the entire number of shares indicated below:
|
| | |
Name | | Number of
Shares
|
Morgan Stanley & Co. LLC | | |
UBS Securities LLC | | |
Jefferies LLC | | |
Merrill Lynch, Pierce, Fenner & Smith | | |
Incorporated | | |
Piper Jaffray & Co | | |
RBC Capital Markets, LLC | | |
Robert W. Baird & Co. Incorporated | | |
Total | | |
The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of Class A common stock subjectoffered pursuant to their acceptance of the shares from us and subject to prior sale. this prospectus:
The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectusunderwriter are subject to certain conditions precedent such as the receipt by the underwriter of officers’ certificates and legal opinions and approval of certain legal matters by their counsel and to certain other conditions.its counsel. The underwriters are obligated to take and pay forunderwriting agreement provides that the underwriter will purchase all of the shares of Class A common stock offered by this prospectus if any such sharesof them are taken.purchased. We have agreed to indemnify the underwriter and certain of its controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriter may be required to make in respect of those liabilities.
The underwriter has advised us that, following the completion of this offering, currently intends to make a market in our Class A common stock as permitted by applicable laws and regulations. However, the underwriters areunderwriter is not requiredobligated to take or paydo so, and the underwriter may discontinue any market-making activities at any time without notice in its sole discretion. Accordingly, no assurance can be given as to the liquidity of the trading market for the shares coveredClass A common stock, that you will be able to sell any of the Class A common stock held by the underwriters’ option to purchase additional shares described below. If an underwriter defaults, the underwriting agreement providesyou at a particular time or that the purchase commitments of the non-defaulting underwriters mayprices that you receive when you sell will be increased, or, in the case of a default with respect tofavorable.
The underwriter is offering the shares covered by the underwriters’ optionof Class A common stock subject to purchase additional shares described below, the underwriting agreement may be terminated.
The underwriters initially propose to offer partits acceptance of the shares of Class A common stock directlyfrom us and subject to prior sale. The underwriter reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. In addition, the underwriter has advised us that it does not intend to confirm sales to any account over which it exercises discretionary authority.
Commission and Expenses
The underwriter has advised us that it proposes to offer the shares of Class A common stock to the public at the public offering price listedset forth on the cover page of this prospectus and part to certain dealers, which may include the underwriter, at athat price that representsless a concession not in excess of $ per share underof Class A common stock. The underwriter may allow, and certain dealers may reallow, a discount from the public offering price.concession not in excess of $ per share of Class A common stock to certain brokers and dealers. After the initial offering, of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.
The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares of common stock at the public offering price, listedconcession and reallowance to dealers may be reduced by the underwriter. No such reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus, less underwriting discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. The option may be exercised only to cover any over-allotments of shares of common stock.prospectus.
The following tables showtable shows the per share and total public offering price, the underwriting discounts and commissions that we are to pay the underwriter and the proceeds, before expenses, to us and the selling stockholders. Thesein connection with this offering. Such amounts to the selling stockholders are shown assuming both no exercise and full exercise of the underwriters’underwriter’s option to purchase up to an additional shares of common stock from the selling stockholders.shares.
|
| | | | | | |
| | | | Total | | |
| | | Per Share | | No ExerciseTotal | |
| | Full ExerciseWithout Option to Purchase Additional Shares | | With Option to Purchase Additional Shares | | Without Option to Purchase Additional Shares | | With Option to Purchase Additional Shares | |
| Public offering price | | $ | | | $ | | | $ | | | $ | | |
| Underwriting discounts and commissions | | $ | | $ | | $ |
Proceeds, before expenses to paid by us | | $ | | | $ | | | $ | | | $ | | |
| Proceeds to us, before expenses | | $ | | | $ | | | $ | | | $ | | |
94
The estimated offeringWe estimate expenses payable by us exclusive ofin connection with this offering, other than the underwriting discounts and commissions arereferred to above, will be approximately $ . WeAs set forth in the underwriting agreement, we have also agreed to reimburse the underwritersunderwriter for certain of their expenses in an amount up to $ , as set forthincurred in connection with review and qualification by the underwriting agreement.
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5%Financial Industry Regulatory Authority of the total numberterms of shares of common stock offered by them.this offering.
Listing
Our Class A common stock is listed on the Nasdaq Global Select Market under the trading symbol NDLS.
Stamp Taxes
If you purchase shares of Class A common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.
Option to Purchase Additional Shares
We have granted to the underwriter an option, exercisable for 30 days from the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of $4,800,000 shares from us at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions.
No Sales of Similar Securities
We, our sponsors, all directorsstockholders and , who in the aggregate own % of our outstanding common stock, and our executive officers and directors have each agreed, subject to specified exceptions, not to directly or indirectly:
sell, offer, contract or grant any option to sell (including any short sale), pledge, lend or otherwise transfer shares of Class A common stock,
otherwise dispose of any shares of Class A common stock, options or warrants to acquire shares of Class A common stock, or securities exchangeable or exercisable for or convertible into shares of Class A common stock currently or hereafter owned either of record or beneficially including through swaps or other arrangements, or
publicly announce an intention to do any of the selling stockholders, have agreed that,foregoing for a period of 60 days after the date of the final prospectus relating to this offering without the prior written consent of Morgan Stanley & Co. LLC and UBS Securities LLC on behalfJefferies LLC.
This restriction terminates after the close of trading of the underwriters,Class A common stock on and subject to certain exceptions, we and they will not, duringincluding the period ending 75 dayssixtieth day after the date of this prospectus (or such earlier date or dates as agreed between us and Morgan Stanley & Co. LLC and UBS Securities LLC):
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock beneficially owned or any other securities convertible into or exercisable or exchangeable for common stock;
file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or
enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock;
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of Morgan Stanley & Co. LLC and UBS Securities LLC on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.prospectus.
The restrictions described in the immediately preceding paragraph do not apply to:
the sale of shares to the underwriters;
the issuance by us of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing;
the sale or issuance of shares in connection with bona fide mergers or acquisitions, joint ventures, commercial relationships or other strategic transactions; provided that the aggregate number of such shares shall not exceed 5% of the total number of our issued and outstanding common stock;
the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act, for the transfer of shares of common stock, provided that such plan does not provide for the transfer of common stock during the restricted period and no public announcement or filing under the Exchange Act regarding the establishment of such plan shall be required or shall be voluntarily made;
transfers of shares of common stock as a bona fide gift or charitable contribution, by will or intestacy or to any trust for the direct or indirect benefit of the holder or the immediate family of the holder;
distributions of shares of common stock to beneficiaries or affiliates, including limited partners, members or stockholders of the holder;
transactions relating to shares of common stock or other securities acquired in open market transactions after the completion of this offering, provided, that no filing under the Exchange Act (other than a filing on Form 5, Schedule 13D or Schedule 13G (or 13D/A or 13G/A) made after the expiration of 180 day period) will be required or voluntarily made in connection with subsequent sales of common stock or other securities acquired in such open market transactions; or
transfers in connection with a liquidation, merger, stock exchange or similar transaction that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property;
provided, that in the case of any transfer or distribution pursuant to the fourth and fifth bullets above, it will be a condition of transfer or distribution, as the case may be, that each transferee, donee and distributee shall enter into a written agreement accepting the restrictions set forth in the preceding paragraph as if it were a selling shareholder and no filing under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares of common stock, shall be required or shall be voluntarily made in respect of the transfer or distribution during the restricted period.
Morgan Stanley & Co. LLC and UBS Securities LLCunderwriter may, in theirits sole discretion and at any time or from time to time before the termination of the 75 day60-day period without public notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriter and any of our shareholders who will execute a lock-up agreement, providing consent to the sale of shares prior to the expiration of the lock-up period.
In orderStabilization
The underwriter has advised us that, pursuant to facilitateRegulation M under the Exchange Act, certain persons participating in the offering of the common stock, the underwriters may engage in short sale transactions, that stabilize, maintainstabilizing transactions, syndicate covering transactions or otherwise affect the imposition of penalty bids in connection with this offering. These activities may have the effect of stabilizing or maintaining the market price of the Class A common stock. Specifically,stock at a level above that which might otherwise prevail in the underwritersopen market. Establishing short sales positions may sell more shares than theyinvolve either “covered” short sales or “naked” short sales.
“Covered” short sales are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is nosales made in an amount not greater than the number of shares available for purchase by the underwriters under the option to purchase additional shares. The underwriters can close out a covered short sale by exercising theunderwriter’s option to purchase additional shares of our Class A common stock in this offering. The underwriter may close out any covered short position by either exercising its option to purchase additional shares of our Class A common stock or purchasing shares of our Class A common stock in the open market. In determining the source of shares to close out athe covered short sale,position, the underwritersunderwriter will consider, among other things, the open market price of shares available for purchase in the open market as compared to the price available underat which it may purchase shares through the option to purchase additional shares. The underwriters may also sell shares
“Naked” short sales are sales in excess of the option to purchase additional shares creating a naked short position.of our Class A common stock. The underwritersunderwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters areunderwriter is concerned that there may be downward pressure on the price of the shares of our Class A common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may
A stabilizing bid is a bid for andthe purchase of shares of Class A common stock inon behalf of the open market to stabilizeunderwriter for the purpose of fixing or maintaining the price of the Class A common stock. These activitiesA syndicate covering transaction is the bid for or the purchase of shares of Class A common stock on behalf of the underwriter to reduce a short position incurred by the underwriter in connection with the offering. Similar to other purchase transactions, the underwriter’s purchases to cover the syndicate short sales may raisehave the effect of raising or maintainmaintaining the market price of theour Class A common stock above independent market levels or preventpreventing or retardretarding a decline in the market price of our Class A common stock. As a result, the price of our Class A common stock may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriter to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the Class A common stock originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member.
Neither we, nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our Class A common stock. The underwriters areunderwriter is not requiredobligated to engage in these activities and, may endif commenced, any of thesethe activities may be discontinued at any time.
The underwritersunderwriter may also imposeengage in passive market making transactions in our Class A common stock on the NASDAQ Global Select Market in accordance with Rule 103 of Regulation M during a penalty bid. This occurs whenperiod before the commencement of offers or sales of shares of our Class A common stock in this offering and extending through the completion of distribution. A passive market maker must display its bid at a particular underwriter repays to the underwriters a portionprice not in excess of the underwriting discount received by it becausehighest independent bid of that security. However, if all independent bids are lowered below the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.
We, the selling stockholders, and the several underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.Electronic Distribution
A prospectus in electronic format may be made available on websitesby e-mail or through online services maintained by onethe underwriter or more underwriters, or selling group members, if any, participating in this offering.its affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The representativeunderwriter may agree with us to allocate a specific number of shares of Class A common stock to underwriters for sale to their online brokerage account holders. InternetAny such allocation for online distributions will be allocatedmade by the representative to underwriters that may make internet distributionsunderwriter on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriter’s web site and any information contained in any other web site maintained by the underwriter is not part of this prospectus, has not been approved and/or endorsed by us or the underwriter and should not be relied upon by investors.
Selling RestrictionsOther Activities and Relationships
The underwriter and certain of its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriter and certain of its affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for us and our affiliates, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriter and certain of its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments issued by us and our affiliates. If the underwriter or its affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The underwriter and its affiliates may hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the Class A common stock offered hereby. Any such short positions could adversely affect future trading prices of the Class A common stock offered hereby. The underwriter and certain of its affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Disclaimers About Non-U.S. Jurisdictions
Canada
The distribution of the shares of Class A common stock in Canada is being made only in the provinces of Ontario, Quebec, Alberta and British Columbia on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of these shares of Class A common stock are made. Any resale of the shares of Class A common stock in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares of Class A common stock.
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| (B) | Representations of Canadian Purchasers |
By purchasing the shares of Class A common stock in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:
the purchaser is entitled under applicable provincial securities laws to purchase the shares of Class A common stock without the benefit of a prospectus qualified under those securities laws as it is an “accredited investor” as defined under National Instrument 45-106 – Prospectus Exemptions,
the purchaser is a “permitted client” as defined in National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations,
where required by law, the purchaser is purchasing as principal and not as agent, and
the purchaser has reviewed the text above under Resale Restrictions.
Canadian purchasers are hereby notified that Jefferies is relying on the exemption set out in section 3A.3 or 3A.4, if applicable, of National Instrument 33-105 – Underwriting Conflicts from having to provide certain conflict of interest disclosure in this document.
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| (D) | Statutory Rights of Action |
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if the prospectus (including any amendment thereto) such as this document contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser of these shares of Class A common stock in Canada should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
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| (E) | Enforcement of Legal Rights |
All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
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| (F) | Taxation and Eligibility for Investment |
Canadian purchasers of the shares of Class A common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares of Class A common stock in their particular circumstances and about the eligibility of the shares of common stock for investment by the purchaser under relevant Canadian legislation.
Australia
This prospectus is not a disclosure document for the purposes of Australia’s Corporations Act 2001 (Cth) of Australia, or Corporations Act, has not been lodged with the Australian Securities & Investments Commission and is only directed to the categories of exempt persons set out below. Accordingly, if you receive this prospectus in Australia:
You confirm and warrant that you are either:
a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act;
a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant’s certificate to the Company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made;
a person associated with the Company under Section 708(12) of the Corporations Act; or
a “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act.
To the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act any offer made to you under this prospectus is void and incapable of acceptance.
You warrant and agree that you will not offer any of the securities issued to you pursuant to this prospectus for resale in Australia within 12 months of those securities being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.
