Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 23, 2012

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 001-34920

 

 

BRAVO BRIO RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio		34-1566328
(State or other jurisdiction incorporation or organization)		(I.R.S. Employer Identification No.)
777 Goodale Boulevard, Suite 100 Columbus, Ohio		43212
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code (614) 326-7944

 

Former name, former address and former fiscal year, if changed since last report.

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    No  ¨

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.

 

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

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.    Yes  ¨    No  x

As of November 1, 2012, the latest practicable date, 19,743,248 of the registrant’s common shares, no par value per share, were issued and outstanding.

 

 

 

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Table of Contents

Table of Contents:

 

Part I – Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statements of Stockholders’ Equity			5
Consolidated Statements of Cash Flows			6
Condensed Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			21
Item 4. Controls and Procedures			21
Part II – Other Information			22
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Mine Safety Disclosures			22
Item 5. Other Information			22
Item 6. Exhibits			22
Signatures			23

 

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

As of September 23, 2012 and December 25, 2011

(Dollars in thousands)

 

		September 23, 2012				December 25, 2011
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	7,919			$	10,093
Accounts receivable			5,829				6,403
Tenant improvement allowance receivable			3,003				1,219
Inventories			2,587				2,767
Deferred income taxes, net			3,354				2,328
Prepaid expenses and other current assets			1,694				2,367
Total current assets			24,386				25,177
Property and equipment, net			177,185				163,208
Deferred income taxes, net			51,825				55,811
Other assets, net			4,287				3,430
Total assets		$	257,683			$	247,626
Liabilities and stockholders’ equity
Current liabilities
Trade and construction payables		$	13,498			$	13,058
Accrued expenses			23,295				20,183
Current portion of long-term debt			2,366				1,714
Deferred lease incentives			6,122				5,639
Deferred gift card revenue			6,911				10,863
Total current liabilities			52,192				51,457
Deferred lease incentives			65,081				62,565
Long-term debt			21,058				30,857
Other long-term liabilities			20,774				18,163
Commitments and contingencies
Stockholders’ equity
Common shares, no par value per share - authorized, 100,000,000 shares; issued and outstanding, 19,684,284 at September 23, 2012 and 19,476,559 at December 25, 2011			195,322				193,034
Preferred shares, no par value per share - authorized, 5,000,000 shares; issued and outstanding, 0 shares at September 23, 2012 and December 25, 2011			—				—
Retained deficit			(96,744	)			(108,450	)
Total stockholders’ equity			98,578				84,584
Total liabilities and stockholders’ equity		$	257,683			$	247,626

See condensed notes to unaudited consolidated financial statements.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Thirteen and Thirty-Nine Weeks Ended September 23, 2012 and September 25, 2011 (Unaudited)

(All information in thousands except per share data)

 

 

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September 23, 2012				September 25, 2011				September 23, 2012				September 25, 2011
Revenues		$	95,921			$	88,774			$	297,105			$	273,592
Costs and expenses
Cost of sales			25,045				23,617				77,164				73,008
Labor			33,528				30,730				102,950				92,893
Operating			15,089				13,958				45,752				42,388
Occupancy			6,230				5,587				19,448				17,747
General and administrative expenses			5,700				5,185				17,085				16,067
Restaurant preopening costs			1,442				1,281				3,615				2,882
Depreciation and amortization			4,689				4,303				13,765				12,555
Total costs and expenses			91,723				84,661				279,779				257,540
Income from operations			4,198				4,113				17,326				16,052
Interest expense, net			322				394				1,008				1,315
Income before income taxes			3,876				3,719				16,318				14,737
Income tax expense (benefit)			1,049				121				4,612				(56,806	)
Net income		$	2,827			$	3,598			$	11,706			$	71,543
Net income per basic share		$	0.14			$	0.19			$	0.60			$	3.71
Net income per diluted share		$	0.14			$	0.18			$	0.57			$	3.48
Weighted average shares outstanding-basic			19,618				19,330				19,558				19,286
Weighted average shares outstanding-diluted			20,649				20,551				20,617				20,545

See condensed notes to unaudited consolidated financial statements.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Thirty-Nine Weeks Ended September 23, 2012 (Unaudited)

(Dollars in thousands)

 

 

		Common Shares								Retained Deficit				Stockholders’ Equity
		Shares				Amount
Balance — December 25, 2011			19,476,559			$	193,034			$	(108,450	)		$	84,584
Net income			—				—				11,706				11,706
Proceeds from the exercise of stock options			206,971				295				—				295
Excess tax benefit related to share based payments			—				279				—				279
Issuance of restricted stock			1,250				—				—				—
Shares withheld from restricted stock vesting for minimum tax withholdings			(496	)			(9	)			—				(9	)
Share-based compensation costs			—				1,723				—				1,723
Balance — September 23, 2012			19,684,284			$	195,322			$	(96,744	)		$	98,578

See condensed notes to unaudited consolidated financial statements.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Thirty-Nine Weeks Ended September 23, 2012 and September 25, 2011 (Unaudited)

(Dollars in thousands)

 

 

