UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
period ended December 26, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-34920
BRAVO BRIO RESTAURANT GROUP,
INC.
(Exact name of registrant as
specified in its charter)
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Ohio
(State or other jurisdiction
of
incorporation or organization)
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34-1566328
(I.R.S. Employer
Identification No.)
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777 Goodale Boulevard, Suite 100
Columbus, Ohio
(Address of principal
executive office)
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43212
(Zip Code)
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Registrants telephone number, including area code
(614) 326-7944
Former name, former address and former fiscal year, if
changed since last report.
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares, no par value per share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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NO
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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NO
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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NO
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
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NO
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes
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NO
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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 definition of
accelerated filer, large accelerated
filer, and smaller reporting company, in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
as defined in
Rule 12b-2
of the
Act. Yes
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NO
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As of June 27, 2010 (the last business day of our most
recently completed second fiscal quarter), the registrants
common shares were not listed on any exchange or
over-the-counter market. The registrants common shares
began trading on the NASDAQ Global Market on October 21,
2010. As of December 26, 2010, the aggregate market value
of the registrants voting stock held by non-affiliates was
approximately $225.4 million based on the number of shares
held by non-affiliates as of December 26, 2010, and the
last reported sale price of the registrants common shares
on December 26, 2010.
As of February 16, 2011, the latest practicable date,
19,250,500 of the registrants common shares, no par value
per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this annual report on
Form 10-K
incorporates by reference information from the registrants
Proxy Statement for the Annual Meeting of Shareholders to be
held on April 14, 2011.
Forward-Looking
Statements
This annual report on
Form 10-K
contains forward-looking statements. These statements relate to
future events or our future financial performance. We have
attempted to identify forward-looking statements by terminology
including anticipates, believes,
can, continue, could,
estimates, expects, intends,
may, plans, potential,
predicts, should or will or
the negative of these terms or other comparable terminology.
These statements are only predictions and involve known and
unknown risks, uncertainties, and other factors, including those
discussed under Risk Factors. The following factors,
among others, could cause our actual results and performance to
differ materially from the results and performance projected in,
or implied by, the forward-looking statements:
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the success of our existing and new restaurants;
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our ability to successfully develop and expand our operations;
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changes in economic conditions, including continuing effects
from the recent recession;
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our history of net losses;
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damage to our reputation or lack of acceptance of our brands;
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economic and other trends and developments, including adverse
weather conditions, in those local or regional areas in which
our restaurants are concentrated;
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the impact of economic factors, including the availability of
credit, on our landlords and other retail center tenants;
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changes in availability or cost of our principal food products;
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increases in our labor costs, including as a result of changes
in government regulation;
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labor shortages or increased labor costs;
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increasing competition in the restaurant industry in general as
well as in the dining segments of the restaurant industry in
which we compete;
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changes in attitudes or negative publicity regarding food safety
and health concerns;
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the success of our marketing programs;
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potential fluctuations in our quarterly operating results due to
new restaurant openings and other factors;
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the effect on existing restaurants of opening new restaurants in
the same markets;
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the loss of key members of our management team;
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strain on our infrastructure and resources caused by our growth;
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the impact of federal, state or local government regulations
relating to building construction and the opening of new
restaurants, our existing restaurants, our employees, the sale
of alcoholic beverages and the sale or preparation of food;
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the impact of litigation;
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our inability to obtain adequate levels of insurance coverage;
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the impact of our indebtedness;
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future asset impairment charges;
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security breaches of confidential guest information;
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inadequate protection of our intellectual property;
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the failure or breach of our information technology systems;
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a major natural or man-made disaster at our corporate facility;
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our ability to maintain adequate internal controls over
financial reporting;
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the impact of federal, state and local tax rules;
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concentration of ownership among our existing executives,
directors and principal shareholders may prevent other investors
from influencing significant corporate decisions; and
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other factors discussed from time to time in our filings with
the Securities and Exchange Commission (the SEC),
including factors discussed under the headings Risk
Factors, and Managements Discussion and
Analysis of Financial Condition and Results of Operations
of this annual report on
Form 10-K.
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Although we believe that the expectations reflected in the
forward-looking statements are reasonable based on our current
knowledge of our business and operations, we cannot guarantee
future results, levels of activity, performance or achievements.
You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this annual
report on
Form 10-K.
We assume no obligation to provide revisions to any
forward-looking statements should circumstances change.
Basis of
Presentation
We utilize a typical restaurant 52- or 53-week fiscal year
ending on the last Sunday in the calendar year. Fiscal years are
identified in this prospectus according to the calendar year in
which the fiscal years end. For example, references to
2010, fiscal 2010, fiscal year
2010 or similar references refer to the fiscal year ended
December 26, 2010.
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Part I
As used in this annual report on
Form 10-K,
unless the context otherwise indicates, the references to
our company, the Company,
us, we and our refer to
Bravo Brio Restaurant Group, Inc. together with its
subsidiaries.
Our
Business
Bravo Brio Restaurant Group, Inc. was incorporated in July 1987
as an Ohio corporation under the name Belden Village Venture,
Inc. Our name was changed to Bravo Cucina of Dayton, Inc. in
September 1995, to Bravo Development, Inc. in December 1998 and
to Bravo Brio Restaurant Group, Inc. in June 2010. We completed
the initial public offering of our common shares in October
2010. We are a leading owner and operator of two distinct
Italian restaurant brands, BRAVO! Cucina Italiana
(BRAVO!) and BRIO Tuscan Grille (BRIO).
We have positioned our brands as multifaceted culinary
destinations that deliver the ambiance, design elements and food
quality reminiscent of fine dining restaurants at a value
typically offered by casual dining establishments, a combination
known as the upscale affordable dining segment. Each of our
brands provides its guests with a fine dining experience and
value by serving affordable cuisine prepared using fresh
flavorful ingredients and authentic Italian cooking methods,
combined with attentive service in an attractive, lively
atmosphere. We strive to be the best Italian restaurant company
in America and are focused on providing our guests an excellent
dining experience through consistency of execution. At
December 26, 2010, we had 86 restaurants in 29 states.
BRAVO!
Cucina Italiana
BRAVO! Cucina Italiana is a full-service, upscale affordable
Italian restaurant offering a broad menu of freshly-prepared
classic Italian food served in a lively, high-energy environment
with attentive service. The subtitle Cucina
Italiana, meaning Italian Kitchen, is
appropriate since all cooking is done in full view of our
guests, creating the energy of live theater. As of
December 26, 2010, we owned and operated 47 BRAVO!
restaurants in 20 states.
BRAVO! offers a wide variety of pasta dishes, steaks, chicken,
seafood and pizzas, emphasizing fresh,
made-to-order
cuisine and authentic recipes that deliver an excellent value to
guests. BRAVO! also offers creative seasonal specials, an
extensive wine list, carry-out and catering. We believe that our
menu offerings and generous portions of flavorful food, combined
with our ambiance and friendly, attentive service, offer our
guests an attractive price-value proposition. The average check
for BRAVO! during fiscal 2010 was $19.37 per guest.
The breadth of menu offerings at BRAVO! helps generate
significant guest traffic at both lunch and dinner. Lunch
entrées range in price from $8 to $18, while appetizers,
pizzas, flatbreads and entrée salads range from $6 to $14.
During fiscal 2010, the average lunch check for BRAVO! was
$14.91 per guest. Dinner entrées range in price from $11 to
$29 and include a broad selection of fresh pastas, steaks,
chicken and seafood. Dinner appetizers, pizzas, flatbreads and
entrée salads range from $6 to $15. During fiscal 2010, the
average dinner check for BRAVO! was $22.10 per guest. At BRAVO!,
lunch and dinner represented 29.3% and 70.7% of revenues,
respectively, in 2010. Our average annual sales per comparable
BRAVO! restaurant were $3.4 million in fiscal 2010.
BRAVO!s architectural design incorporates interior
features such as arched colonnades, broken columns, hand-crafted
Italian reliefs, Arabescato marble and sizable wrought-iron
chandeliers. We locate our BRAVO! restaurants in high-activity
areas such as retail and lifestyle centers that are situated
near commercial office space and high-density residential
housing.
BRIO
Tuscan Grille
BRIO Tuscan Grille is an upscale affordable Italian chophouse
restaurant serving freshly-prepared, authentic northern Italian
food in a Tuscan Villa atmosphere. BRIO means lively
or full of life in Italian
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and draws its inspiration from the cherished Tuscan philosophy
of to eat well is to live well. As of
December 26, 2010, we owned and operated 39 BRIO
restaurants in 18 states.
The cuisine at BRIO is prepared using fresh ingredients and a
high standard for quality execution with an emphasis on steaks,
chops, fresh seafood and
made-to-order
pastas. BRIO also offers creative seasonal specials, an
extensive wine list, carry-out and banquet facilities at select
locations. We believe that our passion for excellence in service
and culinary expertise, along with our generous portions,
contemporary dining elements and ambiance, offer our guests an
attractive price-value proposition. The average check for BRIO
during fiscal 2010 was $25.24 per guest.
BRIO offers lunch entrées that range in price from $9 to
$17 and appetizers, sandwiches, flatbreads and entrée
salads ranging from $8 to $15. During fiscal 2010, the average
lunch check for BRIO was $17.88 per guest. Dinner entrées
range in price from $14 to $30, while appetizers, sandwiches,
flatbreads, bruschettas and entrée salads range from $8 to
$15. During fiscal 2010, the average dinner check for BRIO was
$30.72 per guest. At BRIO, lunch and dinner represented 30.3%
and 69.7% of revenues, respectively, in 2010. Our average annual
revenues per comparable BRIO restaurant were $5.0 million
in fiscal 2010.
The design and architectural elements of BRIO restaurants are
important to the guest experience. The goal is to bring the
pleasures of the Tuscan country villa to our restaurant guests.
The warm, inviting ambiance of BRIO incorporates interior
features such as antique hardwood Cypress flooring, arched
colonnades, hand-crafted Italian mosaics, hand-crafted walls
covered in an antique Venetian plaster, Arabescato marble and
sizable wrought-iron chandeliers. BRIO is typically located in
high-traffic, high-visibility locations in affluent suburban and
urban markets.
We also operate one full-service upscale affordable
American-French bistro restaurant in Columbus, Ohio under the
brand Bon Vie. Our Bon Vie restaurant is included in
the BRIO operating and financial data set forth in this report.
Our
Business Strengths
Our mission statement
is to be the best Italian restaurant
company in America by delivering the highest quality food and
service to each guest...at each meal...each and every day
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The following strengths help us achieve these objectives:
Two Differentiated yet Complementary
Brands.
We have developed two premier upscale
affordable Italian restaurant brands that are highly
complementary and can be located in common markets. Our brands
are designed to have broad guest appeal at two different price
points. Both BRAVO! and BRIO have their own Corporate Executive
Chef who develops recipes and menu items with differentiated
flavor profiles and price points. Entry level pricing for both
lunch and dinner entrees at BRAVO! is approximately $2 below
BRIO, providing more alternatives for guests at a lower price
point. The guests of BRIO, which offers a greater selection of
protein dishes, tend to purchase more steaks, chops, chicken and
seafood items while guests of BRAVO! select a higher mix of
pasta dishes. In addition, sales of alcoholic beverages at
BRAVO! represent approximately 16.7% of restaurant sales
compared to approximately 22.4% of restaurant sales at BRIO,
primarily due to BRIOs slightly more extensive wine list
and more favorable bar business.
Each brand features unique design elements and atmospheres that
attract a diverse guest base as well as common guests who visit
both BRAVO! and BRIO for different dining experiences. The
differentiated qualities of our brands allow us to operate in
significantly more locations than would be possible with one
brand, including high-density residential areas, shopping malls,
lifestyle centers and other high-traffic locations. Based on
demographics, co-tenants and net investment requirements, we can
choose between our two brands to determine which is optimal for
a location and thereby generate highly attractive returns on our
investment. We focus on choosing the right brand for a specific
site based on population density and demographics. Management
targets markets with $65,000 minimum annual household income and
a population density of 125,000 residents within a particular
trade area for BRAVO! and $70,000 minimum annual household
income and a population density of 150,000 residents within a
particular trade area for
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BRIO. We have a business model that maintains quality and
consistency on a national basis while also having the
flexibility to cater to the specific characteristics of a
particular market. We have a proven track record of successfully
opening new restaurants in a number of diverse real estate
locations, including both freestanding and in-line with other
national retailers. In addition, we believe the flexibility of
our restaurant design is a competitive advantage that allows us
to open new restaurants in attractive markets without being
limited to a standard prototype.
Our brands maintain several common qualities, including certain
design elements such as chandeliers and marble and granite
counter tops, that help reduce building and construction costs
and create consistency for our guests. We share best practices
in service, preparation and food quality across both brands. In
addition, we share services such as real estate development,
purchasing, human resources, marketing and advertising,
information technology, finance and accounting, allowing us to
maximize efficiencies across our company as we continue our
growth.
Broad Appeal with Attractive Guest Base.
We
provide an upscale, yet inviting, atmosphere attracting guests
from a variety of age groups and economic backgrounds. We
provide our guests an upscale affordable dining experience at
both lunch and dinner, which attracts guests from both the
casual dining and fine dining segments. We locate our
restaurants in high-traffic suburban and urban locations to
attract primarily local patrons with limited reliance on
business travelers. Our blend of location, menu offerings and
ambiance is designed to appeal to women, a key decision-maker
when deciding where to dine and shop. We believe that women
accounted for approximately 62% and 65% of our guest traffic at
BRAVO! and BRIO, respectively, during 2010. This positioning
helps make our restaurants attractive for developers and
landlords. We have also cultivated a loyal guest base, with a
majority of our guests dining with us at least once a month.
Superior Dining Experience and Value.
The
strength of our value proposition lies in our ability to provide
freshly-prepared Italian cuisine in a lively restaurant
atmosphere with highly attentive guest service at an attractive
price point. We believe that the dining experiences we offer,
coupled with an attractive price-value relationship, helps us
create long-term, loyal and highly satisfied guests.
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The Food.
We offer
made-to-order
menu items prepared using traditional Italian culinary
techniques with an emphasis on fresh ingredients and authentic
recipes. Our food menu is complemented by a wine list that
offers both familiar varieties as well as wines exclusive to our
restaurants. An attention to detail, culinary expertise and
focused execution reflects our chef-driven culture. Each
brands menu has its own distinctive flavor profile, with
BRAVO! favoring the more classic Italian cuisine that includes a
variety of pasta dishes and pizzas and BRIO favoring a broader
selection of premium steaks, chops, seafood, flatbreads,
bruschettas and pastas. All of our new menu items are developed
by our Corporate Executive Chefs through a six month ideation
process designed to meet our high standards of quality and
exceed our guests expectations.
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The Service.
We are committed to delivering
superior service to each guest, at each meal, each and every
day. We place significant emphasis on maintaining high
waitstaff-to-table
ratios, thoroughly training all service personnel on the details
of each menu item and staffing each restaurant with experienced
management teams to ensure consistent and attentive guest
service. An attention to detail, culinary expertise and focused
execution underscores our chef-driven culture. Only trained,
experienced chefs and culinary staff are hired and allowed to
operate in the kitchen.
Best-in-class
service standards are designed to ensure satisfied guests and
attract both new and repeat guest traffic.
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The Experience.
Lively, high-energy
environments blending dramatic design elements with a warm and
inviting atmosphere create a memorable guest experience.
Signature architectural and décor elements include the
lively theatre of exhibition kitchens, high ceilings, white
tablecloths, a centerpiece bar and relaxing patio areas. In
addition, the majority of our restaurants include attractive
outdoor patios with full bar and dining areas at the front of
our restaurants that create an exciting and inviting atmosphere
for our guests. These elements, along with our superior service
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and value, help form a bond between our guests and our
restaurants, encouraging guest loyalty and more frequent visits.
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Nationally Recognized Restaurant Anchor.
We
believe that our differentiated brands, the attractive
demographics of our guests and the high number of weekly guest
visits to our restaurants have positioned us as a preferred
tenant and the multi-location Italian restaurant company of
choice for national and regional real estate developers.
Landlords and developers seek out our concepts to be restaurant
anchors for their developments as they are highly complementary
to national retailers, having attracted on average between
3,000-5,000 guests per restaurant each week in fiscal 2010. As a
result of the importance of our brands to the retail centers in
which we are located, we are often able to negotiate the prime
location within a center and favorable real estate terms, which
helps to drive strong returns on capital for our shareholders.
Compelling Unit Economics.
We have
successfully opened and operated both of our brands in multiple
geographic regions and achieved attractive average annual
revenues per comparable restaurant of $3.4 million and
$5.0 million at our BRAVO! and BRIO restaurants,
respectively, in fiscal 2010. Our ability to grow rapidly and
efficiently in all market conditions is evidenced through our
strong track record of new restaurant openings. Under our
current investment model, BRAVO! restaurant openings require a
net cash investment of approximately $1.8 million and BRIO
restaurant openings require a net cash investment of
approximately $2.2 million. We target a
cash-on-cash
return beginning in the third operating year for both of our
restaurants of between 30% and 40%.
Management Team with Proven Track Record.
We
have assembled a tested and proven management team with
significant experience operating public companies. Our
management team is led by our CEO and President, Saed Mohseni,
former CEO of McCormick & Schmicks Seafood
Restaurants, Inc., who joined the company in February 2007.
Since Mr. Mohsenis arrival, we have continued to open
new restaurants despite the economic recession. These new
restaurant openings have been a key driver of our growth in
revenue, which has increased 42.1% between the years ended 2006
and 2010. In addition to new restaurant growth, we have also
implemented a number of revenue and margin enhancing initiatives
such as our wine by the glass offerings, wine flights, dessert
trays and a new bar menu. These programs were strategically
implemented to improve our guest experience and maintain our
brand image, as opposed to discounting programs designed to
increase traffic and revenue at the expense of operating
margins. In addition, we have improved our labor efficiencies
and food cost management, which helped to drive our margin
increases and improved our restaurant-level profitability. These
changes resulted in an increase in our restaurant-level
operating margin from 16.0% in 2006 to 18.4% in 2010, a
240 basis point improvement. Restaurant-level operating
margin represents our revenues less total restaurant operating
costs, as a percentage of our revenues.
Our
Growth Strategies
Our growth model is comprised of the following three primary
drivers:
Pursue Disciplined Restaurant Growth.
We
believe that there are significant opportunities to grow our
brands on a nationwide basis in both existing and new markets
where we believe we can generate attractive unit level
economics. We are pursuing a disciplined growth strategy for
both of our brands. We believe that each brand is at an early
stage of its expansion.
We have built a scalable infrastructure and have successfully
grown our restaurant base through a challenging market
environment. Despite difficult economic conditions, we opened
seven new restaurants in 2009 and five new restaurants in 2010.
We plan to open six to seven new restaurants in 2011 and aim to
open between 45 and 50 new restaurants over the next five years.
Grow Existing Restaurant Sales.
We will
continue to pursue targeted local marketing efforts and evaluate
operational initiatives designed to increase unit volumes
without relying on margin-eroding discounting programs.
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Initiatives at BRAVO! include increasing online ordering, which
generates a higher average per person check compared to our
current carry-out business, expanding local restaurant marketing
and promoting our patio business. Other initiatives include
promoting our bar program through martini night and happy hour
programs and expanding our feature cards to include appetizers
and desserts.
At BRIO, we are promoting our bar programs, have implemented
wine flights and dessert trays, introduced a new bar menu and
expanded the selection of wines by the glass. In addition, we
believe there is an opportunity to expand our banquet and
special events catering business. Our banquet and special events
catering business typically generates a higher average per
person check than our dining rooms and, as a result of reduced
labor costs relative to revenue, allows us to achieve higher
margins on those revenues.
We believe our existing restaurants will benefit from increasing
brand awareness as we continue to enter new markets. In
addition, we may selectively remodel existing units to include
additional seating capacity to increase revenue.
Maintain Margins Throughout Our Growth.
We
will continue to aggressively protect our margins using
economies of scale, including marketing and purchasing synergies
between our brands and leveraging our corporate infrastructure
as we continue to open new restaurants. Additional margin
enhancement opportunities include increasing labor efficiency
through the use of scheduling tools, menu engineering and other
operating cost reduction programs.
Real
Estate
As of December 26, 2010, we leased 82 and owned four
restaurant sites, of which 76 are located adjacent to or in
lifestyle centers
and/or
shopping malls and ten are free-standing units strategically
positioned in high-traffic areas. In addition, at
February 16, 2011, we were contractually committed to lease
six restaurants that had not yet opened. On average, our
restaurants range in size from 6,000 to 9,000 square feet.
Since the beginning of 2006, we have opened 41 new locations and
converted, relocated or closed 4 locations. We consider our
ability to locate and secure attractive real estate locations
for new restaurants a key differentiator and long-term success
factor. The majority of our leases provide for minimum annual
rentals and contain
percentage-of-sales
rent provisions against which the minimum rent is applied. A
significant percentage of our leases also provide for periodic
escalation of minimum annual rent based upon increases in the
Consumer Price Index. Typically, our leases are ten or
15 years in length with two, five-year extension options.
Site
Selection Process
Part of our growth strategy is to develop a nationwide system of
restaurants. We have developed a disciplined site acquisition
and qualification process incorporating managements
experience as well as extensive data collection, analysis and
interpretation. We are actively developing BRAVO! and BRIO
restaurants in both new and existing markets, and we will
continue to expand in major metropolitan areas throughout the
U.S. Management closely analyzes traffic patterns,
demographic characteristics, population density, level of
affluence and consumer attitudes or preferences. In addition,
management carefully evaluates the current or expected co-retail
and restaurant tenants in order to accurately assess the
attractiveness of the identified area.
BRAVO! and BRIO are highly sought after by the owners and
developers of upscale shopping centers and mixed use projects.
We are therefore typically made aware of new developments and
opportunities very early on in their selection process. In
addition to our real estate personnel and broker network
actively seeking locations, we do site screening on projects
that are brought to our attention in the planning phases.
Design
BRAVO! and BRIO restaurants integrate critical design elements
of each brand while making each restaurant unique. Consideration
is taken with each design to incorporate the centers
architecture and other regional design elements while still
maintaining certain critical features that help identify our
brands. Our
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interiors, while timeless and inviting, incorporate current
trends that give our restaurants a sophisticated yet classic
feel. This flexibility of design allows us to build one and two
story restaurants and to place restaurants in a variety of
locales, including ground up locations, in-line locations and
conversions of office, retail and restaurant space.
The flexibility of our concepts has enabled us to open
restaurants in a wide variety of locations, including
high-density residential areas, shopping malls, lifestyle
centers and other high-traffic locations. On average, it takes
us approximately 12 to 18 months from identification of the
specific site to opening the doors for business. In order to
maintain consistency of food, guest service and atmosphere at
our restaurants, we have set processes and timelines to follow
for all restaurant openings to ensure they stay on schedule.
The identification of new sites along with their development and
construction are the responsibilities of the Companys Real
Estate Development Group. Several project managers are
responsible for building the restaurants, and several staff
members deal with purchasing, project management, budgeting,
scheduling and other administrative functions. Senior management
reviews the comprehensive studies provided by the Real Estate
Development Group to determine which regions to pursue prior to
any new restaurant development.
New
Restaurant Development
We have successfully opened 41 new locations and converted,
relocated or closed 4 locations since the beginning of 2006.
Management believes it is well-positioned to continue its trend
of disciplined unit expansion through its new restaurant
pipeline. We maintain a commitment to strengthening our core
markets while also pursuing attractive locations in a wide
variety of new markets. We aim to open between 45 and 50 new
restaurants over the next five years. New restaurants will
typically range in size from 7,000 to 9,000 square feet and
are expected to generate a first year average unit volume of
approximately $3.5 million and $4.8 million for BRAVO!
and BRIO, respectively.
Restaurant
Operations
We currently have 14 district partners that report directly to
our Chief Operating Officer, who in turn reports to our Chief
Executive Officer. Each restaurant district partner typically
supervises the operations of six to eight restaurants in their
respective geographic areas, and is in frequent contact with
each location. The staffing at our restaurants typically
consists of a general manager, two to three assistant managers,
an executive chef and one to three sous chefs. In addition, our
restaurants typically employ 60 to 150 hourly employees.
Our operational philosophy is as follows:
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Offer Italian Food and Wines.
We seek to
differentiate ourselves from other multi-location restaurants by
offering affordable cuisine prepared using fresh ingredients and
authentic Italian cooking methods. To ensure that the menu is
consistently prepared to our high standards, we have developed a
comprehensive ten week management training program. As part of
their skill preparation, all of our executive chefs perform a
cooking demonstration. This enables our Corporate Executive
Chefs to evaluate a candidates skill set. All executive
chefs are required to complete ten weeks of kitchen training,
including mastering all stations, ordering, receiving and
inventory control. Due to our high average unit volumes, the
executive chefs are trained throughout the ten weeks to ensure
that their food is consistently prepared on a timely basis. In
addition, all executive chefs are trained on product and labor
management programs to achieve maximum efficiencies. Both of
these tools reinforce our commitment to training our employees
to run their business from a profit and loss perspective, as
well as the culinary side.
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Deliver Superior Guest Service.
Significant
time and resources are spent in the development and
implementation of our training programs, resulting in a
comprehensive service system for both hourly service people and
management. We offer guests prompt, friendly and efficient
service, keeping wait
staff-to-table
ratios high, and staffing each restaurant with experienced
on the floor management teams to ensure consistent
and attentive guest service. We employ food runners to ensure
prompt delivery of fresh dishes at the appropriate temperature,
thus allowing the wait staff to focus on overall guest
satisfaction. All service personnel are thoroughly trained in
the specific flavors of each dish.
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Using a thorough understanding of our menu, the servers assist
guests in selecting menu items complementing individual
preferences.
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Leverage Our Partnership Management
Philosophy.
A key element to our current
expansion and success has been the development of our
partnership management philosophy, which is based on the premise
that active and ongoing economic participation (via a bonus
plan) by each restaurants general manager, executive chef,
assistant managers and sous chefs is essential to long-term
success. The purpose of this structure is to attract and retain
an experienced management team, incentivize the team to execute
our strategy and objectives and provide stability to the
operating management team. This program is offered to all
restaurant management. This provides our management team with
the financial incentive to develop people, build lifelong guests
and operate their restaurants in accordance with our standards.
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Sourcing
and Supply
To ensure the highest quality menu ingredients, raw materials
and other supplies, we continually research and evaluate
products. We contract with Distribution Market Advantage, or
DMA, a cooperative of multiple food distributors located
throughout the nation, and US Foodservice for the broadline
distribution of most of our food products. DMA is a company with
whom we negotiate and gain access to third party food
distributors and suppliers. In fiscal 2010, distributors through
our DMA arrangement supplied us with approximately 60% of our
food supplies. We utilize two primary distributors, Gordon Food
Service, or GFS, and Ben E. Keith Company, or Ben E. Keith, for
the majority of our food distribution under the DMA arrangement.
In fiscal 2010, GFS and Ben E. Keith distributed approximately
88% and 12%, respectively, of the food supplies distributed
through our DMA arrangement. In fiscal 2010, US Foodservice
supplied us with approximately 4% of our food supplies. We
negotiate pricing and volume terms directly with certain of our
suppliers and distributors or through DMA and US Foodservice.
Currently, we have pricing understandings of varying lengths
with several of our distributors and suppliers, including our
distributors and suppliers of poultry, certain seafood products,
dairy products, soups and sauces, bakery items and certain meat
products. Our restaurants place orders directly with GFS, Ben E.
Keith or US Foodservice and maintain regular distribution
schedules.
In addition to our broadline distribution arrangements, we
utilize direct distribution for several products, including a
majority of our meat deliveries, produce and non-alcoholic
beverages. Our purchasing contracts are generally negotiated
annually and cover substantially all of our requirements for a
specific product. Our contracts typically provide either for
fixed or variable pricing based on an agreed upon cost-plus
formula and require that our suppliers deliver directly to our
distributors. We are currently under a fixed-price contract
through March 2012 with our direct meat distributor that covers
a large portion of our meat requirements and a mixed fixed-price
and market-based contract with our poultry supplier that covers
substantially all of our poultry requirements through December
2011. Produce is supplied to our restaurants by a cooperative of
local suppliers. We are currently under a mixed fixed-price and
market-based contract with our national produce management
companies that continues through October 2011. We are currently
under contract with our principal non-alcoholic beverage
provider through the later of 2013 or when certain minimum
purchasing thresholds are satisfied. Our ability to arrange
national distribution of alcoholic beverages is restricted by
state law; however, where possible, we negotiate directly with
spirit companies
and/or
national distributors. We also contract with a third party
provider to supply, maintain and remove our cooking shortening
and oil systems.