European Economic Area
In relation to each Member Statemember state of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), an offer to the public of any shares of ourClass A common stock which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any shares of ourClass A common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
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(a) | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
to any legal entity which is a “qualified investor” as defined in the Prospectus Directive;
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(b) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
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the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the underwriter; orin any other circumstances falling within Article 3(2) of the Prospectus Directive,
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(c) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive. |
provided that no such offer of shares of Class A common stock shall require us or the underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of shares of Class A common stock to the public” in relation to anythe shares of ourClass A common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and anythe shares of ourClass A common stock to be offered so as to enable an investor to decide to purchase anyor subscribe to the shares of ourClass A common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
United Kingdom
Each underwriter has represented and agreed that:
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(a) | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and |
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(b) | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom. |
Hong Kong
TheNo shares of Class A common stock have been offered or sold, and no shares of Class A common stock may not be offered or sold, in Hong Kong, by means of any document, other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong),persons whose ordinary business is to buy or (ii)sell shares or debentures, whether as principal or agent; or to “professional investors” within the meaning ofas defined in the Securities and Futures Ordinance (Cap.571, Laws(Cap. 571) of Hong Kong)Kong (“SFO”) and any rules made thereunder,under that Ordinance; or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning ofas defined in the Companies Ordinance (Cap.32, Laws(Cap. 32) of Hong Kong), and no advertisement,Kong (“CO”) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO. No document, invitation or documentadvertisement relating to the shares of Class A common stock has been issued or may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public inof Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares of Class A common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” withinas defined in the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)SFO and any rules made thereunder.under the SFO.
This prospectus has not been registered with the Registrar of Companies in Hong Kong. Accordingly, this prospectus may not be issued, circulated or distributed in Hong Kong, and the shares of Class A common stock may not be offered for subscription to members of the public in Hong Kong. Each person acquiring the shares of Class A common stock will be required, and is deemed by the acquisition of the shares of Class A common stock, to confirm that he is aware of the restriction on offers of the shares of Class A common stock described in this prospectus and the relevant offering documents and that he is not acquiring, and has not been offered any shares of Class A common stock in circumstances that contravene any such restrictions.
Israel
This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968, or the Securities Law, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, and any offer of the shares of Class A common stock is directed only at, (i) a limited number of persons in accordance with the Israeli Securities Law and (ii) investors listed in the first addendum, (the “Addendum”), to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case, purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors are required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.
Japan
The offering has not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948 of Japan, as amended), or FIEL, and the underwriter will not offer or sell any shares of Class A common stock, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEL and any other applicable laws, regulations and ministerial guidelines of Japan.
Singapore
This prospectus has not been and will not be lodged or registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares of Class A common stock may not be circulated or distributed, nor may the shares of Class A common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares of Class A common stock are subscribed or purchased under Section 275 of the SFA by a relevant person which is: (a)
a corporation (which is not an accredited investor)investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b)
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, shares, debentures and units
securities (as defined in Section 239(1) of shares and debenturesthe SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferable for 6transferred within six months after that corporation or that trust has acquired the shares of Class A common stock pursuant to an offer made under Section 275 of the SFA except: (1)
to an institutional investor underor to a relevant person defined in Section 274275(2) of the SFA, or to a relevant person, or any person pursuantarising from an offer referred to Section 275(1A), and in accordance with the conditions, specified in Section 275275(1A) or Section 276(4)(i)(B) of the SFA; (2)
where no consideration is or will be given for the transfer; or (3)
where the transfer is by operation of law.law;
Japanas specified in Section 276(7) of the SFA; or
The securities have not beenas specified in Regulation 32 of the Securities and will not be registered under the Financial InstrumentsFutures (Offers of Investments) (Shares and Exchange LawDebentures) Regulations 2005 of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.Singapore.
Switzerland
This prospectus doesThe shares of Class A common stock may not constitute an issue prospectus pursuant to Article 652a or Article 1156 of the Swiss Code of Obligations (“CO”)be publicly offered in Switzerland and the shares will not be listed on the SIX Swiss Exchange. Therefore, thisExchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This prospectus may not comply withhas been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the CO and/Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules (includingof any other stock exchange or regulated trading facility in Switzerland. Neither this prospectus schemes) of the SIX Swiss Exchange. Accordingly, the shares may not be offered to the public innor any other offering or from Switzerland, but only to a selected and limited circle of investors, which do not subscribemarketing material relating to the shares with a view to distribution.of Class A common stock or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Australia
NoNeither this prospectus nor any other offering or other disclosure document (as defined in the Corporations Act 2001 (Cth) of Australia (“Corporations Act”)) in relationmarketing material relating to the offering, the Company or the shares of Class A common stock hashave been or will be lodgedfiled with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the Australian Securities & Investments Commission (“ASIC”). This document has not been lodged with ASIC and is only directed to certain categories of exempt persons. Accordingly, if you receive this document in Australia:
you confirm and warrant that you are either:
a "sophisticated investor" under section 708(8)(a) or (b)offer of the Corporations Act;
a "sophisticated investor" under section 708(8)(c) or (d)shares of Class A common stock will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of the Corporations Act and that you have provided an accountant's certificate to us which complies with the requirementsshares of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made;
a person associated with the company under section 708(12) of the Corporations Act; or
a "professional investor" within the meaning of section 708(11)(a) or (b) of the Corporations Act, and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act any offer made to you under this document is void and incapable of acceptance; and
you warrant and agree that you will not offer any of the common stock for resale in Australia within 12 months of that common stock being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.
Korea
The common stock may not be offered, sold and delivered directly or indirectly, or offered or sold to any person for reoffering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the Korea Securities and Exchange Act and the Foreign Exchange Transaction Law and the decrees and regulations thereunder. TheClass A common stock has not been registered withand will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of the shares of Class A common stock.
United Kingdom
This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) investment professionals falling within Article 19(5) of the Financial Services Commission of Korea for public offering in Korea. Furthermore, the common stock may not be resoldand Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) high net worth entities falling within Article 49(2)(a) to Korean residents unless the purchaser(d) of the common stock complies with all applicable regulatory requirements (including but not limitedOrder and other persons to government approval requirements under the Foreign Exchange Transaction Law and its subordinate decrees and regulations) in connection with the purchase of the common stock.
Dubai International Finance Centrewhom it may lawfully be communicated (each such person being referred to as a “relevant person”).
This prospectus relates to an Exempt Offer in accordance with the Markets Rules of the Dubai Financial Services Authority. This prospectus is intended for distribution only to Professional Clients whoand its contents are not natural persons. It mustconfidential and should not be delivereddistributed, published or reproduced (in whole or in part) or disclosed by recipients to or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewingpersons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or verifying any documents in connection with Exempt Offers. The Dubai Financial Services Authority has not approvedrely on this document nor taken steps to verify the information set out in it, and has no responsibility for it. The Securities to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasersany of the Securities offered should conduct their own due diligence on the Securities. If you do not understand the contents of this document you should consult an authorized financial adviser.its contents.
LEGAL MATTERS
The validity of the shares of Class A common stock offered by this prospectus will be passed upon for us by Gibson, Dunn & Crutcher LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwritersunderwriter by KirklandWhite & EllisCase LLP, New York, New York.
EXPERTS
The consolidated financial statements of Noodles & Company incorporated by reference in the Noodles & Company at January 1, 2013 and January 3, 2012, andAnnual Report (Form 10-K) for the fiscal yearsyear ended January 1, 2013, January 3, 2012 and December 28, 2010, appearing in this prospectus and registration statement29, 2015 have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhereincluded therein, and incorporated herein andby reference. Such consolidated financial statements are includedincorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our Class A common stock.stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our Class A common stock, we refer you to the registration statement, including the exhibits and the consolidated financial statements and notes filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be reviewed for the complete contents of these contracts and documents. In addition, certain information is incorporated by reference into this prospectus as described under “Incorporation of Certain Documents by Reference.”
A copy of the registration statement, including the exhibits and the financial statements and notes filed as a part of the registration statement, may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon the payment of fees prescribed by it. You may call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference facilities. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with it.
We are subject to the information and periodic and current reporting requirements of the Exchange Act, and in accordance therewith, we file periodic and current reports, proxy statements and other information with the SEC. The registration statement, such periodic and current reports and other information can be inspected and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington, D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC’s website at www.sec.gov.
We also furnish our stockholders with annual reports containing our financial statements audited by an independent registered public accounting firm and quarterly reports containing our unaudited financial information. We maintain a website at http://investor.noodles.com. You may access our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act with or to the SEC, free of charge at our website as soon as reasonably practicable after this material is electronically filed with, or furnished to, the SEC. The reference to our website or web address does not constitute incorporation by reference of the information contained at that site.
The SEC allows us to “incorporate by reference” the information we file with the SEC, which means we can disclose important information to you by referring you to those documents. The documents that have been incorporated by reference are an important part of Contents
Noodles & Companythe prospectus, and you should review that information in order to understand the nature of any investment by you in our common stock. We are incorporating by reference the documents listed below:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSour Annual Report on Form 10-K for the year ended December 29, 2015, as filed with the SEC on March 1, 2016 (including the portions of our Definitive Proxy Statement on Schedule 14A for our Annual Meeting of Stockholders, as filed with the SEC on March 24, 2016, incorporated by reference therein);
our Quarterly Report on Form 10-Q for the quarter ended March 29, 2016, as filed with the SEC on May 4, 2016; |
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Consolidated Financial Statements | |
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our Quarterly Report on Form 10-Q for the quarter ended June 28, 2016, as filed with the SEC on August 5, 2016;our Quarterly Report on Form 10-Q for the quarter ended September 27, 2016, as filed with the SEC on November 7, 2016; and
our Current Reports on Form 8-K as filed with the SEC on February 26, 2016 (two filings), March 7, 2016, April 26, 2016, May 6, 2016, July 20, 2016, July 26, 2016 (excluding Item 2.02 and Exhibit 99.1 thereunder), February 9, 2017 (excluding Item 2.02) and February 9, 2017 (excluding Item 2.02, Item 7.01 and Exhibit 99.1).
Notwithstanding the foregoing, no information is incorporated by reference in this prospectus supplement and the accompanying prospectus where such information under applicable forms and regulations of the SEC is not deemed to be “filed” under Section 18 of the Exchange Act or otherwise subject to the liabilities of that section (such as, without limitation, the information furnished under Item 2.02 or Item 7.01 in any Current Report on Form 8-K), unless we indicate in the report or filing containing such information that the information is to be considered “filed” under the Exchange Act or is to be incorporated by reference in this prospectus supplement and the accompanying prospectus.
Copies of these filings are available at no cost on our website, http://investor.noodles.com. In addition, you may request a copy of these filings and any amendments thereto at no cost, by writing or telephoning us at (720) 214-1900. Those copies will not include exhibits to those documents unless the exhibits are specifically incorporated by reference in the documents or unless you specifically request them. You may also request copies of any exhibits to the registration statement. Please direct your request to:
See accompanying notes to consolidated financial statements.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Noodles & Company
We have auditedAttention: Corporate Secretary
520 Zang Street, Suite D
Broomfield, CO 80021
(720) 214-1900
Any statements contained in a document incorporated by reference in this prospectus shall be deemed to be modified or superseded for purposes of this prospectus to the accompanying consolidated balance sheetsextent that a statement contained in this prospectus modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed to constitute a part of Noodles & Company (the Company)this prospectus except as of January 1, 2013 and January 3, 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended January 1, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.so modified or superseded.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Noodles & Company as of January 1, 2013 and January 3, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2013, in conformity with U.S. generally accepted accounting principles.