		Thirty-Nine Weeks Ended
		September, 23 2012				September 25, 2011
Cash flows from operating activities:
Net income		$	11,706			$	71,543
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			14,041				12,836
Loss on disposals of property and equipment			295				361
Amortization of deferred lease incentives			(4,521	)			(4,143	)
Share-based compensation costs			1,723				1,294
Deferred income taxes			2,960				(57,905	)
Changes in assets and liabilities:
Accounts and tenant improvement allowance receivables			(1,210	)			(2,304	)
Inventories			180				177
Prepaid expenses and other current assets			673				561
Trade and construction payables			(671	)			(329	)
Deferred lease incentives			7,520				10,500
Deferred gift card revenue			(3,952	)			(4,047	)
Other accrued expenses			3,112				1,901
Other — net			1,432				1,610
Net cash provided by operating activities			33,288				32,055
Cash flows from investing activities:
Purchase of property and equipment			(26,880	)			(22,258	)
Net cash used in investing activities			(26,880	)			(22,258	)
Cash flows from financing activities:
Payments on long-term debt			(9,147	)			(8,000	)
Proceeds from the exercise of stock options			295				162
Excess tax benefit related to share based payments			279				321
Shares withheld from restricted stock vesting for minimum tax withholdings			(9	)			—
Net cash used in financing activities			(8,582	)			(7,517	)
Net (decrease) increase in cash and cash equivalents			(2,174	)			2,280
Cash and cash equivalents — beginning of period			10,093				2,460
Cash and cash equivalents — end of period		$	7,919			$	4,740
Supplemental disclosures of cash flow information:
Interest paid			772				1,087
Income taxes paid			1,500				1,162
Property financed by trade and construction payables			3,090				4,595

See condensed notes to unaudited consolidated financial statements.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

Description of Business — As of September 23, 2012, Bravo Brio Restaurant Group, Inc. (the “Company”) operated 101 restaurants, under the trade names “Bravo! Cucina Italiana^®,” “Brio Tuscan Grille^TM,” and “Bon Vie^®.” Of the 101 restaurants the Company operates, there are 48 Bravo! Cucina Italiana^® (“BRAVO”) restaurants, 52 Brio Tuscan Grille^TM (“BRIO”) restaurants and one Bon Vie^® restaurant in operation in 31 states throughout the United States of America. The Company owns all of its restaurants with the exception of one BRIO restaurant, which it operates under a management agreement and for which operation it receives a management fee.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the thirty-nine weeks ended September 23, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2012.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited consolidated financial statements and related condensed notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2011 filed with the SEC on March 6, 2012.

2. Net Income Per Share

Basic earnings per share (EPS) data is computed based on weighted average common shares outstanding during the period. Diluted EPS data is computed based on weighted average common shares outstanding, including all potentially issuable common shares. At September 23, 2012 and September 25, 2011, all outstanding stock options and restricted stock were included in the dilutive calculation.

(all information in thousands, except per share data)

 

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		September 23, 2012				September 25, 2011				September 23, 2012				September 25, 2011
Net income		$	2,827			$	3,598			$	11,706			$	71,543
Weighted average common shares outstanding			19,618				19,330				19,558				19,286
Effect of dilutive securities:
Stock options			958				1,104				998				1,155
Restricted stock			73				117				61				104
Weighted average common and potentially issuable common shares outstanding - diluted			20,649				20,551				20,617				20,545
Basic net income per common share		$	0.14			$	0.19			$	0.60			$	3.71
Diluted net income per common share		$	0.14			$	0.18			$	0.57			$	3.48

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements – (Continued)

 

3. Long-Term Debt

Long-term debt at September 23, 2012 and December 25, 2011 consisted of the following (in thousands):

 

		September 23, 2012				December, 25 2011
Total term loan		$	23,424			$	32,571
Less current maturities			2,366				1,714
Long-term debt		$	21,058			$	30,857

On October 26, 2010, the Company, in connection with its Initial Public Offering (“IPO”), entered into a credit agreement with a syndicate of financial institutions with respect to its senior credit facilities. The senior credit facilities provide for (i) a $45.0 million term loan facility, maturing in 2015, and (ii) a revolving credit facility under which the Company may borrow up to $40.0 million (including a sublimit cap of up to $10.0 million for letters of credit and up to $10.0 million for swing-line loans), maturing in 2015.

Under the credit agreement, the Company is allowed to incur additional incremental term loans and/or increases in the revolving credit facility of up to $20.0 million if no event of default exists and certain other requirements are satisfied. Borrowings under the senior credit facilities bear interest at the Company’s option of either (i) the Alternate Base Rate (as such term is defined in the credit agreement) plus the applicable margin of 1.75% to 2.25% or (ii) at a fixed rate for a period of one, two, three or six months equal to the London interbank offered rate, LIBOR, plus the applicable margin of 2.75% to 3.25%. In addition to paying any outstanding principal amount under the Company’s senior credit facilities, the Company is required to pay an unused facility fee to the lenders equal to 0.50% to 0.75% per annum on the aggregate amount of the unused revolving credit facility, excluding swing-line loans, commencing on October 26, 2010, payable quarterly in arrears. Borrowings under the Company’s senior credit facilities are collateralized by a first priority interest in all assets of the Company.

The credit agreement provides for a bank guarantee under standby letter of credit arrangements in the normal course of business operations. The standby letters of credit are cancellable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letters of credit in accordance with its credit. As of September 23, 2012, the maximum exposure under these standby letters of credit was $2.8 million.

Pursuant to the credit agreement, the Company is required to meet certain financial covenants including leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. At September 23, 2012, the Company was in compliance with its applicable financial covenants.

On October 9, 2012, the Company entered into an amendment to its credit agreement. The amendment eliminated dollar restrictions in paying dividends, distributions to shareholders, or repurchasing its common shares subject to the defined leverage ratio.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements – (Continued)

 

4. Stock Based Compensation

2006 Plan

Stock option activity for the thirty-nine weeks ended September 23, 2012 is summarized as follows:

 

		Number of Shares				Weighted Average Exercise Price
Outstanding at December 25, 2011			1,260,825			$	1.44
Exercised			(206,971	)		$	1.42
Granted			—			$	—
Forfeited			—			$	—
Outstanding at September 23, 2012			1,053,854			$	1.45
Exercisable at September 23, 2012			1,053,854			$	1.45

At September 23, 2012, the weighted-average remaining contractual term of options outstanding was approximately 4.2 years and all of the options were exercisable. Each outstanding option was awarded under the 2006 Plan (as defined below). Aggregate intrinsic value is calculated as the difference between the Company’s closing price at the end of the fiscal quarter and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders had they all exercised such options on the fiscal quarter end date. The aggregate intrinsic value for outstanding and exercisable options at September 23, 2012 was $14.3 million.