We have a procurement strategy for all of our product categories
that includes contingency plans for key products, ingredients
and supplies. These plans include selecting suppliers that
maintain alternate production facilities capable of satisfying
our requirements, or in certain instances, the approval of
secondary suppliers or alternative products. We believe our
procurement strategy will allow us to obtain sufficient product
quantities from other sources at competitive prices.
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Food
Safety
Providing a safe and clean dining experience for our guests is
essential to our mission statement. We have taken steps to
mitigate food quality and safety risks, including designing and
implementing a training program for our chefs, hourly service
people and managers focusing on food safety and quality
assurance. In addition, we include food safety standards and
proceeds in every recipe for our cooks. 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 will all federal
food safety and quality guidelines.
Marketing
and Advertising
Our restaurants have generated broad appeal due to their
flavorful food, friendly, attentive service and ambiance. The
target audience for BRAVO! and BRIO is college-educated
professionals,
ages 35-65,
and their families that dine out frequently for social or
special occasions. Our marketing strategy is designed to promote
and build brand awareness while retaining local neighborhood
relationships by focusing on driving comparable restaurant sales
growth by increasing frequency of visits by our current guests
as well as attracting new guests. Our marketing strategy also
focuses on generating brand awareness at new store openings.
Local
Restaurant Marketing
A significant portion of our marketing budget is spent on
point-of-sale
materials to communicate and promote key brand initiatives to
our guests while they are dining in our restaurants. We believe
that our initiatives, such as seasonal menu changes, holiday
promotions, bar promotions, private party and banquet offerings,
contribute to repeat guest visits for multiple occasions and
drive brand awareness and loyalty.
A key aspect of our local store marketing strategy is developing
community relationships with local schools, churches, hotels,
chambers of commerce and residents. We place advertisements with
junior high and high school athletic programs, school newspapers
and special event programs as well as weekly bulletins for
churches. We believe courting and catering to local hotel
concierges or hosting annual receptions drives traveler
recommendations for BRAVO! and BRIO. Participating in off-site
food and charity fairs and events allows us to make contact with
local families. Hosting chamber of commerce meetings and mixers,
advertising in newsletters and sending out
e-blasts
have also been successful in reaching the business community.
Our restaurant managers are closely involved in developing and
implementing the majority of the local store marketing programs.
Advertising
We spend a limited amount of our marketing budget on various
advertising outlets, including print, radio, direct mail and
outdoor, to build brand awareness. These advertisements are
designed to emphasize the quality and consistency of BRAVO! and
BRIOs food and service and the superior guest experience
we offer in a warm and inviting atmosphere. Direct mail is
primarily used for new store openings but has also been employed
to promote special holiday offers and events.
New
Restaurant Openings
We use the openings of new restaurants as opportunities to reach
out to various media outlets as well as the local community.
Local public relations firms are retained to assist BRAVO! and
BRIO with obtaining appearances on radio and television cooking
shows, establishing relationships with local charities and
gaining coverage in local newspapers and magazines. We employ a
variety of marketing techniques to promote new openings along
with press releases, direct mail,
e-marketing
and other local restaurant marketing activities, which include
concierge parties, training lunches and dinners with local
residents, media, community leaders and businesses. In addition,
we typically partner with a local charity and host an event in
connection with our grand openings.
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E-Marketing &
Social Media
We have increased our use of
e-marketing
tools, which enables us to reach a significant number of people
in a timely and targeted fashion at a fraction of the cost of
traditional media. We believe that BRAVO! and BRIO guests are
frequent Internet users and will explore
e-applications
to make dining decisions or to share dining experiences. We have
set up Facebook and Twitter pages and developed mobile
applications for BRAVO! and BRIO, along with advertising on
weather.com, citysearch.com, yelp.com and urbanspoon.com. We
anticipate allocating an increasing amount of marketing budget
toward this rapidly growing area.
Training
and Employee Programs
We conduct comprehensive training programs for our management,
hourly employees and corporate personnel. Our training
department provides a series of formulated training modules that
are used throughout our company, including leadership training,
team building, food safety certification, alcohol safety
programs, guest service philosophy training, sexual harassment
training and others. All training materials are kept
up-to-date
and stored on our corporate PASTAnet internal web
site for individual restaurants to access as needed.
E-learning
is utilized for several management training modules as trainees
progress through our ten week management training program. Once
management training is completed in the respective restaurants,
all management trainees are brought to our corporate offices for
three days of classroom certification and testing.
Team member selection has been developed to include
pre-employment assessment at all levels, from hourly through
multi-restaurant management candidates. These selection reports
help to bring objectivity to the selection process. Customized
standards have been created for the company that utilize our
strongest performers as the behavioral model for future new
hires.
Our training process in connection with opening new restaurants
has been refined over the course of our experience. Regional
trainers oversee and conduct both service and kitchen training
and are on site through the first two weeks of opening. The
regional trainers lend support and introduce our standards and
culture to the new team. We believe that hiring the best
available team members and committing to their training helps
keep retention high during the restaurant opening process.
Several development programs have been instrumental to our long
term success. The Rising Star program was created as
part of our Bravo Brio Restaurant Group University (BBRGU) to
develop aspiring hourly team members into assistant managers and
chefs. The key element of the Rising Star program is to provide
upward mobility within the organization, utilizing existing
labor hours in the restaurants for focused training for the most
promising employees. Many of our general managers and executive
chefs have gained their positions through internal promotions as
a result of this program. Once an employee is identified as a
potential leader through observation and assessment, a
customized development program is designed that incorporates
mentoring, coaching and training. Business classes for
additional restaurant management skill and leadership traits are
also offered through BBRGU at our corporate office.
Management
Information Systems
Restaurant level financial and accounting controls are handled
through a sophisticated
point-of-sale
(POS) cash register system and computer network in
each restaurant that communicates with our corporate
headquarters. The POS system is also used to authorize and
transmit credit card sales transactions. All of our restaurants
use MICROS RES 3700 software with
state-of-the-art
equipment. Our restaurant communications are comprised of cable,
DSL, Fractional T1 and T1 lines. Our restaurants use MICROS
back-office applications to manage the business and control
costs. The applications that are part of the back-office tools
are Product Management, Financial Management and Labor
Management. These systems integrate with the MICROS RES 3700
software. Product Management helps drive food and beverage costs
down by identifying kitchen or bar inefficiencies and, through
the menu engineering capabilities, it aides in enhancing
profitability. Labor Management provides the ability to schedule
labor and manage labor costs, including time clock governance
that does not allow an employee to clock in more
than a designated amount of time before a scheduled shift.
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In 2008, we implemented the Lawson 9.0 software platform as our
ERP system. Its core subsystems include GL, AP, construction
accounting, Payroll and Human Resources. The data pulled from
the restaurants is integrated into the Lawson system and a data
warehouse. This data provides visibility to allow us to better
analyze the business. In 2009, we focused on re-designing our
guest facing websites to provide a distinct brand image on each
website, as well as allowing us to elevate our message to our
guests. As part of the redesign, we included search engine
optimization into the websites (www.bbrg.com,
www.bravoitalian.com, www.brioitalian.com, www.bon-vie.com).
Also in 2009, we implemented an internal website called
PASTAnet. This intranet site utilizing Microsoft Sharepoint
provides us with the ability to collaborate, communicate, train
and share information between the restaurants and our corporate
office. In 2010, we implemented Online Ordering for our BRAVO!
restaurants and launched www.workatbravo.com and
www.workatbrio.com to accept online applications for both hourly
and management applicants. In connection with our initial public
offering in October 2010, we also launched our investor
relations website, investors.bbrg.com. Also in late 2010, we
implemented wireless access points in all of our restaurants to
provide our guests wireless internet services.
Government
Regulation
We are subject to numerous federal, state and local laws
affecting our business. Each of our restaurants is subject to
licensing and regulation by a number of government authorities,
which may include alcoholic beverage control, nutritional
information disclosure, product safety, health, sanitation,
environmental, zoning and public safety agencies in the state or
municipality in which the restaurant is located. Difficulties in
obtaining or failures to obtain required licenses or approvals
could delay or prevent the development and openings of new
restaurants or could disrupt the operations of existing
restaurants. We believe that we are in compliance in all
material respects with all applicable governmental regulations
and, to date, we have not experienced abnormal difficulties or
delays in obtaining the licenses or approvals required to open
or operate any of our restaurants.
During fiscal 2010, approximately 19.8% of our restaurant sales
were attributable to alcoholic beverages. Alcoholic beverage
control regulations require each of our restaurants to apply to
a state authority and, in certain locations, county and
municipal authorities, for licenses and permits to sell
alcoholic beverages on the premises. Typically, licenses must be
renewed annually and may be subject to penalties, temporary
suspension or revocation for cause at any time. The failure of a
restaurant to obtain its licenses, permits or other approvals,
or any suspension of such licenses, permits or other approvals,
would adversely affect that restaurants operations and
profitability and could adversely affect our ability to obtain
these licenses, permits and approvals elsewhere. Alcoholic
beverage control regulations impact many aspects of the daily
operations of our restaurants, including: the minimum ages of
patrons and staff members consuming or serving these beverages,
respectively; staff member alcoholic beverage training and
certification requirements; hours of operation; advertising;
wholesale purchasing and inventory control of these beverages;
the seating of minors and the servicing of food within our bar
areas; special menus and events, such as happy hours; and the
storage and dispensing of alcoholic beverages. State and local
authorities in many jurisdictions routinely monitor compliance
with alcoholic beverage laws.
We are also subject to dram shop statutes in most of
the states in which we operate, which generally provide a person
injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages
to the intoxicated person who then causes injury to himself or a
third party. We train our staff on how to serve alcohol, and we
carry liquor liability coverage as part of our comprehensive
general liability insurance. We have never been named as a
defendant in a lawsuit involving a dram shop statute.
Various federal and state labor laws govern our operations and
our relationships with our staff members, including such matters
as minimum wages, meal and rest breaks, overtime, tip credits,
fringe benefits, family leave, safety, working conditions,
unionization, citizenship or work authorization requirements and
hiring and employment practices. We are also subject to
increasingly complex federal and state immigration laws and
regulations, including regulations of the U.S. Citizenship
and Immigration Services and U.S. Customs and Immigration
Enforcement. In addition, some states in which we operate have
adopted immigration employment laws which impose additional
conditions on employers. Even if we operate our restaurants in
strict
14
compliance with the laws, rules and regulations of these federal
and state agencies, some of our staff members may not meet
federal citizenship or residency requirements or may lack
appropriate work authorizations, which could lead to a
disruption in our work force. We are also subject to federal and
state child labor laws which, among other things, prohibit the
use of certain hazardous equipment by staff members
younger than 18 years old.
Significant government-imposed increases in minimum wages, paid
or unpaid leaves of absence, sick leave and mandated health
benefits, or increased tax reporting, assessment or payment
requirements related to our staff members who receive
gratuities, could be detrimental to the profitability of our
restaurants. Minimum wage increases in recent years at the
federal level and in the states in which we operate have
impacted the profitability of our restaurants and led to
increased menu prices. In addition, the costs of insurance and
medical care have risen significantly over the past few years
and are expected to continue to increase. We are continuing to
review and assess the impact of the national health care reform
legislation enacted on March 23, 2010, the Patient
Protection and Affordable Care Act (the PPACA), on
our health care benefit costs. The imposition of any requirement
that we provide health insurance benefits to staff members that
are more extensive than the health insurance benefits we
currently provide, or the imposition of additional employer paid
employment taxes on income earned by our employees, could have
an adverse effect on our results of operations and financial
position. Our distributors and suppliers also may be affected by
higher minimum wage and benefit standards, which could result in
higher costs for goods and services supplied to us. While we
carry employment practices insurance covering a variety of
labor-related liability claims, a settlement or judgment against
us that is uninsured or in excess of our coverage limitations
could have a material adverse effect on our results of
operations, liquidity or financial position.
Pursuant to the PPACA, chain restaurants with 20 or more
locations in the United States will be required to comply with
federal nutritional disclosure requirements. A number of states,
counties and cities have also enacted menu labeling laws
requiring
multi-unit
restaurant operators to make certain nutritional information
available to guests, or have enacted legislation restricting the
use of certain types of ingredients in restaurants. Although the
PPACA is intended to preempt conflicting state or local laws on
nutrition labeling, until the United States Food and Drug
Administration (the FDA) issues final regulations
implementing the federal standards, we will continue to be
subject to a variety of state and local laws and regulations
regarding nutritional content disclosure requirements, many of
which are inconsistent or are interpreted differently from one
jurisdiction to another. While we believe that our ability to
adapt to consumer preferences is a strength of our concepts, we
are concerned that the imposition of menu-labeling laws could
have an adverse effect on our results of operations and
financial position, as well as the restaurant industry in
general.
There is also a potential for increased regulation of food in
the United States. For example, the United States Congress is
currently considering food safety legislation that is expected
to greatly expand the FDAs authority over food safety. If
this legislation is enacted, we cannot assure you that it will
not adversely impact our business or the restaurant industry in
general. Additional food safety requirements may also be imposed
by state and local authorities. Additionally, our suppliers may
initiate or otherwise be subject to food recalls that may impact
the availability of certain products, result in adverse
publicity or require us to take other actions that could be
costly for us or otherwise adversely impact our business.
We are subject to a variety of federal and state environmental
regulations, including various laws concerning the handling,
storage and disposal of hazardous materials, such as cleaning
solvents, and the operation of restaurants in environmentally
sensitive locations may impact aspects of our operations. We do
not anticipate that compliance with federal, state and local
provisions regulating the discharge of materials into the
environment, or which otherwise relate to the protection of the
environment, will have a material adverse effect upon our
capital expenditures, revenues or competitive position.
Our facilities must comply with the applicable requirements of
the Americans with Disabilities Act of 1990 (ADA)
and related federal and state statutes. The ADA prohibits
discrimination on the basis of disability with respect to public
accommodations and employment. Under the ADA and related federal
and state laws, we must make access to our new or significantly
remodeled restaurants readily accessible to disabled persons. We
must also make reasonable accommodations for the employment of
disabled persons.
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We are also subject to laws and regulations relating to
information security, privacy, cashless payments, gift cards and
consumer credit, protection and fraud, and any failure or
perceived failure to comply with these laws and regulations
could harm our reputation or lead to litigation, which could
adversely affect our financial condition.
We have a significant number of hourly restaurant staff members
who receive income from gratuities. We have elected to
voluntarily participate in a Tip Reporting Alternative
Commitment (TRAC) agreement with the IRS. By
complying with the educational and other requirements of the
TRAC agreement, we reduce the likelihood of potential
employer-only FICA tax assessments for unreported or
underreported tips. However, we rely on our staff members to
accurately disclose the full amount of their tip income and our
reporting on the disclosures provided to us by such tipped
employees.
See Item 1A Risk Factors for a discussion of
risks relating to federal, state and local regulation of our
business.
Intellectual
Property
We currently own six separate registrations in connection with
restaurant service from the United States Patent and Trademark
Office for the following trademarks:
BRAVO!
®
,
BRAVO! Cucina
Italiana
®
,
Cucina BRAVO!
Italiana
®
,
BRAVO! Italian
Kitchen
®
,
Brio
®
,
Brio Tuscan
Grille
tm
and Bon
Vie
®
.
Our registrations confer a federally recognized exclusive right
for us to use these trademarks throughout the United States, and
we can prevent the adoption of confusingly similar trademarks by
other restaurants that do not possess superior common law rights
in particular markets. An important part of our intellectual
property strategy is the monitoring and enforcement of our
rights in markets in which our restaurants currently exist or
markets which we intend to enter in the future. We also monitor
trademark registers to oppose the registration of confusingly
similar trademarks or to limit the expansion of existing
trademarks with superior common law rights.
We enforce our rights through a number of methods, including the
issuance of
cease-and-desist
letters or making infringement claims in federal court. If our
efforts to protect our intellectual property are inadequate, or
if any third party misappropriates or infringes on our
intellectual property, the value of our brands may be harmed,
which could have a material adverse effect on our business and
might prevent our brands from achieving or maintaining market
acceptance.
Competition
The restaurant business is intensely competitive with respect to
food quality, price-value relationships, ambiance, service and
location, and is affected by many factors, including changes in
consumer tastes and discretionary spending patterns,
macroeconomic conditions, demographic trends, weather
conditions, the cost and availability of raw materials, labor
and energy and government regulations. Any change in these or
other related factors could adversely affect our restaurant
operations. The main competitors for our brands are other
operators of mid-priced, full service concepts in the
multi-location, upscale affordable dining segment in which we
compete most directly for real estate locations and guests,
including Maggianos, Cheesecake Factory, P.F. Changs
and BJs Restaurants. We also compete to a lesser extent
with nationally recognized casual dining Italian restaurants
such as Romanos Macaroni Grill, Carrabbas Italian
Grill and Olive Garden, as well as high quality, locally-owned
and operated Italian restaurants.
There are a number of well-established competitors with
substantially greater financial, marketing, personnel and other
resources than ours. In addition, many of our competitors are
well established in the markets where our operations are, or in
which they may be, located. While we believe that our
restaurants are distinctive in design and operating concept,
other companies may develop restaurants that operate with
similar concepts. In addition, with improving product offerings
at fast casual restaurants, quick-service restaurants and
grocery stores, consumers may choose to trade down to these
alternatives, which could also negatively affect our financial
results.
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Employees
As of December 26, 2010, we had approximately
8,000 employees of whom approximately 80 were corporate
management and staff personnel, approximately 500 were
restaurant managers or trainees, and approximately 7,400 were
employees in non-management restaurant positions. None of our
employees are unionized or covered by a collective bargaining
agreement. We believe that we have good relations with our
employees.
Available
Information
We maintain a website at www.bbrg.com. On our website, we make
available at no charge our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
all amendments to those reports, and our proxy statements as
soon as reasonably practicable after we electronically file this
material with or furnish it to the SEC. Our filings are also
available on the SECs website at www.sec.gov.
Additionally, we make available free of charge on our website
our Code of Business Conduct and Ethics; the charter of the
Nominating and Corporate Governance Committee of our Board of
Directors; the charter of the Compensation Committee of our
Board of Directors; and the charter of the Audit Committee of
our Board of Directors. Our website and the information
contained therein or connected thereto shall not be deemed to be
incorporated into this report.
In addition to the factors discussed elsewhere in this annual
report on
Form 10-K,
the following are important factors which could cause actual
results or events to differ materially from those contained in
any forward-looking statements made by or on behalf of us. We
operate in a competitive and dynamic environment and new risk
factors may emerge at any time. It is not possible for us to
predict the impact these factors could have on us or the extent
to which any one factor, or combination of factors, may
adversely affect our results.
Risks
Relating to Our Business and Industry
Our
financial results depend significantly upon the success of our
existing and new restaurants.
Future growth in revenues and profits will depend on our ability
to grow sales and efficiently manage costs in our existing and
new restaurants. As of December 26, 2010, we operated 47
BRAVO! restaurants and 39 BRIO restaurants, of which two BRAVO!
restaurants and three BRIO restaurants were opened within the
preceding twelve months. The results achieved by these
restaurants may not be indicative of longer-term performance or
the potential market acceptance of restaurants in other
locations.
In particular, the success of our restaurants revolves
principally around guest traffic and average check per guest.
Significant factors that might adversely impact our guest
traffic levels and average guest check include, without
limitation:
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declining economic conditions, including housing market
downturns, rising unemployment rates, lower disposable income
and consumer confidence and other events or factors that
adversely affect consumer spending in the markets we serve;
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increased competition (both in the upscale affordable dining
segment and in other segments of the restaurant industry);
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changes in consumer preferences;
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guests budgeting constraints and choosing not to order
certain high-margin items such as desserts and beverages (both
alcoholic and non-alcoholic);
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guests failure to accept menu price increases that we may
make to offset increases in key operating costs;
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our reputation and consumer perception of our concepts
offerings in terms of quality, price, value and service; and
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guest experiences from dining in our restaurants.
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Our restaurants are also susceptible to increases in certain key
operating expenses that are either wholly or partially beyond
our control, including, without limitation:
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food and other raw materials costs, many of which we do not or
cannot effectively hedge;
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labor costs, including wage, workers compensation, health
care and other benefits expenses;
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rent expenses and other costs under leases for our new and
existing restaurants;
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energy, water and other utility costs;
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costs for insurance (including health, liability and
workers compensation);
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information technology and other logistical costs; and
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expenses due to litigation against us.
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The failure of our existing or new restaurants to perform as
expected could have a significant negative impact on our
financial condition and results of operations.
Our
long-term success is highly dependent on our ability to
successfully develop and expand our operations.
We intend to develop new restaurants in our existing markets,
and selectively enter into new markets. Since the start of 2006,
we have expanded from 30 BRAVO! restaurants and 19 BRIO
restaurants to 47 and 39 BRAVO! and BRIO restaurants,
respectively, as of December 26, 2010. There can be no
assurance that any new restaurant that we open will have similar
operating results to those of existing restaurants. The number
and timing of new restaurants actually opened during any given
period, and their associated contribution to operating growth,
may be negatively impacted by a number of factors including,
without limitation:
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our inability to generate sufficient funds from operations or to
obtain favorable financing to support our development;
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identification and availability of, and competition for, high
quality locations that will continue to drive high levels of
sales per unit;
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acceptable lease arrangements, including sufficient levels of
tenant allowances and construction contributions;
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the financial viability of our landlords, including the
availability of financing for our landlords;
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construction and development cost management;
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timely delivery of the leased premises to us from our landlords
and punctual commencement of build-out construction activities;
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delays due to the highly customized nature of our restaurant
concepts and the complex design, construction and pre-opening
processes for each new location;
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obtaining all necessary governmental licenses and permits on a
timely basis to construct and operate our restaurants;
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competition in new markets, including competition for restaurant
sites;
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unforeseen engineering or environmental problems with the leased
premises;
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adverse weather during the construction period;
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anticipated commercial, residential and infrastructure
development near our new restaurants;
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recruitment of qualified managers, chefs and other key operating
personnel; and
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other unanticipated increases in costs, any of which could give
rise to delays or cost overruns.
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We may not be able to open our planned new restaurants on a
timely basis, if at all, and, if opened, these restaurants may
not be operated profitably. We have experienced, and expect to
continue to experience, delays in restaurant openings from time
to time. Such actions may limit our growth opportunities. We
cannot assure you that we will be able to successfully expand or
acquire critical market presence for our brands in new
geographical markets, as we may encounter well-established
competitors with substantially greater financial resources. We
may be unable to find attractive locations, acquire name
recognition, successfully market our brands or attract new
guests. Competitive circumstances and consumer characteristics
in new market segments and new geographical markets may differ
substantially from those in the market segments and geographical
markets in which we have substantial experience. If we are
unable to expand in existing markets or penetrate new markets,
our ability to increase our revenues and profitability may be
harmed.
Changes
in economic conditions, including continuing effects from the
recent recession, could materially affect our business,
financial condition and results of operations.
We, together with the rest of the restaurant industry, depend
upon consumer discretionary spending. The recent recession,
coupled with high unemployment rates, reduced home values,
increases in home foreclosures, investment losses, personal
bankruptcies and reduced access to credit and reduced consumer
confidence, has impacted consumers ability and willingness
to spend discretionary dollars. Economic conditions may remain
volatile and may continue to repress consumer confidence and
discretionary spending for the near term. If the weak economy
continues for a prolonged period of time or worsens, guest
traffic could be adversely impacted if our guests choose to dine
out less frequently or reduce the amount they spend on meals
while dining out. We believe that if the current negative
economic conditions persist for a long period of time or become
more pervasive, consumers might make long-lasting changes to
their discretionary spending behavior, including dining out less
frequently on a permanent basis. Additionally, a decline in
corporate travel and entertainment spending could result in a
decrease in the traffic of business travelers at our
restaurants. If restaurant sales decrease, our profitability
could decline as we spread fixed costs across a lower level of
sales. Reductions in staff levels, asset impairment charges and
potential restaurant closures have resulted and could result
from prolonged negative restaurant sales.
We
have had net losses in the past and our future profitability is
uncertain.
In fiscal 2010, we had a net loss of $1.2 million despite
comparable restaurant sales increases of 1.6%, primarily as a
result of realizing several one-time charges, including a
$17.9 million one-time non-cash stock compensation charge
related to the modification and acceleration of the existing
options to purchase our common shares that became fully vested
and exercisable upon consummation of our initial public
offering. During the year ended December 28, 2008, we had a
net loss of approximately $61.4 million. The net loss
during this period was due to a number of factors, including an
income tax expense of $55.0 million due primarily to a
valuation allowance of $59.4 million against the total net
deferred tax asset as well as a non-cash impairment charge of
$8.5 million as well as the impact of the recent recession
and weak economic conditions in the markets in which our
restaurants are located. In addition, we had a 7.1% decrease in
revenues from our comparables restaurants in 2009 as compared to
2008. See Part II, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Although we had net income of
$3.4 million for the year ended December 27, 2009 and,
in the absence of the non-cash one-time stock compensation
charge relating to our initial public offering, we would have
had net income of $16.7 million for the year ended
December 26, 2010, we can make no assurances that we will
be profitable in future periods. Future net losses and declines
in average sales per comparable restaurant may limit our ability
to fund our operations, pursue our growth strategy and service
our indebtedness.
19
Damage
to our reputation or lack of acceptance of our brands in
existing and new markets could negatively impact our business,
financial condition and results of operations.
We believe we have built a strong reputation for the quality and
breadth of our menu and our restaurants, and we must protect and
grow the value of our BRAVO! and BRIO brands to continue to be
successful in the future. Any incident that erodes consumer
affinity for our brands could significantly reduce their
respective values and damage our business. If guests perceive or
experience a reduction in food quality, service or ambiance, or
in any way believe we failed to deliver a consistently positive
experience, our brand value could suffer and our business may be
adversely affected.
A multi-location restaurant business such as ours can be
adversely affected by negative publicity or news reports,
whether or not accurate, regarding food quality issues, public
health concerns, illness, safety, injury or government or
industry findings concerning our restaurants, restaurants
operated by other foodservice providers or others across the
food industry supply chain. Negative publicity concerning E.
coli bacteria, mad cow and
foot-and-mouth
disease relating to the consumption of beef and other meat
products, H1N1 or swine flu related to
pork products, avian flu related to poultry products
and the publication of government, academic or industry findings
about health concerns relating to menu items served by our
restaurants could affect consumer food preferences. The sale of
food and prepared food products also involves the risk of injury
or illness to our guests as a result of tampering by
unauthorized third parties or product contamination or spoilage,
including the presence of foreign objects, substances,
chemicals, other agents or residues introduced during the
growing, storage, handling and transportation phases. These
types of health concerns and negative publicity concerning our
food products may adversely affect the demand for our food and
negatively impact our business and results of operations. While
we have taken steps to mitigate food quality, public health and
other foodservice-related risks, these types of health concerns
or negative publicity cannot be completely eliminated or
mitigated and may materially harm our results of operations and
result in damage to our brands. For example, in May 2006, a food
virus outbreak in Michigan affected area restaurants, including
one of our BRAVO! restaurants. As a result, this restaurant was
closed for four days. While the effect of the outbreak was
immaterial to our business, food quality issues or other public
health concerns could have an adverse impact on our
profitability.
In addition, our ability to successfully develop new restaurants
in new markets may be adversely affected by a lack of awareness
or acceptance of our brands in these new markets. To the extent
that we are unable to foster name recognition and affinity for
our brands in new markets, our new restaurants may not perform
as expected and our growth may be significantly delayed or
impaired.
Because
many of our restaurants are concentrated in local or regional
areas, we are susceptible to economic and other trends and
developments, including adverse weather conditions, in these
areas.
Our financial performance is highly dependent on restaurants
located in Ohio, Florida, Michigan and Pennsylvania
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which comprise approximately 43% of our total restaurants.
As a result, adverse economic conditions in any of these areas
could have a material adverse effect on our overall results of
operations. In recent years, certain of these states have been
more negatively impacted by the housing decline, high
unemployment rates and the overall economic crisis than other
geographic areas. In addition, given our geographic
concentrations, negative publicity regarding any of our
restaurants in these areas could have a material adverse effect
on our business and operations, as could other regional
occurrences such as local strikes, terrorist attacks, increases
in energy prices, adverse weather conditions, hurricanes,
droughts or other natural or man-made disasters.
In particular, adverse weather conditions can impact guest
traffic at our restaurants, cause the temporary underutilization
of outdoor patio seating, and, in more severe cases, cause
temporary restaurant closures, sometimes for prolonged periods.