Denver, Colorado
March 22, 2013, except
for Note 17, as to which the date is June 26, 2013
and except to which Note 1, as to which is date is
November 18, 2013
Noodles & Company
Consolidated Balance Sheets
(in thousands, except share and per share data)Class A Common Stock
PRELIMINARY PROSPECTUS
|
| | | | | | | | |
| | | January 1, 2013 | | January 3, 2012 |
| | | | | |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 581 |
| | $ | 523 |
|
| Accounts receivable | | 4,566 |
| | 3,413 |
|
| Inventories | | 6,042 |
| | 4,595 |
|
| Prepaid expenses and other assets | | 3,970 |
| | 3,332 |
|
| Income tax receivable | | 995 |
| | 1,016 |
|
| Total current assets | | 16,154 |
| | 12,879 |
|
| Property and equipment, net | | 136,287 |
| | 103,831 |
|
| Deferred tax assets, net | | 2,791 |
| | 5,496 |
|
| Other assets, net | | 1,763 |
| | 4,119 |
|
| Total long-term assets | | 140,841 |
| | 113,446 |
|
| Total assets | | $ | 156,995 |
| | $ | 126,325 |
|
| Liabilities and Stockholders' Equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 9,393 |
| | $ | 6,900 |
|
| Accrued payroll and benefits | | 5,345 |
| | 6,198 |
|
| Accrued expenses and other current liabilities | | 7,249 |
| | 5,846 |
|
| Current deferred tax liabilities | | 1,023 |
| | 863 |
|
| Current portion of long-term debt | | 750 |
| | 750 |
|
| Total current liabilities | | 23,760 |
| | 20,557 |
|
| Long-term debt | | 93,731 |
| | 77,523 |
|
| Deferred rent | | 23,013 |
| | 18,644 |
|
| Other long-term liabilities | | 2,483 |
| | 2,078 |
|
| Total liabilities | | 142,987 |
| | 118,802 |
|
| Temporary equity | | | | |
| Common stock subject to put options—296,828 shares as of 2012 and 2011 | | 3,601 |
| | 2,572 |
|
| Stockholders' equity: | | | | |
| Preferred stock—$0.01 par value, authorized 2,885,000 shares; no shares issued or outstanding | | — |
| | — |
|
| Common stock—$0.01 par value, authorized 34,043,001 shares; 23,238,984 issued and outstanding as of 2012 and 2011 | | 232 |
| | 232 |
|
| Additional paid-in capital | | 7,585 |
| | 6,291 |
|
| Accumulated other comprehensive loss, net of tax | | (24 | ) | | (52 | ) |
| Retained earnings (accumulated deficit) | | 2,614 |
| | (1,520 | ) |
| Total stockholders' equity | | 10,407 |
| | 4,951 |
|
| Total liabilities and stockholders' equity | | $ | 156,995 |
| | $ | 126,325 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Income, 2017
(in thousands, except share and per share data)
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 |
| Revenue: | | | | | | |
| Restaurant revenue | | $ | 297,264 |
| | $ | 253,467 |
| | $ | 218,560 |
|
| Franchise royalties and fees | | 3,146 |
| | 2,599 |
| | 2,272 |
|
| Total revenue | | 300,410 |
| | 256,066 |
| | 220,832 |
|
| Costs and expenses: | | | | | | |
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | |
| Cost of sales | | 78,997 |
| | 66,419 |
| | 56,869 |
|
| Labor | | 89,435 |
| | 75,472 |
| | 64,942 |
|
| Occupancy | | 29,323 |
| | 25,208 |
| | 21,650 |
|
| Other restaurant operating costs | | 36,380 |
| | 32,031 |
| | 27,403 |
|
| General and administrative | | 29,081 |
| | 26,463 |
| | 27,302 |
|
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 13,932 |
|
| Pre-opening | | 3,145 |
| | 2,327 |
| | 2,088 |
|
| Asset disposals, closure costs and restaurant impairments | | 1,278 |
| | 1,629 |
| | 2,815 |
|
| Total costs and expenses | | 284,358 |
| | 244,050 |
| | 217,001 |
|
| Income from operations | | 16,052 |
| | 12,016 |
| | 3,831 |
|
| Debt extinguishment expense | | 2,646 |
| | 275 |
| | — |
|
| Interest expense | | 5,028 |
| | 6,132 |
| | 1,819 |
|
| Income before income taxes | | 8,378 |
| | 5,609 |
| | 2,012 |
|
| Provision (benefit) for income taxes | | 3,215 |
| | 1,780 |
| | (366 | ) |
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
|
| Earnings per Class A and Class B common stock, combined | | | | | | |
| Basic | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.10 |
|
| Diluted | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.09 |
|
| Weighted average Class A and Class B common stock outstanding, combined | | | | | | |
| Basic | | 23,238,984 |
| | 23,237,698 |
| | 24,386,059 |
|
| Diluted | | 23,265,542 |
| | 23,237,698 |
| | 25,226,989 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Comprehensive Income
(in thousands)
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 |
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
|
| Other comprehensive income (loss): | | | | | | |
| Cash flow hedges: | | | | | | |
| Loss recognized in accumulated other comprehensive income | | (186 | ) | | (209 | ) | | (560 | ) |
| Reclassification of loss to net income | | 382 |
| | 434 |
| | 754 |
|
| Unrealized income on cash flow hedges | | 196 |
| | 225 |
| | 194 |
|
| Provision for income tax on cash flow hedges | | (168 | ) | | (3 | ) | | (74 | ) |
| Other comprehensive income (loss), net of tax | | 28 |
| | 222 |
| | 120 |
|
| Comprehensive income | | $ | 5,191 |
| | $ | 4,051 |
| | $ | 2,498 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Equity
(in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Series A Preferred Stock | | Common Stock(1) | | Treasury | | Additional
Paid-In
Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity | | Temporary Equity |
| | | | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance—December 29, 2009 | | 5,898,709 |
| | $ | — |
| | 24,462,846 |
| | $ | — |
| | 11,897,375 |
| | $ | (67,513 | ) | | $ | 104,184 |
| | $ | (394 | ) | | $ | (7,727 | ) | | $ | 28,550 |
| | $ | — |
|
| Exercise of stock options | | — |
| | — |
| | 59,990 |
| | — |
| | — |
| | — |
| | 147 |
| | — |
| | — |
| | 147 |
| | — |
|
| Stock-based compensation expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,987 |
| | — |
| | — |
| | 1,987 |
| | — |
|
| Equity recapitalization—Preferred shares converted to common | | (5,898,709 | ) | | — |
| | 11,797,418 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cancellation of outstanding treasury stock | | — |
| | — |
| | (11,897,375 | ) | | — |
| | (11,897,375 | ) | | 67,513 |
| | (67,513 | ) | | — |
| | — |
| | — |
| | — |
|
| Conversion of outstanding common stock into the right to receive cash, net of rollover equity | | — |
| | — |
| | (22,491,822 | ) | | 19 |
| | — |
| | — |
| | (194,849 | ) | | — |
| | — |
| | (194,830 | ) | | — |
|
| Accelerated vesting of unvested outstanding stock options | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,706 |
| | — |
| | — |
| | 3,706 |
| | — |
|
| Cash settlement of outstanding options, net of rollover equity | | — |
| | — |
| | 418,711 |
| | 4 |
| | — |
| | — |
| | (16,445 | ) | | — |
| | — |
| | (16,441 | ) | | 2,572 |
|
| Issuance of common stock, net of transaction expenses | | — |
| | — |
| | 20,887,401 |
| | 209 |
| (2) | — |
| | — |
| | 173,680 |
| | — |
| | — |
| | 173,889 |
| | — |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,378 |
| | 2,378 |
| | — |
|
| Unrealized income on cash flow hedges, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 120 |
| | — |
| | 120 |
| | — |
|
| Balance—December 28, 2010 | | — |
| | — |
| | 23,237,169 |
| | 232 |
| (3) | — |
| | — |
| | 4,897 |
| | (274 | ) | | (5,349 | ) | | (494 | ) | | 2,572 |
|
| Exercise of stock options | | — |
| | — |
| | 1,815 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| | — |
|
| Tax benefit on exercise of stock options | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 109 |
| | — |
| | — |
| | 109 |
| | — |
|
| Stock-based compensation expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,402 |
| | — |
| | — |
| | 1,402 |
| | — |
|
| 2010 Merger-transaction expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (133 | ) | | — |
| | — |
| | (133 | ) | | — |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,829 |
| | 3,829 |
| | — |
|
| Unrealized income on cash flow hedges, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 222 |
| | — |
| | 222 |
| | — |
|
| Balance—January 3, 2012 | | — |
| | — |
| | 23,238,984 |
| | 232 |
| (3) | — |
| | — |
| | 6,291 |
| | (52 | ) | | (1,520 | ) | | 4,951 |
| | 2,572 |
|
| Tax benefit on exercise of stock options | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
| | — |
|
| Stock-based compensation expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,315 |
| | — |
| | — |
| | 1,315 |
| | — |
|
| 2010 Merger-transaction expenses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (48 | ) | | — |
| | — |
| | (48 | ) | | — |
|
| Temporary equity related to put options | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,029 | ) | | (1,029 | ) | | 1,029 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,163 |
| | 5,163 |
| | — |
|
| Unrealized income on cash flow hedges, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | 28 |
| | — |
|
| Balance—January 1, 2013 | | — |
| | $ | — |
| | 23,238,984 |
| | $ | 232 |
| (3) | — |
| | $ | — |
| | $ | 7,585 |
| | $ | (24 | ) | | $ | 2,614 |
| | $ | 10,407 |
| | $ | 3,601 |
|
_____________________
| |
(1) | Unless otherwise noted, activity relates to Class A common stock |
| |
(2) | Represents issuance of 14,594,760 shares of Class A common stock, 6,292,640 shares of Class B common stock and one share of Class C common stock |
| |
(3) | Includes 6,292,640 shares of Class B common stock and one share of Class C common stock |
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Cash Flows
(in thousands)
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | January 1, 2013 | | January 3, 2012 | | December 28, 2010 |
| Operating activities | | | | | | |
| Net income | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 16,719 |
| | 14,501 |
| | 13,932 |
|
| Provision (benefit) for deferred income taxes | | 2,607 |
| | 1,520 |
| | (419 | ) |
| Excess tax benefit on stock-based compensation | | (27 | ) | | (109 | ) | | — |
|
| Asset disposals, closure costs and restaurant impairments | | 1,278 |
| | 1,629 |
| | 2,815 |
|
| Amortization of debt issuance costs and debt | | | | | | |
| extinguishment expense | | 3,227 |
| | 1,013 |
| | 155 |
|
| Stock-based compensation | | 1,234 |
| | 1,327 |
| | 5,610 |
|
| Other noncash | | (341 | ) | | 892 |
| | (250 | ) |
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable and income tax receivable | | (1,104 | ) | | 274 |
| | (2,384 | ) |
| Inventories | | (1,447 | ) | | (680 | ) | | (572 | ) |
| Prepaid expenses and other assets | | (644 | ) | | (63 | ) | | (743 | ) |
| Accounts payable | | (155 | ) | | 80 |
| | 270 |
|
| Deferred rent | | 4,369 |
| | 2,290 |
| | 2,973 |
|
| Accrued expenses and other liabilities | | 1,190 |
| | 1,419 |
| | 840 |
|
| Net cash provided by operating activities | | 32,069 |
| | 27,922 |
| | 24,605 |
|
| Investing activities | | | | | | |
| Purchases of property and equipment | | (47,384 | ) | | (30,047 | ) | | (26,933 | ) |
| Net cash used in investing activities | | (47,384 | ) | | (30,047 | ) | | (26,933 | ) |
| Financing activities | | | | | | |
| Proceeds from issuances of notes payable | | 105,697 |
| | 111,771 |
| | 57,624 |
|
| Payments on notes payable | | (89,549 | ) | | (65,498 | ) | | (59,462 | ) |
| (Payments on) proceeds from bridge financing | | — |
| | (45,977 | ) | | 45,000 |
|
| Debt issuance costs | | (754 | ) | | (4,226 | ) | | — |
|
| Change in restricted cash related to equity recapitalization | | — |
| | 189,388 |
| | (189,388 | ) |
| Change in shareholder escrow-equity recapitalization | | — |
| | (189,502 | ) | | (5,484 | ) |
| Cash settlement of outstanding options, net | | — |
| | — |
| | (7,264 | ) |
| Payment of payroll taxes associated with equity recapitalization | | — |
| | (6,602 | ) | | — |
|
| Issuance of common stock, net of transaction expenses | | (48 | ) | | (133 | ) | | 174,042 |
|
| Proceeds from exercise of stock options | | — |
| | 16 |
| | 147 |
|
| Excess tax benefit on stock-based compensation | | 27 |
| | 109 |
| | — |
|
| Net cash provided by (used in) financing activities | | 15,373 |
| | (10,654 | ) | | 15,215 |
|
| Net increase (decrease) in cash and cash equivalents | | 58 |
| | (12,779 | ) | | 12,887 |
|
| Cash and cash equivalents | | | | | | |
| Beginning of year | | 523 |
| | 13,302 |
| | 415 |
|
| End of year | | $ | 581 |
| | $ | 523 |
| | $ | 13,302 |
|
See accompanying notes to consolidated financial statements.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies
Business
Noodles & Company (the "Company" or "Noodles & Company"), a Delaware corporation, develops and operates fast casual restaurants that serve globally inspired noodle and pasta dishes, soups, salads and sandwiches. As of January 1, 2013, there were 276 company-owned restaurants and 51 franchise restaurants in 25 states and the District of Columbia. The Company operates its business as one operating and reportable segment.
In December 2010, Catterton Partners ("Catterton") and Argentia Private Investments Inc. ("Argentia") completed an equity recapitalization to purchase approximately 90% of the Company's equity interests. See Note 2, Equity Recapitalization.
All share and per share data, including options, have been retroactively adjusted in the accompanying financial statements to reflect a reverse stock split. See Note 17, Subsequent Events.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation.
Fiscal Year
The Company operates on a 52 or 53 week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2012 and 2010, which ended on January 1, 2013 and December 28, 2010, respectively, each contained 52 weeks. Fiscal year 2011, which ended on January 3, 2012, contained 53 weeks.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Error Correction
The Company's consolidated balance sheets as of January 1, 2013 and January 3, 2012 included in its previously issued consolidated financial statements excluded temporary equity of $3.6 million and $2.6 million, respectively. The related consolidated statements of equity overstated additional paid in capital by $2.6 million in each of the years presented and overstated retained earnings by $1.0 million for the year ended January 1, 2013. Accordingly the accompanying consolidated balance sheets as of January 1, 2013 and January 3, 2012 and the consolidated statements of equity for the years ended January 1, 2013, January 3, 2012 and December 28, 2010 have been revised to correct this error. Temporary equity represents the fair market value of 296,828 outstanding shares subject to put options that can be exercised in circumstances outside the Company's control. See Note 15, Commitments and Contingencies.
Reclassifications
During 2013, the Company changed the manner in which it reports marketing expenses between general and administrative expenses and other restaurant operating costs to more appropriately reflect only those costs directly related to restaurant-level marketing in other restaurant operating costs. Marketing costs previously reported as restaurant operating costs, that were not directly related to restaurant-level marketing, have been reclassified to general and administrative expense in the Company's consolidated financial statements in all periods presented. In the accompanying consolidated statements of income for 2012, 2011 and 2010, $2.9 million, $2.6 million and $2.4 million, respectively, have been reclassified from restaurant operating costs to general and administrative expense. The change has no impact on income from operations.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with an initial maturity of three months or less when purchased to be cash equivalents. Amounts receivable from credit card processors are converted to cash shortly after the related sales transaction and considered to be cash equivalents because they are both short-term and highly liquid in nature. Amounts receivable from credit card processors and considered cash equivalents as of January 1, 2013 and January 3, 2012 were $2.5 million and $1.0 million, respectively, and were offset on the consolidated balance sheets by payments processed by the Company, but not yet redeemed by the payee. Book overdrafts, which are outstanding checks in excess of cash and cash equivalents, are recorded with accounts payable in the accompanying consolidated balance sheets and within operating activities in the accompanying statements of cash flows.
Accounts Receivable
Accounts receivable consist primarily of tenant improvement receivables and vendor rebates receivable, as well as amounts due from franchisees and other miscellaneous receivables. The Company believes all amounts to be collectible. Accordingly, no allowance for doubtful accounts has been recorded as of January 1, 2013 or January 3, 2012.
