UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

 

 

Commission File Number 001-34920

 

BRAVO BRIO RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s 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:

 

 

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 o     NO þ

 

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 o     NO þ

 

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 þ     NO o

 

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 o     NO o

 

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes o     NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.  Yes o     NO þ

 

As of June 27, 2010 (the last business day of our most recently completed second fiscal quarter), the registrant’s common shares were not listed on any exchange or over-the-counter market. The registrant’s common shares began trading on the NASDAQ Global Market on October 21, 2010. As of December 26, 2010, the aggregate market value of the registrant’s 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 registrant’s common shares on December 26, 2010.

 

As of February 16, 2011, the latest practicable date, 19,250,500 of the registrant’s 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 registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 14, 2011.

 

 

Table of Contents:

 

 

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:

 

 

 

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.

 

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.

 

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

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. 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 BRIO’s 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

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.

 

 

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 & Schmick’s Seafood Restaurants, Inc., who joined the company in February 2007. Since Mr. Mohseni’s 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.

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 management’s 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 center’s architecture and other regional design elements while still maintaining certain critical features that help identify our brands. Our

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 Company’s 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:

 

 

 

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.

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 BRIO’s 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.

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.

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 restaurant’s 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

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 FDA’s 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.

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 Maggiano’s, Cheesecake Factory, P.F. Chang’s and BJ’s Restaurants. We also compete to a lesser extent with nationally recognized casual dining Italian restaurants such as Romano’s Macaroni Grill, Carrabba’s 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.

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 SEC’s 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:

 

 

 

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

 

 

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:

 

 

 

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 “Management’s 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.

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, 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

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

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 employee’s hourly wage for minimum wage compliance purposes, have recently been and continue to be proposed and implemented at both federal and state government levels. 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

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 Maggiano’s, Cheesecake Factory, P.F. Chang’s and BJ’s Restaurants. We also compete to a lesser extent with nationally recognized casual dining Italian restaurants such as Romano’s Macaroni Grill, Carrabba’s 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

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

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. O’Connor, 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. O’Connor. 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, employer’s 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.

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 “Management’s 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:

 

 

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.

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” and “Management’s 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 management’s 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 “Management’s 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.

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 management’s attention and resources or require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s 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.

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

 

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

 

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

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:

 

 

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 company’s 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

substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.

 

Future sales of our common 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:

 

 

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.

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:

 

 

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 investor’s 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

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.

 

 

None.

 

The following table sets forth our restaurant locations as of December 26, 2010.

 

 

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.

 

 

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.

 

 

 

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:

 

 

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 Company’s 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 Nation’s Restaurant News Stock Index. The chart below the graph sets forth the actual numbers depicted on the graph.

 

 

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.

 

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 “Management’s 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

 

 

 

 

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:

 

 

 

 

 

 

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.

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:

 

 

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.

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:

 

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

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.

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 worker’s 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

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:

 

 

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

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).

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 Company’s 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 Company’s liquidity needs.

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 Company’s 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

process requires the use of estimates and assumptions regarding future undiscounted cash flows and operating outcomes, which are based upon a significant degree of management’s judgment.

 

Based on this analysis, if 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

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.

 

 

 

 

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

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 enterprise’s 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.

 

 

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

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.

 

 

The consolidated financial statements required to be filed hereunder are set forth in Part IV, Item 15 of this report.

 

 

None.

 

 

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.

Management’s Report on Internal Control Over Financial Reporting

 

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s 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.

 

 

None.

 

 

Except as set forth below, the information required by this Item 10 is incorporated herein by reference from the Company’s definitive proxy statement for use in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders (the “Proxy Statement”) to be filed within 120 days after the end of the Company’s 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.

 

 

The information required by this Item 11 is incorporated herein by reference from the Proxy Statement.

 

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.

 

 

 

The information required by this Item 13 is incorporated herein by reference from the Proxy Statement.

 

 

The information required by this Item 14 is incorporated herein by reference from the Proxy Statement.

 

 

(a) The following documents are filed as a part of this report:

 

 

2. Financial statement schedules: None.

 

3. Exhibits: See Exhibit Index appearing on page 75 of this report.

Index to Consolidated Financial Statements

 

 

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 Company’s 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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.

 

 

Columbus, Ohio

February 17, 2011

 

 

See notes to consolidated financial statements.

 

 

See notes to consolidated financial statements.