Prospectus

 

 

Filed Pursuant to Rule 424(b)(1)

File No. 333-172642

4,161,020 Shares

 

 

Bravo Brio Restaurant Group, Inc.

 

Common Stock

 

The selling shareholders identified in this prospectus are offering 4,161,020 of our common shares, no par value per share. We will not receive any proceeds from the sale of shares by the selling shareholders, but we have agreed to pay certain registration expenses relating to such common shares.

 

Our common shares are listed on the Nasdaq Global Market under the symbol “BBRG.” On March 28, 2011, the last reported sale price of our common shares on the Nasdaq Global Market was $16.58 per share.

 

Investing in our common shares involves a high degree of risk. Please read “Risk Factors” beginning on page 14.

 

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

 

 

 

 

Delivery of the common shares is expected to be made on or about April 1, 2011. The selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to an additional 416,102 common shares to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by the selling shareholders will be $353,686.70 and the total proceeds to the selling shareholders, before expenses, will be $6,407,970.80.

 

 

 

 

 

Prospectus dated March 29, 2011

 

Table of Contents

 

 

Until April 23, 2011 (25 days after the date of this prospectus), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus. Do not rely upon any information or representations made outside of this prospectus. This prospectus is not an offer to sell, and it is not soliciting an offer to buy, (1) any securities other than our common shares or (2) our common shares in any circumstances in which such offer or solicitation is unlawful. The information contained in this prospectus may change after the date of this prospectus. Do not assume after the date of this prospectus that the information contained in this prospectus is still correct.

 

The menus included in this prospectus are sample menus only. Actual menus vary by location and certain locations may carry alternate menu items or have additional menu items.

 

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.

 

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

 

In this prospectus, we refer (without the ownership notation) to several registered and common law trademarks that we own, including BRAVO!^®, BRAVO! Cucina Italiana^®, Cucina BRAVO! Italiana^®, BRAVO! Italian Kitchen^®, Brio^®, Brio Tuscan Grille^tm and Bon Vie^®. All brand names or other trademarks appearing in this prospectus are the property of their respective owners.

 

Prospectus Summary

	•	The Food.  We offer made-to-order menu items prepared using traditional Italian culinary techniques with an emphasis on fresh ingredients and authentic recipes. Our food menu is complemented by a wine list that offers both familiar varieties as well as wines exclusive to our restaurants. An attention to detail, culinary expertise and focused execution reflects our chef-driven culture.
	•	The Service.  We are committed to delivering superior service to each guest, at each meal, each and every day. We place significant emphasis on maintaining high wait staff-to-table ratios, thoroughly training all service personnel on the details of each menu item and staffing each restaurant with experienced management teams to ensure consistent and attentive guest service.
	•	The Experience.  Lively, high-energy environments blending dramatic design elements with a warm and inviting atmosphere create a memorable guest experience. Signature architectural and décor elements include the lively theatre of exhibition kitchens, high ceilings, white tablecloths, a centerpiece bar and relaxing patio areas. These elements, along with our superior service and value, help form a bond between our guests and our restaurants, encouraging guest loyalty and more frequent visits.

	•	our financial results depend significantly upon the success of our existing and new restaurants;
	•	our long-term success is highly dependent on our ability to successfully develop and expand our operations;
	•	changes in economic conditions, including continued effects from the recent recession, could materially affect our business, financial condition and results of operations;
	•	we have had net losses in the past and our future profitability is uncertain;

	•	damage to our reputation or lack of acceptance of our brands in existing and new markets could negatively affect our business, financial condition and results of operations;
	•	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;
	•	changes in food availability and costs could adversely affect our operating results;
	•	increases in our labor costs, including as a result of changes in government regulation, could slow our growth or harm our business; and
	•	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.