Inventories
Inventories consist of food, beverages, supplies, and smallwares, and are stated at the lower of cost (first-in, first-out method) or market. Smallwares inventory, which consist of the plates, silverware, and cooking utensils used in the restaurants, are frequently replaced and are considered current assets. Replacement costs of smallwares inventory are recorded as other restaurant operating costs and are expensed as incurred. As of January 1, 2013 and January 3, 2012, smallwares inventory of $3.8 million and $3.0 million was included on the consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for major renewals and improvements are capitalized, while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term, which generally includes option periods that are reasonably assured to be exercised. Depreciation and amortization expense on property and equipment, including assets under capital lease, was $16.7 million in 2012, $14.5 million in 2011 and $13.9 million in 2010.
The estimated useful lives for property and equipment are:
|
| | |
Property and Equipment | | Estimated Useful Lives |
Leasehold improvements | | Shorter of lease term or estimated useful life, not to exceed 20 years |
Furniture and fixtures | | 3 to 15 years |
Equipment | | 3 to 7 years |
The Company capitalizes internal payroll and payroll related costs directly related to the successful acquisition, development, design and construction of its new restaurants. Capitalized internal costs were $2.3 million, $1.8 million and $1.6 million in 2012, 2011 and 2010, respectively. Interest incurred on funds used to construct company-owned restaurants is capitalized and amortized over the estimated useful life of the related assets. Capitalized interest totaled $0.3 million in 2012 and 2011 and $0.1 million in 2010.
Other Assets
Other assets consist primarily of unamortized debt issuance costs, long term deposits, trademark rights and transferable liquor licenses. Direct costs incurred for the issuance of debt are capitalized and amortized using the straight-line method, which approximates the effective interest method, over the term of the debt. During 2012 and 2011, the Company incurred debt issuance costs related to an amendment of its credit facility in 2012 and its financing in 2011. See Note 4, Borrowings.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
Net debt issuance costs of $1.0 million and $3.5 million are recorded in other assets, net of accumulated amortization of $0.5 million and $0.7 million, as of January 1, 2013 and January 3, 2012, respectively. In conjunction with the 2012 amendment of its credit facility, the Company wrote off $2.6 million of debt issuance costs, net of $0.8 million of accumulated amortization. The Company wrote off $0.3 million of debt issuance costs in 2011, net of $0.9 million of accumulated amortization, related to the new credit facility entered into during 2011. Trademark rights are amortized over their estimated useful life of 20 years. Transferable liquor licenses are carried at the lower of fair value or cost. The estimated aggregate future amortization expense of intangible assets as of January 1, 2013 is $8,000 in each of the next five years.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value, which is based on discounted future cash flows. Estimates of future cash flows are based on the Company's experience and knowledge of local operations. The Company recorded impairment charges of certain long-lived assets of $0.1 million, $0.7 million and $2.3 million in 2012, 2011 and 2010, respectively, which are included in asset disposals, closure costs and restaurant impairments in the consolidated statements of income. Fair value of the restaurants was determined using Level 3 inputs (as described in Note 6, Fair Value Measures) based on a discounted cash flows method at a market level through the estimated date of closure.
Self-Insurance Programs
The Company self-insures for health, workers' compensation, general liability and property damage. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence cash outlay. Estimated costs to settle reported claims and incurred but unreported claims for health and workers' compensation self-insured plans are recorded in accrued payroll and benefits and for general liability and property damage in accrued expenses and other liabilities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company's cash balances may exceed federally insured limits. Credit card transactions at the Company's restaurants are processed by one service provider. Concentration of credit risk related to accounts receivable are limited, as the Company's receivables are primarily amounts due from landlords for the reimbursement of tenant improvements and the Company generally has the right to offset rent due for tenant improvement receivables.
Revenue Recognition
Revenue consists of sales from restaurant operations and franchise royalties and fees. Revenue from the operation of company-owned restaurants are recognized when sales occur. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage"). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 6% of gift cards will not be redeemed, which is recognized ratably over the estimated redemption period of the gift card, approximately 18 months. The Company recognized gift card breakage of $0.2 million in 2012 and $0.1 million in 2011 and 2010, in restaurant revenue.
Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants' sales occur. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by the Company. Both franchise fees and development fees will generally be recognized upon the opening of a franchise restaurant or upon termination of the agreement(s) between the Company and the franchisee.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
As of January 1, 2013, January 3, 2012, and December 28, 2010, there were 51, 45, and 43 franchise restaurants in operation. Franchisees opened six, two and no restaurants in 2012, 2011 and 2010 respectively.
Pre-Opening Costs
Pre-opening costs, including rent, wages, benefits and travel for the training and opening teams, food, beverage, and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and aggregated $2.8 million, $2.3 million and $2.1 million in 2012, 2011 and 2010, respectively. These costs are included in restaurant operating costs, general and administrative expenses and pre-opening costs based on the nature of the advertising and marketing costs incurred.
Rent
Rent expense for the Company's leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The lease term includes renewal options which are reasonably assured of being exercised and begins when the Company has control and possession of the leased property, which is typically before rent payments are due under the lease. The difference between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheets. Rent expense for the period prior to the restaurant opening is reported in pre-opening costs in the consolidated statements of income. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as a reduction of rent expense over the term of the lease. Certain leases contain rental provisions based on the sales of the underlying restaurants; the Company has determined that the amount of these provisions is immaterial.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes is accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those deferred amounts are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in provision (benefit) for income taxes in the consolidated statement of income.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of the net income (loss) and other gains and losses affecting stockholders' equity that, under accounting principles generally accepted in the United States, are excluded from net income. Other comprehensive income (loss), presented in the consolidated statements of comprehensive income for 2012 and 2011, consists of the unrealized income (loss), net of tax, on the Company's cash flow hedges. See Note 5, Derivative Instruments.
Stock Compensation Expense
The Company recognizes stock-based compensation using fair value measurement guidance for all share-based payments, including stock options and warrants. For option awards, expense is recognized ratably over the vesting period in an amount equal to the fair value of the stock-based awards on the date of grant determined using the Black-Scholes option pricing model. Warrants are valued using the fair value of the common stock as of the measurement date. See Note 10, Stock-Based Compensation.
Earnings Per Share
Basic earnings per share ("EPS") are calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options and restricted stock. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Convertible preferred stock is considered converted to common. See Note 11, Earnings Per Share.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, "Presentation of Comprehensive Income," which revises the manner in which companies present comprehensive income. Under ASU 2011-05, companies may present comprehensive income, which is net income adjusted for components of other comprehensive income, either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASU 2011-05 during 2012 and elected to present comprehensive income in the statements of comprehensive income. The adoption concerns presentation and disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")." This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between US GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 on January 4, 2012 increased the Company's fair value disclosure requirements but did not have an impact on its consolidated financial statements.
2. Equity Recapitalization
On December 27, 2010, the Company completed an equity recapitalization through a merger with a newly organized Delaware corporation ("Merger Sub"), which was 100% indirectly owned by Catterton and the Public Sector Pension Investment Board ("PSPIB"), a Canadian Crown corporation, pursuant to the Agreement and Plan of Merger dated November 26, 2010 ("Merger Agreement"). The Company was the surviving entity of the recapitalization. The Company received $181.0 million from Catterton and Argentia and paid $7.0 million in transaction expenses. Total consideration paid for the outstanding shares was $211.7 million, of which $16.7 million was settled in rollover shares and the remainder was paid in cash in 2010 and 2011.
In connection with the Merger, the following equity transactions were completed:
The Series A preferred stock and Class A common stock was converted on a 3.4 for 1 basis;
All outstanding shares of Series A preferred stock (5,898,709 shares or 11,797,418 as converted to common on a 2 for 1 basis at the option of the holder) and Class A common stock (12,625,462 outstanding, 11,897,375 held in treasury) were cancelled. Outstanding shares were converted to the right to receive cash consideration of $8.67 or the equivalent equity interest in the surviving entity ("rollover shares");
Outstanding stock options with an intrinsic value of $17,494,531 were cancelled in exchange for payments in cash or equity in the surviving entity. The intrinsic value was calculated as the fair market value in excess of exercise price at the time of settlement;
Holders of shares immediately prior to the merger elected to retain $16.7 million in equity interests, or 1,931,058 shares of Class A common stock;
Certain members of the Company's management team were issued $3.6 million in equity interests, or 418,711 shares of Class A common stock ("rollover shares");
Catterton was issued 10,501,400 shares of Class A common stock in exchange for $91.0 million in cash, which was used to pay the cash portion of merger consideration to shareholders and holders of outstanding stock options;
Argentia received 4,093,360 shares of Class A common stock, 6,292,640 shares of Class B common stock, and 1 share of Class C common stock in exchange for $90.0 million, which was also used to pay selling shareholders and holders of outstanding stock options. Class B and Class C common stock is nonvoting.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Equity Recapitalization (Continued)
Catterton and Argentia also made a bridge loan to the Company. See Note 4, Borrowings. Following the equity recapitalization, Catterton and Argentia owned 90% of the Company's issued and outstanding shares of common stock, while the management team and other shareholders owned the remaining 10%.
The Company completed the following analysis in connection with the Equity Recapitalization that occurred at the end of fiscal year 2010:
A transitory entity was used to effect the transaction, and the Company evaluated whether this entity was a substantive entity. The Company concluded that it was not substantive since it did not participate in any significant pre-combination activities and did not survive the transaction (it was subsumed into Noodles & Company). These facts led the Company to conclude that the transitory entity was not an accounting acquirer and the transaction was not deemed to be a business combination under ASC 805;
The Company then considered whether any investor obtained control of Noodles & Company but concluded that following the transaction it was not substantially wholly owned. Catterton held shares of Class A common stock representing an approximate 45% economic interest in the Company and Argentia held shares of common stock also representing an approximate 45% economic interest in the Company. However, Argentia held shares of both Class A common stock, with voting rights, and nonvoting Class B common stock, so Catterton held shares representing an approximate 62% voting interest while Argentia held shares representing an approximate 24% voting interest. The rights of the holders of Class A common stock and Class B common stock are identical, except that the Class B common stock does not vote on the election or removal of directors unless converted on a share-for-share basis into Class A common stock. The Company's articles of incorporation, upon consummation of the transaction, contained 19 specific items that require at least 75% of the voting shares (Class A common stock and Class B common stock voting as one group). These specific items include substantive participating rights, such as: to approve/amend the Company's five year plan, appoint or remove the Company's independent auditors and enter into a merger transaction or initiate an IPO. The Company, therefore, determined that these voting rights prevent control by Catterton. These facts led the Company to conclude that although a change of control had occurred, the Company had not become substantially wholly owned by Catterton and thus business combination accounting treatment under ASC 805 was not required;
For purposes of assessing whether the guidance on push-down accounting should be applied, the Company evaluated whether the new investors and any rollover investors constitute a collaborative group under the SEC's guidance in ASC 805-50-S99 and concluded that the new investors and management are a collaborative group. The Company determined that Catterton, Argentia, current Company management and one board member would all be considered part of the surviving collaborative group as they came together to mutually promote and subsequently collaborate as one investor and control Noodles & Company. The remaining investors, all of whom were rollover shareholders, were not solicited to participate in the investment, since they were already shareholders. The Company's management, and not the non-management rollover shareholders, negotiated the terms of the merger. Additionally, the remaining investors do not participate in the subsequent collaboration and would not be included in the collaborative group. The Company then determined that this collaborative group acquired more than 80% (by vote and economic value) but less than 95% (vote and economic value) ownership of Noodles & Company, thus the Company is permitted (but not required) to reflect a new basis in Noodles & Company's financial statements. The Company elected not to apply push-down accounting, but to treat the transaction as a recapitalization;
The Company continually monitors the composition of the collaborative group to substantiate the fact that no changes have occurred with respect to the collaborative group (or the related ownership or voting percentages) since the recapitalization transaction, that would require push-down accounting to be applied.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Supplemental Financial Information (in thousands)
Prepaid expenses and other assets consist of the following:
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Prepaid occupancy related costs | | $ | 2,700 |
| | $ | 2,179 |
|
| Other prepaid expenses | | 1,191 |
| | 1,097 |
|
| Other current assets | | 79 |
| | 56 |
|
| | | $ | 3,970 |
| | $ | 3,332 |
|
Property and equipment, net, consist of the following:
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Leasehold improvements | | $ | 139,907 |
| | $ | 113,313 |
|
| Furniture, fixtures and equipment | | 77,202 |
| | 62,472 |
|
| Construction in progress | | 7,878 |
| | 3,227 |
|
| | | 224,987 |
| | 179,012 |
|
| Accumulated depreciation and amortization | | (88,700 | ) | | (75,181 | ) |
| | | $ | 136,287 |
| | $ | 103,831 |
|
Accrued payroll and benefits consist of the following:
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Accrued payroll and related liabilities | | $ | 2,537 |
| | $ | 2,094 |
|
| Accrued bonus | | 1,981 |
| | 3,511 |
|
| Insurance liabilities | | 827 |
| | 593 |
|
| | | $ | 5,345 |
| | $ | 6,198 |
|
Accrued expense and other liabilities consist of the following:
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Gift card liability | | $ | 2,182 |
| | $ | 1,875 |
|
| Occupancy related | | 1,264 |
| | 1,188 |
|
| Utilities | | 1,002 |
| | 870 |
|
| Accrued interest | | 484 |
| | 337 |
|
| Other accrued expenses | | 2,317 |
| | 1,576 |
|
| | | $ | 7,249 |
| | $ | 5,846 |
|
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Borrowings
Credit Facility
In February 2011, the Company entered into a credit facility to increase its borrowing capacity to $120.0 million, consisting of a $75.0 million senior term loan and a $45.0 million revolving line of credit. The revolving line of credit includes a swing line loan of $5.0 million, used to fund the Company's everyday working capital requirements. In August 2012, the credit facility was amended to provide more favorable borrowing rates and extend borrowing capacity through July 2017. The Company had $94.5 million outstanding and $23.1 million available for borrowing under the credit facility as of January 1, 2013.
