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BRAVO BRIO RESTAURANT GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read this discussion together with our unaudited consolidated financial statements and accompanying condensed notes included herein. Unless indicated otherwise, any reference in this report to the "Company," "we," "us," and "our" refer to Bravo Brio Restaurant Group, Inc. together with its subsidiaries. This discussion contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading "Risk Factors" in our 2013 Annual Report on Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our 2013 Annual Report on Form 10-K and the unaudited consolidated financial statements and the related condensed notes thereto included herein. Overview We are a leading owner and operator of two distinct Italian restaurant brands, BRAVO! Cucina Italiana ("BRAVO!") and BRIO Tuscan Grille ("BRIO"), which for purposes of the following discussion includes our one Bon Vie restaurant. We have positioned our brands as multifaceted culinary destinations that deliver the ambiance, design elements and food quality reminiscent of fine dining restaurants at a value typically offered by casual dining establishments, a combination known as the upscale affordable dining segment. Each of our brands provides its guests with a fine dining experience and value by serving affordable cuisine prepared using fresh flavorful ingredients and authentic Italian cooking methods, combined with attentive service in an attractive, lively atmosphere. We strive to be the best Italian restaurant company in America and are focused on providing our guests an excellent dining experience through consistency of execution. Our approach to operations continues to focus on core ways to drive and grow our business. We look for new and different ways to increase our comparable sales through various initiatives. We are constantly identifying new potential sites to expand both of our brands by opening new restaurants in the best possible locations within a development and throughout the country. We will continue to evaluate our existing restaurant base to ensure each location is meeting our standards from both an operational and profitability standpoint. Finally, we explore all of our options in deploying our capital in a way that is best for our shareholders and our business. Our business is highly sensitive to seasonal fluctuations as historically, the percentage of operating income earned during the fourth quarter has been higher due, in part, to higher restaurant sales during the year-end holiday shopping season. Our business is also highly sensitive to changes in guest traffic and the operating environment continues to be difficult with negative comparable store sales, driven by negative guest traffic, in each quarter of 2013 and the first two quarters of 2014. Increases and decreases in guest traffic can have a significant impact on our financial results. In recent years, we have faced and we continue to face uncertain economic conditions, which have resulted in changes to our guests' discretionary spending. To adjust to this decrease in guest spending, we have focused on controlling product margins and costs while maintaining our high standards for food quality and service and enhancing our guests' dining experience. We have worked with our distributors and suppliers to control commodity costs, become more efficient with the use of our employee base and found new ways to improve efficiencies across our company. We have increased our electronic advertising, social media communication and public relations activities in order to bring new guests to our restaurants and keep loyal guests coming back to grow our revenues. We have focused resources on highlighting our menu items and promoting our non-entrée selections such as appetizers, desserts and beverages as part of our efforts to drive higher sales volumes at our restaurants. Additionally, we continue to promote our light menu to attract guests looking for healthier options in their dining experience. - 10 --------------------------------------------------------------------------------- Table of Contents Results of Operations Thirteen Weeks Ended June 29, 2014 Compared to the Thirteen Weeks Ended June 30, 2013 The following table sets forth, for the periods indicated, our consolidated statements of operations both on an actual basis and expressed as a percentage of revenues. Thirteen Weeks Ended % of % of June 29, 2014 Revenues June 30, 2013 Revenues Change % Change (dollars in thousands) Revenues $ 104,455 100.0 % $ 105,622 100 % $ (1,167 ) (1.1 )% Cost and expenses: Cost of sales 27,251 26.1 % 27,051 25.6 % 200 0.7 % Labor 36,695 35.1 % 36,882 34.9 % (187 ) (0.5 )% Operating 16,265 15.6 % 16,588 15.7 % (323 ) (1.9 )% Occupancy 7,054 6.8 % 7,171 6.8 % (117 ) (1.6 )% General and administrative expenses 5,910 5.7 % 5,836 5.5 % 74 1.3 % Restaurant preopening costs 678 0.6 % 558 0.5 % 120 21.5 % Depreciation and amortization 5,035 4.8 % 4,962 4.7 % 73 1.5 % Total costs and expenses 98,888 94.7 % 99,048 93.8 % (160 ) (0.2 )% Income from operations 5,567 5.3 % 6,574 6.2 % (1,007 ) (15.3 )% Net interest expense 236 0.2 % 284 0.3 % (48 ) (16.9 )% Income before income taxes 5,331 5.1 % 6,290 6.0 % (959 ) (15.2 )% Income tax expense 1,359 1.3 % 1,748 1.7 % (389 ) (22.3 )% Net income $ 3,972 3.8 % $ 4,542 4.3 % $ (570 ) (12.5 )% Certain percentage amounts may not sum due to rounding. Revenues. Revenues decreased $1.1 million, or 1.1%, to $104.5 million for the thirteen weeks ended June 29, 2014, as compared to $105.6 million for the thirteen weeks ended June 30, 2013. The decrease of $1.1 million was primarily due to a decrease in comparable restaurant revenues of 5.1% or $5.0 million, which was driven by a 6.2% decrease in guest counts. Partially offsetting the effect of the decrease in comparable guest counts was a net additional 56 operating weeks provided by six company owned restaurants opened in the last three quarters of 2013 and one restaurant opened in the second quarter of 2014; less the operating weeks of three restaurant closures in 2014; and an increase of 1.1% in comparable average check. We consider a restaurant to be part of the comparable revenue base in the first full quarter following the eighteenth month of operations. For our BRAVO! brand, restaurant revenues decreased $2.0 million, or 5.0%, to $39.1 million for the thirteen weeks ended June 29, 2014 as compared to $41.1 million for the thirteen weeks ended June 30, 2013. Comparable revenues for the BRAVO! brand restaurants decreased 6.0%, or $2.4 million, to $37.5 million for the thirteen weeks ended June 29, 2014 as compared to $39.9 million for the thirteen weeks ended June 30, 2013. This decrease was due to a decrease in guest counts partially offset by an increase in average check. Revenues for BRAVO! brand restaurants not included in the comparable revenue base increased $0.4 million to $1.6 million for the thirteen weeks ended June 29, 2014 as compared to $1.2 million for the thirteen weeks ended June 30, 2013. The increase of $0.4 million was primarily due to the opening of one restaurant in the current year. At June 29, 2014, there were 45 BRAVO! restaurants included in the comparable revenue base and two BRAVO! restaurants not included in the comparable revenue base. For our BRIO brand, restaurant revenues increased $0.9 million, or 1.3%, to $65.3 million for the thirteen weeks ended June 29, 2014 as compared to $64.4 million for the thirteen weeks ended June 30, 2013. Comparable revenues for the BRIO brand restaurants decreased 4.5%, or $2.7 million, to $55.5 million for the thirteen weeks ended June 29, 2014 as compared to $58.2 million for the thirteen weeks ended June 30, 2013. This decrease was due to a decrease in guest counts as well as a slight decrease in average check. Revenues for BRIO brand restaurants not included in the comparable revenue base increased $3.6 million to $9.8 million for the thirteen weeks ended June 29, 2014 as compared to $6.2 million for the thirteen weeks ended June 30, 2013. At June 29, 2014, there were 49 BRIO restaurants included in the comparable revenue base and nine BRIO restaurants not included in the comparable revenue base. - 11 --------------------------------------------------------------------------------- Table of Contents Cost of Sales. Cost of sales increased $0.2 million, or 0.7%, to $27.3 million for the thirteen weeks ended June 29, 2014 as compared to $27.1 million for the thirteen weeks ended June 30, 2013. The increase was primarily due to higher commodity costs, principally seafood, which was partially offset by a menu price increase in 2014 as compared to 2013. As a percentage of revenues, cost of sales increased to 26.1% for the thirteen weeks ended June 29, 2014 as compared to 25.6% for the thirteen weeks ended June 30, 2013. The increase in cost of sales, as a percentage of revenues, was primarily due to higher commodity costs. As a percentage of revenues, food costs increased 0.7% to 21.7% for the thirteen weeks ended June 29, 2014 as compared to 21.0% for the thirteen weeks ended June 30, 2013. Beverage costs decreased 0.2% as a percentage of revenues to 4.4% for the thirteen weeks ended June 29, 2014 as compared to 4.6% for the thirteen weeks ended June 30, 2013. Labor Costs. Labor costs decreased $0.2 million, or 0.5%, to $36.7 million for the thirteen weeks ended June 29, 2014 as compared to $36.9 million for the thirteen weeks ended June 30, 2013. As a percentage of revenues, labor costs increased to 35.1% for the thirteen weeks ended June 29, 2014, from 34.9% for the thirteen weeks ended June 30, 2013. While manager labor, as a percentage of sales, increased due to the deleveraging resulting from the decrease in our comparable revenues, this