Approximately 33% of our total restaurants are located in Ohio,
Michigan and Pennsylvania, which are particularly susceptible to
snowfall, and 13% of our total restaurants are located in
Florida and Louisiana, which are particularly susceptible to
hurricanes. Our business is subject to seasonal fluctuations,
with restaurant sales typically higher during certain months,
such as December. Adverse weather conditions during our most
favorable months or periods may exacerbate the effect of adverse
weather on guest
20
traffic and may cause fluctuations in our operating results from
quarter-to-quarter
within a fiscal year. For example, the significant snowfall in
the Northeast United States in February 2010 led to reduced
guest traffic at several of our restaurants. In addition,
outdoor patio seating is available at most of our restaurants
and may be impacted by a number of weather-related factors. Our
inability to fully utilize our restaurants seating
capacity as planned may negatively impact our revenues and
results of operations.
The
impact of negative economic factors, including the availability
of credit, on our landlords and other retail center tenants
could negatively affect our financial results.
Negative effects on our existing and potential landlords due to
the inaccessibility of credit and other unfavorable economic
factors may, in turn, adversely affect our business and results
of operations. If our landlords are unable to obtain financing
or remain in good standing under their existing financing
arrangements, they may be unable to provide construction
contributions or satisfy other lease covenants to us.
Approximately 6% of our restaurants are in locations that are
owned, managed or controlled by a landlord that has filed for
bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code in the last 12 months. This landlord may be
able to reject our leases in the bankruptcy proceedings. As of
December 26, 2010, none of our leases have been rejected,
but we cannot assure you that any landlord that has filed, or
may in the future file, for bankruptcy protection may not
attempt to reject leases with us. In addition, if our landlords
are unable to obtain sufficient credit to continue to properly
manage their retail sites, we may experience a drop in the level
of quality of such retail centers. Our development of new
restaurants may also be adversely affected by the negative
financial situations of developers and potential landlords. Many
landlords have delayed or cancelled recent development projects
(as well as renovations of existing projects) due to the
instability in the credit markets and recent declines in
consumer spending, which has reduced the number of high-quality
locations available that we would consider for our new
restaurants.
In addition, several other tenants at retail centers in which we
are located or where we have executed leases have ceased
operations or, in some cases, have deferred openings or failed
to open after committing to do so. These failures may lead to
reduced guest traffic at retail centers in which our restaurants
are located and may contribute to lower guest traffic at our
restaurants.
Changes
in food availability and costs could adversely affect our
operating results.
Our profitability and operating margins are dependent in part on
our ability to anticipate and react to changes in food costs. We
rely on local, regional and national distributors and suppliers
to provide our produce, beef, poultry, seafood and other
ingredients. We contract with Distribution Market Advantage, or
DMA, a cooperative of multiple food distributors located
throughout the nation, and US Foodservice for the broadline
distribution of most of our food products. Other than for a
portion of our commodities, which are purchased locally by each
restaurant, we rely on GFS and Ben E. Keith, as the primary
distributors of a majority of our ingredients. Through our
agreement with DMA, we have a non-exclusive arrangement with
both GFS and Ben E. Keith on terms and conditions that we
believe are consistent with those made available to similarly
situated restaurant companies. Although we believe that
alternative distribution sources are available, any increase in
distribution prices or failure to perform by either GFS or Ben
E. Keith could cause our food costs to increase. Additionally,
we currently rely on sole suppliers for certain of our food
products, including substantially all of our soups and the
majority of our sauces. Failure to identify an alternate source
of supply for these items may result in significant cost
increases. Increases in distribution costs or sale prices could
also cause our food costs to increase. In addition, any material
interruptions in our supply chain, such as a material
interruption of ingredient supply due to the failures of
third-party distributors or suppliers, or interruptions in
service by common carriers that ship goods within our
distribution channels, may result in significant cost increases
and reduce sales. Changes in the price or availability of
certain food products could affect our ability to offer a broad
menu and price offering to guests and could materially adversely
affect our profitability and reputation.
The type, variety, quality and price of produce, beef, poultry
and seafood are more volatile than other types of food and are
subject to factors beyond our control, including weather,
governmental regulation, availability and seasonality, each of
which may affect our food costs or cause a disruption in our
supply. For
21
example, weather patterns in recent years have resulted in lower
than normal levels of rainfall in key agricultural states such
as California, impacting the price of water and the
corresponding prices of food commodities grown in states facing
drought conditions. Our food distributors or suppliers also may
be affected by higher costs to produce and transport commodities
used in our restaurants, higher minimum wage and benefit costs
and other expenses that they pass through to their customers,
which could result in higher costs for goods and services
supplied to us. Although we are able to contract for the
majority of the food commodities used in our restaurants for
periods of up to one year, the pricing and availability of some
of the commodities used in our operations cannot be locked in
for periods of longer than one week or at all. Currently, we
have pricing understandings of varying lengths with several of
our distributors and suppliers, including our distributors and
suppliers of poultry, seafood, dairy products, soups and sauces,
bakery items and certain meat products. We do not use financial
instruments to hedge our risk to market fluctuations in the
price of beef, seafood, produce and other food products at this
time. We may not be able to anticipate and react to changing
food costs through our purchasing practices and menu price
adjustments in the future, and failure to do so could negatively
impact our revenues and results of operations.
Increases
in our labor costs, including as a result of changes in
government regulation, could slow our growth or harm our
business.
We are subject to a wide range of labor costs. Because our labor
costs are, as a percentage of revenues, higher than other
industries, we may be significantly harmed by labor cost
increases.
We retain the financial responsibility for up to $250,000 of
risks and associated liabilities with respect to workers
compensation, general liability, employment practices and other
insurable risks through our self insurance programs. Unfavorable
fluctuations in market conditions, availability of such
insurance or changes in state
and/or
federal regulations could significantly increase our self
insurance costs and insurance premiums. In addition, we are
subject to the risk of employment-related litigation at both the
state and federal levels, including claims styled as class
action lawsuits which are more costly to defend. Also, some
employment related claims in the area of wage and hour disputes
are not insurable risks.
Despite our efforts to control costs while still providing
competitive health care benefits to our staff members,
significant increases in health care costs continue to occur,
and we can provide no assurance that our cost containment
efforts in this area will be effective. Further, we are
continuing to assess the impact of recently-adopted federal
health care legislation on our health care benefit costs, and
significant increases in such costs could adversely impact our
operating results. There is no assurance that we will be able to
pass through the costs of such legislation in a manner that will
not adversely impact our operating results.
In addition, many of our restaurant personnel are hourly workers
subject to various minimum wage requirements or changes to tip
credits. Mandated increases in minimum wage levels and changes
to the tip credit, which are the amounts an employer is
permitted to assume an employee receives in tips when
calculating the employees hourly wage for minimum wage
compliance purposes, have recently been and continue to be
proposed and implemented at both federal and state government
levels. Minimum wage increases or changes to allowable tip
credits may increase our labor costs or effective tax rate.
Additionally, potential changes in labor legislation, including
the Employee Free Choice Act (EFCA), could result in portions of
our workforce being subjected to greater organized labor
influence. The EFCA could impact the nature of labor relations
in the United States and how union elections and contract
negotiations are conducted. The EFCA aims to facilitate
unionization, and employers of unionized employees may face
mandatory, binding arbitration of labor scheduling, costs and
standards, which could increase the costs of doing business.
Although we do not currently have any unionized employees, EFCA
or similar labor legislation could have an adverse effect on our
business and financial results by imposing requirements that
could potentially increase costs and reduce our operating
flexibility.
Labor
shortages could increase our labor costs significantly or
restrict our growth plans.
Our restaurants are highly dependent on qualified management and
operating personnel, including regional management, general
managers and executive chefs. Qualified individuals have
historically been in
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short supply and an inability to attract and retain them would
limit the success of our existing restaurants as well as our
development of new restaurants. We can make no assurances that
we will be able to attract and retain qualified individuals in
the future. Additionally, the cost of attracting and retaining
qualified individuals may be higher than we anticipate, and as a
result, our profitability could decline.
Guest
traffic at our restaurants could be significantly affected by
competition in the restaurant industry in general and, in
particular, within the dining segments of the restaurant
industry in which we compete.
The restaurant industry is highly competitive with respect to
food quality, ambiance, service, price and value and location,
and a substantial number of restaurant operations compete with
us for guest traffic. The main competitors for our brands are
other operators of mid-priced, full service concepts in the
multi-location upscale affordable dining segment in which we
compete most directly for real estate locations and guests,
including Maggianos, Cheesecake Factory, P.F. Changs
and BJs Restaurants. We also compete to a lesser extent
with nationally recognized casual dining Italian restaurants
such as Romanos Macaroni Grill, Carrabbas Italian
Grill and Olive Garden, as well as high quality, locally-owned
and operated Italian restaurants. Some of our competitors have
significantly greater financial, marketing, personnel and other
resources than we do, and many of our competitors are well
established in markets in which we have existing restaurants or
intend to locate new restaurants. Any inability to successfully
compete with the other restaurants in our markets will place
downward pressure on our guest traffic and may prevent us from
increasing or sustaining our revenues and profitability. We may
also need to evolve our concepts in order to compete with
popular new restaurant formats or concepts that develop from
time to time, and we cannot offer any assurance that we will be
successful in doing so or that modifications to our concepts
will not reduce our profitability. In addition, with improving
product offerings at fast casual restaurants, quick-service
restaurants and grocery stores and the influence of negative
economic conditions and other factors, consumers may choose less
expensive alternatives, which could also negatively affect guest
traffic at our restaurants.
Legislation
and regulations requiring the display and provision of
nutritional information for our menu offerings, and new
information or attitudes regarding diet and health or adverse
opinions about the health effects of consuming our menu
offerings, could affect consumer preferences and negatively
impact our results of operations.
Government regulation and consumer eating habits may impact our
business as a result of changes in attitudes regarding diet and
health or new information regarding the health effects of
consuming our menu offerings. These changes have resulted in,
and may continue to result in, the enactment of laws and
regulations that impact the ingredients and nutritional content
of our menu offerings, or laws and regulations requiring us to
disclose the nutritional content of our food offerings. For
example, a number of states, counties and cities have enacted
menu labeling laws requiring
multi-unit
restaurant operators to disclose certain nutritional information
available to guests, or have enacted legislation restricting the
use of certain types of ingredients in restaurants. Furthermore,
the PPACA establishes a uniform, federal requirement for certain
restaurants to post nutritional information on their menus.
Specifically, the PPACA requires chain restaurants with 20 or
more locations operating under the same name and offering
substantially the same menus to publish the total number of
calories of standard menu items on menus and menu boards, along
with a statement that puts this calorie information in the
context of a total daily calorie intake. The PPACA also requires
covered restaurants to provide to consumers, upon request, a
written summary of detailed nutritional information for each
standard menu item, and to provide a statement on menus and menu
boards about the availability of this information upon request.
The FDA is also permitted to require additional nutrient
disclosures, such as disclosure of trans fat content. An
unfavorable report on, or reaction to, our menu ingredients, the
size of our portions or the nutritional content of our menu
items could negatively influence the demand for our offerings.
Certain provisions of the PPACA became effective upon enactment,
while other provisions will require regulations to be
promulgated by the FDA. For example, the FDA is required to
issue proposed regulations by March 23, 2011 to establish
the methods by which restaurants should measure the nutrient
content of their standard menu items to arrive at the declared
value, and provide guidance as to the format and manner of the
nutrient content disclosures required under the law. It is
expected that the FDA will not enforce the applicable
23
provisions of the PPACA until these regulations are finalized.
The PPACA specifically preempts conflicting state and local
laws, and instead provides a single, national standard for
nutrition labeling of restaurant menu items. However, until the
FDA issues final regulations, we will continue to be subject to
a variety of state and local laws and regulations regarding
nutritional content disclosure requirements, many of which are
inconsistent or are interpreted differently from one
jurisdiction to another.
Compliance with current and future laws and regulations
regarding the ingredients and nutritional content of our menu
items may be costly and time-consuming. Additionally, if
consumer health regulations or consumer eating habits change
significantly, we may be required to modify or discontinue
certain menu items, and we may experience higher costs
associated with the implementation of those changes. We cannot
predict the impact of the new nutrition labeling requirements
under the PPACA, once they are issued and implemented.
Additionally, some government authorities are increasing
regulations regarding trans-fats and sodium, which may require
us to limit or eliminate trans-fats and sodium from our menu
offerings and switch to higher cost ingredients and may hinder
our ability to operate in certain markets.
We cannot make any assurances regarding our ability to
effectively respond to changes in consumer health perceptions or
our ability to successfully implement the nutrient content
disclosure requirements and to adapt our menu offerings to
trends in eating habits. While we believe that our ability to
adapt to consumer preferences is a strength of our concepts, we
are concerned that the imposition of menu-labeling laws could
have an adverse effect on our results of operations and
financial position, as well as the restaurant industry in
general.
Our
marketing programs may not be successful.
We expend significant resources in our marketing efforts, using
a variety of media, including social media venues. We expect to
continue to conduct brand awareness programs and guest
initiatives to attract and retain guests. These initiatives may
not be successful, resulting in expenses incurred without the
benefit of higher revenues. Additionally, some of our
competitors have greater financial resources, which enable them
to purchase significantly more television and radio advertising
than we are able to purchase. Should our competitors increase
spending on advertising and promotions or our advertising funds
decrease for any reason, or should our advertising and
promotions be less effective than our competitors, there could
be a material adverse effect on our results of operations and
financial condition.
The
impact of new restaurant openings could result in fluctuations
in our financial performance.
Quarterly results have been, and in the future may continue to
be, significantly impacted by the timing of new restaurant
openings (often dictated by factors outside of our control),
including associated pre-opening costs and operating
inefficiencies, as well as changes in our geographic
concentration due to the opening of new restaurants. We
typically incur the most significant portion of pre-opening
expenses associated with a given restaurant within the two
months immediately preceding and the month of the opening of the
restaurant. Our experience has been that labor and operating
costs associated with a newly opened restaurant for the first
several months of operation are materially greater than what can
be expected after that time, both in aggregate dollars and as a
percentage of revenues. Our new restaurants commonly take
several months to reach planned operating levels due to
inefficiencies typically associated with new restaurants,
including the training of new personnel, lack of market
awareness, inability to hire sufficient qualified staff and
other factors. Accordingly, the volume and timing of new
restaurant openings has had, and may continue to have, a
meaningful impact on our profitability. Due to the foregoing
factors, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or
for a full fiscal year, and these fluctuations may cause our
operating results to be below expectations of public market
analysts and investors.
Opening
new restaurants in existing markets may negatively affect sales
at our existing restaurants.
The consumer target area of our restaurants varies by location,
depending on a number of factors such as population density,
local retail and business attractions, area demographics and
geography. As a result, the opening of a new restaurant, whether
using the same brand or a different brand, in or near markets in
which
24
we already have existing restaurants could adversely impact the
sales of new or existing restaurants. We do not intend to open
new restaurants that materially impact the existing sales of our
existing restaurants. However, there can be no assurance that
sales cannibalization between our restaurants will not occur or
become more significant in the future as we continue to expand
our operations.
Our
business operations and future development could be
significantly disrupted if we lose key members of our management
team.
The success of our business continues to depend to a significant
degree upon the continued contributions of our senior officers
and key employees, both individually and as a group. Our future
performance will be substantially dependent in particular on our
ability to retain and motivate Saed Mohseni, our President and
Chief Executive Officer and James J. OConnor, our Chief
Financial Officer, as well as certain of our other senior
executive officers. We currently have employment agreements in
place with Mr. Mohseni and Mr. OConnor. The loss
of the services of our CEO, CFO, senior officers or other key
employees could have a material adverse effect on our business
and plans for future development. We have no reason to believe
that we will lose the services of any of these individuals in
the foreseeable future; however, we currently have no effective
replacement for any of these individuals due to their
experience, reputation in the industry and special role in our
operations. We also do not maintain any key man life insurance
policies for any of our employees.
Our
growth may strain our infrastructure and resources, which could
slow our development of new restaurants and adversely affect our
ability to manage our existing restaurants.
We opened two BRAVO! and three BRIO restaurants in 2010, two
BRAVO! and five BRIO restaurants in 2009, and in 2008 we opened
seven BRAVO! and six BRIO restaurants. Our recent and future
growth may strain our restaurant management systems and
resources, financial controls and information systems. Those
demands on our infrastructure and resources may also adversely
affect our ability to manage our existing restaurants. If we
fail to continue to improve our infrastructure or to manage
other factors necessary for us to meet our expansion objectives,
our operating results could be materially and adversely
affected. Likewise, if sales decline, we may be unable to reduce
our infrastructure quickly enough to prevent sales deleveraging,
which would adversely affect our profitability.
Restaurant
companies have been the target of
class-actions
and other litigation alleging, among other things, violations of
federal and state law.
We are subject to a variety of lawsuits, administrative
proceedings and claims that arise in the ordinary course of our
business. In recent years, a number of restaurant companies have
been subject to claims by guests, employees and others regarding
issues such as food safety, personal injury and premises
liability, employment-related claims, harassment,
discrimination, disability and other operational issues common
to the foodservice industry. A number of these lawsuits have
resulted in the payment of substantial damages by the
defendants. Similar lawsuits have been instituted against us
from time to time, including a 2004 class action lawsuit
initiated by servers at a BRIO location in Newport, Kentucky. In
this lawsuit, certain of our servers alleged that they were
required to remit back to the restaurant a percentage of their
tips in violation of Kentucky law. While we settled this lawsuit
for an immaterial amount and no other such lawsuits have had a
material impact historically
,
an adverse judgment
or settlement that is not insured or is in excess of insurance
coverage could have an adverse impact on our profitability and
could cause variability in our results compared to expectations.
We are self-insured, or carry insurance programs with specific
retention levels, for a significant portion of our risks and
associated liabilities with respect to workers
compensation, general liability, employers liability,
health benefits and other insurable risks. Regardless of whether
any claims against us are valid or whether we are ultimately
determined to be liable, we could also be adversely affected by
negative publicity, litigation costs resulting from the defense
of these claims and the diversion of time and resources from our
operations.
25
Our
insurance policies may not provide adequate levels of coverage
against all claims, and fluctuating insurance requirements and
costs could negatively impact our profitability.
We believe our insurance coverage is customary for businesses of
our size and type. However, there are types of losses we may
incur that cannot be insured against or that we believe are not
commercially reasonable to insure. These losses, if they occur,
could have a material and adverse effect on our business and
results of operations. In addition, the cost of workers
compensation insurance, general liability insurance and
directors and officers liability insurance
fluctuates based on our historical trends, market conditions and
availability. Additionally, health insurance costs in general
have risen significantly over the past few years and are
expected to continue to increase in 2011. These increases, as
well as recently-enacted federal legislation requiring employers
to provide specified levels of health insurance to all
employees, could have a negative impact on our profitability,
and there can be no assurance that we will be able to
successfully offset the effect of such increases with plan
modifications and cost control measures, additional operating
efficiencies or the pass-through of such increased costs to our
guests.
Our
indebtedness may limit our ability to invest in the ongoing
needs of our business.
We have a substantial amount of indebtedness. In connection with
the initial public offering of our common shares, we repaid all
outstanding loans under our previously existing senior credit
facilities and entered into new senior credit facilities that
included a $45.0 million term loan facility and a
$40.0 million revolving credit facility. As of
December 26, 2010, we had approximately $41.0 million
of outstanding indebtedness under our term loan facility and no
outstanding indebtedness under our revolving credit facility. As
of December 26, 2010, we had $36.8 million of
revolving loan availability under our senior revolving credit
facility (after giving effect to $3.2 million of
outstanding letters of credit). For the years ended
December 26, 2010 and December 27, 2009, our net
principal repayments on indebtedness (including net repayments
under our previously existing revolving credit facility) were
$77.1 million and $9.3 million, respectively, and cash
interest payments for such periods were $6.4 million and
$7.0 million, respectively. Our senior credit facilities
mature in 2015, and borrowings under the senior credit
facilities bear interest at our option of either (i) the
Alternate Base Rate (as such term is defined in our credit
agreement) plus the applicable margin of 1.75% to 2.25% or
(ii) at a fixed rate for a period of one, two, three or six
months equal to the London interbank offered rate, LIBOR, plus
the applicable margin of 2.75% to 3.25%. See Part II,
Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations
Capital Resources Current Resources.
Our
indebtedness could have important consequences to you. For
example, it:
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requires us to utilize a substantial portion of our cash flow
from operations to payments on our indebtedness, reducing the
availability of our cash flow to fund working capital, capital
expenditures, development activity and other general corporate
purposes;
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increases our vulnerability to adverse general economic or
industry conditions;
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limits our flexibility in planning for, or reacting to, changes
in our business or the industries in which we operate;
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makes us more vulnerable to increases in interest rates, as
borrowings under our senior credit facilities are at variable
rates;
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limits our ability to obtain additional financing in the future
for working capital or other purposes; and
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places us at a competitive disadvantage compared to our
competitors that have less indebtedness.
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Although our senior credit facilities contain restrictions on
the incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and
the indebtedness incurred in compliance with these restrictions
could be substantial. Also, these restrictions do not prevent us
from incurring obligations that do not constitute indebtedness.
26
Our senior credit facilities require us to maintain certain
interest expense coverage ratios and leverage ratios which
become more restrictive over time. While we have never defaulted
on compliance with any financial covenants under the terms of
our indebtedness, our ability to comply with these ratios in the
future may be affected by events beyond our control, and an
inability to comply with the required financial ratios could
result in a default under our senior credit facilities. In the
event of any default, the lenders under our senior credit
facilities could elect to terminate lending commitments and
declare all borrowings outstanding, together with accrued and
unpaid interest and other fees, to be immediately due and
payable.
See Part II, Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and
Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Resources.
We may
be unable to obtain debt or other financing on favorable terms
or at all.
There are inherent risks in our ability to borrow. Our lenders
may have suffered losses related to their lending and other
financial relationships, especially because of the general
weakening of the national economy, increased financial
instability of many borrowers and the declining value of their
assets. As a result, lenders may become insolvent or tighten
their lending standards, which could make it more difficult for
us to borrow under our senior credit facilities, refinance our
existing indebtedness or to obtain other financing on favorable
terms or at all. Our financial condition and results of
operations would be adversely affected if we were unable to draw
funds under our senior credit facilities because of a lender
default or to obtain other cost-effective financing.
Longer term disruptions in the capital and credit markets as a
result of uncertainty, changing or increased regulation, reduced
alternatives or failures of significant financial institutions
could adversely affect our access to liquidity needed for our
business. Any disruption could require us to take measures to
conserve cash until the markets stabilize or until alternative
credit arrangements or other funding for our business can be
arranged. Such measures could include deferring capital
expenditures (including the opening of new restaurants) and
reducing or eliminating other discretionary uses of cash.
We may
be required to record additional asset impairment charges in the
future.
In accordance with accounting guidance as it relates to the
impairment of long-lived assets, we review long-lived assets,
such as property and equipment and intangibles, subject to
amortization, for impairment when events or circumstances
indicate the carrying value of the assets may not be
recoverable. In determining the recoverability of the asset
value, an analysis is performed at the individual restaurant
level and primarily includes an assessment of historical cash
flows and other relevant factors and circumstances. The other
factors and circumstances include changes in the economic
environment, changes in the manner in which assets are used,
unfavorable changes in legal factors or business climate,
incurring excess costs in construction of the asset, overall
restaurant operating performance and projections for financial
performance. These estimates result in a wide range of
variability on a year to year basis due to the nature of the
criteria. Negative restaurant-level cash flow over the previous
12-month
period is considered a potential impairment indicator. In such
situations, we evaluate future cash flow projections in
conjunction with qualitative factors and future operating plans.
Our impairment assessment process requires the use of estimates
and assumptions regarding future undiscounted cash flows and
operating outcomes, which are based upon a significant degree of
managements judgment. Based on this analysis, if we
believe that the carrying amount of the assets are not
recoverable, an impairment charge is recognized based upon the
amount by which the assets carrying value exceeds fair value.
See Part II, Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Significant Accounting
Policies Impairment of Long-Lived Assets. We
recognized asset impairment charges of approximately
$6.4 million and $8.5 million in fiscal 2009 and 2008,
respectively, related to three and five restaurants,
respectively. We had no asset impairment charges in fiscal 2010.
Continued economic weakness within our respective markets may
adversely impact consumer discretionary spending and may result
in lower restaurant sales. Unfavorable fluctuations in our
commodity costs, supply costs and labor rates, which may or may
not be within our control, may also impact our operating
margins.
27
Any of these factors could as a result affect the estimates used
in our impairment analysis and require additional impairment
tests and charges to earnings. We continue to assess the
performance of our restaurants and monitor the need for future
impairment. There can be no assurance that future impairment
tests will not result in additional charges to earnings.
Security
breaches of confidential guest information in connection with
our electronic processing of credit and debit card transactions
may adversely affect our business.
The majority of our restaurant sales are by credit or debit
cards. Other restaurants and retailers have experienced security
breaches in which credit and debit card information of their
customers has been stolen. We may in the future become subject
to lawsuits or other proceedings for purportedly fraudulent
transactions arising out of the actual or alleged theft of our
guests credit or debit card information. Any such claim or
proceeding, or any adverse publicity resulting from these
allegations, may have a material adverse effect on us and our
restaurants.
We may
not be able to adequately protect our intellectual property,
which, in turn, could harm the value of our brands and adversely
affect our business.
Our ability to implement our business plan successfully depends
in part on our ability to further build brand recognition using
our trademarks, service marks and other proprietary intellectual
property, including our names and logos and the unique ambiance
of our restaurants. We have registered or applied to register a
number of our trademarks. We cannot assure you that our
trademark applications will be approved. Third parties may also
oppose our trademark applications, or otherwise challenge our
use of the trademarks. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our goods
and services, which could result in loss of brand recognition,
and could require us to devote resources to advertising and
marketing new brands.
If our efforts to register, maintain and protect our
intellectual property are inadequate, or if any third party
misappropriates, dilutes or infringes on our intellectual
property, the value of our brands may be harmed, which could
have a material adverse effect on our business and might prevent
our brands from achieving or maintaining market acceptance. We
may also face the risk of claims that we have infringed third
parties intellectual property rights. If third parties
claim that we infringe upon their intellectual property rights,
our operating profits could be adversely affected. Any claims of
intellectual property infringement, even those without merit,
could be expensive and time consuming to defend, require us to
rebrand our services, if feasible, divert managements
attention and resources or require us to enter into royalty or
licensing agreements in order to obtain the right to use a third
partys intellectual property.
Any royalty or licensing agreements, if required, may not be
available to us on acceptable terms or at all. A successful
claim of infringement against us could result in our being
required to pay significant damages, enter into costly license
or royalty agreements, or stop the sale of certain products or
services, any of which could have a negative impact on our
operating profits and harm our future prospects.
Information
technology system failures or breaches of our network security
could interrupt our operations and adversely affect our
business.
We rely on our computer systems and network infrastructure
across our operations, including
point-of-sale
processing at our restaurants. Our operations depend upon our
ability to protect our computer equipment and systems against
damage from physical theft, fire, power loss, telecommunications
failure or other catastrophic events, as well as from internal
and external security breaches, viruses, worms and other
disruptive problems. Any damage or failure of our computer
systems or network infrastructure that causes an interruption in
our operations could have a material adverse effect on our
business and subject us to litigation or actions by regulatory
authorities. Although we employ both internal resources and
external consultants to conduct auditing and testing for
weaknesses in our systems, controls, firewalls and encryption
and intend to maintain and upgrade our security technology and
operational procedures to prevent such damage, breaches or other
disruptive problems, there can be no assurance that these
security measures will be successful.
28
A
major natural or man-made disaster at our corporate facility
could have a material adverse effect on our
business.
Most of our corporate systems, processes and corporate support
for our restaurant operations are centralized at one Ohio
location with certain systems and processes being concurrently
stored at an offsite storage facility in accordance with our new
disaster recovery plan.
Back-up
data
tapes are also sent to a separate off-site location on a weekly
basis. As part of our new disaster recovery plan, we are
currently finalizing the backup processes for our core systems
at our co-location facility. If we are unable to fully implement
this new disaster recovery plan, we may experience failures or
delays in recovery of data, delayed reporting and compliance,
inability to perform necessary corporate functions and other
breakdowns in normal operating procedures that could have a
material adverse effect on our business and create exposure to
administrative and other legal claims against us.
We now
incur increased costs and obligations as a result of being a
public company.