The total weighted-average grant-date fair value of options granted in 2007 and 2009 was $0.52, and was estimated at the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for these options: weighted-average risk-free interest rate of 4.49%, no expected dividend yield, weighted-average volatility of 32.2%, based upon competitors within the industry, and an expected option life of five years. In October 2010 in connection with the IPO, the Company’s board of directors determined, pursuant to the exercise of its discretion in accordance with the Bravo Development, Inc. Option Plan (the “2006 Plan”), that upon the consummation of the IPO (i) each then outstanding option award under the 2006 Plan would be 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 then outstanding option award would be deemed 80.0% exercisable. As a result of such determination, all of the options were subject to modification accounting and therefore were revalued in their entirety at the date of the modification. The Company recorded all of the stock compensation expense related to the 2006 Plan in the fourth quarter of 2010 and no additional stock compensation expense will be recorded with respect to options granted under the 2006 Plan.

Following the modification, the total weighted-average fair value of options granted under the 2006 Plan was $12.64, and was estimated at the date of the modification using the Black-Scholes option-pricing model. The following assumptions were used for these options: weighted-average risk-free interest rate of 1.1%, no expected dividend yield, weighted-average volatility of 45.8%, based upon competitors within the industry and an expected option life of five years.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements – (Continued)

 

Stock Incentive Plan

In October 2010, the Company adopted the Bravo Brio Restaurant Group, Inc. Stock Incentive Plan (the “Stock Incentive Plan”).

Restricted stock activity for the thirty-nine weeks ended September 23, 2012 is summarized as follows:

 

		Number of Shares				Weighted- Average Grant Date Fair Value
Outstanding at December 25, 2011			318,531			$	16.99
Granted			157,000			$	19.76
Vested			(1,250	)		$	22.41
Forfeited			(7,875	)		$	16.90
Outstanding at September 23, 2012			466,406			$	17.91

Fair value of the outstanding shares of restricted stock is based on the average of the high and low price of the Company’s shares on the date immediately preceding the date of grant. For the thirty-nine weeks ended September 23, 2012, a total of 157,000 shares of restricted stock have been granted to employees and directors of the Company pursuant to the Stock Incentive Plan. The weighted average of the high and low price of the Company’s shares on the date immediately preceding each 2012 grant date was $19.76. In the first thirty-nine weeks of 2012, the Company recorded approximately $1.7 million in stock compensation costs related to the shares of restricted stock. As of September 23, 2012, total unrecognized stock-based compensation expense related to non-vested shares of restricted stock was approximately $6.2 million, which is expected to be recognized over a weighted average period of approximately 2.5 years taking into account potential forfeitures. These shares of restricted stock will vest, subject to certain exceptions, annually over a four-year period. In conjunction with the shares that have vested in 2012, 496 shares were withheld to cover tax obligations of the recipient at a price of $17.54 per share, which was the average of the high and low price of the Company’s shares on the date immediately preceding the vesting date of the shares.

5. Income Taxes

The Company established a $59.5 million valuation allowance in 2008 against its then existing net deferred tax assets and credits as it was deemed the negative evidence outweighed the positive evidence that the deferred tax assets would not likely be realized in future periods.

During the thirteen weeks ended June 26, 2011, the Company determined that it was more likely than not that its existing net deferred tax assets and tax credits would be realized after considering all positive and negative evidence. Positive evidence included cumulative profitability, future tax deductions and credits and a forecast of future taxable income sufficient to realize its existing net deferred tax assets prior to the expiration of existing net operating loss and credit carryforwards. Accordingly, the Company recorded an income tax benefit of $57.2 million related to the reduction of the valuation allowance against net deferred income tax assets in the thirteen weeks ended June 26, 2011. As of both September 23, 2012 and December 25, 2011, the Company did not carry a valuation allowance against its net deferred tax assets.

 

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BRAVO BRIO RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements – (Continued)

 

For the thirty-nine weeks ended September 23, 2012, the Company recorded tax expense of $4.6 million, or 28.3% of pre-tax income. For the thirty-nine weeks ended September 25, 2011, the Company recorded an income tax benefit of $56.8 million primarily related to the reduction of the valuation allowance.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is currently being audited by the Internal Revenue Service for the fiscal year ended December 26, 2010. The Company does not anticipate any material changes occurring as a result of this audit.

6. Commitments and Contingencies

The Company is subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

On May 24, 2012, the Company was named as a defendant in a class action lawsuit alleging certain violations of the Fair Labor Standards Act as well as certain Iowa wage and hours laws. The Company has answered the complaint and denied the allegations. The Company believes that it has meritorious defenses to these allegations and intends to continue to vigorously defend against them, including challenging the plaintiffs’ efforts to certify a class. Due to the preliminary nature of this matter, the Company cannot currently estimate with any degree of certainty the amount or range of potential loss relating to such action, if any.

7. Subsequent Events

On October 17, 2012, the Board of Directors of the Company approved the terms of a share repurchase plan (the “Share Repurchase Plan”), under which the Company is authorized to repurchase up to $20 million of its common shares in open market and privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The Share Repurchase Plan was declared effective October 26, 2012, is subject to the Company’s pre-existing blackout periods, and expires on December 29, 2013.