Common shares outstanding		19,250,500 shares.
Common shares offered by the selling shareholders		4,161,020 shares, or 4,577,122 shares if the underwriters exercise their over-allotment option in full.
Over-allotment option		The selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to 416,102 additional common shares to cover overallotments.
Ownership after offering		Upon completion of this offering, our executive officers and directors will beneficially own approximately 11.5% of our outstanding common shares, including options to purchase our common shares that are exercisable within 60 days of February 14, 2011, or approximately 11.5% if the underwriters exercise their over-allotment option in full. See “Principal and Selling Shareholders.”
Use of proceeds		We will not receive any proceeds upon the sale of the common shares covered by this prospectus, but we will incur expenses in connection with the filing of the registration statement of which this prospectus forms a part. See “Use of Proceeds.”
Dividend policy		We do not currently pay cash dividends on our common shares and do not anticipate paying any dividends on our common shares in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then 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. See “Risk Factors — Our indebtedness may limit our ability to invest in the ongoing needs of our business.”
Nasdaq Global Market symbol		“BBRG.”
Risk factors		Investment in our common shares involves substantial risks. You should read this prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and the related notes to those statements included elsewhere in this prospectus before investing in our common shares.

	•	1,414,203 common shares issuable upon exercise of outstanding options under the Bravo Development, Inc. Option Plan (the “2006 Plan”) as of February 14, 2011 at a weighted average exercise price of $1.44 per share. See “Compensation Discussion and Analysis — Bravo Development, Inc. Option Plan”;

	•	1,454,200 common shares reserved as of February 14, 2011 for future grants under the Bravo Brio Restaurant Group, Inc. Stock Incentive Plan. See “Compensation Discussion and Analysis — Bravo Brio Restaurant Group, Inc. Stock Incentive Plan” for further discussion of this plan; and
	•	up to 445,300 common shares reserved as of February 14, 2011 for future issuance upon settlement of restricted stock awards granted under the Bravo Brio Restaurant Group, Inc. Stock Incentive Plan. See “Compensation Discussion and Analysis — Bravo Brio Restaurant Group, Inc. Stock Incentive Plan” for further discussion of this plan and these awards.

		Year Ended(1)
		December 28,				December 27,				December 26,
		2008				2009				2010
		(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenues		$	300,783			$	311,709			$	343,025
Cost of sales			84,618				82,609				89,456
Labor			102,323				106,330				114,468
Operating			47,690				48,917				53,331
Occupancy			18,736				19,636				22,729
General and administrative expenses			15,271				17,280				37,539
Restaurant pre-opening costs			5,434				3,758				2,375
Depreciation and amortization			14,651				16,088				16,708
Asset impairment charges			8,506				6,436				—
Total costs and expenses			297,229				301,054				336,606
Income from operations			3,554				10,655				6,419
Loss on extinguishment of debt			—				—				1,300
Net interest expense			9,892				7,119				6,121
(Loss) income before income taxes			(6,338	)			3,536				(1,002	)
Income tax expense			55,061				135				228
Net (loss) income		$	(61,399	)		$	3,401			$	(1,230	)
Undeclared preferred dividend, net of adjustment(2)			(10,175	)			(11,599	)			(3,769	)
Net loss attributed to common shareholders(3)		$	(71,574	)		$	(8,198	)		$	(4,999	)
Per Share Data:
Net loss attributed to common shareholders		$	(9.89	)		$	(1.13	)		$	(0.54	)
Weighted average common shares outstanding — basic and diluted			7,234				7,234				9,281
Other Financial Data:
Net cash provided by operating activities		$	32,501			$	33,782			$	37,682
Net cash used in investing activities		$	(43,088	)		$	(24,957	)		$	(18,691	)
Net cash provided by (used in) financing activities		$	10,529			$	(9,258	)		$	(16,780	)
Capital expenditures, net of lease incentives		$	24,578			$	14,121			$	10,349
Adjusted EBITDA(4)		$	27,218			$	34,790			$	43,360
Adjusted EBITDA margin			9.0	%			11.2	%			12.6	%
Operating Data:
Total restaurants (at end of period)			75				81				86
Total comparable restaurants (at end of period)(5)			54				64				76
Change in comparable restaurant sales(5)			(3.8	)%			(7.1	)%			1.6	%
BRAVO!:
Restaurants (at end of period)			44				45				47
Total comparable restaurants (at end of period)(5)			33				37				44
Average sales per comparable restaurant(5)		$	3,715			$	3,464			$	3,378
Change in comparable restaurant sales(5)			(4.1	)%			(6.9	)%			(0.1	)%
BRIO:
Restaurants (at end of period)			31				36				39
Total comparable restaurants (at end of period)(5)			21				27				32
Average sales per comparable restaurant(5)		$	5,401			$	4,896			$	4,991
Change in comparable restaurant sales(5)			(3.6	)%			(7.4	)%			3.2	%
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	682			$	249			$	2,460
Working capital (deficit)		$	(34,320	)		$	(36,156	)		$	(35,334	)
Total assets		$	157,764			$	160,842			$	163,453
Total debt		$	125,950			$	118,031			$	41,000
Total stockholders’ equity (deficiency in assets)		$	(76,091	)		$	(72,690	)		$	6,403