Prior to October 26, 2010, as a privately held company, we
were not required to comply with certain corporate governance
and financial reporting practices and policies required of a
publicly traded company. As a publicly traded company, we now
incur significant legal, accounting and other expenses that we
were not required to incur in the recent past. In addition, new
and changing laws, regulations and standards relating to
corporate governance and public disclosure, including the
Dodd-Frank Wall Street Reform and Consumer Protection Act and
the rules and regulations promulgated and to be promulgated
thereunder, as well as under the Sarbanes-Oxley Act of 2002, as
amended (the Sarbanes-Oxley Act), and the rules and
regulations of the U.S. Securities and Exchange Commission
(the SEC) and the Nasdaq Global Market, have created
uncertainty for public companies and increased our costs and
time that our board of directors and management must devote to
complying with these rules and regulations. We expect these
rules and regulations to increase our legal and financial
compliance costs and lead to a diversion of management time and
attention from revenue generating activities. We estimate that
we will incur approximately $1.0 to $1.5 million of
incremental costs per year associated with being a
publicly-traded company; however, it is possible that our actual
incremental costs of being a publicly-traded company will be
higher than we currently estimate. In estimating these costs, we
took into account expenses related to insurance, legal,
accounting and compliance activities.
Furthermore, the need to establish the corporate infrastructure
demanded of a public company may divert managements
attention from implementing our growth strategy, which could
prevent us from improving our business, results of operations
and financial condition. We have made, and will continue to
make, changes to our internal controls and procedures for
financial reporting and accounting systems to meet our reporting
obligations as a publicly traded company. However, the measures
we take may not be sufficient to satisfy our obligations as a
publicly traded company.
Section 404 of the Sarbanes-Oxley Act requires annual
management assessments of the effectiveness of our internal
control over financial reporting, starting with the second
annual report that we file with the SEC after the consummation
of our initial public offering, and will require in the same
report a report by our independent registered public accounting
firm on the effectiveness of our internal control over financial
reporting. In connection with the implementation of the
necessary procedures and practices related to internal control
over financial reporting, we may identify deficiencies that we
may not be able to remediate in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the
requirements of Section 404. We will be unable to issue
securities in the public markets through the use of a shelf
registration statement if we are not in compliance with
Section 404. Furthermore, failure to achieve and maintain
an effective internal control environment could have a material
adverse effect on our business and share price and could limit
our ability to report our financial results accurately and
timely.
Federal,
state and local tax rules may adversely impact our results of
operations and financial position.
We are subject to federal, state and local taxes in the
U.S. Although we believe our tax estimates are reasonable,
if the Internal Revenue Service (IRS) or other
taxing authority disagrees with the positions we have taken on
our tax returns, we could face additional tax liability,
including interest and penalties. If material, payment of such
additional amounts upon final adjudication of any disputes could
have a material
29
impact on our results of operations and financial position. In
addition, complying with new tax rules, laws or regulations
could impact our financial condition, and increases to federal
or state statutory tax rates and other changes in tax laws,
rules or regulations may increase our effective tax rate. Any
increase in our effective tax rate could have a material impact
on our financial results.
Risks
Relating to Our Common Shares
The
price of our common shares may be volatile and you could lose
all or part of your investment.
Volatility in the market price of our common shares may prevent
you from being able to sell your shares at or above the price
you paid for your shares. The market price of our common shares
could fluctuate significantly for various reasons, which include:
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our quarterly or annual earnings or those of other companies in
our industry;
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changes in laws or regulations, or new interpretations or
applications of laws and regulations, that are applicable to our
business;
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the publics reaction to our press releases, our other
public announcements and our filings with the SEC;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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additions or departures of our senior management personnel;
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sales of common shares by our directors and executive officers;
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sales or distributions of common shares by our private equity
sponsors;
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adverse market reaction to any indebtedness we may incur or
securities we may issue in the future;
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actions by shareholders;
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the level and quality of research analyst coverage for our
common shares, changes in financial estimates or investment
recommendations by securities analysts following our business or
failure to meet such estimates;
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the financial disclosure we may provide to the public, any
changes in such disclosure or our failure to meet such
disclosure;
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various market factors or perceived market factors, including
rumors, whether or not correct, involving us, our distributors
or suppliers or our competitors;
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introductions of new offerings or new pricing policies by us or
by our competitors;
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acquisitions or strategic alliances by us or our competitors;
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short sales, hedging and other derivative transactions in our
common shares;
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the operating and stock price performance of other companies
that investors may deem comparable to us; and
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other events or factors, including changes in general conditions
in the United States and global economies or financial markets
(including those resulting from Acts of God, war, incidents of
terrorism or responses to such events).
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In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by
many companies, including companies in our industry. The price
of our common shares could fluctuate based upon factors that
have little or nothing to do with our company, and these
fluctuations could materially reduce our share price.
In the past, following periods of market volatility in the price
of a companys securities, security holders have often
instituted class action litigation. If the market value of our
common shares experiences adverse fluctuations and we become
involved in this type of litigation, regardless of the outcome,
we could incur
30
substantial legal costs and our managements attention
could be diverted from the operation of our business, causing
our business to suffer.
Future
sales of our common shares in the public market could lower our
share price.
Sales of substantial amounts of our common shares in the public
market by our existing shareholders, upon the exercise of
outstanding stock options or stock options granted in the future
or by persons who acquire shares in the public market may
adversely affect the market price of our common shares. Such
sales could also create public perception of difficulties or
problems with our business. These sales might also make it more
difficult for us to sell securities in the future at a time and
price that we deem appropriate.
As of December 26, 2010, we had outstanding 19,250,500
common shares, of which:
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11,500,000 shares are shares that were sold in connection
with our initial public offering and, unless purchased by
affiliates, may be resold in the public market;
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44,564 shares are shares held by non-employee existing
shareholders and are eligible for sale; and
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7,705,936 shares are restricted securities, as
defined in Rule 144 under the Securities Act, and eligible
for sale in the public market pursuant to the provisions of
Rule 144, all of which are subject to
lock-up
agreements with the underwriters of our initial public offering
and will become available for resale in the public market
beginning April 19, 2011, unless earlier waived by the
underwriters.
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In addition, we have reserved 1.9 million common shares for
issuance under the Bravo Brio Restaurant Group, Inc. Stock
Incentive Plan, of which 449,300 shares are subject to
vesting under outstanding restricted stock awards and
1,450,200 shares remain eligible for future issuance, and
stock options to purchase an aggregate of 1,404,203 common
shares are currently outstanding under the Bravo Development,
Inc. Option Plan.
With limited exceptions, the
lock-up
agreements with the underwriters of our initial public offering
prohibit a shareholder from selling, contracting to sell or
otherwise disposing of any common shares or securities that are
convertible or exchangeable for common shares or entering into
any arrangement that transfers the economic consequences of
ownership of our common shares for at least 180 days from
the date of the prospectus filed in connection with our initial
public offering, although the lead underwriters may, in their
sole discretion and at any time without notice, release all or
any portion of the securities subject to these
lock-up
agreements. Upon a request to release any shares subject to a
lock-up,
the
lead underwriters would consider the particular circumstances
surrounding the request including, but not limited to, the
length of time before the
lock-up
expires, the number of shares requested to be released, reasons
for the request, the possible impact on the market for our
common shares and whether the holder of our shares requesting
the release is an officer, director or other affiliate of ours.
As a result of these
lock-up
agreements, notwithstanding earlier eligibility for sale under
the provisions of Rule 144, none of these shares may be
sold until at least April 19, 2011.
As restrictions on resale end, our share price could drop
significantly if the holders of these restricted shares sell
them or are perceived by the market as intending to sell them.
These sales might also make it more difficult for us to sell
securities in the future at a time and at a price that we deem
appropriate.
If
securities analysts or industry analysts downgrade our shares,
publish negative research or reports, or do not publish reports
about our business, our share price and trading volume could
decline.
The trading market for our common shares is influenced by the
research and reports that industry or securities analysts
publish about us, our business and our industry. If one or more
analysts adversely change their recommendation regarding our
shares or our competitors stock, our share price would
likely decline. If one or more analysts cease coverage of us or
fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause
our share price or trading volume to decline.
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Certain
provisions of Ohio law and our articles of incorporation and
regulations may deter takeover attempts, which may limit the
opportunity of our shareholders to sell their shares at a
favorable price, and may make it more difficult for our
shareholders to remove our board of directors and
management.
Provisions in our articles of incorporation and regulations may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
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advance notice requirements for shareholders proposals and
nominations;
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availability of blank check preferred shares;
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establishment of a classified board of directors so that not all
members of our board of directors are elected at one time;
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the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors or
due to the resignation or departure of an existing board member;
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the prohibition of cumulative voting in the election of
directors, which would otherwise allow less than a majority of
shareholders to elect director candidates; and
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limitations on the removal of directors.
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In addition, because we are incorporated in Ohio, we are
governed by the provisions of Section 1704 of the Ohio
Revised Code. These provisions may prohibit large shareholders,
particularly those owning 10% or more of our outstanding voting
stock, from merging or combining with us. These provisions in
our articles of incorporation and regulations and under Ohio law
could discourage potential takeover attempts, could reduce the
price that investors are willing to pay for our common shares in
the future and could potentially result in the market price
being lower than it would without these provisions.
Although no preferred shares were outstanding as of
December 26, 2010 and although we have no present plans to
issue any preferred shares, our articles of incorporation
authorize the board of directors to issue up to 5,000,000
preferred shares. The preferred shares may be issued in one or
more series, the terms of which will be determined at the time
of issuance by our board of directors without further action by
the shareholders. These terms may include voting rights,
including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of
any preferred shares could diminish the rights of holders of our
common shares and, therefore, could reduce the value of our
common shares. In addition, specific rights granted to future
holders of preferred shares could be used to restrict our
ability to merge with, or sell assets to, a third party. The
ability of our board of directors to issue preferred shares and
the foregoing anti-takeover provisions may prevent or frustrate
attempts by a third party to acquire control of our company,
even if some of our shareholders consider such change of control
to be beneficial.
Since
we do not expect to pay any dividends for the foreseeable
future, investors may be forced to sell their shares in order to
realize a return on their investment.
We have not declared or paid any dividends on our common shares.
We do not anticipate that we will pay any dividends to holders
of our common shares for the foreseeable future. Any payment of
cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, capital
requirements, legal requirements, earnings and other factors.
Our ability to pay dividends is restricted by the terms of our
senior credit facilities and might be restricted by the terms of
any indebtedness that we incur in the future. Consequently, you
should not rely on dividends in order to receive a return on
your investment.
The
concentration of our capital stock ownership with our sponsors
and other insiders will likely limit an investors ability
to influence corporate matters.
As of December 26, 2010, our private equity sponsors,
Castle Harlan, Inc. and Bruckmann, Rosser, Sherrill &
Co., each owned approximately 11.8% of our outstanding common
shares, and our sponsors, executive officers, directors and
affiliated entities controlled by us, these entities or these
individuals together beneficially owned or controlled
approximately 34.0% of our outstanding common shares. As a
result, these
32
shareholders, acting individually or together, have substantial
influence and control over management and matters that require
approval by our shareholders, including amendments to our
articles of incorporation and regulations and approval of
significant corporate transactions, including mergers and sales
of substantially all of our assets. This concentration of
ownership may delay or prevent a change in control of our
company and make the execution of some transactions more
difficult or impossible without the support of these
shareholders. It is possible that the interests of our sponsors
and other insider shareholders may in some circumstances
conflict with our interests, the interests of the other sponsors
or insiders or the interests of our other shareholders,
including you.
Certain of our directors are also officers or control persons of
our sponsors
and/or
their
affiliates. Although these directors owe a fiduciary duty to
manage us in a manner beneficial to us and our shareholders,
these individuals also owe fiduciary duties to these other
entities and their shareholders, members and limited partners.
Because our sponsors and their affiliates have such interests in
other companies and engage in other business activities, certain
of our directors may experience conflicts of interest in
allocating their time and resources among our business and these
other activities. Furthermore, these individuals could make
substantial profits as a result of investment opportunities
allocated to entities other than us. As a result, these
individuals could pursue transactions that may not be in our
best interest, which could have a material adverse effect on our
operations and your investment.
Our
reported financial results may be adversely affected by changes
in accounting principles applicable to us.
Generally accepted accounting principles in the U.S. are
subject to interpretation by the Financial Accounting Standards
Board, or FASB, the American Institute of Certified Public
Accountants, the SEC and various bodies formed to promulgate and
interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on
our reported financial results, and could affect the reporting
of transactions completed before the announcement of a change.
In addition, the SEC has announced a multi-year plan that could
ultimately lead to the use of International Financial Reporting
Standards by U.S. issuers in their SEC filings. Any such
change could have a significant effect on our reported financial
results.
Our
ability to raise capital in the future may be
limited.
Our business and operations may consume resources faster than we
anticipate. In the future, we may need to raise additional funds
through the issuance of new equity securities, debt or a
combination of both. Additional financing may not be available
on favorable terms, or at all. If adequate funds are not
available on acceptable terms, we may be unable to fund our
capital requirements. If we issue new debt securities, the debt
holders would have rights senior to common shareholders to make
claims on our assets, and the terms of any debt could restrict
our operations, including our ability to pay dividends on our
common shares. If we issue additional equity securities,
existing shareholders will experience dilution, and the new
equity securities could have rights senior to those of our
common shares. Because our decision to issue securities in any
future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future offerings. Thus, our
shareholders bear the risk of our future securities offerings
reducing the market price of our common shares and diluting
their interest.
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Item 1B.
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Unresolved
Staff Comments.
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None.
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The following table sets forth our restaurant locations as of
December 26, 2010.
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Bravo
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Brio
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Total Number
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Location
|
|
Restaurants
|
|
Restaurants
|
|
of Restaurants
|
|
Alabama
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Arizona
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Arkansas
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Colorado
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Connecticut
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Delaware
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Florida
|
|
|
2
|
|
|
|
7
|
|
|
|
9
|
|
Georgia
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Illinois
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
Indiana
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Iowa
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Kansas
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Kentucky
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Louisiana
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Maryland
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Michigan
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Missouri
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Nevada
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
New Jersey
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
New Mexico
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
New York
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
North Carolina
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Ohio
|
|
|
10
|
|
|
|
6
|
|
|
|
16
|
|
Oklahoma
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Pennsylvania
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Tennessee
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Texas
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
Virginia
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Wisconsin
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47
|
|
|
|
39
|
|
|
|
86
|
|
We own four properties, two in Ohio and one in each of Indiana
and Pennsylvania, and operate restaurants on each of these
sites. We lease the remaining land and buildings used in our
restaurant operations under various long-term operating lease
agreements. The initial lease terms range from ten to
20 years. The leases include renewal options for three to
20 additional years. Our leases currently expire between 2011
and 2028. The majority of our leases provide for base (fixed)
rent, plus additional rent based on gross sales (as defined in
each lease agreement) in excess of a stipulated amount,
multiplied by a stated percentage. We are also generally
obligated to pay certain real estate taxes, insurances, common
area maintenance charges and various other expenses related to
the properties. The term of one lease relating to the restaurant
locations set forth above is set to expire in 2011 but may be
renewed at our option for an additional three year term expiring
in 2014. Our main office, not included in the table above, is
also leased and is located at 777 Goodale Boulevard,
Suite 100, Columbus, Ohio 43212.
|
|
Item 3.
|
Legal
Proceedings.
|
Occasionally we are a party to various legal actions arising in
the ordinary course of our business including claims resulting
from slip and fall accidents, employment related
claims and claims from guests or employees alleging illness,
injury or other food quality, health or operational concerns.
None of these types of litigation, most of which are covered by
insurance, has had a material effect on us, and as of
February 17, 2011, we are not a party to any material
pending legal proceedings and are not aware of any claims that
could have a materially adverse effect on our financial
position, results of operations, or cash flows.
34
|
|
Item 4.
|
(Removed
and Reserved).
|
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Our common shares have been traded on the NASDAQ Global Market
under the symbol BBRG since October 21, 2010.
Prior to that date there was no public market for our common
shares. The following table set forth, for the periods
indicated, the high and low price per share of our common
shares, as reported by the NASDAQ Global Market:
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
Low
|
|
December 26, 2010
|
|
$
|
20.29
|
|
|
$
|
14.26
|
|
Dividend
Policy
We have not paid or declared any cash dividends on our common
shares and do not anticipate paying any dividends on our common
shares in the foreseeable future. We currently intend to retain
any future earnings to fund the operation, development and
expansion of our business. Any future determinations relating to
our dividend policies will be made at the discretion of our
board of directors and will depend on existing conditions,
including our financial condition, results of operations,
contractual restrictions, capital requirements, business
prospects and other factors our board of directors may deem
relevant. In addition, our ability to declare and pay dividends
is restricted by covenants in our senior credit facilities.
Holders:
There were approximately 900 holders of record of our
common shares at February 16, 2011.
Price
Performance Graph
The graph below compares the cumulative total shareholder return
on $100.00 invested at the opening of the market on
October 21, 2010, the date the Companys common shares
were first listed on the NASDAQ Global Market, through and
including the market close on December 26, 2010, with the
cumulative total return of the same time period on the same
amount invested in the NASDAQ
Composite
®
(US) Index and the
Nations Restaurant News Stock
Index
. The chart below the graph sets forth the actual
numbers depicted on the graph.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/21/2010
|
|
|
10/24/2010
|
|
|
11/21/2010
|
|
|
12/26/2010
|
Bravo Brio Restaurant Group, Inc. (BBRG)
|
|
|
$
|
100.00
|
|
|
|
$
|
124.14
|
|
|
|
$
|
121.10
|
|
|
|
$
|
129.03
|
|
NASDAQ
Composite
®
(US) Index
|
|
|
|
100.00
|
|
|
|
|
101.48
|
|
|
|
|
101.11
|
|
|
|
|
107.89
|
|
Nations Restaurant News Stock Index
|
|
|
|
100.00
|
|
|
|
|
102.80
|
|
|
|
|
104.90
|
|
|
|
|
104.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Unregistered
Sales of Equity Securities and Use of Proceeds from Sales of
Registered Securities
Immediately prior to the consummation of our initial public
offering, pursuant to an exchange agreement dated as of
October 18, 2010 among us and each of our then existing
shareholders, we completed an exchange of each share of our then
outstanding common stock and Series A preferred stock for
our new common shares. An aggregate of 14,250,000 new common
shares were issued by us in exchange for all shares of our
outstanding Series A preferred stock and our outstanding
common stock. Under the terms of the exchange agreement, each
outstanding share of Series A preferred stock together with
all accrued and undeclared dividends thereon was exchanged for
approximately 117.9 new common shares and each outstanding share
of common stock was exchanged for approximately 6.9 new common
shares. After completion of the exchange, we had 7,234,370 and
7,015,630 common shares, no par value per share, outstanding as
a result of the exchange of our outstanding common stock and
Series A preferred stock, respectively. In connection with
the exchange and our initial public offering, we increased our
authorized shares from 3,000,000 shares of common stock,
par value $0.001 per share, up to 100,000,000 common shares, no
par value per share, and 5,000,000 preferred shares, no par
value per share.
On October 20, 2010, our Registration Statement on
Form S-1
originally filed on July 2, 2010, as amended (Registration
No. 333-167951),
was declared effective, pursuant to which on October 26,
2010 (i) we issued and sold 5.0 million of our common
shares, no par value per share, for aggregate gross offering
proceeds of $70.0 million at a price to the public of
$14.00 per share and (ii) certain of our existing
shareholders sold 6.5 million of our common shares, no par
value per share, including 1.5 million shares to cover
over-allotments, for aggregate gross offering proceeds of
$91.0 million at a price to the public of $14.00 per share.
The underwriters for the offering were Jefferies &
Company, Piper Jaffray & Co., Wells Fargo Securities,
LLC, KeyBanc Capital Markets and Morgan Keegan &
Company Incorporated.
We paid to the underwriters underwriting discounts and
commissions totaling approximately $4.9 million in
connection with the offering. In addition, through
December 26, 2010, we incurred additional costs of
approximately $3.0 million in connection with the offering
which, when added to the underwriting discounts and commissions
paid, resulted in total expenses of approximately
$7.9 million related to the offering. Accordingly, the net
proceeds to us from the offering, after deducting underwriting
discounts and commissions and offering expenses, were
approximately $62.1 million.
We used those net proceeds to pay down our then existing
indebtedness as well as to pay management termination fees and
for general corporate purposes. There was no material change in
the planned use of proceeds from our initial public offering as
described in our final prospectus filed with the SEC on
October 21, 2010 pursuant to Rule 424(b) of the
Securities Act of 1933, as amended. Except for the payment of
management termination fees, which totaled approximately
$0.8 million, none of the payments made by us were direct
or indirect payments to any of our directors or officers or
their associates or persons owning 10 percent of more of
our common shares or to our affiliates or to others.
36
|
|
Item 6.
|
Selected
Financial Data.
|
You should read the following selected historical consolidated
financial data in conjunction with our consolidated financial
statements and the related notes to those statements. You should
also read Managements Discussion and Analysis of
Financial Condition and Results of Operations. All of
these materials are contained elsewhere in this report. The
selected historical consolidated financial data as of
December 26, 2010 and December 27, 2009 and for the
three years in the period ended December 26, 2010 have been
derived from consolidated financial statements audited by
Deloitte & Touche LLP, an independent registered
public accounting firm. The selected historical consolidated
financial data as of December 28, 2008, December 30,
2007 and December 31, 2006 and for the two years in the
period ended December 30, 2007 have been derived from our
audited consolidated financial statements not included elsewhere
in this report.
BRAVO
BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year(1)
|
|
Statement of Operations Data
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands except per share data)
|
|
|
Revenues
|
|
$
|
343,025
|
|
|
$
|
311,709
|
|
|
$
|
300,783
|
|
|
$
|
265,374
|
|
|
$
|
241,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
89,456
|
|
|
|
82,609
|
|
|
|
84,618
|
|
|
|
75,340
|
|
|
|
70,632
|
|
Labor
|
|
|
114,468
|
|
|
|
106,330
|
|
|
|
102,323
|
|
|
|
89,663
|
|
|
|
81,054
|
|
Operating
|
|
|
53,331
|
|
|
|
48,917
|
|
|
|
47,690
|
|
|
|
41,567
|
|
|
|
36,966
|
|
Occupancy
|
|
|
22,729
|
|
|
|
19,636
|
|
|
|
18,736
|
|
|
|
16,054
|
|
|
|
14,072
|
|
General and administrative expenses
|
|
|
37,539
|
|
|
|
17,280
|
|
|
|
15,271
|
|
|
|
17,230
|
|
|
|
15,760
|
|
Restaurant preopening costs
|
|
|
2,375
|
|
|
|
3,758
|
|
|
|
5,434
|
|
|
|
5,647
|
|
|
|
4,658
|
|
Asset impairment charges
|
|
|
|
|
|
|
6,436
|
|
|
|
8,506
|
|
|
|
|
|
|
|
3,266
|
|
Depreciation and amortization
|
|
|
16,708
|
|
|
|
16,088
|
|
|
|
14,651
|
|
|
|
12,309
|
|
|
|
9,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
336,606
|
|
|
|
301,054
|
|
|
|
297,229
|
|
|
|
257,810
|
|
|
|
235,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,419
|
|
|
|
10,655
|
|
|
|
3,554
|
|
|
|
7,564
|
|
|
|
5,547
|
|
Loss on extinguishment of debt
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
6,121
|
|
|
|
7,119
|
|
|
|
9,892
|
|
|
|
11,853
|
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense
|
|
|
(1,002
|
)
|
|
|
3,536
|
|
|
|
(6,338
|
)
|
|
|
(4,289
|
)
|
|
|
(96
|
)
|
Income tax expense (benefit)
|
|
|
228
|
|
|
|
135
|
|
|
|
55,061
|
|
|
|
(3,503
|
)
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(1,230
|
)
|
|
|
3,401
|
|
|
|
(61,399
|
)
|
|
|
(786
|
)
|
|
|
(709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeclared preferred dividends- net of adjustments(2)
|
|
|
(3,769
|
)
|
|
|
(11,599
|
)
|
|
|
(10,175
|
)
|
|
|
(8,920
|
)
|
|
|
(4,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common shareholders
|
|
$
|
(4,999
|
)
|
|
$
|
(8,198
|
)
|
|
$
|
(71,574
|
)
|
|
$
|
(9,706
|
)
|
|
$
|
(4,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common shareholders Basic and
Diluted
|
|
$
|
(0.54
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(9.89
|
)
|
|
$
|
(1.34
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic and Diluted
|
|
|
9,281
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at the end of the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,460
|
|
|
|
249
|
|
|
|
682
|
|
|
|
740
|
|
|
|
829
|
|
Working capital (deficit)
|
|
|
(35,334
|
)
|
|
|
(36,156
|
)
|
|
|
(34,320
|
)
|
|
|
(33,110
|
)
|
|
|
(18,334
|
)
|
Total assets
|
|
|
163,453
|
|
|
|
160,842
|
|
|
|
157,764
|
|
|
|
195,048
|
|
|
|
180,132
|
|
Total debt
|
|
|
41,000
|
|
|
|
118,031
|
|
|
|
125,950
|
|
|
|
114,136
|
|
|
|
112,056
|
|
Total stockholders equity (deficiency in assets)
|
|
|
6,403
|
|
|
|
(72,690
|
)
|
|
|
(76,091
|
)
|
|
|
(14,692
|
)
|
|
|
(13,906
|
)
|
|
|
|
(1)
|
|
We utilize a 52- or 53-week accounting period which ends on the
last Sunday of the calendar year. The fiscal years ended
December 26, 2010, December 27, 2009,
December 28, 2008 and December 30, 2007, each have
52 weeks, while the fiscal year ended December 31,
2006 had 53 weeks.
|
|
(2)
|
|
The undeclared preferred dividend total for fiscal 2010 of
$10.8 million was offset by an add-back of
$7.0 million in the fourth quarter of 2010 related to the
exchange of the Companys Series A preferred
|
37
|
|
|
|
|
stock. The exchange of the Series A preferred stock was
completed prior to our initial public offering, using an
estimated initial public offering price of $15.00 per share
which, based on the total liquidation preference for the
Series A preferred stock (including accrued and undeclared
dividends thereon) of $105.2 million as of the date of the
exchange, resulted in the issuance of 7,015,630 common shares.
Because the final initial public offering price was $14.00 per
share, the 7,015,630 common shares issued to the preferred
shareholders represented only $98.2 million of value,
$7.0 million less than the carrying value of the
Series A preferred stock as of the date of the exchange.
Because the fair value of consideration transferred was less
than the carrying amount of the Series A preferred stock,
the discount was added back to undeclared preferred dividends in
arriving at net earnings available to common shareholders and is
recorded as such on the Consolidated Statements of Operations
for fiscal 2010.
|
|
(3)
|
|
The Company was structured as a Subchapter S corporation for the
year ended December 25, 2005 and was changed to a C
corporation effective June 29, 2006 as part of our
recapitalization in 2006. As a result, corporate income taxes
and per share data for 2006 is not meaningful and therefore not
shown in the table above. If the Company had been a C
corporation during the pre-recapitalization period of 2006, the
income tax expense would have been $0.5 million higher than
the amount presented in the table above.
|
Non-GAAP Measures
Modified Pro Forma net income and Modified Pro Forma earnings
per share are supplemental measures of our performance that are
not required or presented in accordance with generally accepted
accounting principles, or GAAP. These non-GAAP measures may not
be comparable to similarly titled measures used by other
companies and should not be considered by themselves or as a
substitute for measures of performance prepared in accordance
with GAAP.
We calculate these non-GAAP measures by adjusting net income and
net income per share for the impact of certain items that are
reflected to show a year over year comparison taking into
account the assumption that our initial public offering occurred
and we became a public company on the first day of 2009. We
believe these adjusted measures provide additional information
to facilitate the comparison of our past and present financial
results. We utilize results that both include and exclude the
identified items in evaluating business performance. However,
our inclusion of these adjusted measures should not be construed
as an indication that our future results will not be affected by
unusual or infrequent items. Appling the above assumption, our
basic and dilutive share counts for this calculation are
19,250,500 shares and 20,600,000, respectively.