The timing and number of shares to be repurchased pursuant to the Share Repurchase Plan are subject to a number of factors, including legal constraints, available cash and covenants under the Company’s credit agreement that limit share repurchases based on a defined leverage ratio as described in Note 3. Common shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by the Company. The Company will make the determination to repurchase shares based on several factors, including an evaluation of current and future capital needs associated with new restaurant development, current and forecasted cash flows, an ongoing review of its capital structure and cost of capital, its share price and current market conditions.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read this discussion together with our unaudited consolidated financial statements and accompanying condensed notes. Unless indicated otherwise, any reference in this report to the “Company,” “we,” “us,” and “our” refer to Bravo Brio Restaurant Group, Inc. together with its subsidiaries.

This discussion 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 the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011 filed with the SEC on March 6, 2012 (the “2011 Annual Report on Form 10-K”).

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. We assume no obligation to provide revisions to any forward-looking statements should circumstances change.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our 2011 Annual Report on Form 10-K and the unaudited consolidated financial statements and the related condensed notes thereto included herein.

Overview

We are a leading owner and operator of two distinct Italian restaurant brands, BRAVO! Cucina Italiana (“BRAVO!”) and BRIO Tuscan Grille (“BRIO”), which for purposes of the following discussion 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 control commodity costs, become more efficient with the use of our employee base and found new ways to improve efficiencies across our company. We have increased our electronic advertising, social media communication and public relations activities in order to bring new guests to our restaurants and keep loyal guests coming back to grow our revenues. Additionally, we have focused resources on highlighting our menu items and promoting our non-entrée selections such as appetizers, desserts and beverages as part of our efforts to drive higher sales volumes at our restaurants.

 

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Results of Operations

Thirteen Weeks Ended September 23, 2012 Compared to the Thirteen Weeks Ended September 25, 2011

The following table sets forth, for the periods indicated, our consolidated statements of operations both on an actual basis and expressed as percentages of revenues.

 

		Thirteen Weeks Ended
		September 23, 2012				% of Revenues				September 25, 2011				% of Revenues				Change				% Change
		(dollars in thousands)
Revenues		$	95,921				100	%		$	88,774				100	%		$	7,147				8.1	%
Cost and expenses:
Cost of sales			25,045				26.1	%			23,617				26.6	%			1,428				6.0	%
Labor			33,528				35.0	%			30,730				34.6	%			2,798				9.1	%
Operating			15,089				15.7	%			13,958				15.7	%			1,131				8.1	%
Occupancy			6,230				6.5	%			5,587				6.3	%			643				11.5	%
General and administrative expenses			5,700				5.9	%			5,185				5.8	%			515				9.9	%
Restaurant preopening costs			1,442				1.5	%			1,281				1.4	%			161				12.6	%
Depreciation and amortization			4,689				4.9	%			4,303				4.8	%			386				9.0	%
Total costs and expenses			91,723				95.6	%			84,661				95.4	%			7,062				8.3	%
Income from operations			4,198				4.4	%			4,113				4.6	%			85				2.1	%
Interest expense, net			322				0.3	%			394				0.4	%			(72	)			(18.3	)%
Income before income taxes			3,876				4.0	%			3,719				4.2	%			157				4.2	%
Income tax expense			1,049				1.1	%			121				0.1	%			928				—
Net income		$	2,827				2.9	%		$	3,598				4.1	%		$	(771	)			(21.4	)%

Certain percentage amounts may not sum due to rounding. Percentages over 100% are not shown.

Revenues. Revenues increased approximately $7.1 million, or 8.1%, to $95.9 million for the thirteen weeks ended September 23, 2012, as compared to $88.8 million for the thirteen weeks ended September 25, 2011. The increase of $7.1 million was primarily due to an additional 116 operating weeks provided by six new restaurants opened in the last twenty-six weeks of 2011 and seven new restaurants opened in the first thirty-nine weeks of 2012. The increase in operating weeks was partially offset by a decrease of $0.7 million, or 0.9%, related to a decline in comparable restaurant revenues. This decrease was driven by a 3.4% decrease in guest counts and partially offset by a $0.59 increase in average check. We consider a restaurant to be part of the comparable revenue base in the first full quarter following the eighteenth month of operations. Additionally, during the second quarter of 2012, we opened one BRIO that we do not own but which we operate pursuant to a management agreement under which we receive a management fee. Other than our receipt of this management fee, the operation of this restaurant has no impact on our financial statements.

For our BRAVO! brand, restaurant revenues increased $0.1 million, or 0.1%, to $39.2 million for the thirteen weeks ended September 23, 2012 as compared to $39.1 million for the thirteen weeks ended September 25, 2011. Comparable revenues for the BRAVO! brand restaurants decreased 0.5%, or $0.2 million, to $37.2 million for the thirteen weeks ended September 23, 2012 as compared to $37.4 million for the same period in 2011. Revenues for BRAVO! brand restaurants not included in the comparable revenue base increased $0.3 million to $2.0 million for the thirteen weeks ended September 23, 2012. At September 23, 2012, there were 45 BRAVO! restaurants included in the comparable revenue base and three BRAVO! restaurants not included in the comparable revenue base.

For our BRIO brand, restaurant revenues increased $7.0 million, or 14.1%, to $56.6 million for the thirteen weeks ended September 23, 2012 as compared to $49.6 million for the thirteen weeks ended September 25, 2011. Comparable revenues for the BRIO brand restaurants decreased 1.1%, or $0.5 million, to $46.2 million for the

 

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thirteen weeks ended September 23, 2012 as compared to $46.7 million for the same period in 2011. Revenues for BRIO brand restaurants not included in the comparable revenue base increased $7.5 million to $10.4 million for the thirteen weeks ended September 23, 2012. At September 23, 2012, there were 39 BRIO restaurants included in the comparable revenue base and 13 BRIO restaurants not included in the comparable revenue base.