(1)		We utilize a 52- or 53-week accounting period which ends on the last Sunday of the calendar year. The fiscal years ended December 28, 2008, December 27, 2009 and December 26, 2010 each have 52 weeks.
(2)		The undeclared preferred dividend total for fiscal 2010 of $10.8 million was offset by an add-back of $7.0 million in the fourth quarter of 2010 related to the exchange of our Series A preferred stock. The exchange of the Series A preferred stock was completed prior to our initial public offering, using an estimated initial public offering price of $15.00 per share which, based on the total liquidation preference for the Series A preferred stock (including accrued and undeclared dividends thereon) of $105.2 million as of the date of the exchange, resulted in the issuance of 7,015,630 common shares. Because the final initial public offering price was $14.00 per share, the 7,015,630 common shares issued to the preferred shareholders represented only $98.2 million of value, $7.0 million less than the carrying value of the Series A preferred stock as of the date of the exchange. Because the fair value of consideration transferred was less than the carrying amount of the Series A preferred stock, the discount was added back to undeclared preferred dividends in arriving at net loss attributed to common shareholders and is recorded as such on the Consolidated Statements of Operations for fiscal 2010.
(3)		We adjust net loss attributed to common shareholders for the impact of certain items to show a year-over-year comparison based on the assumption that our initial public offering occurred and we became a public company on the first day of 2009. We believe this supplemental measure, which we refer to as modified pro forma net income, provides additional information to facilitate the comparison of our past and present financial results. Modified pro forma net income is a supplemental measure of our performance that is not required to be and is not presented in accordance with generally accepted accounting principles, or GAAP. Modified pro forma net income may not be comparable to similarly titled measures used by other companies and should not be considered by itself or as a substitute for measures of performance prepared in accordance with GAAP. Our inclusion of this supplemental measure should not be construed as an indication that our future results will not be affected by unusual or infrequent items. Applying the above assumptions, our basic and dilutive share counts for this calculation are 19,250,500 shares and 20,600,000, respectively.
		We made the following adjustments to reconcile from GAAP net loss attributed to common shareholders to non-GAAP modified pro forma net income for the year ended December 27, 2009: (i) removed $1.7 million of management fees and expenses and advisory fees accrued for our private equity sponsors and directors, (ii) added $1.2 million in estimated incremental public company costs, (iii) added $1.8 million in estimated additional stock compensation costs related to our Stock Incentive Plan, (iv) decreased net interest expense by an estimated $4.5 million as a result of the payoff of our previous senior credit facilities and our 13.25% senior subordinated secured notes with proceeds from our initial public offering and entry into our new senior credit facilities, (v) removed $11.6 million of undeclared preferred dividends related to our Series A preferred stock, (vi) removed the $1.5 million gain on the sale of a restaurant in 2009, (vii) removed $6.4 million of asset impairment costs incurred in 2009 and (viii) increased income tax expense by $3.4 million to reflect the change in estimated net income as well as a 30% applicable effective tax rate. We made the following adjustments to reconcile from GAAP net loss attributed to common shareholders to non-GAAP modified pro forma net income for the year ended December 26, 2010: (i) removed $2.4 million of management fees and expenses and advisory fees paid to our directors, (ii) added $1.2 million in estimated incremental public company costs, (iii) added $1.5 million in estimated additional stock compensation costs related to our Stock Incentive Plan, (iv) decreased net interest expense by an estimated $4.2 million as a result of the payoff of our previous senior credit facilities and our 13.25% senior subordinated secured notes with proceeds from our initial public offering and entry into our new senior credit facilities, (v) removed $3.8 million of undeclared preferred dividends, net of adjustment, related to our Series A preferred stock, (vi) removed $1.3 million in unamortized loan origination fees related to our previous senior credit facilities, (vii) removed a one-time non-cash $17.9 million stock compensation charge related to our 2006 Plan and (viii) increased income tax expense by $6.4 million to reflect the change in estimated net income as well as a 30% applicable effective tax rate.