Borrowings under the credit facility bear interest, at the Company's option, at either (i) LIBOR plus 2.00% to 4.25%, based on the lease-adjusted leverage ratio or (ii) at the highest of the following rates plus 1.00% to 3.25%: (a) the federal funds rate plus 0.50%; (b) the Bank of America prime rate or (c) the one-month LIBOR plus 1.00%. Prior to the August 2012 amendment, borrowings under the credit facility bore interest, at the Company's option, at either (i) LIBOR plus 4.00% to 5.00%, based on the lease-adjusted leverage ratio or (ii) at the highest of the following rates plus 3.00% to 4.00%: (a) the federal funds rate plus 0.50%; (b) the Bank of America prime rate or (c) the one-month LIBOR plus 1.00%. The August 2012 amendment eliminated a 1.25% LIBOR floor on all borrowings. The facility includes a commitment fee of 0.50% per year on any unused portion of the facility. The term loan commitment requires quarterly principal payments of $0.2 million through December 2015. The Company also maintains outstanding letters of credit to secure its obligations under its workers' compensation program and certain lease obligations. The letters of credit and quarterly principal payments reduce the amount of future borrowings available under the agreement as amounts borrowed and repaid on the term debt may not be reborrowed and aggregated $1.7 million and $0.8 million, respectively, as of January 1, 2013. As of January 1, 2013, the credit facility bore interest from 3.6% to 5.5% per year.
Availability of borrowings under the credit facility is conditioned on the Company's compliance with specified covenants, including a maximum lease-adjusted leverage ratio, a maximum leverage ratio and a minimum consolidated fixed charge coverage ratio. The Company is subject to a number of other customary covenants, including limitations on additional borrowings, acquisitions, dividend payments and lease commitments. As of January 1, 2013, the Company was in compliance with all of its debt covenants.
The credit facility is secured by a pledge of stock of substantially all subsidiaries of the Company and a lien on substantially all personal property assets of the Company and its subsidiaries.
As required by the Company's amended facility, the Company entered into two variable-to-fixed interest rate swap agreements covering a portion of its borrowings under the senior term loan. See Note 5, Derivative Instruments.
Bridge Financing
In connection with the 2010 Equity Recapitalization the Company obtained bridge financing from Catterton and Argentia in the amount of $45.0 million. Such amount was repaid, along with $0.9 million of PIK interest at 12%, in conjunction with the February 2011 debt refinancing.
5. Derivative Instruments
The Company enters into derivative instruments for risk management purposes only, including derivatives designated as cash flow hedges. The Company uses interest rate-related derivative instruments to manage its exposure to fluctuations in interest rates. By using these instruments, the Company exposes itself, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis. Management has evaluated credit and nonperformance risks as of January 1, 2013 and January 3, 2012 and considers the risk of counterparty default to be improbable. Market risk, as it relates to the Company's interest-rate derivatives, is the adverse effect on the value of a financial instrument that results from changes in interest rates. The Company minimizes market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be taken.
During 2008, the Company entered into two variable-to-fixed interest rate swap agreements, with a combined notional amount of $29.0 million. In February 2011, the Company's interest rate swap with a notional amount of $15.0 million matured. The swap had been designated as a cash flow hedge in October 2008 and gains of $0.2 million, $27,000 and $10,000 were recorded in earnings during 2012, 2011 and 2010, respectively, due to ineffectiveness as a result of the fair value of the swap not equaling
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Derivative Instruments (Continued)
zero at the date of hedge designation. A second interest rate swap on a notional amount of $14.0 million was terminated by the Company in March 2011. The fair value of the interest rate swap on the date of termination was $0.5 million and will be settled in payments on a new interest rate swap with an effective date of April 4, 2011 and a notional amount of $17.5 million. The deferred loss accumulated in other comprehensive income as of the date of termination was amortized over the life of the terminated swap through November 2012, the original term of the terminated swap.
As required by the new credit facility and to mitigate exposure to fluctuations in interest rates, the Company entered into two variable-to-fixed interest rate swap agreements with embedded floors matching that of the hedged portion of its borrowings under the credit facility. The new interest rate swaps became effective on April 4, 2011 and mature April 4, 2013. The swaps were designated as cash flow hedges at inception and were expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during their respective terms. In August 2012, the Company ceased the application of hedge designation on both interest rate swaps as a result of the interest rate floor being removed from the hedged credit facility. Under the terms of the swap agreements, the Company is required to make payments based on a fixed rate of 1.59% calculated on a notional amount of $20.0 million and 3.06% calculated on a notional amount of $17.5 million. The fair value of the $20.0 million swap was zero at designation, while the fair value of the $17.5 million swap was a liability of $0.5 million at designation, which is reflective of the fair value of the previously terminated swap. In exchange, the Company will receive interest on $20.0 million of notional amount at a variable rate based on the greater of 1.25% or one-month LIBOR and will receive interest on a notional amount of $17.5 million at a variable rate based on the greater of 1.25% or one-month LIBOR.
The effective portion of changes in the fair value of designated cash flow hedges were recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Following termination of hedge designation in August 2012, changes in the fair value of the interest rate swaps were recorded directly to interest expense. During 2011 and 2012, these derivatives were used to hedge the variable cash flows associated with the Company's applicable credit facilities. The ineffective portion of the change in fair value of the derivatives was calculated using the hypothetical derivative method and recognized directly in earnings. During 2012, the Company recorded $174,000 of hedge ineffectiveness in earnings attributable to the fair value at inception on the $17.5 million notional interest rate swap.
The following table summarizes the fair value and presentation of the interest rate swaps as hedging instruments in the accompanying consolidated balance sheets (in thousands):
|
| | | | | | | | |
| | | 2012 Fair Value | | 2011 Fair Value |
| Deferred revenue and other noncurrent liabilities | | $ | 98 |
| | $ | 473 |
|
The following table summarizes the effect of the interest rate swap on the consolidated statements of income for the fiscal years 2012, 2011 and 2010 (in thousands):
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Loss on swap in accumulated other comprehensive loss (pretax) | | $ | 186 |
| | $ | 209 |
| | $ | 560 |
|
| Realized loss (pretax) recognized in interest expense | | 382 |
| | 434 |
| | 754 |
|
The interest rate swaps are measured at fair value on a recurring basis. As of January 1, 2013, the fair market value of the interest rate swaps is recorded in other noncurrent liabilities. As a result of this activity, accumulated other comprehensive loss decreased by $196,000, or $28,000 net of tax, for the fiscal year ended January 1, 2013. Additionally, the Company reclassified to earnings $202,000 of accumulated other comprehensive loss related to the interest rate swap terminated and embedded in a new instrument in April 2011. Amounts reported in accumulated other comprehensive income related to the interest rate swaps will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
6. Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments. The carrying amounts of borrowings approximate fair value as the line of credit and term borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. Asset impairment charges are recorded at fair value on a nonrecurring basis.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Fair Value Measurements (Continued)
Fair Value of Derivatives
All derivatives are recognized on the balance sheet at fair value as either assets or liabilities. The fair value of the Company's derivative financial instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The Company reports its derivative assets or liabilities in other assets, other liabilities, other current assets or accrued expenses as applicable. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation.
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2—Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3—Prices or valuation techniques which require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The Company's cash flow hedges are measured at fair value on a recurring basis, including an adjustment for the Company's credit risk. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of January 1, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following table presents the Company's liabilities measured at fair value on a recurring basis as of January 1, 2013 and January 3, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Total derivatives—Level 1 | | $ | — |
| | $ | — |
|
| Total derivatives—Level 2 | | 98 |
| | 473 |
|
| Total derivatives—Level 3 | | — |
| | — |
|
The Company's temporary equity is measured at fair value on a recurring basis. The Company has determined that the majority of the inputs used to value its stock, which directly impacts the valuation of temporary equity, fall within Level 3 of the fair value hierarchy. See Note 10, Stock Based Compensation, for further discussion of the significant inputs into the share price valuation.
Fair Value of Temporary Equity
The following table represents the temporary equity measured at fair value on a recurring basis as of January 1, 2013 and January 3, 2012 and the level in the fair value hierarchy within which the measurements fall (in thousands):
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Level 1 | | $ | — |
| | $ | — |
|
| Level 2 | | — |
| | — |
|
| Level 3 | | 3,601 |
| | 2,572 |
|
7. Closed Restaurant Reserve
The Company provides for closed property operating lease liabilities using a discount rate to calculate the present value of the remaining non-cancelable lease payments after the closing date, net of estimated subtenant income. Following is a summary of the changes in the liability for closed properties as of January 1, 2013 and January 3, 2012 (in thousands).
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Closed Restaurant Reserve (Continued)
|
| | | | | | | | |
| | | 2012 | | 2011 |
| Closed restaurant reserves, beginning of period | | $ | 515 |
| | $ | 577 |
|
| Additions—store closing costs incurred, accretion | | 483 |
| | 140 |
|
| Decreases—payments | | (210 | ) | | (202 | ) |
| Closed restaurant reserves, end of period | | $ | 788 |
| | $ | 515 |
|
The current portion of the liability, $0.3 million and $0.2 million as of January 1, 2013 and January 3, 2012, respectively, is recorded in accrued expenses and other liabilities, and the long-term portion is reported in other noncurrent liabilities in the Company's consolidated balance sheets.
8. Income Taxes
The components of the provision (benefit) for income taxes are as follows for 2012, 2011 and 2010 (in thousands):
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Current tax provision: | | | | | | |
| Federal | | $ | 49 |
| | $ | — |
| | $ | 47 |
|
| State | | 559 |
| | 260 |
| | 6 |
|
| | | 608 |
| | 260 |
| | 53 |
|
| Deferred tax provision (benefit): | | | | | | |
| Federal | | 2,591 |
| | 1,945 |
| | (340 | ) |
| State | | 16 |
| | (425 | ) | | (79 | ) |
| | | 2,607 |
| | 1,520 |
| | (419 | ) |
| Total provision (benefit) for income taxes | | $ | 3,215 |
| | $ | 1,780 |
| | $ | (366 | ) |
The reconciliation of income tax provision (benefit) that would result from applying the federal statutory rate to pre-tax income as shown in the accompanying consolidated statements of income is as follows for 2012, 2011 and 2010 (in thousands):
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Federal income expense at federal rate | | $ | 2,848 |
| | $ | 1,907 |
| | $ | 684 |
|
| State income tax, net of related federal income tax benefit | | 420 |
| | 257 |
| | 8 |
|
| Permanent items—primarily incentive stock options and cash settlement of options | | 83 |
| | (10 | ) | | (626 | ) |
| Foreign rate differential | | 106 |
| | — |
| | — |
|
| Change in blended state rate | | — |
| | (25 | ) | | — |
|
| Other items, net | | (242 | ) | | (349 | ) | | (432 | ) |
| Provision (benefit) for income taxes | | $ | 3,215 |
| | $ | 1,780 |
| | $ | (366 | ) |
| Effective income tax rate | | 38.4 | % | | 31.7 | % | | (18.2 | )% |
Pre-tax net income in 2012 totaled $8.4 million and included a foreign loss of $0.3 million in 2012.
In 2012 and 2011, the Company recognized tax benefits on option exercises at fair value in excess of those utilized to record stock-based compensation for book purposes, totaling $27,000 and $109,000, respectively, as a credit to additional paid-in capital. The largest portion of the permanent items in 2010 relate to the stock-based compensation expense for incentive stock options that was previously added back for tax purposes and deductible due to the Merger.
In 2012, other items represents changes made between the provision for income taxes and the filed tax return and the impact of the prior year interest rate swap designation to interest expense. Other items in 2011 represents the reconciliation of the beginning deferred tax asset for state asset depreciation, while the true up adjustment in 2010 represents the reconciliation of the deferred
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes (Continued)
tax asset for nonqualified stock options following the Merger. The tax-effected true up adjustments represent $242,000, $349,000 and $432,000 for 2012, 2011 and 2010, respectively.
Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following (in thousands):
|
| | | | | | | | |
| | | 2,012 | | 2,011 |
| Noncurrent deferred tax assets (liabilities): | | | | |
| Loss carry forwards | | $ | 2,445 |
| | $ | 3,275 |
|
| Deferred rent and franchise revenue | | 9,622 |
| | 7,696 |
|
| Property, equipment and intangible assets | | (11,061 | ) | | (6,628 | ) |
| Stock-based compensation | | 994 |
| | 514 |
|
| Alternative minimum tax credits | | 256 |
| | 205 |
|
| Interest rate swap | | 38 |
| | 183 |
|
| Other | | 497 |
| | 251 |
|
| Total noncurrent net deferred tax assets | | 2,791 |
| | 5,496 |
|
| Current deferred tax assets (liabilities): | | | | |
| Inventory smallwares | | (1,459 | ) | | (1,146 | ) |
| Other | | 436 |
| | 283 |
|
| Total current deferred tax liabilities | | (1,023 | ) | | (863 | ) |
| Net deferred tax assets | | $ | 1,768 |
| | $ | 4,633 |
|
At January 1, 2013 and January 3, 2012, net operating loss carryforwards for federal income tax purposes of approximately $15.6 million and $18.1 million, respectively, were available to offset future taxable income through the year 2032 and 2031, respectively. The net operating loss carry forwards are primarily composed of excess tax deductions for equity compensation. Utilization of the net operating losses is subject to an annual limitation resulting from a change in control in 2007 and a change of control in 2010, pursuant to the change in ownership provisions of Section 382 of the Internal Revenue Code and similar provisions of state law. As a result of certain realization requirements of ASC 718, the deferred tax assets shown above include only realized tax deductions related to equity compensation equal to the compensation recognized for financial reporting during the years ended January 1, 2013 and January 3, 2012. Equity will be increased by up to $3.3 million if and when the net operating loss is ultimately realized.
Uncertain tax positions are recognized if it is more likely than not that the Company will be able to sustain the tax position taken, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. There were no uncertain tax positions for the years ended January 1, 2013 or January 3, 2012. The only periods subject to examination for the Company's federal and state returns are 2009 through 2012.