Cost of Sales. Cost of sales increased $1.4 million, or 6.0%, to $25.0 million for the thirteen weeks ended September 23, 2012, as compared to $23.6 million for the thirteen weeks ended September 25, 2011. As a percentage of revenues, cost of sales decreased to 26.1% for the thirteen weeks ended September 23, 2012, from 26.6% for the thirteen weeks ended September 25, 2011. The decrease in cost of sales, as a percentage of revenues, was a result of lower commodity costs for our grocery and dairy products in 2012 as compared to 2011 and an increase in average check. As a percentage of revenues, food costs decreased 0.5% but increased in total dollars by $1.1 million. Beverage costs were flat as a percentage of revenues and increased in total dollars by $0.3 million. The increase in these costs in total dollars was related to the growth in restaurants in 2012 due to the six new restaurants opened in the last twenty-six weeks of 2011 and seven new restaurants opened in the first thirty-nine weeks of 2012.

Labor Costs. Labor costs increased $2.8 million, or 9.1%, to $33.5 million for the thirteen weeks ended September 23, 2012, as compared to $30.7 million for the thirteen weeks ended September 25, 2011. As a percentage of revenues, labor costs increased to 35.0% for the thirteen weeks ended September 23, 2012, from 34.6% for the thirteen weeks ended September 25, 2011. Higher labor costs as a percentage of revenues were driven by labor inefficiencies related to our newer restaurants as well as a modest amount of deleveraging.

Operating Costs. Operating costs increased $1.1 million, or 8.1%, to $15.1 million for the thirteen weeks ended September 23, 2012, as compared to $14.0 million for the thirteen weeks ended September 25, 2011. This increase was mainly due to an additional 116 operating weeks provided by six new restaurants opened in the last twenty-six weeks of 2011 and seven new restaurants opened in the first thirty-nine weeks of 2012. As a percentage of revenues, operating costs remained flat at 15.7% for the thirteen weeks ended September 23, 2012 and September 25, 2011.

Occupancy Costs. Occupancy costs increased $0.6 million, or 11.5%, to $6.2 million for the thirteen weeks ended September 23, 2012, as compared to $5.6 million for the thirteen weeks ended September 25, 2011. The increase was due to the six new restaurants opened in the last twenty-six weeks of 2011 and the seven new restaurants opened in the first thirty-nine weeks of 2012. As a percentage of revenues, occupancy costs increased to 6.5% for the thirteen weeks ended September 23, 2012, from 6.3% for the thirteen weeks ended September 25, 2011.

General and Administrative. General and administrative expenses increased by $0.5 million, or 9.9%, to $5.7 million for the thirteen weeks ended September 23, 2012, as compared to $5.2 million for the thirteen weeks ended September 25, 2011. As a percentage of revenues, general and administrative expenses increased to 5.9% for the thirteen weeks ended September 23, 2012, from 5.8% for the thirteen weeks ended September 25, 2011. The increase was primarily related to higher stock compensation costs, wages, travel and third party gift card distribution costs.

Restaurant Pre-opening Costs. Pre-opening costs increased by approximately $0.2 million, to $1.4 million for the thirteen weeks ended September 23, 2012, as compared to the thirteen weeks ended September 25, 2011. Year over year changes in pre-opening costs are driven by the timing and number of restaurant openings in a given period. During the thirteen weeks ended September 23, 2012, we opened three restaurants and had three additional restaurants under construction. During the thirteen weeks ended September 25, 2011, we opened two restaurants and had seven additional restaurants under construction.

Depreciation and Amortization. Depreciation and amortization expenses increased $0.4 million, to $4.7 million for the thirteen weeks ended September 23, 2012 compared to approximately $4.3 million for the thirteen weeks ended September 25, 2011. The increase was due to the growth in our restaurant base. As a percentage of revenues, depreciation and amortization expenses increased to 4.9% for the thirteen weeks ended September 23, 2012 as compared to 4.8% for the thirteen weeks ended September 25, 2011.

 

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Interest Expense, Net. Net interest expense decreased $0.1 million to $0.3 million for the thirteen weeks ended September 23, 2012 as compared to $0.4 million for the thirteen weeks ended September 25, 2011. This decrease was due to lower average outstanding debt for the thirteen weeks ended September 23, 2012 compared to the same period in the prior year.

Income Taxes. Income tax expense was $1.0 million for the thirteen weeks ended September 23, 2012 as compared to a $0.1 million income tax expense for the thirteen weeks ended September 25, 2011. For the thirteen weeks ended September 23, 2012, our income tax rate was 27.1% primarily due to adjustments from our state tax return filings. In the second quarter of 2011, we substantially reduced the valuation allowance previously provided against net deferred tax assets. Throughout the remainder of 2011, we reduced the rest of our valuation allowance against our net deferred tax assets but recorded tax expenses incurred at the state and local level in 2011.

Non-GAAP Net Income. Modified Pro Forma Net Income is a supplemental measure of our performance that is not required or presented in accordance with GAAP. We calculate this non-GAAP measure by adjusting net income 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, as well as the exclusion of certain non-comparable items to facilitate the comparison of our past and present financial results. For the thirteen weeks ended September 23, 2012, there were no adjustments to net income of $2.8 million to arrive at Modified Pro Forma Net Income. However, for the thirteen weeks ended September 25, 2011, net income was decreased by $1.0 million to arrive at Modified Pro Forma Net Income of $2.6 million. The adjustment for the thirteen weeks ended September 25, 2011 was an increase to income tax expense of $1.0 million to reflect an estimated effective tax rate of 30%.

Thirty-nine Weeks Ended September 23, 2012 Compared to the Thirty-nine Weeks Ended September 25, 2011

The following table sets forth, for the periods indicated, our consolidated statements of operations both on an actual basis and expressed as percentages of revenues.