		A reconciliation from net loss attributed to common shareholders to modified pro forma net income for the years ended December 27, 2009 and December 26, 2010 is provided below:

		Year Ended				Year Ended
		December 27,				December 26,
		2009				2010
		(Dollars in thousands)
Net loss attributed to common shareholders		$	(8,198	)		$	(4,999	)
Removal of management and advisory fees and expenses			1,722				2,402
Increase in incremental public company fees			(1,224	)			(1,164	)
Increase in stock compensation costs related to Stock Incentive Plan			(1,800	)			(1,507	)
Decrease in net interest expense			4,453				4,169
Removal of undeclared preferred dividends, net of adjustment			11,599				3,769
Write off of loan origination fees			—				1,300
Stock compensation costs related to 2006 Plan			—				17,892
Gain on the sale of restaurant			(1,502	)			—
Asset impairment			6,436				—
Increase in income tax expense			(3,351	)			(6,399	)
Modified pro forma net income		$	8,135			$	15,463

		Set forth in the table below is each of the line items on our audited consolidated statements of operations for the year ended December 27, 2009 to which an adjustment has been made as described above:

		Year Ended
		December 27,
		2009				Adjustment				Modified Pro Forma
		(Dollars in thousands)
Occupancy costs		$	19,636			$	1,200	(a)		$	20,836
General and administrative expenses			17,280				1,604	(b)			18,884
Asset Impairment			6,436				(6,436	)(c)			—
Net interest expense			7,119				(4,453	)(d)			2,666
Income tax expense			135				3,351	(e)			3,486
Undeclared preferred dividends			(11,599	)			11,599				—

	(b)	Reflects the addition of $1.8 million in stock compensation costs related to our Stock Incentive Plan, an increase of $1.2 million in public company costs and the removal of a $0.3 million gain on the sale of a restaurant, partially offset by the removal of $1.7 million in management and advisory fees and expenses.

	(c)	Reflects the removal of $6.4 million in asset impairment charges related to three restaurants.

	(d)	Reflects a decrease of $4.5 million resulting from our lower debt balance as well as the lower average interest rate under our new senior credit facilities entered into in connection with our initial public offering.

	(e)	Reflects a $3.4 million increase in income tax expense. Currently, our net deferred tax assets are offset by a full valuation allowance. This adjustment assumes a tax rate of 30.0%, which reflects our estimate of our long-term effective tax rate.

		Set forth in the table below is each of the line items on our unaudited consolidated statements of operations for the year ended December 26, 2010 to which an adjustment has been made as described above:

		Year Ended
		December 26,
		2010				Adjustment				Modified Pro Forma
		(Dollars in thousands)
General and administrative expenses		$	37,539			$	(17,623	)(a)		$	19,916
Loss on extinguishment of debt			1,300				(1,300	)(b)			—
Net interest expense			6,121				(4,169	)(c)			1,952
Income tax expense			228				6,399	(d)			6,627
Undeclared preferred dividends, net of adjustment			(3,769	)			3,769				—

	(a)	Reflects the removal of a one-time non-cash $17.9 million stock compensation charge related to our 2006 Plan, the removal of $2.4 million of management and advisory fees and expenses, the addition of $1.2 million in public company costs, and the addition of $1.5 million in stock compensation costs related to our Stock Incentive Plan.

	(b)	Reflects the write off of $1.3 million of loss on extinguishment of debt relating to the write off of unamortized loan costs resulting from the payoff of our former senior credit facilities and 13.25% senior subordinated secured notes in connection with our initial public offering.