9. Stockholders' Equity
The Company has 36,928,001 shares of stock authorized, consisting of 27,119,000 shares of Class A common stock, par value $0.01 per share; 6,294,000 shares of Class B common stock, par value $0.01; 1 share of Class C common stock, par value $0.01 per share and 2,885,000 shares of preferred stock, par value $0.01 per share. Preferred stock rights will be determined by the Company's Board of Directors in the event that preferred shares are issued. The following summarizes the rights of common stock:
Voting—Shares of Class A common stock and Class B common stock are entitled to one vote per share in all voting matters, with the exception that Class B common stock does not vote on the election or removal of directors. Class C common stock is entitled to vote only on amendments to the certificate of incorporation that would adversely affect the rights and preferences of the Class C common stock and reclassification or subdivision matters related to the Class C common stock.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholder's Equity (Continued)
Conversion—Each share of Class A common stock held by one of the Equity Sponsors is convertible, at the option of the holder, into one share of Class B common stock. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock.
Dividends—A Class C dividend agreement was entered in connection with the Merger Agreement between one of the Equity Sponsors and the Company, which provides that the new investor will receive, in the form of a dividend, an amount equal to the compensation payable to the other new investor under a Management Services Agreement. See additional information in Note 16, Related-Party Transactions. Class A common stock and Class B common stock share equally if a dividend is declared or paid to either class, but do not have rights to any special dividend.
Liquidation, Dissolution or Winding Up—Class A common stock and Class B common stock share equally in distributions in liquidation, dissolution, or winding up of the corporation.
Registration Rights—After December 27, 2011, the Equity Sponsors have the right to demand registration of 10% or more of the shares of the Company's common stock held by them. Other shareholders have piggyback registration rights, but are not required to exercise these rights.
10. Stock-Based Compensation
In connection with the Merger Agreement, the Company adopted the 2010 Stock Incentive Plan (the "Plan"), under which the Company's Board of Directors may grant incentive stock options and nonstatutory stock options to directors, officers and employees of the Company. Option awards may be issued under the Plan for up to 3,168,705 shares. Stock options are granted at fair market value of the stock at the date the option is granted, and in no event less than the fair market value of the shares. The fair market value of shares for the purposes of the Plan is determined by the compensation committee of the Board of Directors, or the Board of Directors using historical or current transactions, comparable public company valuations, historical transactions, third-party valuations and other factors. Stock options generally have a 10-year term and vest equally over 4 years from the date of grant.
Stock-based compensation expense is generally recognized on a straight-line basis over the service period of the options. In 2012, 2011 and 2010, non-cash stock-based compensation expense of $1.2 million, $1.3 million and $5.6 million, respectively, is included in general and administrative expense. Stock-based compensation of $81,000, $75,000 and $83,000 is included in capitalized internal costs in 2012, 2011 and 2010, respectively. The Company recognized $3.7 million of stock-based compensation expense in 2010 related to acceleration of unvested options in connection with the Merger Agreement. A total of 4,939,389 outstanding stock options were settled for the right to receive cash consideration of $8.67 per share, net of exercise price and income taxes withheld, or equity interest in the surviving entity. The Merger Agreement called for acceleration of unvested options immediately prior to the transaction. Accordingly, options to purchase 2,393,725 shares were accelerated.
Options granted prior to December 27, 2010 were granted under the 1998 Stock Option Plan, as amended, or the 2010 Stock Option Plan, both of which were terminated with the Merger Agreement. The 1998 Stock Option Plan, as amended, authorized option grants to purchase up to 8,969,350 shares of common stock, while the 2010 Stock Option Plan authorized up to 480,641 option grants to purchase shares of common stock. Both of these plans allowed for the Company's Board of Directors to grant incentive stock options or nonstatutory stock options to employees, directors and consultants. In February 2010, the Company's Board of Directors also adopted a new stock incentive plan, under which the Company may grant incentive stock options, nonstatutory options, or other stock incentives, including restricted stock, covering up to 1,471,350 shares of Class A common stock, to employees, directors and consultants. No options were granted under the new stock incentive plan, and the plan was terminated in conjunction with the Merger Agreement.
At January 1, 2013, options available for future share grants totaled 193,711. The intrinsic value associated with options exercised was $16,000 and $147,000 for the fiscal years ended January 3, 2012 and December 28, 2010, respectively. There were no options exercised in 2012.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation (Continued)
The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. Expected volatilities are based on the historical Company volatility, as well as volatilities from publicly traded companies operating in the Company's industry. The Company uses historical data to estimate expected employee forfeiture of stock options. The expected life of options granted is management's best estimate using recent and expected transactions. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average assumptions used in the model were as follows:
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Risk-free interest | | 0.4 | % | | 1.1 | % | | 1.9 | % |
| Expected life (years) | | 3.4 |
| | 3.7 |
| | 4.5 |
|
| Expected dividend yield | | — |
| | — |
| | — |
|
| Volatility | | 32.7 | % | | 26.2 | % | | 29.5 | % |
| Weighted-average Black-Scholes fair value per share at date of grant | | $ | 2.84 |
| | $ | 1.89 |
| | $ | 1.72 |
|
The tables below summarize the option activity under the Plan:
|
| | | | | | | |
| | | Shares | | Weighted- Average Exercise Price |
| Outstanding—December 29, 2009 | | 4,348,407 |
| | $ | 4.96 |
|
| Granted | | 736,734 |
| | 5.86 |
|
| Forfeited | | (85,762 | ) | | 5.04 |
|
| Exercised | | (59,990 | ) | | 2.46 |
|
| Cash settled | | (4,939,389 | ) | | 5.13 |
|
| Outstanding at Merger | | — |
| | — |
|
| Granted | | 2,420,861 |
| | 8.67 |
|
| Forfeited | | — |
| | — |
|
| Exercised | | — |
| | — |
|
| Outstanding—December 28, 2010 | | 2,420,861 |
| | 8.67 |
|
| Granted | | 283,307 |
| | 8.67 |
|
| Forfeited | | (81,330 | ) | | 8.67 |
|
| Exercised | | (1,815 | ) | | 8.67 |
|
| Outstanding—January 3, 2012 | | 2,621,023 |
| | 8.67 |
|
| Granted | | 516,473 |
| | 11.27 |
|
| Forfeited | | (164,329 | ) | | 8.68 |
|
| Exercised | | — |
| | — |
|
| Outstanding—January 1, 2013 | | 2,973,167 |
| | $ | 9.12 |
|
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Years of Contractual Life | | Aggregate Intrinsic Value(1) (in thousands) |
| Outstanding as of January 1, 2013 | | 2,973,167 |
| | $ | 9.12 |
| | 8.10 | | $ | 8,971 |
|
| Vested and expected to vest | | 2,823,099 |
| | 9.06 |
| | 8.05 | | 8,656 |
|
| Exercisable as of January 1, 2013 | | 1,229,341 |
| | 8.67 |
| | 7.48 | | 4,261 |
|
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation (Continued)
| |
(1) | Aggregate intrinsic value represents the amount by which estimated fair value of the Company's stock ($12.13 as of January 1, 2013) exceeds the exercise price of the option as of January 1, 2013. |
Since our common stock is not publicly traded, the Company estimated the fair value of each stock option grant at or near the date of grant by performing its own contemporaneous valuation, which is approved by the Board of Directors. The Company uses the market approach including but not limited to recent arm's length sales of the Company's common stock in privately negotiated transactions, current and projected financial performance, as well as a discount factor for the stock option's lack of marketability. The table below reflects disclosure as recommended by the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation for stock option grants in the twelve month period preceding the latest consolidated balance sheet presented:
|
| | | | | | | | | |
| Grant Date | | Number of Options Granted | | Exercise Price | | Common Stock Fair Value Per Share at Grant Date |
| April 10, 2012 | | 15,868 |
| | 9.53 |
| | 9.53 |
|
| May 14, 2012 | | 152,328 |
| | 9.53 |
| | 9.53 |
|
| September 20, 2012 | | 8,655 |
| | 10.40 |
| | 10.40 |
|
| December 6, 2012 | | 339,622 |
| | 12.13 |
| | 12.13 |
|
As of January 1, 2013, there was $3.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan, which is expected to be recognized over two years. The following table summarizes information about stock options outstanding at January 1, 2013:
|
| | | | | | | | | | | | | | | | |
| | | Outstanding | | Exercisable |
| Range of Exercise Price | | Number of Options | | Weighted- Average Remaining Years of Contractual Life | | Weighted- Average Exercise Price | | Number of Options | | Weighted- Average Exercise Price |
| $8.67-$12.13 | | 2,973,167 |
| | 8.10 | | $ | 9.12 |
| | 1,229,341 |
| | $ | 8.67 |
|
On March 10, 2011, the Company issued warrants to a consultant to purchase 86,550 shares of Class B common stock at $8.67 per share, which are classified as equity awards. The warrants vest based on specified performance criteria and are considered stock-based compensation to nonemployees. Stock-based compensation expense related to the awards is recognized when the performance criteria are met, using the estimated fair value at the measurement date. During 2012, the Company did not recognize stock-based compensation expense related to the warrants as no performance criteria were met in 2012. No warrants have been exercised by the consultant.
11. Earnings Per Share
EPS is calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share ("diluted EPS") is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options and restricted common stock. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The following table sets forth the computations of basic and dilutive earnings per share:
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Earnings Per Share (Continued)
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Net income (in thousands) | | $ | 5,163 |
| | $ | 3,829 |
| | $ | 2,378 |
|
| Shares: | | | | | | |
| Basic weighted average shares outstanding | | 23,238,984 |
| | 23,237,698 |
| | 24,386,059 |
|
| Dilutive stock options and warrants | | 26,558 |
| | — |
| | 840,930 |
|
| Diluted weighted average number of shares outstanding | | 23,265,542 |
| | 23,237,698 |
| | 25,226,989 |
|
| Earnings per share: | | | | | | |
| Basic | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.10 |
|
| Diluted | | $ | 0.22 |
| | $ | 0.16 |
| | $ | 0.09 |
|
The Company excluded 590,617, 2,621,023 and 736,734 outstanding options from the diluted earnings per share calculation for 2012, 2011 and 2010, respectively, as the options were out of the money and to include them would have been antidilutive. All outstanding warrants were dilutive in the calculation of diluted earnings per share.
12. Employee Benefit Plans
In October 2003, the Company adopted a defined contribution plan, The Noodles & Company 401(k) Plan (the "401(k) Plan"). Company employees with six months of service, aged 21 or older, are eligible to participate in the 401(k) Plan. Under the provisions of the plan, the Company may, at its discretion, make contributions to the 401(k) Plan. Participants are 100% vested in their own contributions. The Company made no contributions during 2012, 2011 or 2010. The employee benefit plans remained in effect following the Merger Agreement.
13. Leases
The Company leases restaurant facilities, office space and certain equipment under operating leases that expire on various dates through December 2028. Lease terms for traditional shopping centers generally include a base term of 10 years, with options to extend these leases for additional periods of 5 to 15 years. Typically, the lease includes rent escalations, which are expensed on a straight-line basis over the lease term. The difference between rent expense and cash paid for rent is recognized as deferred rent. Rent expense for 2012 and 2011 was approximately $24.6 million and $20.9 million, respectively.
Future minimum lease payments required under existing leases as of January 1, 2013 are as follows (in thousands):
|
| | | |
| 2013 | $ | 29,528 |
|
| 2014 | 28,981 |
|
| 2015 | 27,139 |
|
| 2016 | 25,575 |
|
| 2017 | 22,786 |
|
| Thereafter | 70,394 |
|
| | $ | 204,403 |
|
Minimum payments have not been reduced by minimum sublease rentals of $45,000 due in the future under non-cancelable subleases.
14. Supplemental Disclosures to Consolidated Statements of Cash Flows
The following table presents the supplemental disclosures to the consolidated statements of cash flows (in thousands) for fiscal years 2012, 2011 and 2010:
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Supplemental Disclosures to Consolidated Statements of Cash Flows (Continued)
|
| | | | | | | | | | | | |
| | | 2012 | | 2011 | | 2010 |
| Interest paid (net of amounts capitalized) | | $ | 4,400 |
| | $ | 5,177 |
| | $ | 1,551 |
|
| Income taxes paid (net of refunds) | | 509 |
| | 43 |
| | 870 |
|
| Purchases of property and equipment accrued in accounts payable | | 2,648 |
| | 1,170 |
| | 1,354 |
|
| Settlement of stock options in shares of Class A common stock | | — |
| | — |
| | 3,628 |
|
Non-cash settlement of outstanding equity(1) | | — |
| | — |
| | 189,388 |
|
| |
(1) | Represents the liability for payments due to shareholders that was paid in 2011. |
15. Commitments and Contingencies
In the normal course of business, the Company is subject to proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of January 1, 2013. These matters could affect the operating results of any one financial reporting period when resolved in future periods. Management believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to the Company's consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect the Company's business, financial condition, results of operations or cash flows.
The Company entered into employment agreements with two of its executives in connection with the Merger Agreement, superseding the previous employment agreements with these executives. The agreements have an initial term of three years and automatically renew annually unless cancelled by either party within 90 days of the end of the initial term or anniversaries thereof. In the event of termination for good reason by the executive or termination without cause by the Company, the executive is entitled to receive severance pay equal to 18 months of his then current salary, payment of accrued bonus from prior years, severance bonus equal to the pro rata portion of the executive's target annual bonus for the year in which termination occurs and reimbursement for COBRA benefits coverage. The agreements also include a call option in favor of the Company and a put option in favor of the executive, for the Company to purchase 296,828 rollover shares at fair market value if the employment agreement is terminated prior to a qualified initial public offering. The put option does not result in the executive avoiding the risks and rewards of owning the rollover shares. The fair value of the shares of common stock subject to put options has been presented as temporary equity in the Company's consolidated financial statements. The Company records changes in the fair value of the common stock subject to put options by adjusting temporary equity with the offset to retained earnings. The fair value per share is determined using the most recent valuation performed by the board of directors. See Note 10, Stock Based Compensation.