The following is a reconciliation from net loss and net loss per
share to the corresponding adjusted measures:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2010
|
|
|
2009
|
|
|
Net loss attributed to common shareholders
|
|
$
|
(4,999
|
)
|
|
$
|
(8,198
|
)
|
Impact from:
|
|
|
|
|
|
|
|
|
Management Fees(1)
|
|
|
2,402
|
|
|
|
1,722
|
|
Incremental Public Company Costs(2)
|
|
|
(1,164
|
)
|
|
|
(1,224
|
)
|
Stock Compensation Expense(3)
|
|
|
(1,507
|
)
|
|
|
(1,800
|
)
|
Interest Expense(4)
|
|
|
4,169
|
|
|
|
4,453
|
|
Income Tax Expense(5)
|
|
|
(6,399
|
)
|
|
|
(3,351
|
)
|
Undeclared Preferred Dividends(6)
|
|
|
3,769
|
|
|
|
11,599
|
|
Write-off of loan origination fees(7)
|
|
|
1,300
|
|
|
|
|
|
Stock Compensation Expense(8)
|
|
|
17,892
|
|
|
|
|
|
Gain on Sale of Restaurant(9)
|
|
|
|
|
|
|
(1,502
|
)
|
Asset Impairment(10)
|
|
|
|
|
|
|
6,436
|
|
|
|
|
|
|
|
|
|
|
Modified Pro Forma net income
|
|
$
|
15,463
|
|
|
$
|
8,135
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net loss per share- using adjusted share counts
|
|
$
|
(0.26
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.40
|
)
|
Impact from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees(1)
|
|
$
|
0.12
|
|
|
|
0.09
|
|
|
|
0.12
|
|
|
|
0.08
|
|
Incremental Public Company Costs(2)
|
|
$
|
(0.06
|
)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
Stock Compensation Expense(3)
|
|
$
|
(0.08
|
)
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
(0.09
|
)
|
Interest Expense(4)
|
|
$
|
0.22
|
|
|
|
0.23
|
|
|
|
0.20
|
|
|
|
0.22
|
|
Income Tax Expense(5)
|
|
$
|
(0.33
|
)
|
|
|
(0.17
|
)
|
|
|
(0.31
|
)
|
|
|
(0.16
|
)
|
Undeclared Preferred Dividends(6)
|
|
$
|
0.19
|
|
|
|
0.60
|
|
|
|
0.18
|
|
|
|
0.56
|
|
Write-off of loan origination fees(7)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Stock Compensation Expense(8)
|
|
$
|
0.93
|
|
|
|
|
|
|
|
0.87
|
|
|
|
|
|
Gain on Sale of Restaurant(9)
|
|
$
|
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
(0.07
|
)
|
Asset Impairment(10)
|
|
$
|
|
|
|
|
0.33
|
|
|
|
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Pro Forma net income per share
|
|
$
|
0.80
|
|
|
$
|
0.42
|
|
|
$
|
0.75
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
|
Represents management fees and expenses paid to our private
equity sponsors which will not be incurred subsequent to our
initial public offering.
|
|
2)
|
|
Represents an estimate of additional recurring incremental
legal, accounting, insurance and other compliance costs we
expect to incur as a public company.
|
|
3)
|
|
Represents the estimate of recurring stock compensation expense
related to restricted shares issued pursuant to the Bravo Brio
Restaurant Group, Inc. Stock Incentive Plan which was approved
by our board of directors and shareholders in October, 2010,
offset by the actual compensation cost booked in the fourth
quarter of 2010 related to outstanding restricted shares.
|
|
4)
|
|
Represents an adjustment to interest expense assuming the
receipt of proceeds from our initial public offering and the use
of such proceeds to pay down debt at the beginning of fiscal
2009.
|
|
5)
|
|
Currently, our net deferred tax assets are offset by a full
valuation allowance. This adjustment reflects a tax rate of
30.0% which reflects our estimate of our long-term effective tax
rate.
|
|
6)
|
|
Our Series A preferred shares plus cumulative undeclared
dividends thereon were converted to common shares pursuant to
the exchange agreement (executed in connection with our initial
public offering). This adjustment reflects the add-back of
undeclared preferred dividends net of gain on conversion of
preferred stock.
|
|
7)
|
|
Reflects the write-off of the unamortized portion of our old
loan origination costs related to our previous credit facility.
|
|
8)
|
|
Represents the one-time non-cash stock compensation charge
recorded for existing options to purchase our common shares
under the 2006 Stock Option Plan that became fully vested and
exercisable upon consummation of our initial public offering.
|
|
9)
|
|
Reflects an adjustment for a gain on the sale of a restaurant
during the third quarter of 2009, primarily due to the
recognition of deferred lease incentives. We do not expect gains
of this nature in the future.
|
|
10)
|
|
Reflects the charges recorded in fiscal 2009 related to the
impairment of three restaurants.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion should be read in conjunction with the
Selected Financial Data and our audited consolidated financial
statements and the accompanying notes thereto included elsewhere
in this report. In addition to historical information, the
following discussion also contains forward-looking statements
that include risks and uncertainties. Our actual results may
differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including those factors set forth under Part I,
Item 1A Risk Factors of this report.
39
Overview
We are a leading owner and operator of two distinct Italian
restaurant brands, BRAVO! Cucina Italiana (BRAVO!)
and BRIO Tuscan Grille (BRIO), which includes our
one Bon Vie restaurant. We have positioned our brands as
multifaceted culinary destinations that deliver the ambiance,
design elements and food quality reminiscent of fine dining
restaurants at a value typically offered by casual dining
establishments, a combination known as the upscale affordable
dining segment. Each of our brands provides its guests with a
fine dining experience and value by serving affordable cuisine
prepared using fresh flavorful ingredients and authentic Italian
cooking methods, combined with attentive service in an
attractive, lively atmosphere. We strive to be the best Italian
restaurant company in America and are focused on providing our
guests an excellent dining experience through consistency of
execution.
Our business is highly sensitive to changes in guest traffic.
Increases and decreases in guest traffic can have a significant
impact on our financial results. In recent years, we have faced
and we continue to face uncertain economic conditions, which
have resulted in changes to our guests discretionary
spending. To adjust to this decrease in guest spending, we have
focused on controlling product margins and costs while
maintaining our high standards for food quality and service and
enhancing our guests dining experience. We have worked
with our distributors and suppliers to lower commodity costs,
become more efficient with the use of our employee base and
found new ways to improve efficiencies across our company. We
have implemented limited incremental discounting as we have
opted to focus on improving our menu items as opposed to
discounting them. While we knew that limited incremental
discounting might impact our guest counts and sales, we directed
our efforts to improve our operating margins. Additionally, we
have focused resources on highlighting our menu items and
promoting our non-entrée selections such as appetizers,
desserts and beverages. These efforts have resulted in a
favorable sales mix and an increase in average guest check.
Performance
Indicators
We use the following key performance indicators in evaluating
the performance of our restaurants:
|
|
|
|
|
Comparable Restaurants and Comparable Restaurant
Sales
. We consider a restaurant to be comparable
in the first full quarter following the eighteenth month of
operations. Changes in comparable restaurant sales reflect
changes in sales for the comparable group of restaurants over a
specified period of time. Changes in comparable sales reflect
changes in guest count trends as well as changes in average
check.
|
|
|
|
Average Check.
Average check is calculated by
dividing revenues by guest counts for a given time period.
Average check reflects menu price influences as well as changes
in menu mix. Management uses this indicator to analyze trends in
guests preferences, effectiveness of menu changes and price
increases and per guest expenditures.
|
|
|
|
Average Unit Volume.
Average unit volume
consists of the average sales of our restaurants over a certain
period of time. This measure is calculated by dividing total
restaurant sales within a period by the relevant period. This
indicator assists management in measuring changes in guest
traffic, pricing and development of our brands.
|
|
|
|
Operating Margin.
Operating margin represents
income from operations before interest and taxes as a percentage
of our revenues. By monitoring and controlling our operating
margins, we can gauge the overall profitability of our company.
|
Key
Financial Definitions
Revenues.
Revenues primarily consist of food
and beverage sales, net of any discounts, such as management
meals, employee meals and coupons, associated with each sale.
Revenues in a given period are directly influenced by the number
of operating weeks in such period and comparable restaurant
sales growth.
Cost of Sales.
Cost of sales consist primarily
of food and beverage related costs. The components of cost of
sales are variable in nature, change with sales volume and are
subject to increases or decreases based on fluctuations in
commodity costs. Our cost of sales depends in part on the
success of controls we have in place to manage our food and
beverage costs.
40
Labor Costs.
Labor costs include restaurant
management salaries, front and back of house hourly wages and
restaurant-level manager bonus expense, employee benefits and
payroll taxes.
Operating Costs.
Operating costs consist
primarily of restaurant-related operating expenses, such as
supplies, utilities, repairs and maintenance, credit card fees,
marketing costs, training, recruiting, travel and general
liability insurance costs.
Occupancy Costs.
Occupancy costs include rent
charges, both fixed and variable, as well as common area
maintenance costs, property insurance and taxes, the
amortization of tenant allowances and the adjustment to
straight-line rent.
General and Administrative.
General and
administrative costs include costs associated with corporate and
administrative functions that support our operations, including
management and staff compensation and benefits, travel, legal
and professional fees, corporate office rent, stock compensation
costs and other related corporate costs.
Restaurant Pre-opening Costs.
Restaurant
pre-opening expenses consist of costs incurred prior to opening
a restaurant, including executive chef and manager salaries,
relocation costs, recruiting expenses, employee payroll and
related training costs for new employees, including rehearsal of
service activities. Pre-opening costs also include an accrual
for straight-line rent recorded during the period between date
of possession and the restaurant opening date for our leased
restaurant locations.
Impairment.
We review long-lived assets, such
as property and equipment and intangibles, for impairment when
events or circumstances indicate the carrying value of the
assets may not be recoverable. In determining the recoverability
of the asset value, an analysis is performed at the individual
restaurant level and primarily includes an assessment of
historical cash flows and other relevant factors and
circumstances. Factors considered include, but are not limited
to, significant underperformance relative to expected historical
or projected future operating results, significant changes in
the use of assets, changes in our overall business strategy and
significant negative industry or economic trends. See
Significant Accounting Policies
Impairment of Long-Lived Assets for further detail.
Net interest expense.
Net interest expense
consists primarily of interest on our outstanding indebtedness,
net of payments and
mark-to-market
adjustments on an interest rate swap agreement that expired in
2009.
Results
of Operations
The following table sets forth, for the periods indicated, our
consolidated statements of operations expressed as percentages
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 26
|
|
|
% of
|
|
|
December 27
|
|
|
% of
|
|
|
December 28
|
|
|
% of
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
(Dollar in thousands, unless percentage)
|
|
|
|
|
|
Revenues
|
|
$
|
343,025
|
|
|
|
100
|
%
|
|
$
|
311,709
|
|
|
|
100
|
%
|
|
$
|
300,783
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
89,456
|
|
|
|
26.1
|
%
|
|
|
82,609
|
|
|
|
26.5
|
%
|
|
|
84,618
|
|
|
|
28.1
|
%
|
Labor
|
|
|
114,468
|
|
|
|
33.4
|
%
|
|
|
106,330
|
|
|
|
34.1
|
%
|
|
|
102,323
|
|
|
|
34.0
|
%
|
Operating
|
|
|
53,331
|
|
|
|
15.5
|
%
|
|
|
48,917
|
|
|
|
15.7
|
%
|
|
|
47,690
|
|
|
|
15.9
|
%
|
Occupancy
|
|
|
22,729
|
|
|
|
6.6
|
%
|
|
|
19,636
|
|
|
|
6.3
|
%
|
|
|
18,736
|
|
|
|
6.2
|
%
|
General and administrative expenses
|
|
|
37,539
|
|
|
|
10.9
|
%
|
|
|
17,280
|
|
|
|
5.5
|
%
|
|
|
15,271
|
|
|
|
5.1
|
%
|
Restaurant preopening costs
|
|
|
2,375
|
|
|
|
0.7
|
%
|
|
|
3,758
|
|
|
|
1.2
|
%
|
|
|
5,434
|
|
|
|
1.8
|
%
|
Asset impairment charges
|
|
|
|
|
|
|
0.0
|
%
|
|
|
6,436
|
|
|
|
2.1
|
%
|
|
|
8,506
|
|
|
|
2.8
|
%
|
Depreciation and amortization
|
|
|
16,708
|
|
|
|
4.9
|
%
|
|
|
16,088
|
|
|
|
5.2
|
%
|
|
|
14,651
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
336,606
|
|
|
|
98.1
|
%
|
|
|
301,054
|
|
|
|
96.6
|
%
|
|
|
297,229
|
|
|
|
98.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,419
|
|
|
|
1.9
|
%
|
|
|
10,655
|
|
|
|
3.4
|
%
|
|
|
3,554
|
|
|
|
1.2
|
%
|
Loss on extinguishment of debt
|
|
|
1,300
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Interest expense, net
|
|
|
6,121
|
|
|
|
1.8
|
%
|
|
|
7,119
|
|
|
|
2.3
|
%
|
|
|
9,892
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(1,002
|
)
|
|
|
(0.3
|
)%
|
|
|
3,536
|
|
|
|
1.1
|
%
|
|
|
(6,338
|
)
|
|
|
(2.1
|
)%
|
Income tax expense
|
|
|
228
|
|
|
|
0.1
|
%
|
|
|
135
|
|
|
|
0.0
|
%
|
|
|
55,061
|
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,230
|
)
|
|
|
(0.4
|
)%
|
|
$
|
3,401
|
|
|
|
1.1
|
%
|
|
$
|
(61,399
|
)
|
|
|
(20.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Year
Ended December 26, 2010 Compared to Year Ended
December 27, 2009
Revenues.
Revenues increased
$31.3 million, or 10.0%, to $343.0 million in fiscal
2010, from $311.7 million in fiscal 2009. This increase was
driven by $26.7 million in additional revenues related
primarily to an additional 299 operating weeks provided by new
restaurants opened in 2010 and 2009. Also contributing to this
increase was a $4.6 million, or 1.6%, increase in sales
from our comparable restaurants. Higher comparable restaurant
sales were driven by an increase in average check during fiscal
2010, which resulted in additional revenues of
$7.8 million, partially offset by a 1.1% decrease in guest
counts that resulted in a $3.2 million decrease in revenues.
For our BRAVO! brand, restaurant revenues increased
$6.3 million, or 4.2%, to $156.6 million in fiscal
2010 as compared to $150.3 million in fiscal 2009.
Comparable revenues for the BRAVO! brand restaurants decreased
0.1%, or $0.1 million, to $140.2 million in fiscal
2010. Revenues for BRAVO! brand restaurants not included in the
comparable restaurant base increased $6.4 million to
$16.4 million in fiscal 2010. At December 26, 2010,
there were 44 BRAVO! restaurants included in the comparable
restaurant base and three BRAVO! restaurants not included in the
comparable restaurant base.
For our BRIO brand, restaurant revenues increased
$24.5 million, or 15.2%, to $186.0 million in fiscal
2010 as compared to $161.5 million in fiscal 2009.
Comparable revenues for the BRIO brand restaurants increased
3.2%, or $4.8 million, to $152.2 million in fiscal
2010. Revenues for BRIO brand restaurants not included in the
comparable restaurant base increased $19.7 million to
$33.8 million in fiscal 2010. At December 26, 2010,
there were 32 BRIO restaurants included in the comparable
restaurant base and seven BRIO restaurants not included in the
comparable restaurant base.
Cost of Sales.
Cost of sales increased
$6.9 million, or 8.3%, to $89.5 million in fiscal
2010, from $82.6 million in fiscal 2009. Food costs
decreased 0.4% as a percentage of revenues but increased by
$5.3 million in total dollars for 2010 as compared to 2009.
Beverage costs remained flat as a percentage of revenues but
increased in total dollars by $1.5 million in 2010 as
compared to 2009. As a percent of revenues, cost of sales
declined to 26.1% in 2010, from 26.5% in 2009. The improvement
in gross margin, as a percentage of revenue, was primarily a
result of lower commodity costs for our poultry, meat and
produce in 2010 as compared to 2009.
Labor Costs.
Labor costs increased
$8.2 million, or 7.7%, to $114.5 million in fiscal
2010, from $106.3 million in fiscal 2009. This increase was
a result of approximately $8.1 million of additional labor
and benefits costs incurred from new restaurants opened during
2009 and 2010 associated with the restaurant openings. As a
percent of revenues, labor costs decreased to 33.4% in 2010,
from 34.1% in 2009, primarily as a result of lower management
salaries due to a decrease in average management headcount per
unit as well as the impact of positive comparable restaurant
sales in 2010 as compared to 2009.
Operating Costs.
Operating costs increased
$4.4 million, or 9.0%, to $53.3 million in 2010, from
$48.9 million in 2009. This increase was driven by an
additional 299 operating weeks due to restaurant openings in
2010 and 2009. As a percent of revenues, operating costs
decreased to 15.5% in 2010, compared to 15.7% in 2009. The
decrease was primarily due to lower restaurant supplies costs
incurred as a percentage of revenues.
Occupancy Costs.
Occupancy costs increased
$3.1 million, or 15.8%, to $22.7 million in fiscal
2010, from $19.6 million in fiscal 2009. As a percentage of
revenues, occupancy costs increased to 6.6% in 2010, from 6.3%
in 2009. The increase in occupancy costs in total and as a
percentage of revenues, was primarily due to the recognition of
deferred lease incentives of $1.2 million in 2009
associated with the assignment of a lease related to the sale of
a restaurant.
General and Administrative.
General and
administrative costs increased $20.3 million, or 117.2%, to
$37.5 million in fiscal 2010, from $17.3 million in
fiscal 2009. As a percent of revenues, general and
administrative expenses increased to 10.9% in 2010, from 5.5% in
2009. The increase in total dollars and percent of revenue is
primarily related to a one-time non-cash stock compensation
charge of $17.9 million related to the modification and
acceleration of the existing options to purchase our common
shares that became fully vested and exercisable upon
consummation of our initial public offering and a non-recurring
42
charge of $1.0 million in management fees incurred in
connection with the termination of our management agreements
with our private equity sponsors. Additionally, the Company has
accrued $0.5 million in additional bonus expense in 2010 as
compared to 2009, incurred a $0.3 million non-cash stock
compensation charge related to the Bravo Brio Restaurant Group,
Inc. Stock Incentive Plan in 2010 and recorded a benefit of
$0.3 million related to a gain on sale during 2009.
Restaurant Pre-opening Costs.
Pre-opening
costs decreased by $1.4 million, or 36.8%, to
$2.4 million in 2010, from $3.8 million in 2009. As a
percent of revenues, pre-opening costs decreased to 0.7% in
2010, from 1.2% in 2009. The decrease in pre-opening costs was
due to the impact of opening five new restaurants in 2010
compared to seven new restaurants in 2009.
Depreciation and Amortization.
Depreciation
and amortization costs increased $0.6 million, or 3.9%, to
$16.7 million in fiscal 2010, from $16.1 million in
fiscal 2009. As a percent of revenues, depreciation and
amortization expenses decreased to 4.9% in 2010 from 5.2% in
2009. This decrease as a percentage of revenues is related to
the lower depreciation on fixed assets located in restaurants
that were deemed to be impaired in 2009.
Impairment.
We review long-lived assets, such
as property and equipment and intangibles, subject to
amortization, for impairment when events or circumstances
indicate the carrying value of the assets may not be
recoverable. Factors considered include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
use of assets, changes in our overall business strategy and
significant negative industry or economic trends. Based upon our
analysis, we did not incur an impairment charge in 2010. We did
incur a non-cash charge of $6.4 million in 2009 related to
the impairment of three restaurants.
Loss on extinguishment of debt.
In October
2010, in connection with our initial public offering, we repaid
all our then outstanding indebtedness under our former senior
credit facilities and entered into new senior credit facilities.
In connection with this repayment of previously outstanding
indebtedness, we wrote-off $1.3 million in unamortized loan
origination fees.
Net Interest Expense.
Net interest expense
decreased $1.0 million, or 14.0%, to $6.1 million in
2010, from $7.1 million in 2009. The decrease was due to
the pay down of debt in conjunction with our initial public
offering as well as lower average interest rates during fiscal
2010.
Income Taxes.
Income taxes increased
$0.1 million to $0.2 million in 2010, from
$0.1 million in 2009. The increase was due mainly to a
modest increase in current taxable income at the state and local
levels in 2010 as compared to 2009. No federal income tax
expense was recorded as a full valuation allowance was provided
to offset deferred tax assets, including those arising from net
operating losses and other business credit carry forwards.
Year
Ended December 27, 2009 Compared to Year Ended
December 28, 2008
Revenues.
Revenues increased
$10.9 million, or 3.6%, to $311.7 million in fiscal
2009, from $300.8 million in fiscal 2008. This increase was
driven by $31.6 million in additional revenues related to
an additional 494 operating weeks provided primarily by new
restaurants opened in 2009 and 2008. This increase was partially
offset by a $18.7 million, or 7.1%, decrease in sales from
our comparable restaurants. Lower comparable restaurant sales
were due to a 8.1% decline in guest counts that resulted in a
$21.3 million decrease in revenues. This was partially
offset by an increase in average check during fiscal 2009, which
resulted in additional revenues of $2.6 million.
For our BRAVO! brand, restaurant revenues increased
$1.4 million, or 1.0%, to $150.3 million in fiscal
2009 as compared to $148.9 million in fiscal 2008.
Comparable revenues for the BRAVO! brand restaurants decreased
6.9%, or $9.1 million, in fiscal 2009. Revenues for BRAVO!
brand restaurants not included in the comparable restaurant base
increased $10.6 million to $27.3 million in fiscal
2009. At December 27, 2009, there were 37 BRAVO!
restaurants included in the comparable restaurant base and eight
BRAVO! restaurants not included in the comparable restaurant
base.
43
For our BRIO brand, restaurant revenues increased
$10.5 million, or 7.0%, to $161.5 million in fiscal
2009 as compared to $151.0 million in fiscal 2008.
Comparable revenues for the BRIO brand restaurants decreased
7.4%, or $9.5 million, in fiscal 2009. Revenues for BRIO
brand restaurants not included in the comparable restaurant base
increased $20.0 million to $41.5 million in fiscal
2009. At December 27, 2009, there were 27 BRIO restaurants
included in the comparable restaurant base and nine BRIO
restaurants not included in the comparable restaurant base.
Cost of Sales.
Cost of sales decreased
$2.0 million, or 2.4%, to $82.6 million in fiscal
2009, from $84.6 million in 2008. As a percent of revenues,
cost of sales declined to 26.5% in 2009, from 28.1% in 2008.
Food costs decreased 1.5% as a percentage of revenues and a
total of $2.0 million for 2009 as compared to 2008.
Beverage costs remained flat as a percentage of revenues and
dollars in 2009 as compared to 2008. The improvement in food
costs, as a percentage of revenues, was a result of lower
commodity costs, improvements in food cost from menu management
and operating efficiencies.
Labor Costs.
Labor costs increased
$4.0 million, or 3.9%, to $106.3 million in the year
ended December 27, 2009, from $102.3 million in fiscal
2008. This increase was a result of an additional
$11.1 million of labor costs incurred from new restaurants
opened during 2008 and 2009. This impact was partially offset by
reductions in our more established restaurants of
$3.6 million due to improved hourly labor efficiency,
$1.1 million relating to a reduction in average management
headcount per restaurant and $2.1 million of lower employee
benefits, including payroll taxes and workers compensation
costs due to better than forecasted claim experience. As a
percent of revenues, labor costs increased slightly to 34.1% in
2009, from 34.0% in 2008. This increase of labor costs as a
percentage of revenues was primarily due to decreased leverage
from lower comparable restaurant sales.
Operating Costs.
Operating costs increased
$1.2 million, or 2.6%, to $48.9 million in 2009, from
$47.7 million in 2008. As a percent of revenues, operating
costs decreased to 15.7% in 2009, compared to 15.9% in 2008.
Lower restaurant supplies and utility costs as a percentage of
revenues were the primary drivers of the decrease relative to
revenues, partially offset by higher repair and maintenance
expense and advertising costs as a percentage of revenues as
well as the decrease in sales leverage from lower comparable
restaurant sales.
Occupancy Costs.
Occupancy costs increased
$0.9 million, or 4.8%, to $19.6 million in fiscal
2009, from $18.7 million in fiscal 2008. As a percentage of
revenues, occupancy costs increased to 6.3% in 2009, from 6.2%
in 2008. The increase in occupancy costs as a percentage of
revenues was primarily due to the recognition of deferred lease
incentives of $1.2 million associated with the assignment
of a lease related to the sale of a restaurant, which was
largely offset by the impact of decreased leverage from lower
comparable restaurant sales.
General and Administrative.
As a percent of
revenues, general and administrative expenses increased to 5.5%
in 2009, from 5.0% in 2008. This change was primarily
attributable to an increase in management fees paid to our
private equity sponsors.
Restaurant Pre-opening Costs.
Pre-opening
costs decreased by $1.6 million, or 30.8%, to
$3.8 million in 2009, from $5.4 million in 2008. The
decrease in pre-opening costs was due to the impact of opening
seven new restaurants in 2009 compared to thirteen new
restaurants opened in 2008.
Depreciation and Amortization.
As a percent of
revenues, depreciation and amortization expenses increased to
5.2% in 2009 from 4.9% in 2008. This increase was partially
offset by the $1.1 million decrease in depreciation and
amortization expense associated with restaurants considered
impaired in 2008.
Impairment.
We review long-lived assets, such
as property and equipment and intangibles, subject to
amortization, for impairment when events or circumstances
indicate the carrying value of the assets may not be
recoverable. Factors considered include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
use of assets, changes in our overall business strategy and
significant negative industry or economic trends. Based upon our
analysis, we incurred a non-cash impairment charge of
$6.4 million in 2009 compared to $8.5 million in 2008.
The $2.1 million decrease in impairment on property and
equipment was related to the impairment of three
44
restaurants in 2009 compared to five restaurants in 2008. This
charge was expected to reduce depreciation and amortization
expense for fiscal 2010 by $0.7 million.
Net Interest Expense.
Net interest expense
decreased $2.8 million, or 28%, to $7.1 million in
2009, from $9.9 million in 2008. The decrease was due to
lower average interest rates during fiscal 2009. We had a
three-year interest rate swap agreement which expired during
fiscal 2009. Changes in the market value of the interest rate
swap are recorded as an adjustment to interest expense. Such
adjustments reduced interest expense by $0.8 million in
fiscal 2009.
Income Taxes.
Income taxes decreased
$55.0 million to $0.1 million in 2009, from
$55.1 million in 2008. In 2008, we provided a valuation
allowance of $59.4 million against the total net deferred
tax asset. Net deferred tax assets consists primarily of
temporary differences and net operating loss and credit
carry-forwards. The valuation allowance was established as
management believed that it is more likely than not that these
deferred tax assets would not be realized. The tax benefits
relating to any reversal of the valuation allowance will be
recognized as a reduction of income tax expense.
Liquidity
Our principal sources of cash have been net cash provided by
operating activities and borrowings under our senior credit
facilities. As of December 26, 2010, we had approximately
$2.5 million in cash and cash equivalents and approximately
$36.8 million of availability under our senior revolving
credit facility (after giving effect to $3.2 million of
outstanding letters of credit at December 26, 2010). Our
need for capital resources is driven by our restaurant expansion
plans, on-going maintenance of our restaurants and investment in
our corporate and information technology infrastructures. Based
on our current real estate development plans, we believe our
combined expected cash flows from operations, available
borrowings under our senior credit facilities and expected
landlord lease incentives will be sufficient to finance our
planned capital expenditures and other operating activities in
fiscal 2011.
Consistent with many other restaurant and retail chain store
operations, we use operating lease arrangements for the majority
of our restaurant locations. We believe that these operating
lease arrangements provide appropriate leverage of our capital
structure in a financially efficient manner. Currently,
operating lease obligations are not reflected as indebtedness on
our consolidated balance sheet. The use of operating lease
arrangements will impact our capacity to borrow money under our
senior credit facilities. However, restaurant real estate
operating leases are expressly excluded from the restrictions
under our senior credit facilities related to the incurrence of
funded indebtedness.
Our liquidity may be adversely affected by a number of factors,
including a decrease in guest traffic or average check per guest
due to changes in economic conditions, as described in this
report under Part I, Item 1A Risk Factors.
The following table presents a summary of our cash flows for the
years ended December 26, 2010 and December 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended,
|
|
|
|
December 26,
|
|
|
December 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
37,682
|
|
|
$
|
33,782
|
|
Net cash used in investing activities
|
|
|
(18,691
|
)
|
|
|
(24,957
|
)
|
Net cash used in financing activities
|
|
|
(16,780
|
)
|
|
|
(9,258
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents
|
|
|
2,211
|
|
|
|
(433
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
249
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,460
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
Operating Activities.