	(c)	Reflects a decrease of $4.2 million resulting from our lower debt balance as well as the lower average interest rate under our new senior credit facilities entered into in connection with our initial public offering.

	(d)	Reflects a $6.4 million increase in income tax expense. Currently, our net deferred tax assets are offset by a full valuation allowance. This adjustment assumes a tax rate of 30.0%, which reflects our estimate of our long-term effective tax rate.

		Using the basic and diluted share counts of 19,250,500 and 20,600,000 noted above, our modified pro forma net income per basic and diluted share for the year ended December 27, 2009 would have been $0.42 and $0.39, respectively, and for the year ended December 26, 2010 would have been $0.80 and $0.75, respectively.
(4)		Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization plus the sum of asset impairment charges, loss on extinguishment of debt and management fees and expenses accrued for our private equity sponsors and, with respect to fiscal 2010, a $17.9 million one-time non-cash stock compensation charge related to existing options to purchase our common shares that became fully vested and exercisable upon consummation of our initial public offering. We are presenting Adjusted EBITDA, which is not required by GAAP because it provides an additional measure to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), which we believe provides a more complete understanding of our business than could be obtained absent this disclosure. We use Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as revenue and cash flows from operations, to assess our historical and prospective operating performance and to enhance our understanding of our core operating performance. Adjusted EBITDA is presented because: (i) we believe it is a useful measure for investors to assess the operating performance of our business without the effect of non-cash depreciation and amortization expenses and asset impairment charges and, with respect to fiscal 2010, the one-time non-cash stock compensation charge arising in connection with our initial public offering; (ii) we believe that investors will find it useful in assessing our ability to service or incur indebtedness; and (iii) we use Adjusted EBITDA internally as a benchmark to evaluate our operating performance or compare our performance to that of our competitors. The use of Adjusted EBITDA as a performance measure permits a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. Companies within our industry exhibit significant variations with respect to capital structures and cost of capital (which affect interest expense and tax rates) and differences in book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management believes that Adjusted EBITDA facilitates company-to-company comparisons within our industry by eliminating some of the foregoing variations.
		Adjusted EBITDA is not a measurement determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income (loss), net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies and our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items.
		Our management recognizes that Adjusted EBITDA has limitations as an analytical financial measure, including the following:

	•	Adjusted EBITDA does not reflect our capital expenditures or future requirements for capital expenditures;
	•	Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, associated with our indebtedness;
	•	Adjusted EBITDA does not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor does Adjusted EBITDA reflect any cash requirements for such replacements; and
	•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs.

		This prospectus also includes information concerning Adjusted EBITDA margin, which is defined as the ratio of Adjusted EBITDA to revenues. We present Adjusted EBITDA margin because it is used by management as

		a performance measurement to judge the level of Adjusted EBITDA generated from revenues and we believe its inclusion is appropriate to provide additional information to investors.
		A reconciliation of net (loss) income to Adjusted EBITDA and EBITDA is provided below.

		Year Ended
		December 28,				December 27,				December 26,
		2008				2009				2010
						(In thousands)
Net (loss) income		$	(61,399	)		$	3,401			$	(1,230	)
Income tax expense			55,061				135				228
Net Interest expense			9,892				7,119				6,121
Depreciation and amortization			14,651				16,088				16,708
EBITDA		$	18,205			$	26,743			$	21,827
Asset impairment charges			8,506				6,436				—
Loss on extinguishment of debt			—				—				1,300
IPO-related stock compensation charge			—				—				17,892
Management fees and expenses(a)			507				1,611				2,341
Adjusted EBITDA		$	27,218			$	34,790			$	43,360

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

 

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

 

Risks Relating to Our Business and Industry

 

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

 

Future growth in 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 primarily as a result of 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, a non-cash impairment charge of $8.5 million and 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 “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 one-time non-cash stock compensation charge relating to our initial public offering, we would have had net income 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. Furthermore, the failure of landlords to obtain licenses or permits for development projects on a timely basis, which is beyond our control, may negatively impact our ability to implement our development plan.