The Company entered into a Management Services Agreement with one of the Equity Sponsors, and a Class C dividend agreement with the other Equity Sponsor, which provide for certain management fee and dividend payments by the Company to the Equity Sponsors. See additional discussion in Note 16, Related-Party Transactions.
16. Related-Party Transactions
During 2012 and 2011, the Company paid $1.1 million to the Equity Sponsors for management service fees and Class C dividends pursuant to a management services agreement and an agreement to pay dividends on its Class C common stock. Management service fees and Class C dividends paid in each fiscal year vary due to the timing of payments.
In February 2011, the Company paid the Equity Sponsors $45.9 million to repay subordinated notes, which included amounts accrued for PIK interest. See Note 4, Borrowings.
As discussed in Note 2, Equity Recapitalization, Catterton and Argentia each own approximately 45% of the Company's common shares; however, the terms of the Company's certificate of incorporation prevent control by Catterton or Argentia.
Stockholders Agreement. In connection with the 2010 merger, the Company entered into a stockholders agreement with the Equity Sponsors. Under the 2010 Stockholders Agreement, each of Catterton and Argentia have agreed to vote its respective shares of common stock to elect two directors selected by Argentia. Furthermore, if the Public Sector Pension Investment Board Act ceases to prohibit PSPIB from investing in securities of a corporation to which are attached more than 30% of the votes that may be cast to elect directors, each of Catterton and Argentia will vote its respective shares of common stock to elect two directors
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Related-Party Transactions (Continued)
selected by Catterton. Additionally, Catterton will not vote its shares to elect any three of the five directors not designated by Argentia, unless any such director has been approved by Argentia. Catterton and Argentia have further agreed not to vote their shares in favor of any of certain actions without the mutual consent of the other.
17. Subsequent Events
The Company has evaluated events through June 26, 2013 in connection with Amendment No. 5 to the Registration Statement (Form S-1) filed with the Securities and Exchange Commission.
Reverse Stock Split
On June 25, 2013, the Company effected a 1-for-0.577 reverse stock split of our Class A common stock and Class B common stock. Concurrent with the reverse stock split, we adjusted the number of shares subject to and the exercise price of our outstanding stock option awards under the Plan such that the holders of the options are in the same economic position both before and after the reverse stock split.
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
Unaudited Consolidated Financial Statements | | |
| | |
Consolidated Statements of Income for the quarters ended October 1, 2013 and October 2, 2012 | | |
Consolidated Statements of Comprehensive Income for the quarters ended October 1, 2013 and October 2, 2012 | | |
Consolidated Statements of Cash Flows for the quarters ended October 1, 2013 and October 2, 2012 | | |
| | |
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Balance Sheets
(in thousands, except share and per share data)
|
| | | | | | | | |
| | | October 1,
2013 | | January 1,
2013 |
| | | (unaudited) | | |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 589 |
| | $ | 581 |
|
| Accounts receivable | | 5,842 |
| | 4,566 |
|
| Inventories | | 7,082 |
| | 6,042 |
|
| Prepaid expenses and other assets | | 4,999 |
| | 3,970 |
|
| Income tax receivable | | — |
| | 995 |
|
| Total current assets | | 18,512 |
| | 16,154 |
|
| Property and equipment, net | | 158,413 |
| | 136,287 |
|
| Deferred tax assets, net | | 2,753 |
| | 2,791 |
|
| Other assets, net | | 2,132 |
| | 1,763 |
|
| Total long-term assets | | 163,298 |
| | 140,841 |
|
| Total assets | | $ | 181,810 |
| | $ | 156,995 |
|
| Liabilities and Stockholders' Equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 8,817 |
| | $ | 9,393 |
|
| Accrued payroll and benefits | | 8,871 |
| | 5,345 |
|
| Accrued expenses and other current liabilities | | 7,614 |
| | 7,249 |
|
| Income tax payable | | 909 |
| | — |
|
| Current deferred tax liabilities | | 1,351 |
| | 1,023 |
|
| Current portion of long-term debt | | — |
| | 750 |
|
| Total current liabilities | | 27,562 |
| | 23,760 |
|
| Long-term debt | | 1,714 |
| | 93,731 |
|
| Deferred rent | | 27,596 |
| | 23,013 |
|
| Other long-term liabilities | | 2,426 |
| | 2,483 |
|
| Total liabilities | | 59,298 |
| | 142,987 |
|
| Temporary equity: | | | | |
| Common stock subject to put options—0 and 296,828 shares as of October 1, 2013 and January 1, 2013, respectively | | — |
| | 3,601 |
|
| Stockholders' equity: | | | | |
| Preferred stock—$0.01 par value, authorized 1,000,000 and 2,885,000 shares as of October 1, 2013 and January 1, 2013, respectively; no shares issued or outstanding | | — |
| | — |
|
| Common stock—$0.01 par value, authorized 180,000,000 and 34,043,001 shares as of October 1, 2013 and January 1, 2013, respectively; 29,422,939 and 23,238,984 issued and outstanding as of October 1, 2013 and January 1, 2013, respectively | | 294 |
| | 232 |
|
| Additional paid-in capital | | 114,318 |
| | 7,585 |
|
| Accumulated other comprehensive loss, net of tax | | — |
| | (24 | ) |
| Retained earnings | | 7,900 |
| | 2,614 |
|
| Total stockholders' equity | | 122,512 |
| | 10,407 |
|
| Total liabilities and stockholders' equity | | $ | 181,810 |
| | $ | 156,995 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Income
(in thousands, except share and per share data, unaudited)
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Quarter Ended | | Three Fiscal Quarters Ended |
| | | October 1,
2013 | | October 2,
2012 | | October 1,
2013 | | October 2,
2012 |
| Revenue: | | | | | | | | |
| Restaurant revenue | | $ | 87,864 |
| | $ | 76,306 |
| | $ | 256,744 |
| | $ | 220,261 |
|
| Franchising royalties and fees | | 1,072 |
| | 793 |
| | 2,711 |
| | 2,220 |
|
| Total revenue | | 88,936 |
| | 77,099 |
| | 259,455 |
| | 222,481 |
|
| Costs and expenses: | | | | | | | | |
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
| Cost of sales | | 23,127 |
| | 20,246 |
| | 67,524 |
| | 58,423 |
|
| Labor | | 26,345 |
| | 23,065 |
| | 77,464 |
| | 66,002 |
|
| Occupancy | | 8,870 |
| | 7,468 |
| | 25,824 |
| | 21,669 |
|
| Other restaurant operating costs | | 11,315 |
| | 9,488 |
| | 32,962 |
| | 27,449 |
|
| General and administrative | | 6,939 |
| | 7,464 |
| | 27,808 |
| | 21,426 |
|
| Depreciation and amortization | | 5,238 |
| | 4,334 |
| | 15,074 |
| | 12,165 |
|
| Pre-opening | | 1,183 |
| | 829 |
| | 2,873 |
| | 2,000 |
|
| Asset disposals, closure costs and restaurant impairments | | 339 |
| | 201 |
| | 837 |
| | 663 |
|
| Total costs and expenses | | 83,356 |
| | 73,095 |
| | 250,366 |
| | 209,797 |
|
| Income from operations | | 5,580 |
| | 4,004 |
| | 9,089 |
| | 12,684 |
|
| Debt extinguishment expense | | — |
| | 2,646 |
| | — |
| | 2,646 |
|
| Interest expense | | 132 |
| | 1,118 |
| | 2,199 |
| | 3,894 |
|
| Income before income taxes | | 5,448 |
| | 240 |
| | 6,890 |
| | 6,144 |
|
| Provision for income taxes | | 2,183 |
| | 107 |
| | 2,633 |
| | 2,540 |
|
| Net income | | $ | 3,265 |
| | $ | 133 |
| | $ | 4,257 |
| | $ | 3,604 |
|
| Earnings per share of Class A and Class B common stock, combined: | | | | | | | | |
| Basic | | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.17 |
| | $ | 0.16 |
|
| Diluted | | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.16 |
| | $ | 0.16 |
|
| Weighted average shares of Class A and Class B common stock outstanding, combined: | | | | | | | | |
| Basic | | 29,399,650 |
| | 23,238,984 |
| | 25,382,805 |
| | 23,238,984 |
|
| Diluted | | 31,063,213 |
| | 23,388,729 |
| | 26,528,004 |
| | 23,250,745 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Comprehensive Income
(in thousands, unaudited)
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Quarter Ended | | Three Fiscal Quarters Ended |
| | | October 1,
2013 | | October 2,
2012 | | October 1,
2013 | | October 2,
2012 |
| Net income | | $ | 3,265 |
| | $ | 133 |
| | $ | 4,257 |
| | $ | 3,604 |
|
| Other comprehensive income (loss): | | | | | | | | |
| Cash flow hedges: | | | | | | | | |
| Loss recognized in accumulated other comprehensive income | | — |
| | — |
| | — |
| | (186 | ) |
| Reclassification of loss to net income | | — |
| | 104 |
| | 39 |
| | 312 |
|
| Unrealized income on cash flow hedges | | — |
| | 104 |
| | 39 |
| | 126 |
|
| Provision for income tax on cash flow hedges | | — |
| | (42 | ) | | (15 | ) | | (104 | ) |
| Other comprehensive income, net of tax | | — |
| | 62 |
| | 24 |
| | 22 |
|
| Comprehensive income | | $ | 3,265 |
| | $ | 195 |
| | $ | 4,281 |
| | $ | 3,626 |
|
See accompanying notes to consolidated financial statements.
Noodles & Company
Consolidated Statements of Cash Flows
(in thousands, unaudited)
|
| | | | | | | | |
| | | Three Fiscal Quarters Ended |
| | | October 1,
2013 | | October 2,
2012 |
| Operating activities | | | | |
| Net income | | $ | 4,257 |
| | $ | 3,604 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 15,074 |
| | 12,165 |
|
| Provision for deferred income taxes | | 366 |
| | 4 |
|
| Asset disposal, closure costs, and restaurant impairments | | 837 |
| | 663 |
|
| Amortization of debt issuance costs and debt extinguishment expense | | 82 |
| | 3,170 |
|
| Stock-based compensation | | 4,065 |
| | 921 |
|
| Other noncash | | (205 | ) | | (209 | ) |
| Changes in operating assets and liabilities: | | | | |
| Accounts receivable | | (1,276 | ) | | 536 |
|
| Inventories | | (1,040 | ) | | (1,025 | ) |
| Prepaid expenses and other assets | | (1,050 | ) | | (575 | ) |
| Accounts payable | | 787 |
| | (805 | ) |
| Deferred rent | | 4,583 |
| | 2,534 |
|
| Income taxes | | 1,904 |
| | 1,016 |
|
| Accrued expenses and other liabilities | | 4,078 |
| | 3,378 |
|
| Net cash provided by operating activities | | 32,462 |
| | 25,377 |
|
| Investing activities | | | | |
| Purchases of property and equipment | | (39,788 | ) | | (30,525 | ) |
| Net cash used in investing activities | | (39,788 | ) | | (30,525 | ) |
| Financing activities | | | | |
| Proceeds from issuances of notes payable | | 101,731 |
| | 60,128 |
|
| Payments on notes payable | | (194,498 | ) | | (54,094 | ) |
| Debt issuance costs | | — |
| | (752 | ) |
| Issuance of common stock, net of transaction expenses | | 100,101 |
| | (48 | ) |
| Net cash provided by financing activities | | 7,334 |
| | 5,234 |
|
| Net increase in cash and cash equivalents | | 8 |
| | 86 |
|
| Cash and cash equivalents | | | | |
| Beginning of year | | 581 |
| | 523 |
|
| End of year | | $ | 589 |
| | $ | 609 |
|
See accompanying notes to consolidated financial statements.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business and Summary and Basis of Presentation
Business
Noodles & Company, a Delaware corporation (the "Company" or "Noodles & Company"), develops and operates fast casual restaurants that serve globally inspired noodle dishes and pasta dishes, soups, salads and sandwiches. As of October 1, 2013, there were 310 company-owned restaurants and 58 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as one operating and reportable segment.
On July 2, 2013, the Company completed an initial public offering ("IPO") of shares of Class A common stock at $18.00 per share. The Company issued 6,160,714 shares of Class A common stock, $0.01 par value, including 803,571 shares sold to the underwriters in the IPO pursuant to their over-allotment option. After underwriter discounts and commissions and estimated offering expenses, the Company received net proceeds from the offering of approximately $100.2 million. These proceeds were used to repay all but $0.2 million of outstanding debt under the Company's credit facility.
The accompanying interim unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States ("U.S. GAAP") for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company's results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited financial statements and the related notes for the year ended January 1, 2013 included in the Company'sfinal prospectus filed June 28, 2013.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2013, which ends on December 31, 2013 and fiscal year 2012, which ended on January 1, 2013, each contain 52 weeks. Fiscal quarters each contain thirteen weeks, with the exception of the fourth quarter of a 53 week fiscal year, which contains fourteen weeks.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-2, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which revises disclosure requirements related to components of other comprehensive income. The Company adopted ASU 2013-2 effective January 2, 2013. The adoption concerns presentation and disclosure only and did not have an impact on the Company's consolidated financial position or results of operations.