 

		Thirty-Nine Weeks Ended
		September 23, 2012				% of Revenues				September 25, 2011				% of Revenues				Change				% Change
		(dollars in thousands)
Revenues		$	297,105				100	%		$	273,592				100	%		$	23,513				8.6	%
Cost and expenses:
Cost of sales			77,164				26.0	%			73,008				26.7	%			4,156				5.7	%
Labor			102,950				34.7	%			92,893				34.0	%			10,057				10.8	%
Operating			45,752				15.4	%			42,388				15.5	%			3,364				7.9	%
Occupancy			19,448				6.5	%			17,747				6.5	%			1,701				9.6	%
General and administrative expenses			17,085				5.8	%			16,067				5.9	%			1,018				6.3	%
Restaurant preopening costs			3,615				1.2	%			2,882				1.1	%			733				25.4	%
Depreciation and amortization			13,765				4.6	%			12,555				4.6	%			1,210				9.6	%
Total costs and expenses			279,779				94.2	%			257,540				94.1	%			22,239				8.6	%
Income from operations			17,326				5.8	%			16,052				5.9	%			1,274				7.9	%
Interest expense, net			1,008				0.3	%			1,315				0.5	%			(307	)			(23.3	)%
Income before income taxes			16,318				5.5	%			14,737				5.4	%			1,581				10.7	%
Income tax expense (benefit)			4,612				1.6	%			(56,806	)			(20.8	)%			61,418				—
Net income		$	11,706				3.9	%		$	71,543				26.1	%		$	(59,837	)			(83.6	)%

Certain percentage amounts may not sum due to rounding. Percentages over 100% are not shown.

 

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Revenues. Revenues increased $23.5 million, or 8.6%, to $297.1 million for the thirty-nine weeks ended September 23, 2012, as compared to $273.6 million for the thirty-nine weeks ended September 25, 2011. The increase of $23.5 million was primarily due to an additional 327 operating weeks provided by eight new restaurants opened in 2011 and seven new restaurants opened in the first thirty-nine weeks of 2012. This increase was offset by $0.5 million, or 0.2%, decline in comparable restaurant revenues, which was driven by a 1.8% decrease in guest counts and offset by a $0.37 increase in average check. We consider a restaurant to be part of the comparable revenue base in the first full quarter following the eighteenth month of operations. Additionally, during the second quarter of 2012, we opened one BRIO that we do not own but which we operate pursuant to a management agreement under which we receive a management fee. Other than our receipt of this management fee, the operation of this restaurant has no impact on our financial statements.

For our BRAVO! brand, restaurant revenues decreased $0.2 million, or 0.2%, to $121.1 million for the thirty-nine weeks ended September 23, 2012 as compared to $121.3 million for the thirty-nine weeks ended September 25, 2011. Comparable revenues for the BRAVO! brand restaurants decreased 0.1%, or $0.1 million, to $115.1 million for the thirty-nine weeks ended September 23, 2012 as compared to $115.2 million for the first thirty-nine weeks of 2011. Revenues for BRAVO! brand restaurants not included in the comparable revenue base decreased $0.1 million to $6.0 million for the thirty-nine weeks ended September 23, 2012. At September 23, 2012, there were 45 BRAVO! restaurants included in the comparable revenue base and three BRAVO! restaurants not included in the comparable revenue base.

For our BRIO brand, restaurant revenues increased $23.6 million, or 15.5%, to $175.9 million for the thirty-nine weeks ended September 23, 2012 as compared to $152.3 million for the thirty-nine weeks ended September 25, 2011. Comparable revenues for the BRIO brand restaurants decreased 0.2%, or $0.4 million, to $145.2 million for the thirty-nine weeks ended September 23, 2012 as compared to $145.6 million for the first thirty-nine weeks of 2011. Revenues for BRIO brand restaurants not included in the comparable revenue base increased $24.0 million to $30.7 million for the thirty-nine weeks ended September 23, 2012. At September 23, 2012, there were 39 BRIO restaurants included in the comparable revenue base and 13 BRIO restaurants not included in the comparable revenue base.

Cost of Sales. Cost of sales increased $4.2 million, or 5.7%, to $77.2 million for the thirty-nine weeks ended September 23, 2012, as compared to $73.0 million for the thirty-nine weeks ended September 25, 2011. As a percentage of revenues, cost of sales decreased to 26.0% for the thirty-nine weeks ended September 23, 2012, from 26.7% for the thirty-nine weeks ended September 25, 2011. The decrease in cost of sales, as a percentage of revenues, was primarily a result of lower commodity costs for our grocery, dairy and produce products in 2012 as compared to 2011 and an increase in average check. As a percentage of revenues, food costs decreased 0.6% but increased in total dollars by $3.3 million. Beverage costs decreased as a percentage of revenues by 0.1% but increased in total dollars by $0.9 million. The increase in these costs in total dollars was related to the growth in restaurants in 2012 due to the eight new restaurant opened in 2011 and the seven new restaurants opened in the first thirty-nine weeks of 2012.

Labor Costs. Labor costs increased approximately $10.1 million, or 10.8%, to $103.0 million for the thirty-nine weeks ended September 23, 2012, as compared to $92.9 million for the thirty-nine weeks ended September 25, 2011. As a percentage of revenues, labor costs increased to 34.7% for the thirty-nine weeks ended September 23, 2012, from 34.0% for the thirty-nine weeks ended September 25, 2011. These increases were primarily the result of higher labor costs associated with some of our newer restaurants, a modest amount of deleveraging as well as higher state unemployment costs.