 

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 Gordon Food Services, or GFS, and Ben E. Keith Company, or 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 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. Continued minimum wage increases or changes to allowable tip credits may further 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 Patient Protection and Affordable Care Act (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 United States Food and Drug Administration (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. 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 “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 “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 “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 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 has been volatile and you could lose all or part of your investment.

 

Since our initial public offering on October 26, 2010, our share price has ranged from a high of $20.29 per share to a low of $14.26 per share. 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, and the exercise of outstanding restricted stock awards and stock options and any additional capital raised by us through the sale of our common shares may dilute your ownership in us.

 

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 that number:

 

 

In addition, at February 14, 2011 we have reserved 1.9 million common shares for issuance under the Bravo Brio Restaurant Group, Inc. Stock Incentive Plan, of which 445,300 shares are subject to vesting under outstanding restricted stock awards and 1,454,200 shares remain eligible for future issuance, and stock options to purchase an aggregate of 1,414,203 common shares are currently outstanding under the 2006 Plan. See “Compensation Discussion and Analysis — Bravo Brio Restaurant Group, Inc. Stock Incentive Plan” and “Compensation Discussion and Analysis — Bravo Development, Inc. Option Plan.”

 

With limited exceptions (including the waiver referenced above), 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. The

underwriters waived the restrictions under these lock-up agreements applicable to the Company and the selling shareholders for purposes of this offering.

 

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. See “Description of Capital Stock.”

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. See “Dividend Policy.”

 

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.

 

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

 

We will not receive any of the proceeds from the sale of our common shares by the selling shareholders, but we have agreed to pay certain registration expenses relating to such common shares. See “Underwriting — Commission and Expenses.” We estimate that the total expenses of this offering, excluding underwriting discounts, will be approximately $0.6 million.

 

We do not currently pay 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.

 

The following table sets forth our capitalization as of December 26, 2010 on an actual basis.

 

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

 

 

The common shares to be sold by the selling shareholders pursuant to this prospectus are currently issued and outstanding. Accordingly, there will be no dilution to our existing shareholders as a result of such sales.

 

You should read the following selected historical consolidated financial and operating data in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. 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 prospectus. The selected historical consolidated financial data as of December 27, 2009 and December 26, 2010 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, included elsewhere in this prospectus. The selected historical consolidated financial data as of December 31, 2006, December 30, 2007 and December 28, 2008 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 prospectus.

 

 

 

We made the following adjustments to reconcile from GAAP net loss attributed to common shareholders to non-GAAP modified pro forma net income for the year ended December 27, 2009: (i) removed $1.7 million of management fees and expenses and advisory fees accrued for our private equity sponsors and directors, (ii) added $1.2 million in estimated incremental public company costs, (iii) added $1.8 million in estimated additional stock compensation costs related to our Stock Incentive Plan, (iv) decreased net interest expense by an estimated $4.5 million as a result of the payoff of our previous senior credit facilities and our 13.25% senior subordinated secured notes with proceeds from our initial public offering and entry into our new senior credit facilities, (v) removed $11.6 million of undeclared preferred dividends related to our Series A preferred stock, (vi) removed the $1.5 million gain on the sale of a restaurant in 2009, (vii) removed $6.4 million of asset impairment costs incurred in 2009 and (viii) increased income tax expense by $3.4 million to reflect the change in estimated net income as well as a 30% applicable effective tax rate. We made the following adjustments to reconcile from GAAP net loss attributed to common shareholders to non-GAAP modified pro forma net income for the year ended December 26, 2010: (i) removed $2.4 million of management fees and expenses and advisory fees paid to our directors, (ii) added $1.2 million in estimated incremental public company costs, (iii) added $1.5 million in estimated additional stock compensation costs related to our Stock Incentive Plan, (iv) decreased net interest expense by an estimated $4.2 million as a result of the payoff of our previous senior credit facilities and our 13.25% senior subordinated secured notes with proceeds from our initial public offering and entry into our new senior credit facilities, (v) removed $3.8 million of undeclared preferred dividends, net of adjustment, related to our Series A preferred stock, (vi) removed $1.3 million in unamortized loan origination fees related to our previous senior credit facilities, (vii) removed a one-time non-cash $17.9 million stock compensation charge related to our 2006 Plan and (viii) increased income tax expense by $6.4 million to reflect the change in estimated net income as well as a 30% applicable effective tax rate.