Net cash provided by
operating activities was $37.7 million in 2010, compared to
$33.8 million in 2009. Our business is almost exclusively a
cash business. Almost all of our receipts come in
45
the form of cash and credit cards and a large majority of our
expenditures are paid within a 30 day period. The increase
in net cash provided by operating activities in 2010 compared to
2009 was primarily due to an increase in cash receipts in excess
of cash expenditures from the prior year. Cash receipts in 2010
and 2009 were $343.8 million and $310.1 million,
respectively. Cash expenditures during 2010 and 2009 were
$310.6 million and $280.9 million, respectively.
Investing Activities.
Net cash used in
investing activities was $18.7 million in 2010, compared to
$25.0 million in 2009. We used cash primarily to purchase
property and equipment related to our restaurant expansion
plans. The decrease in spending is related to the timing of
restaurant openings, as well as the number of restaurants that
were opened during 2009 versus 2010. During 2010, we opened five
restaurants and had two additional restaurants under
construction at year end, while in 2009 we opened seven
restaurants and two others were under construction at year end.
Financing Activities.
Net cash used in
financing activities was $16.8 million in 2010, compared to
$9.3 million in 2009. The primary driver of this increase
was the pay down of debt in 2010. In 2010, we paid down
$77.1 million in debt, primarily in connection with the
repayment in full of our then-outstanding loans under our former
senior credit facilities and our then-outstanding
13.25% senior subordinated secured notes through the
proceeds of our initial public offering of $62.1 million,
net of fees, as compared to the pay down of debt in the amount
of $9.3 million in 2009.
As of December 26, 2010, we had no financing transactions,
arrangements or other relationships with any unconsolidated
entities or related parties. Additionally, we had no financing
arrangements involving synthetic leases or trading activities
involving commodity contracts.
Capital
Resources
Future Capital Requirements.
Our capital
requirements are primarily dependent upon the pace of our real
estate development program and resulting new restaurants. Our
real estate development program is dependent upon many factors,
including economic conditions, real estate markets, site
locations and nature of lease agreements. Our capital
expenditure outlays are also dependent on costs for maintenance
and capacity additions in our existing restaurants as well as
information technology and other general corporate capital
expenditures.
We anticipate that each new BRAVO! restaurant will, on average,
require a total cash investment of $1.5 million to
$2.0 million (net of estimated lease incentives). We expect
that each new BRIO restaurant will require an estimated cash
investment of $2.0 million to $2.5 million (net of
estimated lease incentives). We expect to spend approximately
$0.4 to $0.5 million per restaurant for cash pre-opening
costs. The projected cash investment per restaurant is based on
historical averages.
We currently estimate capital expenditures, net of lease
incentives, for 2011 to be in the range of approximately $22.0
to $24.0 million, primarily related to the planned opening
of six to seven new restaurants in 2011, as well as normal
maintenance related capital expenditures related to our existing
restaurants. In conjunction with these restaurant openings, we
anticipate spending approximately $4.0 million in
pre-opening costs in 2011.
Current Resources.
Our operations have not
required significant working capital and, like many restaurant
companies, we have been able to operate with negative working
capital. Restaurant sales are primarily paid for in cash or by
credit card, and restaurant operations do not require
significant inventories or receivables. In addition, we receive
trade credit for the purchase of food, beverage and supplies,
therefore reducing the need for incremental working capital to
support growth. We had a net working capital deficit of
$35.3 million at December 26, 2010, compared to a net
working capital deficit of $36.2 million at
December 27, 2009.
In connection with our 2006 recapitalization, we entered into
our former $112.5 million senior credit facilities with a
syndicate of lenders. The former senior credit facilities
provided for (i) an $82.5 million term loan facility
and (ii) a revolving credit facility under which we could
borrow up to $30.0 million (including a sublimit cap of up
to $7.0 million for letters of credit and up to
$5.0 million for swing-line loans).
46
In addition to our former senior credit facilities, in
connection with our 2006 recapitalization we previously issued
$27.5 million of our 13.25% senior subordinated
secured notes. Interest was payable monthly at an annual
interest rate of 13.25%, with the principal originally due on
December 29, 2012. The senior subordinated secured notes
consisted of cash interest equal to 9.0% and
paid-in-kind
interest of 4.25%. Interest accrued during the term of the notes
was capitalized into the principal balance.
On October 26, 2010, we completed the initial public
offering of our common shares. We issued 5,000,000 shares
in the offering, and existing shareholders sold an additional
6,500,000 previously outstanding shares, including
1,500,000 shares sold to cover over-allotments. We received
net proceeds from the offering of approximately
$62.1 million (after the payment of offering expenses) that
were used, together with borrowings under our senior credit
facilities (as described below), to repay all of our
then-outstanding loans under our former senior credit facilities
and to repay all of our then-outstanding 13.25% senior
subordinated secured notes, in each case including any accrued
and unpaid interest.
In connection with our initial public offering, we entered into
a credit agreement with a syndicate of financial institutions
with respect to our senior credit facilities. Our senior credit
facilities provide for (i) a $45.0 million term loan
facility, maturing in 2015, and (ii) a revolving credit
facility under which we may borrow up to $40.0 million
(including a sublimit cap of up to $10.0 million for
letters of credit and up to $10.0 million for swing-line
loans), maturing in 2015. Under the credit agreement, we are
also entitled to incur additional incremental term loans
and/or
increases in the revolving credit facility of up to
$20.0 million if no event of default exists and certain
other requirements are satisfied. Our revolving credit facility
is (i) jointly and severally guaranteed by each of our
existing or subsequently acquired or formed subsidiaries,
(ii) secured by a first priority lien on substantially all
of our subsidiaries tangible and intangible personal
property, (iii) secured by a first priority security
interest on all owned real property and (iv) secured by a
pledge of all of the capital stock of our subsidiaries. Our
senior credit facilities also require us to meet financial
tests, including a maximum consolidated total leverage ratio, a
minimum consolidated fixed charge coverage ratio and a maximum
consolidated capital expenditures limitation. At
December 26, 2010, the Company was in compliance with its
applicable financial covenants. Additionally, our senior credit
facilities contain negative covenants limiting, among other
things, additional indebtedness, transactions with affiliates,
additional liens, sales of assets, dividends, investments and
advances, prepayments of debt, mergers and acquisitions, and
other matters customarily restricted in such agreements and
customary events of default, including payment defaults,
breaches of representations and warranties, covenant defaults,
defaults under other material debt, events of bankruptcy and
insolvency, failure of any guaranty or security document
supporting the senior credit facilities to be in full force and
effect, and a change of control of our business.
Borrowings under our senior credit facilities bear interest at
our option of either (i) the Alternate Base Rate (as such
term is defined in the credit agreement) plus the applicable
margin of 1.75% to 2.25% or (ii) at a fixed rate for a
period of one, two, three or six months equal to LIBOR plus the
applicable margin of 2.75% to 3.25%. The applicable margins with
respect to our senior credit facilities vary from time to time
in accordance with agreed upon pricing grids based on our
consolidated total leverage ratio. Swing-line loans under our
senior credit facilities bear interest only at the Alternate
Base Rate plus the applicable margin. Interest on loans based
upon the Alternate Base Rate are payable on the last day of each
calendar quarter in which such loan is outstanding. Interest on
loans based on LIBOR are payable on the last day of the
applicable LIBOR period and, in the case of any LIBOR period
greater than three months in duration, interest shall be payable
quarterly. In addition to paying any outstanding principal
amount under our senior credit facilities, we are required to
pay an unused facility fee to the lenders equal to 0.50% to
0.75% per annum on the aggregate amount of the unused revolving
credit facility, excluding swing-line loans, commencing on
October 26, 2010, payable quarterly in arrears. As of
December 26, 2010, we had an outstanding principal balance
of approximately $41.0 million on our term loan facility
and no outstanding balance on our revolving credit facility.
Based on the Companys forecasts, management believes that
the Company will be able to maintain compliance with its
applicable financial covenants in fiscal 2011. Management
believes that the cash flow from operating activities as well as
available borrowings under its revolving credit facility will be
sufficient to meet the Companys liquidity needs.
47
Off-Balance
Sheet Arrangements
As part of our on-going business, we do not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities referred to
as structured finance or variable interest entities
(VIEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of
December 26, 2010, we are not involved in any VIE
transactions and do not otherwise have any off-balance sheet
arrangements.
Significant
Accounting Policies
Pre-opening Costs.
Restaurant pre-opening
costs consist primarily of wages and salaries, recruiting,
meals, training, travel and lodging. Pre-opening costs include
an accrual for straight-line rent recorded during the period
between date of possession and the restaurant opening date for
the Companys leased restaurant locations. We expense all
such costs as incurred. These costs will vary depending on the
number of restaurants under development in a reporting period.
Property and Equipment.
Property and equipment
are recorded at cost. Equipment consists primarily of restaurant
equipment, furniture, fixtures and small wares. Depreciation is
calculated using the straight-line method over the estimated
useful life of the related asset. Leasehold improvements are
amortized using the straight-line method over the shorter of the
lease term, including option periods, which are reasonably
assured of renewal or the estimated useful life of the asset.
The useful life of property and equipment involves judgment by
management, which may produce materially different amounts of
depreciation expense than if different assumptions were used.
Property and equipment costs may fluctuate based on the number
of new restaurants under development or opened, as well as any
additional capital projects that are completed in a given period.
Leases.
We currently lease all but four of our
restaurant locations. We evaluate each lease to determine its
appropriate classification as an operating or capital lease for
financial reporting purposes. All of our leases are classified
as operating leases. We record the minimum lease payments for
our operating leases on a straight-line basis over the lease
term, including option periods which in the judgment of
management are reasonably assured of renewal. The lease term
commences on the date that the lessee obtains control of the
property, which is normally when the property is ready for
tenant improvements. Contingent rent expense is recognized as
incurred and is usually based on either a percentage of
restaurant sales or as a percentage of restaurant sales in
excess of a defined amount. Our lease costs will change based on
the lease terms of our lease renewals as well as leases that we
enter into with respect to our new restaurants.
Leasehold improvements financed by the landlord through tenant
improvement allowances are capitalized as leasehold improvements
with the tenant improvement allowances recorded as deferred
lease incentives. Deferred lease incentives are amortized on a
straight-line basis over the lesser of the life of the asset or
the lease term, including option periods which in the judgment
of management are reasonably assured of renewal (same term that
is used for related leasehold improvements) and are recorded as
a reduction of occupancy expense. As part of the initial lease
terms, we negotiate with our landlords to secure these tenant
improvement allowances. There is no guarantee that we will
receive tenant improvement allowances for any of our future
locations, which would result in additional occupancy expenses.
Impairment of Long-Lived Assets.
We review
long-lived assets, such as property and equipment and
intangibles, subject to amortization, for impairment when events
or circumstances indicate the carrying value of the assets may
not be recoverable. In determining the recoverability of the
asset value, an analysis is performed at the individual
restaurant level and primarily includes an assessment of
historical cash flows and other relevant factors and
circumstances. The other factors and circumstances include
changes in the economic environment, changes in the manner in
which assets are used, unfavorable changes in legal factors or
business climate, incurring excess costs in construction of the
asset, overall restaurant operating performance and projections
for future performance. These estimates result in a wide range
of variability on a year to year basis due to the nature of the
criteria. Negative restaurant-level cash flow over the previous
12-month
period is considered a potential impairment indicator. In such
situations, we evaluate future undiscounted cash flow
projections in conjunction with qualitative factors and future
operating plans. Our impairment assessment
48
process requires the use of estimates and assumptions regarding
future undiscounted cash flows and operating outcomes, which are
based upon a significant degree of managements judgment.
Based on this analysis, if we believe that the carrying amount
of the assets are not recoverable, an impairment charge is
recognized based upon the amount by which the assets carrying
value exceeds fair value. In performing our impairment testing,
we forecast our future undiscounted cash flows by looking at
recent restaurant level performance, restaurant level operating
plans, sales trends, and cost trends for cost of sales, labor
and operating expenses. We believe that this combination of
information gives us a fair benchmark to predict future
undiscounted cash flows. We compare this cash flow forecast to
the assets carrying value at the restaurant. If the predicted
future undiscounted cash flow does not exceed the assets
carrying value, we impair the assets related to that restaurant
as indicated above.
Continued economic weakness within our respective markets may
adversely impact consumer discretionary spending and may result
in lower restaurant sales. Unfavorable fluctuations in our
commodity costs, supply costs and labor rates, which may or may
not be within our control, may also impact our operating
margins. Any of these factors could as a result affect the
estimates used in our impairment analysis and require additional
impairment tests and charges to earnings. We continue to assess
the performance of our restaurants and monitor the need for
future impairment. There can be no assurance that future
impairment tests will not result in additional charges to
earnings.
We are currently monitoring the performance of two BRAVO!
locations, which have a combined carrying value of approximately
$5.6 million. We have forecasted increased future cash flow
at these locations. The assumptions used in our forecast include
our expectations regarding an improvement in the economy,
operational changes, and a positive impact from proactive sales
and cost initiatives recently implemented throughout the
concept, as well as further actions taken at these specific
locations. However, these sites are relatively new and it is
difficult in the current economic environment to determine the
revenue and profitability levels these restaurants will be able
to achieve over time.
Self-Insurance Reserves.
We maintain various
policies, including workers compensation and general
liability. As outlined in these policies, we are responsible for
losses up to certain limits. We record a liability for the
estimated exposure for aggregate losses below those limits. This
liability is based on estimates of the ultimate costs to be
incurred to settle known claims and claims not reported as of
the balance sheet date. The estimated liability is not
discounted and is based on a number of assumptions, including
actuarial assumptions, historical trends and economic
conditions. If actual claims trends, including the severity or
frequency of claims, differ from our estimates and historical
trends, our financial results could be impacted.
Income Taxes.
Income tax provisions consist of
federal and state taxes currently due, plus deferred taxes.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Recognition of deferred tax assets is limited to amounts
considered by management to be more likely than not of
realization in future periods. Future taxable income,
adjustments in temporary difference, available carry forward
periods and changes in tax laws could affect these estimates.
We recognize a tax position in the financial statements when it
is more likely than not that the position will be sustained upon
examination by tax authorities that have full knowledge of all
relevant information.
Stock-Based Compensation.
Subsequent to our
recapitalization in 2006, we adopted the Bravo Development Inc.
Option Plan or the 2006 Plan. Our board of directors determined,
pursuant to the exercise of its discretion in accordance with
the 2006 Plan, that the public offering price of our initial
public offering would be deemed to result in the achievement of
certain performance thresholds applicable under the 2006 Plan,
and, as a result, upon the consummation of the offering
(i) each outstanding option award was deemed to have vested
in a percentage equal to the greater of 80.0% or the percentage
of the option award already vested as of that date and,
(ii) each outstanding option award was deemed 80.0%
exercisable. Any unvested
and/or
unexercisable portion of each outstanding option award was
forfeited in accordance with the terms of the 2006
49
Plan. Due to this modification, all of the options were revalued
at the date of the modification, October 6, 2010, and
therefore the Company recorded a one-time non-cash charge of
$17.9 million in stock compensation expense.
On October 6, 2010, our board of directors approved and, on
October 18, 2010, our shareholders approved the Bravo Brio
Restaurant Group, Inc. Stock Incentive Plan or the Stock
Incentive Plan. The Stock Incentive Plan became effective upon
the completion of our initial public offering. In connection
with the adoption of the Stock Incentive Plan, the board of
directors terminated the 2006 Plan effective as of the date on
which our common stock was Publicly Traded (as defined in the
2006 Plan), and no further awards will be granted under the 2006
Plan after such date. However, the termination of the 2006 Plan
will not affect awards outstanding under the 2006 Plan at the
time of its termination and the terms of the 2006 Plan will
continue to govern outstanding awards granted under the 2006
Plan. Pursuant to the Stock Incentive Plan, the Company granted
451,800 restricted shares on October 26, 2010 which will
vest, subject to certain exceptions, over a four year period.
The Company will record compensation expense related to these
shares over that period.
Commitments
and Contingencies
The following table summarizes contractual obligations at
December 26, 2010 on an actual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
Contractual Obligations
|
|
Total
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
After 2015
|
|
|
|
(In thousands)
|
|
|
Term Loan Facility(1)
|
|
$
|
41,000
|
|
|
$
|
2,050
|
|
|
$
|
6,150
|
|
|
$
|
32,800
|
|
|
|
|
|
Interest
|
|
|
5,554
|
|
|
|
1,527
|
|
|
|
2,996
|
|
|
|
1,031
|
|
|
|
|
|
Operating Leases
|
|
|
260,897
|
|
|
|
19,291
|
|
|
|
39,459
|
|
|
|
40,788
|
|
|
|
161,359
|
|
Construction purchase obligations
|
|
|
1,742
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
309,193
|
|
|
$
|
24,610
|
|
|
$
|
48,605
|
|
|
$
|
74,619
|
|
|
$
|
161,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Our senior credit facilities, consisting of a $45.0 million
term loan facility and a $40.0 million revolving credit
facility, will be paid off over a five year period with the
outstanding balance due in 2015.
|
Inflation
Our profitability is dependent, among other things, on our
ability to anticipate and react to changes in the costs of key
operating resources, including food and other raw materials,
labor, energy and other supplies and services. Substantial
increases in costs and expenses could impact our operating
results to the extent that such increases cannot be passed along
to our restaurant guests. The impact of inflation on food,
labor, energy and occupancy costs can significantly affect the
profitability of our restaurant operations.
Many of our restaurant staff members are paid hourly rates
related to the federal minimum wage. In fiscal 2007, Congress
enacted an increase in the federal minimum wage implemented in
two phases, beginning in fiscal 2007 and concluding in fiscal
2008. In addition, numerous state and local governments
increased the minimum wage within their jurisdictions, with
further state minimum wage increases going into effect in fiscal
2009. Certain operating costs, such as taxes, insurance and
other outside services continue to increase with the general
level of inflation or higher and may also be subject to other
cost and supply fluctuations outside of our control.
While we have been able to partially offset inflation and other
changes in the costs of key operating resources by gradually
increasing prices for our menu items, coupled with more
efficient purchasing practices, productivity improvements and
greater economies of scale, there can be no assurance that we
will be able to continue to do so in the future. From time to
time, competitive conditions could limit our menu pricing
flexibility. In addition, macroeconomic conditions could make
additional menu price increases imprudent. There can be no
assurance that all future cost increases can be offset by
increased menu prices or that increased menu prices will be
fully absorbed by our restaurant guests without any resulting
changes in their visit frequencies or purchasing patterns.
Substantially all of the leases for our restaurants provide for
50
contingent rent obligations based on a percentage of revenues.
As a result, rent expense will absorb a proportionate share of
any menu price increases in our restaurants. There can be no
assurance that we will continue to generate increases in
comparable restaurant sales in amounts sufficient to offset
inflationary or other cost pressures.
Segment
Reporting
We operate upscale affordable dining restaurants under two
brands that have similar economic characteristics, nature of
products and services, class of customer and distribution
methods. Therefore, we report our results of operations as one
reporting segment in accordance with applicable accounting
guidance.
Recently
Adopted Accounting Pronouncements
In February 2008, FASB issued a standard which clarifies the
definition of fair value, describes methods used to
appropriately measure fair value, and expands fair value
disclosure requirements, but does not change existing guidance
as to whether or not an instrument is carried at fair value. For
financial assets and liabilities, this standard is effective for
fiscal years beginning after November 15, 2007, which
required that the Company adopt these provisions in fiscal 2009.
For non-financial assets and liabilities, this standard is
effective for fiscal years beginning after November 15,
2008, which required that we adopt these provisions in the first
quarter of fiscal 2010. The Company adopted this guidance and it
had no material effect on its consolidated financial statements.
In January 2009, the Financial Accounting Standards Board
(FASB) issued a standard that requires new
disclosures regarding recurring or non-recurring fair value
measurements. Entities will be required to separately disclose
significant transfers into and out of Level 1 and
Level 2 measurements in the fair value hierarchy and
describe the reasons for the transfers. Entities will also be
required to provide information on purchases, sales, issuances
and settlements on a gross basis in the reconciliation of
Level 3 fair value measurements. In addition, entities must
provide fair value measurement disclosures for each class of
assets and liabilities, and disclosures about the valuation
techniques used in determining fair value for Level 2 or
Level 3 measurements. This update is effective for interim
and annual reporting periods beginning after December 15,
2009, except for the gross basis reconciliations for the
Level 3 measurements, which are effective for fiscal years
beginning after December 15, 2010. The Company adopted this
guidance and it had no material effect on its consolidated
financial statements.
In June 2009, the FASB issued a standard to amend certain
requirements of accounting for consolidation of variable
interest entities, to improve financial reporting by enterprises
involved with variable interest entities and to provide more
relevant and reliable information to users of financial
statements. These amendments require an enterprise to perform an
analysis to determine whether the enterprises variable
interest(s) give it a controlling financial interest in a
variable interest entity. This guidance was effective for the
annual reporting period beginning after November 15, 2009,
for interim periods within that first annual reporting period
and for interim and annual reporting periods thereafter. The
Company adopted this guidance and it had no material effect on
its consolidated financial statements.
The FASB also updated its standard for Subsequent Events, to
establish general standards of accounting for and disclosing of
events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
This guidance was effective for interim and annual financial
periods ending after June 15, 2009. Adoption of this
guidance did not have a material effect on our consolidated
financial statements. Our management has performed an evaluation
of subsequent events through the original date of issuance.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Interest
Rate Risk
We are subject to interest rate risk in connection with our long
term indebtedness. Our principal interest rate exposure relates
to the loans outstanding under our senior credit facilities,
which are payable at variable
51
rates. We currently have approximately $41.0 million of
borrowings under our term loan facility. Each eighth point
change in interest rates on the variable rate portion of
indebtedness under our senior credit facilities would result in
a $0.1 million annual change in our interest expense.
Commodity
Price Risk
We are exposed to market price fluctuation in beef, seafood,
produce and other food product prices. Given the historical
volatility of beef, seafood, produce and other food product
prices, these fluctuations can materially impact our food and
beverage costs. While we have taken steps to qualify multiple
suppliers and enter into agreements for some of the commodities
used in our restaurant operations, there can be no assurance
that future supplies and costs for such commodities will not
fluctuate due to weather and other market conditions outside of
our control. We are currently unable to contract for some of our
commodities such as fresh seafood and certain produce for
periods longer than one week. Consequently, such commodities can
be subject to unforeseen supply and cost fluctuations. Dairy
costs can also fluctuate due to government regulation. Because
we typically set our menu prices in advance of our food product
prices, we cannot immediately take into account changing costs
of food items. To the extent that we are unable to pass the
increased costs on to our guests through price increases, our
results of operations would be adversely affected. We do not use
financial instruments to hedge our risk to market price
fluctuations in beef, seafood, produce and other food product
prices at this time.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The consolidated financial statements required to be filed
hereunder are set forth in Part IV, Item 15 of this
report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e)
of the Securities Exchange Act of 1934) as of the end of
the period covered in this report. Based on this evaluation, our
principal executive officer and principal financial officer
concluded that our disclosure controls and procedures, including
the accumulation and communication of disclosure to our
principal executive officer and principal financial officer as
appropriate to allow timely decisions regarding disclosure, are
effective to provide reasonable assurance that material
information required to be included in our periodic SEC reports
is recorded, processed, summarized and reported within the time
periods specified in the relevant SEC rules and forms.
Limitations
on the Effectiveness of Controls
The design of any system of control is based upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated objectives under all future events, no matter how remote,
or that the degree of compliance with the policies or procedures
may not deteriorate. Because of its inherent limitations,
disclosure controls and procedures may not prevent or detect all
misstatements. Accordingly, even effective disclosure controls
and procedures can only provide reasonable assurance of
achieving their control objectives.
52
Managements
Report on Internal Control Over Financial Reporting
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies.
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal controls over
financial reporting during our most recent fiscal quarter ended
December 26, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Except as set forth below, the information required by this
Item 10 is incorporated herein by reference from the
Companys definitive proxy statement for use in connection
with the solicitation of proxies for the Companys 2011
Annual Meeting of Shareholders (the Proxy Statement)
to be filed within 120 days after the end of the
Companys fiscal year ended December 26, 2010.
The Company has adopted a written code of business conduct and
ethics, to be known as our code of conduct, which applies to our
chief executive officer, our chief financial officer, our chief
accounting officer and all persons providing similar functions.
Our code of conduct is available on our Internet website,
www.bbrg.com. Our code of conduct may also be obtained by
contacting investor relations at
(614) 326-7944.
Any amendments to our code of conduct or waivers from the
provisions of the code for our chief executive officer, our
chief financial officer and our chief accounting officer will be
disclosed on our Internet website promptly following the date of
such amendment or waiver and the Company will disclose the
nature of the amendment or waiver, its effective date and to
whom it applies in a Current Report on
Form 8-K
filed with the SEC.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item 11 is incorporated
herein by reference from the Proxy Statement.
53
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Except as set forth below, the information required by this
Item 12 is incorporated herein by reference from the Proxy
Statement.
Equity
Compensation Plan Information
Set forth in the table below is a list of all of our equity
compensation plans and the number of securities to be issued on
exercise of equity rights, average exercise price, and number of
securities that would remain available under each plan if
outstanding equity rights were exercised as of December 26,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
Securities to be
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Issued upon
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Securities
|
|
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a).
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bravo Development, Inc. Option Plan
|
|
|
1,414,203
|
|
|
|
1.44
|
|
|
|
|
|
Bravo Brio Restaurant Group, Inc. Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
1,450,200
|
|
Equity Compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item 13 is incorporated
herein by reference from the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item 14 is incorporated
herein by reference from the Proxy Statement.
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following documents are filed as a part of this
report:
|
|
|
|
1.
|
Financial Statements: See Index to Consolidated Financial
Statements appearing on page 55 of this report.
|
2. Financial statement schedules: None.
3. Exhibits: See Exhibit Index appearing on
page 75 of this report.
54
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
55
Report of
Independent Registered Public Accounting Firm
To The Board of Directors and Stockholders of
Bravo Brio Restaurant Group, Inc.
We have audited the accompanying consolidated balance sheets of
Bravo Brio Restaurant Group, Inc. and subsidiaries (the
Company), as of December 26, 2010 and
December 27, 2009, and the related consolidated statements
of operations, stockholders equity (deficiency in assets),
and cash flows for each of the three years in the period ended
December 26, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its 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 Companys 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Bravo Brio Restaurant Group, Inc. and subsidiaries as of
December 26, 2010 and December 27, 2009 and the
results of their operations and their cash flows for each of the
three years in the period ended December 26, 2010, in
conformity with accounting principles generally accepted in the
United States of America.