Operating Costs. Operating costs increased $3.4 million, or 7.9%, to $45.8 million for the thirty-nine weeks ended September 23, 2012, as compared to $42.4 million for the thirty-nine weeks ended September 25, 2011. This increase was mainly due to an additional 327 operating weeks in 2012 as compared to 2011 resulting from the eight new restaurants opened in 2011 and seven new restaurants opened in 2012. As a percentage of revenues, operating costs decreased to 15.4% for the thirty-nine weeks ended September 23, 2012, compared to 15.5% for the thirty-nine weeks ended September 25, 2011. The decrease as a percentage of revenues was primarily related to lower debit card costs during the first thirty-nine weeks of 2012 as compared to the same period in the prior year.

 

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Occupancy Costs. Occupancy costs increased approximately $1.7 million, or 9.6%, to $19.4 million for the thirty-nine weeks ended September 23, 2012, as compared to $17.7 million for the thirty-nine weeks ended September 25, 2011. The increase was due to the eight new restaurants opened in 2011 and seven new restaurants opened in the first thirty-nine weeks of 2012. As a percentage of revenues, occupancy costs remained flat at 6.5% for both periods.

General and Administrative. General and administrative expenses increased by $1.0 million, or 6.3%, to $17.1 million for the thirty-nine weeks ended September 23, 2012, as compared to $16.1 million for the thirty-nine weeks ended September 25, 2011. The increase was primarily attributable to increases in wages and stock compensation costs as well as additional costs associated with travel and third party gift card distribution costs. This was partially offset by $0.6 million of expenses incurred in connection with a secondary public offering of the Company’s common shares in the first quarter of 2011 for which there were no comparable charges in the first thirty-nine weeks of 2012. As a percentage of revenues, general and administrative expenses decreased to 5.8% for the thirty-nine weeks ended September 23, 2012 from 5.9% for the thirty-nine weeks ended September 25, 2011.

Restaurant Pre-opening Costs. Pre-opening costs increased by approximately $0.7 million, to $3.6 million for the thirty-nine weeks ended September 23, 2012, as compared to $2.9 million for the thirty-nine weeks ended September 25, 2011. Year over year changes in pre-opening costs are driven by the timing and number of restaurant openings in a given period. During the first thirty-nine weeks of 2012, we opened seven restaurants and had three additional restaurants under construction. During the first thirty-nine weeks of 2011, we opened four restaurants, converted one restaurant from a BRAVO! to a BRIO and had seven additional restaurants under construction.

Depreciation and Amortization. Depreciation and amortization expenses increased $1.2 million, to $13.8 million for the thirty-nine weeks ended September 23, 2012 compared to $12.6 million for the thirty-nine weeks ended September 25, 2011. The increase was primarily due to the growth in our restaurant base. As a percentage of revenues, depreciation and amortization expenses remained flat at 4.6% for the thirty-nine weeks ended September 23, 2012 and for the thirty-nine weeks ended September 25, 2011.

Interest Expense, Net. Net interest expense decreased $0.3 million to $1.0 million for the thirty-nine weeks ended September 23, 2012 as compared to $1.3 million for the thirty-nine weeks ended September 25, 2011. This decrease was due to lower average outstanding debt in the first thirty-nine weeks of 2012 compared to the same period in the prior year.

Income Taxes. Income tax expense was $4.6 million for the thirty-nine weeks ended September 23, 2012 as compared to a $56.8 million income tax benefit for the thirty-nine weeks ended September 25, 2011. For the thirty-nine weeks ended September 23, 2012, our income tax rate was 28.3% primarily due to greater than anticipated tax credits reflected in our federal and state tax return filings. In the thirteen weeks ended June 26, 2011, we substantially reduced the valuation allowance previously provided against net deferred tax assets. As a result, we recorded a $57.2 million income tax benefit reflecting the adjustment to the valuation allowance. The tax benefit for the thirty-nine weeks ended September 25, 2011 was offset by certain state and local income taxes of $0.4 million.

Non-GAAP Net Income. Modified Pro Forma Net Income is a supplemental measure of our performance that is not required or presented in accordance with GAAP. We calculate this non-GAAP measure by adjusting net income 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, as well as the exclusion of certain non-comparable items to facilitate the comparison of our past and present financial results. For the thirty-nine weeks ended September 23, 2012, there were no adjustments to net income of $11.7 million to arrive at Modified Pro Forma Net Income. However, for the thirty-nine weeks ended September 25, 2011, net income was decreased by $60.8 million to arrive at Modified Pro Forma Net Income of $10.7 million. The adjustments for the thirty-nine weeks ended September 25, 2011 included an increase to income tax expense of $4.2 million to reflect an effective tax rate of 30%, a $57.2 million increase to income tax expense related to the reduction of our valuation allowance, and a decrease to general and administrative expenses by removing the costs of our secondary offering of $0.6 million, which was a one-time expense in 2011.

 

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Liquidity

Our principal sources of cash have been net cash provided by operating activities and borrowings under our senior credit facilities. As of September 23, 2012, we had approximately $7.9 million in cash and cash equivalents and approximately $37.2 million of availability under our senior credit facilities (after giving effect to $2.8 million of outstanding letters of credit at September 23, 2012). 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 for the next twelve months.

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 our 2011 Annual Report on Form 10-K under the heading “Risk Factors.”