 

A reconciliation from net loss attributed to common shareholders to modified pro forma net income for the years ended December 27, 2009 and December 26, 2010 is provided below:

 

Set forth in the table below is each of the line items on our audited consolidated statements of operations for the year ended December 27, 2009 to which an adjustment has been made as described above:

 

 

(a)  Reflects the removal of a $1.2 million gain on the sale of a restaurant.

 

 

 

 

 

Set forth in the table below is each of the line items on our unaudited consolidated statements of operations for the year ended December 26, 2010 to which an adjustment has been made as described above:

 

 

 

 

 

 

 

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

 

Our management recognizes that Adjusted EBITDA has limitations as an analytical financial measure, including the following:

 

 

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

A reconciliation of net (loss) income to Adjusted EBITDA and EBITDA is provided below.

 

 

(a)  Reflects fees and expenses accrued for our private equity sponsors.

 

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

 

Overview

 

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. We believe that both of our brands appeal to a broad base of consumers, especially to women whom we believe accounted for approximately 62% and 65% of our guest traffic at BRAVO! and BRIO, respectively, during 2010.

 

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.

 

Our Growth Strategies and Outlook

 

Our growth model is comprised of the following three primary drivers:

 

 

We opened one restaurant in the fourth quarter of 2010 and, as of March 7, 2011, we have opened one restaurant in the first quarter of 2011. 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.

 

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. In 2010, our capital expenditure outlays equaled approximately $18.6 million and we currently estimate capital expenditures, net of lease incentives, for 2011 to be in the range of approximately $22.0 million to $24.0 million. In conjunction with our planned 2011 restaurant openings, we anticipate spending approximately $4.0 million in pre-opening costs in 2011.

 

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 both on an actual basis and 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 2009 and 2010. 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 percentage 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. As a percentage 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 percentage of revenues, operating costs decreased to 15.5% in 2010, compared to 15.7% in 2009. The decrease was primarily due to lower restaurant supply 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 percentage 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 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 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 of a restaurant 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 percentage 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 percentage 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 percentage 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 percentage 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 percentage 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 percentage 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 28.0%, 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 prospectus under “Risk Factors.”

 

The following table presents a summary of our cash flows for the years ended December 28, 2008, December 27, 2009 and December 26, 2010:

 

 

Operating Activities.  Net cash provided by operating activities was $37.7 million in 2010, compared to $33.8 million in 2009 and $32.5 million in 2008. 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 as compared to 2009 and in 2009 as compared to 2008 is primarily due to an increase in cash receipts in excess of cash expenditures from year to year. Cash receipts in 2010 and 2009 were $343.8 million and $310.1 million, respectively, while cash expenditures during 2010 and 2009 were $310.6 million and $280.9 million, respectively. Cash receipts in 2009 and 2008 were $310.1 million and $301.3 million, respectively, while cash expenditures during 2009 and 2008 were $280.9 million and $277.2 million, respectively. The increase in cash receipts over cash expenditures in 2009 as compared to 2008 is partially offset by lower tenant allowances received from landlords in 2009 as compared to 2008.

 

Investing Activities.  Net cash used in investing activities was $18.7 million in 2010, compared to $25.0 million in 2009 and $43.1 million in 2008. We used cash primarily to purchase property and equipment related to our restaurant expansion plans. The decrease in spending in 2010 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, as compared to 2009 when we opened seven restaurants and two others were under construction at year end and 2008 when we opened 13 restaurants.

 

Financing Activities.  Net cash used in financing activities was $16.8 million in 2010, compared to $9.3 million in 2009, while in 2008 net cash provided by financing activities was $10.5 million. Net cash used in financing activities in 2010 was primarily the result of 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. Net cash used in financing activities in 2009 was primarily the result of payments, net of borrowings, of $8.2 million under our former senior revolving credit facility. Net cash provided by financing activities in 2008 was primarily the result of borrowings, net of payments, of $11.6 million under our former senior revolving credit facility.