/s/
DELOITTE &
TOUCHE LLP
Columbus, Ohio
February 17, 2011
56
BRAVO
BRIO RESTAURANT GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 26, 2010 AND DECEMBER 27, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except par values)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,460
|
|
|
$
|
249
|
|
Accounts receivable
|
|
|
4,754
|
|
|
|
5,534
|
|
Tenant improvement allowance receivable
|
|
|
632
|
|
|
|
2,435
|
|
Inventories
|
|
|
2,415
|
|
|
|
2,203
|
|
Prepaid expenses and other current assets
|
|
|
2,229
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,490
|
|
|
|
12,470
|
|
Property and equipment, net
|
|
|
147,621
|
|
|
|
144,880
|
|
Other assets, net
|
|
|
3,342
|
|
|
|
3,492
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
163,453
|
|
|
$
|
160,842
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY IN
ASSETS)
|
Current liabilities
|
|
|
|
|
|
|
|
|
Trade and construction payables
|
|
$
|
9,920
|
|
|
$
|
12,675
|
|
Accrued expenses
|
|
|
21,150
|
|
|
|
21,658
|
|
Current portion of long-term debt
|
|
|
2,050
|
|
|
|
1,039
|
|
Deferred lease incentives
|
|
|
4,979
|
|
|
|
4,284
|
|
Deferred gift card revenue
|
|
|
9,725
|
|
|
|
8,970
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
47,824
|
|
|
|
48,626
|
|
|
|
|
|
|
|
|
|
|
Deferred lease incentives
|
|
|
54,594
|
|
|
|
53,451
|
|
Long-term debt
|
|
|
38,950
|
|
|
|
116,992
|
|
Other long-term liabilities
|
|
|
15,682
|
|
|
|
14,463
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Stockholders equity (deficiency in assets)
|
|
|
|
|
|
|
|
|
Common shares, no par value, per share authorized,
100,000,000 shares: issued and outstanding,
19,250,500 shares at December 26, 2010;
7,234,370 shares, $0.001 par value, issued and
outstanding at December 27, 2009
|
|
|
191,297
|
|
|
|
1
|
|
Preferred shares, no par value, per share
authorized, 5,000,000 shares; issued and outstanding,
0 shares at December 26, 2010; 59,500 shares
$0.001 par value issued and outstanding at
December 27, 2009
|
|
|
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
|
|
|
|
110,972
|
|
Retained deficit
|
|
|
(184,894
|
)
|
|
|
(183,664
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficiency in assets)
|
|
|
6,403
|
|
|
|
(72,690
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
163,453
|
|
|
$
|
160,842
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
57
BRAVO
BRIO RESTAURANT GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 2010, DECEMBER 27, 2009,
AND
DECEMBER 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 26,
|
|
|
December 27,
|
|
|
December 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars and shares in thousands,
|
|
|
|
except per share data)
|
|
|
Revenues
|
|
$
|
343,025
|
|
|
$
|
311,709
|
|
|
$
|
300,783
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
89,456
|
|
|
|
82,609
|
|
|
|
84,618
|
|
Labor
|
|
|
114,468
|
|
|
|
106,330
|
|
|
|
102,323
|
|
Operating
|
|
|
53,331
|
|
|
|
48,917
|
|
|
|
47,690
|
|
Occupancy
|
|
|
22,729
|
|
|
|
19,636
|
|
|
|
18,736
|
|
General and administrative expenses
|
|
|
37,539
|
|
|
|
17,280
|
|
|
|
15,271
|
|
Restaurant preopening costs
|
|
|
2,375
|
|
|
|
3,758
|
|
|
|
5,434
|
|
Asset impairment charges
|
|
|
|
|
|
|
6,436
|
|
|
|
8,506
|
|
Depreciation and amortization
|
|
|
16,708
|
|
|
|
16,088
|
|
|
|
14,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
336,606
|
|
|
|
301,054
|
|
|
|
297,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,419
|
|
|
|
10,655
|
|
|
|
3,554
|
|
Loss on extinguishment of debt
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
6,121
|
|
|
|
7,119
|
|
|
|
9,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(1,002
|
)
|
|
|
3,536
|
|
|
|
(6,338
|
)
|
Income tax expense
|
|
|
228
|
|
|
|
135
|
|
|
|
55,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,230
|
)
|
|
$
|
3,401
|
|
|
$
|
(61,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeclared preferred dividends, net of adjustment
(Note 1)
|
|
|
(3,769
|
)
|
|
|
(11,599
|
)
|
|
|
(10,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common shareholders
|
|
$
|
(4,999
|
)
|
|
$
|
(8,198
|
)
|
|
$
|
(71,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.54
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(9.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted
|
|
|
9,281
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
BRAVO
BRIO RESTAURANT GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY
IN ASSETS)
FOR THE FISCAL YEARS ENDED DECEMBER 26, 2010, DECEMBER 27, 2009,
AND
DECEMBER 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
(Deficiency in
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Assets)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance December 30, 2007
|
|
|
7,234,370
|
|
|
|
1
|
|
|
|
59,500
|
|
|
|
1
|
|
|
|
110,972
|
|
|
|
(125,666
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,692
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,399
|
)
|
|
|
|
|
|
|
|
|
|
|
(61,399
|
)
|
Purchase of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,585
|
)
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Sale of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,585
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 28, 2008
|
|
|
7,234,370
|
|
|
$
|
1
|
|
|
|
59,500
|
|
|
$
|
1
|
|
|
$
|
110,972
|
|
|
$
|
(187,065
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(76,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,401
|
|
|
|
|
|
|
|
|
|
|
|
3,401
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,217
|
)
|
|
|
(184
|
)
|
|
|
(184
|
)
|
Sale of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,217
|
|
|
|
184
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 27, 2009
|
|
|
7,234,370
|
|
|
$
|
1
|
|
|
|
59,500
|
|
|
$
|
1
|
|
|
$
|
110,972
|
|
|
$
|
(183,664
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(72,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,230
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,230
|
)
|
Share-based compensation costs
|
|
|
|
|
|
|
18,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,177
|
|
Exchange of common and preferred stock, to common shares, no par
value per share
|
|
|
7,015,630
|
|
|
|
110,973
|
|
|
|
(59,500
|
)
|
|
|
(1
|
)
|
|
|
(110,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for initial public offering, net of
fees and issuance costs
|
|
|
5,000,000
|
|
|
|
62,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,138
|
|
Issuance of restricted shares
|
|
|
500
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 26, 2010
|
|
|
19,250,500
|
|
|
$
|
191,297
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(184,894
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
6,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
BRAVO
BRIO RESTAURANT GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 2010, DECEMBER 27, 2009,
AND
DECEMBER 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 26,
|
|
|
December 27,
|
|
|
December 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,230
|
)
|
|
$
|
3,401
|
|
|
$
|
(61,399
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (excluding deferred lease
incentives)
|
|
|
16,768
|
|
|
|
16,088
|
|
|
|
14,651
|
|
Loss (gain) on disposals of property and equipment
|
|
|
235
|
|
|
|
(236
|
)
|
|
|
114
|
|
Write-off of unamortized loan origination fees
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
6,436
|
|
|
|
8,506
|
|
Amortization of deferred lease incentives
|
|
|
(4,734
|
)
|
|
|
(5,016
|
)
|
|
|
(3,139
|
)
|
Stock compensation costs
|
|
|
18,185
|
|
|
|
|
|
|
|
|
|
Interest incurred but not yet paid
|
|
|
114
|
|
|
|
1,340
|
|
|
|
1,285
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
54,895
|
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and tenant improvement receivables
|
|
|
2,583
|
|
|
|
(452
|
)
|
|
|
446
|
|
Inventories
|
|
|
(212
|
)
|
|
|
(213
|
)
|
|
|
24
|
|
Prepaid expenses and other current assets
|
|
|
(180
|
)
|
|
|
9
|
|
|
|
(882
|
)
|
Trade and construction payables
|
|
|
(3,095
|
)
|
|
|
(1,805
|
)
|
|
|
1,596
|
|
Deferred lease incentives
|
|
|
6,572
|
|
|
|
10,771
|
|
|
|
15,205
|
|
Deferred gift card revenue
|
|
|
755
|
|
|
|
431
|
|
|
|
(587
|
)
|
Other accrued liabilities
|
|
|
(508
|
)
|
|
|
(545
|
)
|
|
|
(1,153
|
)
|
Other net
|
|
|
1,129
|
|
|
|
3,573
|
|
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
37,682
|
|
|
|
33,782
|
|
|
|
32,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(18,695
|
)
|
|
|
(25,708
|
)
|
|
|
(42,496
|
)
|
Proceeds from sale of property and equipment
|
|
|
4
|
|
|
|
500
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
251
|
|
|
|
(251
|
)
|
Intangibles acquired
|
|
|
|
|
|
|
|
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(18,691
|
)
|
|
|
(24,957
|
)
|
|
|
(43,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
80,550
|
|
|
|
103,450
|
|
|
|
104,450
|
|
Payments on long-term debt
|
|
|
(152,811
|
)
|
|
|
(112,708
|
)
|
|
|
(93,921
|
)
|
Payment of
paid-in-kind
interest
|
|
|
(4,884
|
)
|
|
|
|
|
|
|
|
|
Proceeds from common share issuance, net of underwriter fees
|
|
|
65,100
|
|
|
|
|
|
|
|
|
|
Cost incurred in connection with the common share issuance
|
|
|
(2,962
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of stock
|
|
|
|
|
|
|
184
|
|
|
|
100
|
|
Repurchase of stock
|
|
|
|
|
|
|
(184
|
)
|
|
|
(100
|
)
|
Loan origination fees related to new credit facility
|
|
|
(1,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(16,780
|
)
|
|
|
(9,258
|
)
|
|
|
10,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash equivalents:
|
|
|
2,211
|
|
|
|
(433
|
)
|
|
|
(58
|
)
|
Cash and equivalents beginning of year
|
|
|
249
|
|
|
|
682
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents end of year
|
|
$
|
2,460
|
|
|
$
|
249
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid net of $70, $454 and $950 capitalized
in 2010, 2009, and 2008, respectively
|
|
$
|
6,362
|
|
|
$
|
7,030
|
|
|
$
|
8,840
|
|
Income taxes paid (refunded)
|
|
$
|
165
|
|
|
$
|
300
|
|
|
$
|
(83
|
)
|
Property additions financed by trade and construction payables
|
|
$
|
1,742
|
|
|
$
|
994
|
|
|
$
|
963
|
|
See notes to consolidated financial statements.
60
BRAVO
BRIO RESTAURANT GROUP, INC., AND SUBSIDIARIES
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
As of
December 26, 2010, Bravo Brio Restaurant Group, Inc. (the
Company) owned and operated 86 restaurants under the
trade names Bravo! Cucina
Italiana
®
,
Brio
®
Tuscan Grille, and Bon
Vie
®
.
Of the 86 restaurants the Company operates, there are 47 Bravo!
Cucina
Italiana
®
restaurants, 38
Brio
®
Tuscan Grille restaurants, and one Bon
Vie
®
restaurant in operation in 29 states throughout the United
States of America.
Fiscal Year End
The Company utilizes a 52- or
53-week accounting period which ends on the last Sunday of the
calendar year. The fiscal years ended December 26, 2010,
December 27, 2009 and December 28, 2008 each have
52 weeks.
Initial Public Offering
On October 26,
2010, the Company completed the initial public offering
(IPO) of its common shares. The Company issued
5,000,000 shares in the offering, and existing shareholders
sold an additional 6,500,000 previously outstanding shares,
including 1,500,000 shares sold to cover over-allotments.
The Company received net proceeds from the offering of
approximately $62.1 million that have been used, together
with borrowings under the Companys senior credit
facilities, to repay all of the Companys previously
outstanding loans under its prior senior credit facilities and
to repay all its previously outstanding notes under its prior
senior subordinated note agreement, in each case including any
accrued and unpaid interest.
Pursuant to an exchange agreement among the Company and each of
its shareholders, the Company completed an exchange (the
Exchange) of each share of the Companys common
stock outstanding prior to the completion of the IPO on
October 26, 2010 for approximately 6.9 new common shares of
the Company. All issued and outstanding common shares and per
share amounts, as well as options to purchase shares under the
Bravo Development Inc. Option Plan (2006 Plan),
contained in the financial statements have been retroactively
adjusted to reflect this Exchange. After completion of the
Exchange, the Company had 7,234,370 common shares and 1,767,754
options to purchase common shares outstanding. In connection
with the IPO, the Company increased its authorized common shares
from 3,000,000 shares of common stock, $0.001 par
value per share, up to 100,000,000 common shares, no par value
per share.
The undeclared preferred dividend total for fiscal 2010 of
$10.8 million was offset by an add back of
$7.0 million in the fourth quarter of 2010 related to the
exchange of the Companys Series A preferred stock.
The exchange of the Series A preferred stock was completed
prior to the Companys initial public offering, using an
estimated initial public offering price of $15.00 per share
which, based on the total liquidation preference for the
Series A preferred stock (including accrued and undeclared
dividends thereon) of $105.2 million as of the date of the
exchange, resulted in the issuance of 7,015,630 common shares.
Because the final initial public offering price was $14.00 per
share, the 7,015,630 common shares issued to the preferred
shareholders represented only $98.2 million of value,
$7.0 million less than the carrying value of the
Series A preferred stock as of the date of the exchange.
Because the fair value of consideration transferred was less
than the carrying amount of the Series A preferred stock,
the discount was added back to undeclared preferred dividends in
arriving at net earnings available to common shareholders and is
recorded as such on the Consolidated Statements of Operations
for fiscal 2010. In connection with the IPO, the Company has
authorized the issuance of up to 5,000,000 preferred shares, no
par value per share.
At October 26, 2010, the closing date of the IPO, the
Company had a total of 19,250,000 common shares issued and
outstanding and no preferred shares issued and outstanding.
Upon consummation of the Companys IPO and after giving
effect to a modification by the board of directors in its
discretion to give effect to the Exchange, 80.0% of the
outstanding options to purchase common shares at a weighted
average exercise price of $1.44 per share under the 2006 Plan
became fully vested and exercisable. The remaining
non-exercisable options were forfeited. Due to this
modification, all of
61
the options were revalued at the date of the modification,
October 6, 2010, and therefore the Company recorded a
one-time non-cash charge of $17.9 million in stock
compensation expense.
On October 6, 2010, the board of directors approved and on
October 18, 2010 the Companys shareholders approved,
the Bravo Brio Restaurant Group, Inc. Stock Incentive Plan
(Stock Incentive Plan). The Stock Incentive Plan
became effective upon the completion of the IPO on
October 26, 2010. Pursuant to this plan, 1.9 million
common shares of the Company have been reserved for award under
the Stock Incentive Plan. In connection with the adoption of the
Stock Incentive Plan, the board of directors terminated the 2006
Plan effective October 26, 2010, and no further awards will
be granted under the 2006 Plan. However, the termination of the
2006 Plan will not affect awards outstanding under the 2006 Plan
at the time of its termination and the terms of the 2006 Plan
will continue to govern outstanding awards granted under the
2006 Plan. On October 26, 2010, the Company granted
451,800 shares of restricted stock to its employees under
the Stock Incentive Plan. These shares will vest, subject to
certain exceptions, over a four year period.
Accounting Estimates
The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the
circumstances at the time. Actual amounts may differ from those
estimates.
Cash and Cash Equivalents
The Company
considers all cash and short-term investments with original
maturities of three months or less as cash equivalents. All cash
is principally deposited in one bank.
Receivables
Receivables, which the Company
classifies within other current assets, consist primarily of
amounts due from landlords for tenant incentives and credit card
processors. Management believes outstanding amounts to be
collectible.
Inventories
Inventories are valued at the
lower of cost or market, using the
first-in,
first-out method and consist principally of food and beverage
items.
Pre-opening Costs
Restaurant pre-opening
costs consist primarily of wages and salaries, recruiting,
meals, training, travel and lodging. Pre-opening costs include
an accrual for straight-line rent recorded during the period
between date of possession and the restaurant opening date for
the Companys leased restaurant locations. The Company
expenses all such costs as incurred. These costs will vary
depending on the number of restaurants under development in a
reporting period.
Property and Equipment
Property and equipment
are recorded at cost, less accumulated depreciation. Equipment
consists primarily of restaurant equipment, furniture, fixtures
and small wares. Depreciation is calculated using the
straight-line method over the estimated useful life of the
related asset. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term,
including option periods which are reasonably assured of renewal
or the estimated useful life of the asset. The useful life of
property and equipment involves judgment by management, which
may produce materially different amounts of depreciation expense
than if different assumptions were used. Property and equipment
costs may fluctuate based on the number of new restaurants under
development or opened, as well as any additional capital
projects that are completed in a given period. The Company
incurred depreciation expense of $16.1 million,
$15.3 million and $13.9 million for the years ended
December 26, 2010, December 27, 2009 and
December 28, 2008, respectively.
Leases
The Company currently leases all but
four of its restaurant locations. The Company evaluates each
lease to determine its appropriate classification as an
operating or capital lease for financial reporting purposes. All
of the Companys leases are classified as operating leases.
The Company records the minimum lease payments for its operating
leases on a straight-line basis over the lease term, including
option periods which in the judgment of management are
reasonably assured of renewal. The lease term commences on the
date that the lessee obtains control of the property, which is
normally when the property is ready for tenant improvements.
Contingent rent expense is recognized as incurred and is usually
based on either a percentage of restaurant sales or as a
percentage of restaurant sales in excess of a defined amount.
The Companys lease
62
costs will change based on the lease terms of its lease renewals
as well as leases that the Company enters into with respect to
its new restaurants.
Leasehold improvements financed by the landlord through tenant
improvement allowances are capitalized as leasehold improvements
with the tenant improvement allowances recorded as deferred
lease incentives. Deferred lease incentives are amortized on a
straight-line basis over the lesser of the life of the asset or
the lease term, including option periods which in the judgment
of management are reasonably assured of renewal (same term that
is used for related leasehold improvements) and are recorded as
a reduction of occupancy expense. As part of the initial lease
terms, the Company negotiates with its landlords to secure these
tenant improvement allowances.
Other Assets
Other assets include liquor
licenses, trademarks, and loan costs and are stated at cost,
less amortization, if any. The trademarks are used in the
advertising and marketing of the restaurants and are widely
recognized and accepted by consumers.
Impairment of Long-Lived Assets
The Company
reviews long-lived assets, such as property and equipment and
intangibles subject to amortization, for impairment when events
or circumstances indicate the carrying value of the assets may
not be recoverable. In determining the recoverability of the
asset value, an analysis is performed at the individual
restaurant level and primarily includes an assessment of
historical cash flows and other relevant factors and
circumstances. Negative restaurant-level cash flow over the
previous
12-month
period is considered a potential impairment indicator. In such
situations, the Company evaluates future cash flow projections
in conjunction with qualitative factors and future operating
plans. Based on this analysis, if the Company believes that the
carrying amount of the assets are not recoverable, an impairment
charge is recognized based upon the amount by which the
assets carrying value exceeds fair value.
The Company recognized asset impairment charges of approximately
$6.4 million and $8.5 million in fiscal 2009 and 2008,
respectively, related to leasehold improvements, fixtures and
equipment for the impacted sites. No impairment charge was
recorded in fiscal 2010.
The Companys impairment assessment process requires the
use of estimates and assumptions regarding future cash flows and
operating outcomes, which are based upon a significant degree of
managements judgment. The Company continues to assess the
performance of restaurants and monitors the need for future
impairment. Changes in the economic environment, real estate
markets, capital spending, and overall operating performance
could impact these estimates and result in future impairment
charges. There can be no assurance that future impairment tests
will not result in additional charges to earnings.
At December 26, 2010, the Company evaluated the
recoverability of the long lived assets of two BRAVO! locations,
which have a combined carrying value of approximately
$5.6 million. The analysis showed that the carrying amount
of assets will be recovered during the useful life of the
assets. The Company has forecasted increased future cash flow at
these locations. The assumptions used in the Companys
forecast include operational changes, and a positive impact from
proactive sales and cost initiatives recently implemented
throughout the concept, as well as further actions taken at
these specific locations.
Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables,
trade and construction payables, and accrued liabilities at
December 26, 2010 and December 27, 2009, approximate
their fair value due to the short-term maturities of these
financial instruments. The carrying amount of the long-term debt
under the revolving credit facility and variable rate notes and
loan agreements approximate the fair values at December 26,
2010 and December 27, 2009. The fair value of the
Companys fixed long-term debt at December 27, 2009
was estimated based on quoted market values offered for the same
or similar agreements for which the lowest level of observable
input significant to the established fair value measurement
hierarchy is Level 2. At December 26, 2010, the
Company no longer carried the fixed long term debt and therefore
has no fair value disclosure requirement for such debt.
Revenue Recognition
Revenue from restaurant
operations is recognized upon payment by the customer at the
time of sale. Revenues are reflected net of sales tax and
certain discounts and allowances.
63
The Company records a liability upon the sale of gift cards and
recognizes revenue upon redemption by the customer. Revenue is
recognized on unredeemed gift cards (breakage) based upon
historical redemption patterns when the Company determines the
likelihood of redemption of the gift card by the customer is
remote and there is no legal obligation to remit the value of
unredeemed gift cards to the relevant jurisdiction. For the
fiscal years ended 2010, 2009 and 2008 the Company recorded gift
card breakage of an immaterial amount. For all periods it is
reported within revenues in the consolidated statements of
operations.
Advertising
The Company expenses the cost of
advertising (including production costs) the first time the
advertising takes place. Advertising expense was
$3.1 million, $2.8 million, and $2.5 million for
2010, 2009, and 2008, respectively.
Self-Insurance Reserves
The Company maintains
various policies, including workers compensation and
general liability. As outlined in these policies, the Company is
responsible for losses up to certain limits. The Company records
a liability for the estimated exposure for aggregate losses
below those limits. This liability is based on estimates of the
ultimate costs to be incurred to settle known claims and claims
not reported as of the balance sheet date. The estimated
liability is not discounted and is based on a number of
assumptions, including actuarial assumptions, historical trends
and economic conditions. If actual claims trends, including the
severity or frequency of claims, differ from the Companys
estimates and historical trends, the Companys financial
results could be impacted.
Derivative Instruments
The Company accounts
for all derivative instruments on the balance sheet at fair
value. Changes in the fair value (i.e., gains or losses) of the
Companys interest rate swap derivative are recorded each
period in the consolidated statement of operations as a
component of interest expense. The Companys prior interest
rate swap derivative expired in August of 2009.
Income Taxes
Income tax provisions are
comprised of federal and state taxes currently due, plus
deferred taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Recognition of deferred tax assets is
limited to amounts considered by management to be more likely
than not of realization in future periods. Future taxable
income, adjustments in temporary difference, available carry
forward periods and changes in tax laws could affect these
estimates.
The Company recognizes a tax position in the financial
statements when it is more likely than not that the position
will be sustained upon examination by tax authorities that have
full knowledge of all relevant information.
Stock-Based Compensation
The Company
maintains equity compensation incentive plans including
nonqualified stock options and restricted stock grants. Options
are granted with exercise prices equal to the fair value of the
Companys common shares at the date of grant. Restricted
stock is recorded at the fair value of the Companys shares
on the average of the high and low on the date immediately
preceding the grant. The cost of employee service is recognized
as a compensation expense over the period that an employee
provides service in exchange for the award, typically the
vesting period. The options which were modified in October 2010
became exercisable in October 2010 upon completion of the IPO
and therefore all of the compensation cost related to these
options was recorded in the fourth quarter of 2010.
Additionally, following the completion of the IPO, the Company
granted restricted shares to its employees. The related
compensation cost is being recorded over the four year vesting
period of the restricted shares (See Note 11).
Segment Reporting
The Company operates
upscale affordable Italian dining restaurants under two brands,
exclusively in the United States, that have similar economic
characteristics, nature of products and service, class of
customer and distribution methods. The Company believes it meets
the criteria for aggregating its operating segments into a
single reporting segment in accordance with applicable
accounting guidance.
Recently Adopted Accounting Pronouncements
In
January, the Financial Accounting Standards Board
(FASB) issued a standard that requires new
disclosures regarding recurring or non-recurring fair value
measurements. Entities will be required to separately disclose
significant transfers into and out of Level 1 and
64
Level 2 measurements in the fair value hierarchy and
describe the reasons for the transfers. Entities will also be
required to provide information on purchases, sales, issuances
and settlements on a gross basis in the reconciliation of
Level 3 fair value measurements. In addition, entities must
provide fair value measurement disclosures for each class of
assets and liabilities, and disclosures about the valuation
techniques used in determining fair value for Level 2 or
Level 3 measurements. This update is effective for interim
and annual reporting periods beginning after December 15,
2009, except for the gross basis reconciliations for the
Level 3 measurements, which are effective for fiscal years
beginning after December 15, 2010. The Company adopted this
guidance and it had no material effect on its consolidated
financial statements.
In February 2008, FASB issued a standard which clarifies the
definition of fair value, describes methods used to
appropriately measure fair value, and expands fair value
disclosure requirements, but does not change existing guidance
as to whether or not an instrument is carried at fair value. For
financial assets and liabilities, this standard is effective for
fiscal years beginning after November 15, 2007, which
required that the Company adopt these provisions in fiscal 2009.
For non-financial assets and liabilities, this standard is
effective for fiscal years beginning after November 15,
2008, which required that the Company adopt these provisions in
the first quarter of fiscal 2010. The Company adopted this
guidance and it had no material effect on its consolidated
financial statements.
In June 2009, the FASB issued a standard to amend certain
requirements of accounting for consolidation of variable
interest entities, to improve financial reporting by enterprises
involved with variable interest entities and to provide more
relevant and reliable information to users of financial
statements. These amendments require an enterprise to perform an
analysis to determine whether the enterprises variable
interest(s) give it a controlling financial interest in a
variable interest entity. This guidance was effective for the
annual reporting period beginning after November 15, 2009,
for interim periods within that first annual reporting period
and for interim and annual reporting periods thereafter. The
Company adopted this guidance and it had no material effect on
its consolidated financial statements.
Basic earnings per common share is computed based on the
weighted average number of common shares outstanding during the
period. The Company had 7,234,370 common shares outstanding
throughout 2010 and issued 5,000,000 new common shares and
exchanged outstanding shares of Series A preferred stock
for an additional 7,015,630 common shares on October 26,
2010 in connection with the IPO. Diluted earnings per common
share are computed similarly, but include the effect of the
assumed exercise of dilutive stock options, if any, and vesting
of restricted stock under the treasury stock method.
The computations of basic and diluted earnings per common share
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
Net loss attributed to common shareholders
|
|
$
|
(4,999
|
)
|
|
$
|
(8,198
|
)
|
|
$
|
(71,574
|
)
|
Basic weighted average common shares outstanding
|
|
|
9,281
|
|
|
|
7,234
|
|
|
|
7,234
|
|
Dilutive effect of equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common and potentially issuable common
shares outstanding
|
|
|
9,281
|
|
|
|
7,234
|
|
|
|
7,234
|
|
Basic and diluted loss per common share
|
|
$
|
(0.54
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(9.89
|
)
|
All 1,414,203 options and 449,300 unvested restricted shares at
December 26, 2010 were anti dilutive and were not included
in the diluted share count due to the net loss incurred during
2010. 1,776,727 options at December 27, 2009 and 1,694,041
options at December 28, 2008, which constituted all of the
options and unvested restricted shares outstanding at such
dates, were not included in diluted earnings per share as they
were not yet deemed probable to become exercisable.
65
|
|
3.
|
PROPERTY
AND EQUIPMENT
|
The major classes of property and equipment at December 26,
2010 and December 27, 2009 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and buildings
|
|
$
|
5,575
|
|
|
$
|
5,402
|
|
Leasehold improvements
|
|
|
134,665
|
|
|
|
124,331
|
|
Equipment and fixtures
|
|
|
82,704
|
|
|
|
76,714
|
|
Construction in progress
|
|
|
5,179
|
|
|
|
4,255
|
|
Deposits on equipment orders
|
|
|
945
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
229,068
|
|
|
|
211,203
|
|
Less accumulated depreciation and amortization
|
|
|
(81,447
|
)
|
|
|
(66,323
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
147,621
|
|
|
$
|
144,880
|
|
|
|
|
|
|
|
|
|
|
The major classes of other assets at December 26, 2010 and
December 27, 2009 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Loan origination fees
|
|
$
|
1,773
|
|
|
$
|
4,512
|
|
Liquor licenses
|
|
|
1,442
|
|
|
|
1,393
|
|
Trademarks
|
|
|
142
|
|
|
|
117
|
|
Deposits
|
|
|
166
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Other assets at cost
|
|
|
3,523
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(181
|
)
|
|
|
(2,680
|
)
|
|
|
|
|
|
|
|
|
|
Other assets net
|
|
$
|
3,342
|
|
|
$
|
3,492
|
|
|
|
|
|
|
|
|
|
|
Long-term debt at December 26, 2010 and December 27,
2009 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Term loan
|
|
$
|
41,000
|
|
|
$
|
79,818
|
|
Note agreement
|
|
|
|
|
|
|
32,270
|
|
Revolving credit facility
|
|
|
|
|
|
|
5,550
|
|
Mortgage notes
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41,000
|
|
|
|
118,031
|
|
Less current maturities
|
|
|
(2,050
|
)
|
|
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
38,950
|
|
|
$
|
116,992
|
|
|
|
|
|
|
|
|
|
|
As part of the recapitalization of the Company in 2006, the
Company entered into a $112.5-million Senior Credit Agreement
(the Credit Agreement) composed of a $82.5-million
Term Loan (the Term Loan) and a $30-million
Revolving Credit Facility (the Revolver).
The interest rate on the Term Loan and Revolver was based on the
prime rate, plus a margin of up to 2.0% or the London Interbank
Offered Rate (LIBOR), plus a margin up to 3.0%, with margins
determined by certain financial ratios. In addition, the Company
paid an annual commitment fee of 0.5% on the unused portion of
the Revolver. Borrowings under the Credit Agreement were
collateralized by a first priority security interest in all of
the assets of the Company, except property collateralized by
mortgage notes.
66
Pursuant to the terms of the Revolver, the Company was subject
to certain financial and nonfinancial covenants, including a
consolidated total leverage ratio, a consolidated senior
leverage ratio, consolidated fixed-charge coverage ratio, and
consolidated capital expenditures limitations.