Reclassifications
In the third quarter of 2013, the Company changed the manner in which it reports marketing expenses between general and administrative expenses and other restaurant operating costs to more appropriately reflect only those costs directly related to restaurant-level marketing in other restaurant operating costs. Marketing costs previously reported as restaurant operating costs, that were not directly related to restaurant-level marketing, have been reclassified to general and administrative expense in the Company's consolidated financial statements in all periods presented. In the first two quarters of 2013 and the first two quarters of 2012, $1.0 million and $1.3 million, respectively, have been reclassified from restaurant operating costs to general and administrative expense. The change has no impact on income from operations.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Supplemental Financial Information
Prepaid expenses and other assets consist of the following (in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | January 1,
2013 |
| Prepaid occupancy related costs | | $ | 3,029 |
| | $ | 2,700 |
|
| Other prepaid expenses | | 1,912 |
| | 1,191 |
|
| Other current assets | | 58 |
| | 79 |
|
| | | $ | 4,999 |
| | $ | 3,970 |
|
Property and equipment, net, consist of the following (in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | January 1,
2013 |
| Leasehold improvements | | $ | 164,498 |
| | $ | 139,907 |
|
| Furniture, fixtures, and equipment | | 89,270 |
| | 77,202 |
|
| Construction in progress | | 5,865 |
| | 7,878 |
|
| | | 259,633 |
| | 224,987 |
|
| Accumulated depreciation and amortization | | (101,220 | ) | | (88,700 | ) |
| | | $ | 158,413 |
| | $ | 136,287 |
|
Accrued payroll and benefits consist of the following (in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | January 1,
2013 |
| Accrued payroll and related liabilities | | $ | 5,196 |
| | $ | 2,537 |
|
| Accrued bonus | | 2,303 |
| | 1,981 |
|
| Insurance liabilities | | 1,372 |
| | 827 |
|
| | | $ | 8,871 |
| | $ | 5,345 |
|
Accrued expense and other liabilities consist of the following (in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | January 1,
2013 |
| Gift card liability | | $ | 1,633 |
| | $ | 2,182 |
|
| Occupancy related | | 1,302 |
| | 1,264 |
|
| Utilities | | 1,319 |
| | 1,002 |
|
| Other accrued expenses | | 3,360 |
| | 2,801 |
|
| | | $ | 7,614 |
| | $ | 7,249 |
|
3. Borrowings
The Company has a credit facility with a borrowing capacity of $45.0 million in the form of a revolving line of credit, expiring in July 2017. Prior to the IPO, the Company had a credit facility with a borrowing capacity of 120.0 million, consisting of a $75.0 million senior term loan and a $45.0 million revolving line of credit. In connection with the IPO, the Company repaid in full its outstanding $75.0 million senior term loan and the majority of the revolving line of credit. The Company will continue to have access to the funds and the ability to borrow under the revolving line of credit; however, the amounts repaid on the senior term loan cannot be re-borrowed. As of October 1, 2013, the Company had $1.7 million outstanding and $41.3 million available
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Borrowings (Continued)
for borrowing under the credit facility. Outstanding letters of credit aggregating $2.0 million reduce the amount of borrowings available under the agreement. The credit facility bore interest at rates ranging from 4.25% to 5.50% and 3.5% to 5.5% for the third quarter of 2013 and the first three quarters of 2013, respectively. The Company was in compliance with all of its debt covenants as of October 1, 2013.
4. Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments. The carrying amounts of borrowings approximate fair value as interest rates on the the line of credit borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates.
Assets and Liabilities Measured at Fair Value
The Company’s deferred compensation plan, under which compensation deferrals began during the third quarter of 2013, is a non-qualified deferred compensation plan which allows highly compensated employees to defer a portion of their base salary and variable compensation each plan year. To offset its obligation, the Company purchases Company-owned whole-life insurance contracts on certain team members. As of October 1, 2013, $460,000 and $480,000 were included in other assets, net and other-long term liabilities, respectively, which represent the carrying value of both the liability for deferred compensation plan and associated life insurance policy equal to fair value.
5. Income Taxes
The following table presents the Company's provision for income taxes for the three quarters ended October 1, 2013 and October 2, 2012 (dollars in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | October 2,
2012 |
| Provision for income taxes | | $ | 2,633 |
| | $ | 2,540 |
|
| Effective tax rate | | 38.0 | % | | 41.3 | % |
The 2013 estimated annual effective tax rate is expected to be 39.2% compared to 38.4% for the full year 2012. The effective tax rate for the first three quarters of 2013 includes the discrete adjustment for certain transaction costs related to the IPO.
6. Stock-Based Compensation
The Company's Stock Incentive Plan, as amended and restated in May of 2013, authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and incentive bonuses to employees, officers, non-employee directors and other service providers. The number of shares of common stock available for issuance pursuant to awards granted under the Stock Incentive Plan on or after the closing of the IPO shall not exceed 3,750,500.
The following table presents information related to the Stock Incentive Plan (in thousands, except for share and per share amounts):
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stock-Based Compensation (Continued)
|
| | | | | | | | | | | | | | | |
| | Fiscal Quarter Ended | | Three Fiscal Quarters Ended |
| | October 1, 2013 | | October 2, 2012 | | October 1, 2013 | | October 2, 2012 |
| Outstanding, beginning of period | 3,474,398 |
| | 2,789,212 |
| | 2,973,168 |
| | 2,621,017 |
|
Granted(1) | — |
| | 8,655 |
| | 538,273 |
| | 176,850 |
|
| Exercised | — |
| | — |
| | — |
| | — |
|
| Canceled | 1,961 |
| | 129,949 |
| | 39,004 |
| | 129,949 |
|
| Outstanding, end of period | 3,472,437 |
| | 2,667,918 |
| | 3,472,437 |
| | 2,667,918 |
|
| Weighted average fair market value on option grant date | N/A | | $ | 1.25 |
| | $ | 5.81 |
| | $ | 1.21 |
|
Stock based compensation expense(2) | $ | 131 |
| | $ | 315 |
| | $ | 4,065 |
| | $ | 921 |
|
| Capitalized stock based compensation expense | $ | 15 |
| | $ | 21 |
| | $ | 56 |
| | $ | 57 |
|
______________________
(1) The stock options granted in the first three quarters of 2013 included 403,900 awards to two executive officers of which 50% vested at IPO and the remaining vest annually over four years on the anniversary of the grant in equal installments.
(2) Stock-based compensation expense includes $45,000 related to the Employee Stock Purchase Plan in the third quarter and first three quarters of 2013 and is included in general and administrative expense on the consolidated statements of income. Of the total stock-based compensation recognized in the first three quarters of 2013, $2.0 million related to accelerated vesting of outstanding stock options at the IPO and $1.2 million related to stock options granted at the IPO to 2 executive officers of which 50% were vested at the time of grant.
On October 1, 2013, 23,289 warrants previously issued to a consultant were exercised for Class B common stock at an exercise price of $8.67 per share. Of the original warrants issued, 57,700 remain outstanding as of October 1, 2013.
During the third quarter of 2013, the Company commenced sales of common stock under it's Employee Stock Purchase Plan ("ESPP") and has reserved 750,100 shares of common stock for issuance. Eligible employees may purchase common stock at 85% of the beginning or ending closing price, whichever is lower, for each quarterly purchase period. During the first three quarters of 2013, the Company issued 14,425 shares of common stock under the ESPP. As of October 1, 2013, the Company has 735,675 shares available for future issuance under the ESPP.
7. Earnings Per Share
EPS is calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share ("diluted EPS") is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options and warrants. The following table sets forth the computations of basic and dilutive earnings per share:
|
| | | | | | | | | | | | | | | | |
| | | Fiscal Quarter Ended | | Three Fiscal Quarters Ended |
| | | October 1,
2013 | | October 2,
2012 | | October 1,
2013 | | October 2,
2012 |
| Net income (in thousands): | | $ | 3,265 |
| | $ | 133 |
| | $ | 4,257 |
| | $ | 3,604 |
|
| Shares: | | | | | | | | |
| Basic weighted average shares outstanding | | 29,399,650 |
| | 23,238,984 |
| | 25,382,805 |
| | 23,238,984 |
|
| Dilutive stock options and warrants | | 1,663,563 |
| | 149,745 |
| | 1,145,199 |
| | 11,761 |
|
| Diluted weighted average number of shares outstanding | | 31,063,213 |
| | 23,388,729 |
| | 26,528,004 |
| | 23,250,745 |
|
| Earnings per share: | | | | | | | | |
| Basic EPS | | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.17 |
| | $ | 0.16 |
|
| Diluted EPS | | $ | 0.11 |
| | $ | 0.01 |
| | $ | 0.16 |
| | $ | 0.16 |
|
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings Per Share (Continued)
In the third quarter of 2013 and 2012 and in the first three quarters of 2013 and 2012, zero and 172,831, and 488,018 and 2,552,951 outstanding options, respectively, were excluded from the diluted earnings per share calculation because their inclusion would be antidilutive. All outstanding warrants are dilutive and were included in the calculation of diluted earnings per share.
8. Supplemental Disclosures to Consolidated Statements of Cash Flows
The following table presents the supplemental disclosures to the consolidated statements of cash flows for the first three quarters ended October 1, 2013 and October 2, 2012 (in thousands):
|
| | | | | | | | |
| | | October 1,
2013 | | October 2,
2012 |
| Interest paid (net of amounts capitalized) | | $ | 2,748 |
| | $ | 4,744 |
|
| Income taxes paid | | 400 |
| | 273 |
|
| (Payments for) purchases of property and equipment accrued in accounts payable | | (1,363 | ) | | 2,025 |
|
9. Commitments and Contingencies
In the normal course of business, the Company is subject to proceedings, lawsuits, and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of October 1, 2013. These matters could affect the operating results of any one financial reporting period when resolved in future periods. Management believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to the Company's consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect the Company's business, financial condition, results of operations or cash flows.
The Company entered into employment agreements with two of its executives in connection with the IPO superseding the previous employment agreements with these executives. The agreements have an initial term of three years and automatically renew annually unless earlier terminated. Under each of the employment agreements, if the executive's employment is terminated by the Company without "cause" or by the executive with "good reason," (as such terms are defined in the applicable employment agreement) the executive is entitled to receive compensation equal to 18 months of the executive's then-current base salary, payable in equal installments over 18 months, a pro rata bonus for the year of termination and reimbursement of "COBRA" premiums for up to18 months for the executive and his dependents. The severance payments are conditioned upon the executive entering into a mutual release of claims with the Company.
The prior employment agreements with such executives, which were superseded by the agreements entered into in connection with the IPO, included a call option in favor of the Company and a put option in favor of the executive, for the Company to purchase certain shares at fair market value if the employment agreement was terminated prior to a qualified initial public offering. The put option did not result in the executive avoiding the risks and rewards of owning the shares. The fair value of the shares of common stock subject to such put options was presented as temporary equity in the Company's consolidated financial statements. In connection with the IPO, the put options were terminated and amounts previously presented in temporary equity were reclassified to permanent stockholders' equity in the Company's consolidated financial statements.
10. Related-Party Transactions
In the first three quarters of 2013 and the first three quarters of 2012, the Company paid $375,000 and $625,000, respectively, to Catterton Partners and Argentia Private Investments Inc. or their affiliates ("Equity Sponsors") for management service fees and Class C Dividends pursuant to a management services agreement and an agreement to pay dividends on its Class C common stock. In connection with the IPO, the management services agreement expired and the one share of Class C common stock was redeemed therefore no payments were made in the third quarter of 2013. Management service fees and Class C dividends paid in prior fiscal quarters varies due to the timing of payments.
In connection with the IPO during the second quarter of 2013, the Company paid $1.7 million of transaction bonuses and related payroll taxes to employees of the Company and $0.8 million in transaction payments to the Equity Sponsors.
NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Subsequent Events
The Company has evaluated subsequent events and found there to be no events requiring recognition or disclosure through the date of issuance of this report.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the variousall expenses, other than underwriting discounts and commissions,commission, paid or payable by the Registrant in connection with the sale of common stock being registered.this offering. All of the amounts shown are estimatedestimates except for the Securities and Exchange CommissionSEC registration fee and the FINRA filing fee.
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| | Amount To Be Paid |
| SEC registration fee | *$4,265 |
| FINRA filing fee | * |
Nasdaq listing fee | *6,020 |
Printing and engraving expenses | * |
| Legal fees and expenses | * |
| Accounting fees and expenses | *150,000 |
| Blue sky fees and expenses | * |
| Transfer agent and registrar fees | * |
Miscellaneous fees and expenses | * |
| Total | $* |
* Certain expenses are not presently known. To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Registrant is a Delaware corporation. Section 145(a) of the Delaware General Corporation Law of the State of Delaware (the “DGCL”) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorney fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper.
Further subsections of DGCL Section 145 provide that:
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| (1) | to the extent a present or former director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses, including attorneys’ fees, actually and reasonably incurred by such person in connection therewith; |
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| (2) | the indemnification and advancement of expenses provided for pursuant to Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise; and |
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| (3) | the corporation shall have the power to purchase and maintain insurance of behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145. |
As used in this Item 14, the term “proceeding” means any threatened, pending, or completed action, suit, or proceeding, whether or not by or in the right of Registrant, and whether civil, criminal, administrative, investigative or otherwise.
Section 145 of the DGCL makes provision for the indemnification of officers and directors in terms sufficiently broad to indemnify officers and directors of Registrant under certain circumstances from liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933.Act. Registrant’s Second Amended and Restated Certificate of Incorporation provides,Bylaws provide, in effect, that, to the fullest extent and under the circumstances permitted by Section 145 of the DGCL, registrant will indemnify any and all of its officers and directors. Before the completion of this offering, registrant intends to enter into indemnification agreements with its officers and directors. Registrant may, in its discretion, similarly indemnify its employees and agents.
personal liability to such corporation or its stockholders for monetary damages for any breach of their fiduciary duty as directors except (i) for a breach of the duty of loyalty, (ii) for failure to act in good faith, (iii) for intentional misconduct or knowing violation of law, (iv) for willful or negligent violations of certain provisions in the DGCL imposing certain requirements with respect to stock repurchases, redemptions and dividends, or (v) for any transactions from which the director derived an improper personal benefit.
Registrant has purchased insurance policies which, within the limits and subject to the terms and conditions thereof, cover certain expenses and liabilities that may be incurred by directors and officers in connection with proceedings that may be brought against them as a result of an act or omission committed or suffered while acting as a director or officer of registrant.the Registrant.
Item 15. Recent Sales of Unregistered Equity Securities.
Item 16. Exhibits and Financial Statement Schedules.
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Broomfield, State of Colorado, on November 18, 2013.February 9, 2017.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith Kinsey, Dave Boennighausen and Paul A. Strasen, and each of them, his or her true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