The following table presents a summary of our cash flows for the thirty-nine weeks ended September 23, 2012 and September 25, 2011 (in thousands):

 

		Thirty-Nine Weeks Ended,
		September 23, 2012				September 25, 2011
Net cash provided by operating activities		$	33,288			$	32,055
Net cash used in investing activities			(26,880	)			(22,258	)
Net cash used in financing activities			(8,582	)			(7,517	)
Net (decrease) increase in cash and cash equivalents			(2,174	)			2,280
Cash and cash equivalents at beginning of period			10,093				2,460
Cash and cash equivalents at end of period		$	7,919			$	4,740

Operating Activities. Net cash provided by operating activities was $33.3 million for the thirty-nine weeks ended September 23, 2012, compared to $32.1 million for the thirty-nine weeks ended September 25, 2011. The increase in net cash provided by operating activities in the first thirty-nine weeks of 2012 compared to the same period in 2011 was due to an increase in cash receipts, primarily due to an increase in revenues, in excess of cash expenditures from the prior year. Cash receipts from operations for the first thirty-nine weeks of 2012 and 2011 were $297.1 million and $275.0 million, respectively. Cash expenditures during the first thirty-nine weeks of 2012 and 2011 were $264.3 million and $245.5 million, respectively. We also received tenant allowance payments from our landlords totaling $5.7 million for the first thirty-nine weeks of 2012 as compared to $8.6 million for the same period in 2011. Additionally, the Company paid cash bonuses totaling $1.7 million for the first thirty-nine weeks of 2012 as compared to $2.4 million paid in the first thirty nine weeks of 2011.

Investing Activities. Net cash used in investing activities was $26.9 million for the thirty-nine weeks ended September 23, 2012, compared to $22.3 million for the thirty-nine weeks ended September 25, 2011. We invest cash to purchase property and equipment related to our restaurant expansion plans. The increase in spending was related to the timing of restaurant openings, the timing of spending related to our new restaurants as well as the number of

 

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restaurants that were opened during 2012 versus 2011. During the first thirty-nine weeks of 2012, we opened seven restaurants and had three additional restaurants under construction. In the first thirty-nine weeks of 2011, we opened four restaurants, converted one restaurant from a BRAVO! to a BRIO and had seven additional restaurants under construction.

Financing Activities. Net cash used in financing activities was $8.6 million for the thirty-nine weeks ended September 23, 2012, compared to cash used in financing activities of $7.5 million for the thirty-nine weeks ended September 25, 2011. For the thirty-nine weeks ended September 23, 2012, we used $9.1 million to pay down the Company’s term loan, which was partially offset by approximately $0.5 million in cash and tax benefits received during the first thirty-nine weeks of 2012 related to stock option exercises. For the thirty-nine weeks ended September 25, 2011, we used $8.0 million to pay down the Company’s term loan, which was partially offset by $0.5 million in cash and tax benefits received during the first thirty-nine weeks of 2011 related to stock option exercises.

On October 17, 2012, the Board of Directors of the Company approved the terms of a share repurchase plan (the “Share Repurchase Plan”), under which the Company is authorized to repurchase up to $20 million of its common shares in open market and privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The Share Repurchase Plan was declared effective October 26, 2012, is subject to the Company’s pre-existing blackout periods, and expires on December 29, 2013. The timing and number of common shares to be repurchased pursuant to the Share Repurchase Plan are subject to a number of factors, including legal constraints, available cash and covenants under our credit agreement that limit share repurchases based on a defined leverage ratio.

As of September 23, 2012, 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 restaurant on average will require a total cash investment of $1.5 million to $2.5 million (net of estimated lease incentives). We expect to spend approximately $0.4 million 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 estimated lease incentives, for the remainder of 2012 to be in the range of approximately $4.0 million to $6.0 million, for a total of $25.0 million to $27.0 million for the year. This is primarily related to the opening of two additional restaurants in the last quarter of 2012, the start of construction of restaurants to be opened in early 2013, as well as normal maintenance related capital expenditures relating to our existing restaurants. In conjunction with these restaurant openings, the Company anticipates spending approximately $1.3 million to $1.7 million in preopening costs for the remainder of 2012 for a total of approximately $4.9 million to $5.3 million for all of 2012.

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 $27.8 million at September 23, 2012, compared to a net working capital deficit of $26.3 million at December 25, 2011.

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

 

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(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 credit agreement also requires 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 September 23, 2012, the Company was in compliance with its applicable financial covenants. Additionally, our credit agreement contains 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 September 23, 2012, we had an outstanding principal balance of approximately $23.4 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 for the next twelve months. 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 over the same period.

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 September 23, 2012, we were not involved in any VIE transactions and do not otherwise have any off-balance sheet arrangements.

Summary of Significant Accounting Policies

Accounting Estimates — The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

 

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There have been no material changes to the significant accounting policies from what was previously reported in our 2011 Annual Report on Form 10-K.

Recent Accounting Pronouncements — We reviewed all newly issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our financial statements as a result of future adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate exposure relates to the loans outstanding under our senior credit facilities, which are payable at variable rates.

At September 23, 2012, we had $23.4 million in debt outstanding under our term loan facility. Each eighth point change in interest rates on the variable rate portion of debt under our senior credit facilities would result in approximately $29,000 annual change in our interest expense.

Commodity Price Risk

We are exposed to market price fluctuation in some of our food product prices. Given the historical volatility of our 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 currently do not contract for any of our fresh seafood and we are unable to contract for some of our commodities such as certain produce items 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 related to any of our food product prices at this time.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedure

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.

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.

 

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Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

See Note 6 to our Consolidated Financial Statements in Part I, Item 1 of this report.

Item 1A. Risk Factors

There have been no material changes from our risk factors as previously reported in our 2011 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity and Use of Proceeds

Information concerning common shares repurchased during the thirteen weeks ended September 23, 2012 is below. All shares were purchased to satisfy tax withholding obligations upon vesting of restricted stock awards.

 

Bravo Brio Restaurant Group Accounting Periods		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of the Publicly Announced Plans				Increase in Share Repurchase Authorization				Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
6/25/2012-7/22/2012			—			$	—				—				—				—
7/23/2012-8/19/2012			496				17.54				—				—				—
8/20/2012-9/23/2012			—				—				—				—				—
Total for the Quarter			496			$	17.54

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed or furnished with this Quarterly Report:

Exhibit Index

 

Exhibit Number		Description
31(a)		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)		Certification of Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 2, 2012

 

 

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