The Revolver also provided for bank guarantee under standby
letter of credit arrangements in the normal course of business
operations. The Companys bank issued standby letters of
credit to secure its obligations to pay or perform when required
to do so pursuant to the requirements of an underlying agreement
or the provision of goods and services. The standby letters of
credit were cancellable only at the option of the beneficiary
who was authorized to draw drafts on the issuing bank up to the
face amount of the standby letter of credit in accordance with
its terms. As of December 27, 2009, the maximum exposure
under these standby letters of credit was $3.7 million.
In addition to the Credit Agreement, the Company entered into a
$27.5 million Note Purchase Agreement (the Note
Agreement). In accordance with the terms of the Note
Agreement, interest was accrued monthly at an annual interest
rate of 13.25% and interest paid monthly equal to 9.0%. Interest
accrued, but unpaid during the term of the Note Agreement was
capitalized into the principal balance. The Note Agreement was
collateralized by a second priority interest in all assets of
the Company except property.
Beginning with the fiscal year ended December 28, 2008, the
Company was required to make excess cash flow payments to reduce
the outstanding principal balances under the Credit Agreement
provided the Company meet certain leverage ratio requirements.
No excess cash flow payments were made in fiscal year 2010 or
2009.
On August 14, 2006, the Company entered into a three-year
interest rate swap agreement fixing the interest rate on
$27 million of its Term Loan debt. The Company settled with
the bank quarterly for the difference between the 5.24% and the
90-day
were
LIBOR in effect at the beginning of the quarter. Changes in the
market value of the interest rate swap recorded each period as
an adjustment to interest expense. Such adjustments were a
reduction of interest expense of $755,000 in fiscal 2009 and a
net increase to interest expense of $120,000 in fiscal 2008. The
interest rate swap expired in August of 2009 and there were no
derivative instruments outstanding at December 26, 2010 and
December 27, 2009.
On October 26, 2010, the Company, in connection with its
IPO, entered into a senior credit agreement with a syndicate of
financial institutions with respect to the senior credit
facilities. The senior credit facilities provide for (i) a
$45.0 million term loan facility, maturing in 2015, and
(ii) a revolving credit facility under which the Company
may borrow up to $40.0 million (including a sublimit cap of
up to $10.0 million for letters of credit and up to
$10.0 million for swing-line loans), maturing in 2015. The
Company used borrowings under its senior credit facilities in
conjunction with the proceeds from the IPO to repay in full the
Term Loan, Revolver and 13.25% senior subordinated secured
notes as of October 26, 2010.
Under the credit agreement, the Company is allowed to incur
additional incremental term loans
and/or
increases in the revolving credit facility of up to
$20.0 million if no event of default exists and certain
other requirements are satisfied. Borrowings under the senior
credit facilities bear interest at the Companys option of
either (i) the Alternate Base Rate (as such term is defined
in the credit agreement) plus the applicable margin of 1.75% to
2.25% or (ii) at a fixed rate for a period of one, two,
three or six months equal to the London interbank offered rate,
LIBOR, plus the applicable margin of 2.75% to 3.25%. In addition
to paying any outstanding principal amount under the
Companys senior credit facilities, the Company is required
to pay an unused facility fee to the lenders equal to 0.50% to
0.75% per annum on the aggregate amount of the unused revolving
credit facility, excluding swing-line loans, commencing on
October 26, 2010, payable quarterly in arrears. Borrowings
under the Companys senior credit facilities are
collateralized by a first priority interest in all assets of the
Company.
The credit agreement provides for bank guarantee under standby
letter of credit arrangements in the normal course of business
operations. The standby letters of credit are cancellable only
at the option of the beneficiary who is authorized to draw
drafts on the issuing bank up to the face amount of the standby
letters of credit in accordance with its credit. As of
October 26, 2010, all previously existing standby letters
were
67
replaced by new standby letters of credit. As of
December 26, 2010, the maximum exposure under these standby
letters of credit was $3.2 million.
The weighted average interest rate on Company borrowings at
December 26, 2010 was 3.36% as compared to 3.47% at
December 27, 2009.
Future maturities of debt as of December 26, 2010 are as
follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
2,050
|
|
2012
|
|
|
2,050
|
|
2013
|
|
|
4,100
|
|
2014
|
|
|
4,100
|
|
2015
|
|
|
28,700
|
|
|
|
|
|
|
Total
|
|
$
|
41,000
|
|
|
|
|
|
|
Pursuant to the credit agreement relating to the Companys
senior credit facilities, the Company is required to meet
certain financial covenants including leverage ratios, fixed
charge ratios, capital expenditures as well as other customary
affirmative and negative covenants. At December 26, 2010,
the Company was in compliance with its applicable financial
covenants.
The major classes of accrued expenses at December 26, 2010
and December 27, 2009 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Compensation and related benefits
|
|
$
|
8,871
|
|
|
$
|
10,268
|
|
Accrued self-insurance claims liability
|
|
|
4,577
|
|
|
|
4,853
|
|
Other taxes payable
|
|
|
4,203
|
|
|
|
3,546
|
|
Other accrued liabilities
|
|
|
3,499
|
|
|
|
2,991
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
21,150
|
|
|
$
|
21,658
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
OTHER
LONG-TERM LIABILITIES
|
Other long-term liabilities at December 26, 2010 and
December 27, 2009 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred rent
|
|
$
|
15,579
|
|
|
$
|
13,975
|
|
Deferred compensation (Note 9)
|
|
|
|
|
|
|
166
|
|
Partner surety (Note 9)
|
|
|
|
|
|
|
200
|
|
Other long-term liabilities
|
|
|
103
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
15,682
|
|
|
$
|
14,463
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain land and buildings used in its
restaurant operations under various long-term operating lease
agreements. The initial lease terms range from 10 to
20 years and currently expire between 2011 and 2028. The
leases include renewal options for 3 to 20 additional years. The
majority of leases provide for base (fixed) rent, plus
additional rent based on gross sales, as defined in each lease
agreement, in excess of a stipulated amount, multiplied by a
stated percentage. The Company is also generally obligated to
pay certain real estate taxes, insurances, common area
maintenance (CAM) charges, and various other expenses related to
the properties.
68
At December 26, 2010, the future minimum rental commitments
under noncancellable operating leases, including option periods
which are reasonably assured of renewal, are as follows (in
thousands):
|
|
|
|
|
2011
|
|
$
|
19,291
|
|
2012
|
|
|
19,632
|
|
2013
|
|
|
19,827
|
|
2014
|
|
|
20,410
|
|
2015
|
|
|
20,378
|
|
Thereafter
|
|
|
161,359
|
|
|
|
|
|
|
Total
|
|
$
|
260,897
|
|
|
|
|
|
|
The above future minimum rental amounts exclude renewal options,
which are not reasonably assured of renewal and additional rent
based on sales or increases in the United States Consumer Price
Index. The Company generally has escalating rents over the term
of the leases and records rent expense on a straight-line basis
for operating leases.
Rent expense, excluding real estate taxes, CAM charges,
insurance and other expenses related to operating leases, in
2010, 2009 and 2008, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Minimum rent
|
|
$
|
13,727
|
|
|
$
|
11,391
|
|
|
$
|
10,618
|
|
Contingent rent
|
|
|
900
|
|
|
|
705
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,627
|
|
|
$
|
12,096
|
|
|
$
|
11,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2003, the Strategic Partner Plan (SPP) was created to reward
and retain top general managers and executive chefs by providing
them with a significantly greater Quarterly Performance Bonus
payout potential, in addition to sharing in the appreciation of
the Company (Deferred Compensation), which is based
on a quarterly targeted sales value times an earnings factor
based on same store sales performance. The Deferred Compensation
vests ratably over the initial term of the agreement and is
payable at the termination of the contract (generally five
years).
To participate in the SPP, the invitee (partner) signs an
agreement to continue their employment with the Company for the
term of the initial agreement (five years) and places a deposit
(Partner Surety) with the Company, which is
reflected in other long-term liabilities. The Partner Surety, as
well as any Deferred Compensation that may be credited to the
partners account, is forfeited if the partner breaches the
requirements of the SPP agreement. The Company pays interest on
the Partner Surety each quarter based on the three-month
Certificate of Deposit rate, as published in the Wall Street
Journal on the first business day of each calendar quarter and
also provides each partner with a $2,500 sign-on bonus when
their Partner Surety is received. Total expenses related to the
SPP, net of Partner Surety forfeitures, amounted to
$0.7 million, $0.8 million and $1.2 million, for
fiscal years 2010, 2009 and 2008, respectively. Effective the
beginning of fiscal year 2008, the SPP plan is no longer being
offered to additional partners although existing partners will
continue to participate in the plan until their respective
agreements expire at the end of the initial five-year term.
|
|
10.
|
EMPLOYEE
BENEFIT PLAN
|
The Company sponsors a 401(k) defined contribution plan (the
401(k) Plan) covering all eligible full-time
employees. The 401(k) Plan provides for employee salary deferral
contributions up to a maximum of 15% of the participants
eligible compensation, as well as discretionary Company matching
contributions. Discretionary Company contributions relating to
the 401(k) Plan for the years ended 2010, 2009, and 2008, were
$228,000, $180,000 and $222,000, respectively.
69
|
|
11.
|
STOCK
BASED COMPENSATION
|
2006
Plan
The Company adopted the 2006 Plan, in June 2006, in order to
provide an incentive to employees selected by the board of
directors for participation. Pursuant to the 2006 Plan, the
Company had 1,767,754 stock options outstanding, immediately
prior to the IPO, that were granted between 2006 and 2009.
Options held ordinarily vest over a period of four years,
subject to the applicable employee remaining employed through
each vesting date. However, under the original terms of the
options, in the event the Company completed a public offering in
which the Company and any participating selling shareholders
received aggregate net proceeds of at least $50.0 million
or the majority of the Companys stock or assets were sold
in a transaction, the options held by the employees would be
subject to accelerated vesting in the discretion of the board of
directors upon the achievement of certain net proceeds and
internal rate of return thresholds.
The board of directors determined, pursuant to the exercise of
its discretion in accordance with the 2006 Plan, that the public
offering price of the IPO would be deemed to result in the
achievement of an internal rate of return to the
Companys sponsors of 32.0% upon the consummation of the
IPO, and, as a result, upon the consummation of the IPO
(i) each outstanding option award under the 2006 Plan was
deemed to have vested in a percentage equal to the greater of
80.0% or the percentage of the option award already vested as of
that date and, (ii) each outstanding option award under the
2006 Plan was deemed 80.0% exercisable. This agreement resulted
in a modification of all of the options under the 2006 Plan. Any
unvested
and/or
unexercisable portion of each outstanding option award was
forfeited in accordance with the terms of the 2006 Plan.
On October 6, 2010, the Companys board of directors
approved and, on October 18, 2010, the Companys
shareholders approved the Stock Incentive Plan. The Stock
Incentive Plan became effective upon the consummation of the
IPO. In connection with the adoption of the Stock Incentive
Plan, the board of directors terminated the 2006 Plan effective
as of the date on which the Companys common stock was
Publicly Traded (as defined in the 2006 Plan), and no further
awards will be granted under the 2006 Plan after such date.
However, the termination of the 2006 Plan will not affect awards
outstanding under the 2006 Plan at the time of its termination
and the terms of the 2006 Plan will continue to govern
outstanding awards granted under the 2006 Plan.
Stock option activity under the 2006 Plan for 2010, 2009, and
2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Outstanding beginning of year
|
|
|
1,776,727
|
|
|
|
1,694,041
|
|
|
|
1,768,645
|
|
Weighted-average exercise price
|
|
$
|
1.45
|
|
|
$
|
1.45
|
|
|
$
|
1.45
|
|
Granted
|
|
|
|
|
|
|
127,463
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
|
|
|
$
|
1.29
|
|
|
$
|
|
|
Forfeited
|
|
|
(362,524
|
)
|
|
|
(44,777
|
)
|
|
|
(74,604
|
)
|
Weighted-average exercise price
|
|
$
|
1.45
|
|
|
$
|
1.45
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
1,414,203
|
|
|
|
1,776,727
|
|
|
|
1,694,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
1.44
|
|
|
$
|
1.44
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable end of year
|
|
|
1,414,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term of options
outstanding at December 26, 2010 was 6 years and all
options were exercisable.
The total weighted-average grant-date fair value of options
granted in 2007 and 2009 was $0.52, and was estimated at the
date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for these options:
weighted-average risk-free interest rate of 4.49%, no expected
dividend yield, weighted-average volatility of 32.2%, based upon
competitors within the industry, and an expected option life of
five years. However, due to the modification that occurred in
October 2010 to fix the number of options at
70
80% of the original grant, all of the options were subject to
modification accounting and therefore were revalued in their
entirety at the date of the modification. As a result of this
modification, the Company recorded a one-time non-cash charge of
$17.9 million in stock compensation expenses for the year
ended December 26, 2010, all of which was recorded in the
fourth quarter of 2010.
Following the modification, the total weighted-average fair
value of options granted as part of the 2006 Plan was $12.64,
and was estimated at the date of the modification using the
Black-Scholes option-pricing model. The following assumptions
were used for these options: weighted-average risk-free interest
rate of 1.10%, no expected dividend yield, weighted-average
volatility of 45.8%, based upon competitors within the industry,
and an expected option life of five years.
A summary of the status of, and changes to, unvested options
during the year ended December 26, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Measurement
|
|
|
|
Options
|
|
|
Date Fair Value
|
|
|
Unvested beginning of year
|
|
|
705,674
|
|
|
$
|
12.64
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(343,150
|
)
|
|
|
12.64
|
|
Forfeited
|
|
|
(362,524
|
)
|
|
|
12.64
|
|
|
|
|
|
|
|
|
|
|
Unvested end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested options totaling 1,414,203 are all exercisable, as the
specified performance conditions have been met.
Stock
Incentive Plan
In October 2010, the Company adopted the Stock Incentive Plan
and on October 26, 2010, the Company granted 451,800
restricted common shares to its employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Outstanding beginning of year
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
451,800
|
|
|
|
16.90
|
|
Vested
|
|
|
(500
|
)
|
|
|
16.90
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
|
16.90
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
449,300
|
|
|
$
|
16.90
|
|
|
|
|
|
|
|
|
|
|
Fair value of the Companys restricted shares is based on
the average of the high and low price of the Companys
shares on the date immediately preceding the date of grant. The
average of the high and low price of the Companys shares
the date immediately preceding the grant date of
October 26, 2010 was $16.90. In the fourth quarter of 2010
the Company recorded approximately $0.3 million in stock
compensation costs related to the restricted shares. As of
December 26, 2010, total unrecognized stock-based
compensation expense related to non-vested restricted shares was
approximately $6.6 million, which is expected to be
recognized over a weighted average period of approximately
3.8 years taking into account potential forfeitures. These
restricted shares will vest, subject to certain exceptions,
annually over a four year period.
71
The provision for income taxes consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
228
|
|
|
|
135
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
|
|
228
|
|
|
|
135
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
50,107
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
4,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
54,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
228
|
|
|
$
|
135
|
|
|
$
|
55,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes as of December 26, 2010 and
December 27, 2009 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Goodwill for tax reporting purposes
|
|
$
|
34,891
|
|
|
$
|
38,127
|
|
Stock compensation
|
|
|
7,026
|
|
|
|
|
|
Self-insurance reserves
|
|
|
2,682
|
|
|
|
2,819
|
|
Depreciation and amortization
|
|
|
5,982
|
|
|
|
4,918
|
|
Federal and state net operating losses
|
|
|
225
|
|
|
|
4,425
|
|
FICA tip credit carryforward
|
|
|
13,349
|
|
|
|
9,893
|
|
Other
|
|
|
879
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
65,034
|
|
|
|
60,991
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid assets
|
|
|
(419
|
)
|
|
|
(305
|
)
|
Deferred rent
|
|
|
(1,847
|
)
|
|
|
(638
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(2,266
|
)
|
|
|
(943
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(62,768
|
)
|
|
|
(60,048
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill for tax reporting purposes is amortized over
15 years. At December 26, 2010, the Company has net
operating loss carryforwards for state income tax purposes of
$2.8 million and no federal net operating loss
carryforwards. The Company also has Federal Insurance
Contributions Act (FICA) tip credit carryforwards of
$13.3 million, which will expire at various dates from 2026
through 2030.
Deferred tax assets are reduced by a valuation allowance if,
based on the weight of the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be
realized. Both positive and negative evidence are considered in
forming managements judgment as to whether a valuation
allowance is appropriate, and more weight is given to evidence
that can be objectively verified. The valuation allowance
relates to net operating loss and credit carryforwards and
temporary differences for which management believes that
realization is uncertain. The tax benefits relating to any
reversal of the valuation allowance on the net deferred tax
assets will be recognized as a reduction of future income tax
expense.
72
The effective income tax expense differs from the federal
statutory tax expense for the years ended December 26,
2010, December 27, 2009 and December 28, 2008, as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Provision at statutory rate
|
|
$
|
(351
|
)
|
|
$
|
1,238
|
|
|
$
|
(2,218
|
)
|
FICA tip credit
|
|
|
(3,487
|
)
|
|
|
(3,073
|
)
|
|
|
(2,890
|
)
|
State income taxes net of federal benefit
|
|
|
104
|
|
|
|
292
|
|
|
|
(389
|
)
|
Other net
|
|
|
1,242
|
|
|
|
1,120
|
|
|
|
1,068
|
|
Deferred tax asset valuation allowance
|
|
|
2,720
|
|
|
|
558
|
|
|
|
59,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
228
|
|
|
$
|
135
|
|
|
$
|
55,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, new accounting standards became effective in regard
to uncertain tax positions. The new standards require that a
position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely
than not (i.e. a likelihood of more than 50%) that the position
would be sustained upon examination by tax authorities. A
recognized tax position is measured at the largest amount of
benefit that is greater than 50% likely of being realized upon
settlement. Upon adoption, the Company determined that these new
standards did not have a material effect on prior consolidated
financial statements and therefore no change was made to the
2009 opening balance of retained earnings. The new standards
also require that changes in judgment that result in subsequent
recognition, derecognition, or change in a measurement of a tax
position taken in a prior annual period (including any related
interest and penalties) be recognized as a discrete item in the
interim period in which the change occurs. As of
December 26, 2010 and December 27, 2009, the Company
had no uncertain income tax positions.
It is the Companys policy to include any penalties and
interest related to income taxes in its income tax provision,
however, the Company currently has no penalties or interest
related to income taxes. The Company is currently open to audit
under the statute of limitations by the Internal Revenue Service
for the years ended December 28, 2007 through
December 26, 2010. The Companys state income tax
returns are open to audit under certain states for the years
ended December 28, 2006 through December 26, 2010.
|
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The Company is subject to various claims, possible legal
actions, and other matters arising out of the normal course of
business. While it is not possible to predict the outcome of
these issues, management is of the opinion that adequate
provision for potential losses has been made in the accompanying
consolidated financial statements and that the ultimate
resolution of these matters will not have a material adverse
effect on the Companys financial position, results of
operations, or cash flows.
The Company is currently the guarantor of a lease that was
previously assigned. Under the guarantee agreement, the Company
is responsible for the costs of the lease and has recorded a
liability for the costs expected to be incurred in future
periods. This amount is immaterial to the Companys
financial statements.
|
|
14.
|
RELATED-PARTY
TRANSACTIONS
|
Prior to the IPO, approximately 80% of the common shares of the
Company were owned by affiliates of Castle Harlan, Inc.
(Castle Harlan), Bruckmann, Rosser, Sherrill and
Co., Inc. (BRS), and Golub Capital Incorporated.
Management fees were determined pursuant to Management
Agreements between the Company and each of Castle Harlan and
BRS. Prior to fiscal 2009, management fees were based upon a
percentage of Earnings Before Interest, Taxes and, Depreciation
and Amortization (Defined EBITDA) as defined in the
Management Agreements. Starting in fiscal 2009 and for all
subsequent years, such fees were based upon predetermined
amounts as outlined in the Management Agreements. Management
fees paid to Castle Harlan and BRS amounted to approximately
$2.4 million, $1.7 million and $0.4 million for
fiscal years 2010, 2009 and 2008, respectively. Effective
October 26, 2010, upon completion of the IPO, the
Management Agreements were terminated. In the fourth quarter of
2010, in accordance with the termination of the Management
Agreements, the Company incurred a $1.0 million termination
charge.
73
|
|
15.
|
INTERIM
FINANCIAL RESULTS (UNAUDITED)
|
The following tables set forth certain unaudited consolidated
financial information for each of the four quarters in fiscal
2010 and fiscal 2009 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
Revenue
|
|
$
|
81,844
|
|
|
$
|
89,152
|
|
|
$
|
83,704
|
|
|
$
|
88,325
|
|
|
$
|
343,025
|
|
Income (loss) from operations
|
|
|
4,386
|
|
|
|
7,244
|
|
|
|
5,079
|
|
|
|
(10,290
|
)
|
|
|
6,419
|
|
Net (loss) income attributed to common shareholders(1)
|
|
|
(573
|
)
|
|
|
2,377
|
|
|
|
(266
|
)
|
|
|
(6,537
|
)
|
|
|
(4,999
|
)
|
Basic and diluted net (loss) income per share(2)
|
|
$
|
(0.08
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
Basic and diluted weighted average shares outstanding
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
15,421
|
|
|
|
9,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
Revenue
|
|
$
|
73,593
|
|
|
$
|
79,921
|
|
|
$
|
76,843
|
|
|
$
|
81,352
|
|
|
$
|
311,709
|
|
Income from operations
|
|
|
600
|
|
|
|
3,716
|
|
|
|
5,330
|
|
|
|
1,009
|
|
|
|
10,655
|
|
Net (loss) income attributed to common shareholders
|
|
|
(4,003
|
)
|
|
|
(914
|
)
|
|
|
487
|
|
|
|
(3,768
|
)
|
|
|
(8,198
|
)
|
Basic and diluted net (loss) income per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.52
|
)
|
|
$
|
(1.13
|
)
|
Basic and diluted weighted average shares outstanding
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
7,234
|
|
|
|
|
(1)
|
|
The fourth quarter of 2010 contains an IPO-related
$20.5 million expense, consisting of $18.2 million for
non cash stock compensation charges, $1.3 million for the
write off of loan origination fees and $1.0 million related
to the termination of the Management Agreements.
|
|
(2)
|
|
Sum of the quarterly amounts do not equal the total year amount
due to the adjustment in share count that occurred in connection
with the IPO.
|
In managements opinion, the unaudited quarterly
information shown above has been prepared on the same basis as
the audited consolidated financial statements and includes all
necessary adjustments that management considers necessary for a
fair presentation of the unaudited quarterly results when read
in conjunction with the Consolidated Financial Statements and
Notes. The Company believes that
quarter-to-quarter
comparisons of its financial results are not necessarily
indicative of future performance.
74
Exhibit Index
|
|
|
|
|
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated Articles of Incorporation of Bravo
Brio Restaurant Group, Inc. (incorporated by reference from
Exhibit 3.1 to the Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 27, 2010).
|
|
3
|
.2
|
|
Second Amended and Restated Regulations of Bravo Brio Restaurant
Group, Inc. (incorporated by reference from Exhibit 3.2 to
the Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 27, 2010).
|
|
4
|
.1
|
|
Form of Common Stock Certificate (incorporated by reference from
Exhibit 4.1 to Amendment No. 3 to the Registration
Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 7, 2010).
|
|
4
|
.2
|
|
Credit Agreement, dated as of October 26, 2010, by and
among Bravo Brio Restaurant Group, Inc., as borrower, the
domestic subsidiaries of the borrower, as guarantors, the
lenders party thereto, Wells Fargo Bank, National Association,
as administrative agent, Bank of America, N.A., as syndication
agent, KeyBank National Association and Regions Financial
Corporation, as co-documentation agents, and Wells Fargo
Securities, LLC and Banc of America Securities LLC, as co-lead
arrangers and joint book managers (incorporated by reference
from Exhibit 4.1 to the Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 27, 2010).
|
|
10
|
.1
|
|
Registration Rights Agreement, dated as of June 29, 2006,
by and among Bravo Development, Inc., Bravo Development Holdings
LLC and the other investors named therein (incorporated by
reference from Exhibit 10.7 to the Registration Statement
on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
July 2, 2010).
|
|
10
|
.2
|
|
Employment Agreement, effective January 12, 2007, by and
between Bravo Development, Inc. and Saed Mohseni (incorporated
by reference from Exhibit 10.10 to the Registration
Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
July 2, 2010).
|
|
10
|
.3
|
|
Employment Agreement, dated as of October 26, 2010, by and
between Bravo Brio Restaurant Group, Inc. and James J.
OConnor (incorporated by reference from Exhibit 10.1
to the Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 27, 2010).
|
|
10
|
.4
|
|
Exchange Agreement, dated as of October 18, 2010, by and
among Bravo Brio Restaurant Group, Inc., Bravo Development
Holdings LLC and all other shareholders of Bravo Brio Restaurant
Group, Inc. listed on the signature pages thereto (incorporated
by reference from Exhibit 10.16 to Amendment No. 5 to
the Registration Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 19, 2010).
|
|
10
|
.5
|
|
Plan of Reorganization, dated as of October 18, 2010, by
and between Bravo Brio Restaurant Group, Inc. and Bravo
Development Holdings LLC (incorporated by reference from
Exhibit 10.17 to Amendment No. 3 to the Registration
Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 7, 2010).
|
|
10
|
.6
|
|
Bravo Development, Inc. 2006 Stock Option Plan (incorporated by
reference from Exhibit 10.11 to the Registration Statement
on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
July 2, 2010).
|
|
10
|
.7
|
|
Amendment No. 1 to the Bravo Development, Inc. 2006 Stock
Option Plan (incorporated by reference from Exhibit 10.11
to Amendment No. 3 to the Registration Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 7, 2010).
|
|
10
|
.8
|
|
Form of Option Award Letter under the Bravo Development, Inc.
2006 Stock Option Plan (incorporated by reference from
Exhibit 10.12 to the Registration Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
July 2, 2010).
|
|
10
|
.9
|
|
Bravo Brio Restaurant Group, Inc. Stock Incentive Plan.
|
|
10
|
.10
|
|
Form of Non-Qualified Option Award Letter under the Bravo Brio
Restaurant Group, Inc. Stock Incentive Plan (incorporated by
reference from Exhibit 10.14 to Amendment No. 4 to the
Registration Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 8, 2010).
|
75
|
|
|
|
|
|
|
Description
|
|
|
10
|
.11
|
|
Form of Restricted Stock Award Letter under the Bravo Brio
Restaurant Group, Inc. Stock Incentive Plan (incorporated by
reference from Exhibit 10.15 to Amendment No. 4 to the
Registration Statement on
Form S-1
(Registration
No. 333-167951)
filed with the Securities and Exchange Commission on
October 8, 2010).
|
|
10
|
.12*
|
|
Bravo Brio Restaurant Group, Inc. Foodservice Distribution
Agreement, dated as of February 10, 2011, by and between
Bravo Brio Restaurant Group, Inc. and Distribution Market
Advantage, Inc.
|
|
12
|
.1
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
21
|
.1
|
|
Subsidiaries of Bravo Brio Restaurant Group, Inc.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
24
|
.1
|
|
Powers of Attorney (included on the signature page).
|
|
31
|
.1
|
|
Certifications of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certifications of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
*
|
|
Certain information in this exhibit has been omitted and filed
separately with the SEC. Confidential treatment has been
requested from the SEC with respect to the omitted portions.
|
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: February 17, 2011
Bravo Brio Restaurant Group, Inc.
Saed Mohseni
President, Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF
ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Saed Mohseni
and James J. OConnor, and each of them, as his or her true
and lawful attorneys-in-fact and agents, 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 to this Report, and to file the same,
with all 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 in connection
therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or
their substitute or substituted, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Saed
Mohseni
Saed
Mohseni
|
|
President, Chief Executive Officer and Director (principal
executive officer)
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ James
J. OConnor
James
J. OConnor
|
|
Chief Financial Officer, Treasurer and Secretary (principal
financial officer and principal accounting officer)
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Allen
J. Bernstein
Allen
J. Bernstein
|
|
Director
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Alton
F. Doody III
Alton
F. Doody III
|
|
Director
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ James
S. Gulmi
James
S. Gulmi
|
|
Director
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ David
B. Pittaway
David
B. Pittaway
|
|
Director
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Harold
O. Rosser, II
Harold
O. Rosser, II
|
|
Director
|
|
February 17, 2011
|
|
|
|
|
|
|
|
By:
|
|
/s/ Fortunato
N. Valenti
Fortunato
N. Valenti
|
|
Director
|
|
February 17, 2011
|
77