increase was partially offset by efficiencies in hourly labor. Operating Costs. Operating costs decreased $0.3 million, or 1.9%, to $16.3 million for the thirteen weeks ended June 29, 2014 as compared to $16.6 million for the thirteen weeks ended June 30, 2013. This decrease was primarily due to lower advertising and supplies costs compared to the same period in the prior year, partially offset by the impact of a net additional 56 operating weeks in 2014 as compared to 2013. As a percentage of revenues, operating costs decreased to 15.6% for the thirteen weeks ended June 29, 2014 as compared to 15.7% for the thirteen weeks ended June 30, 2013. The decrease as a percentage of revenues was due to lower advertising costs and supplies costs that were only partially offset by the decrease in comparable sales in 2014 as compared to the same period in the prior year. Occupancy Costs. Occupancy costs decreased approximately $0.1 million, or 1.6%, to $7.1 million for the thirteen weeks ended June 29, 2014, as compared to $7.2 million for the thirteen weeks ended June 30, 2013. The decrease was primarily due to the effect of two company owned restaurant closures in the current quarter, which resulted in the accelerated recognition of deferred lease incentives that were substantially offset by restaurant closure costs. The decrease in occupancy costs was further offset by the impact of a net additional 56 operating weeks in 2014 as compared to 2013. As a percentage of revenues, occupancy costs remained flat at 6.8% for the thirteen weeks ended June 29, 2014 as compared to the thirteen weeks ended June 30, 2013. General and Administrative. General and administrative expenses increased by $0.1 million, or 1.3%, to $5.9 million for the thirteen weeks ended June 29, 2014, as compared to $5.8 million for the thirteen weeks ended June 30, 2013. The increase in expense was attributable to higher compensation costs partially offset by a decrease in professional fees. As a percentage of revenues, general and administrative expenses increased to 5.7% for the thirteen weeks ended June 29, 2014 as compared to 5.5% for the thirteen weeks ended June 30, 2013 due mainly to the deleveraging resulting from the decrease in comparable sales during the quarter. Restaurant Pre-opening Costs. Pre-opening costs increased by approximately $0.1 million, to $0.7 million for the thirteen weeks ended June 29, 2014, as compared to $0.6 million for the thirteen weeks ended June 30, 2013. Year over year changes in pre-opening costs are driven by the timing and number of restaurant openings in a given period. During the thirteen weeks ended June 29, 2014, we opened one restaurant and had three additional restaurants under construction. During the thirteen weeks ended June 30, 2013, we opened one restaurant and had five additional restaurants under construction. Depreciation and Amortization. Depreciation and amortization expenses remained flat at $5.0 million for the thirteen weeks ended June 29, 2014 as compared to the thirteen weeks ended June 30, 2013. As a percentage of revenues, depreciation and amortization expenses increased to 4.8% for the thirteen weeks ended June 29, 2014 as compared to 4.7% for the thirteen weeks ended June 30, 2013. The increase, as a percentage of revenues, was due to the deleveraging resulting from the decrease in comparable sales during the quarter. Net Interest Expense. Net interest expense decreased slightly to $0.2 million for the thirteen weeks ended June 29, 2014. This decrease was due to lower average outstanding debt during the thirteen weeks ended June 29, 2014 as compared to the same period in the prior year. Income Taxes. Income tax expense was $1.4 million, or 25.5% of income before income taxes, for the thirteen weeks ended June 29, 2014 as compared to $1.7 million, or 27.8% of income before income taxes, for the thirteen weeks ended June 30, 2013. The decrease in tax expense as a percentage of income before income taxes was due to the relative impact of the general business credits on lower income before income taxes for the thirteen weeks ended June 29, 2014 as compared to the thirteen weeks ended June 30, 2013. - 12 --------------------------------------------------------------------------------- Table of Contents Twenty-Six Weeks Ended June 29, 2014 Compared to the Twenty-Six Weeks Ended June 30, 2013 The following table sets forth, for the periods indicated, our consolidated statements of operations both on an actual basis and expressed as a percentage of revenues. Twenty-Six Weeks Ended June 29, % of June 30, % of 2014 Revenues 2013 Revenues Change % Change (dollars in thousands) Revenues $ 207,103 100 % $ 208,685 100 % $ (1,582 ) (0.8 )% Cost and expenses: Cost of sales 53,761 26.0 % 54,015 25.9 % (254 ) (0.5 )% Labor 73,259 35.4 % 73,464 35.2 % (205 ) (0.3 )% Operating 33,078 16.0 % 32,708 15.7 % 370 1.1 % Occupancy 14,468 7.0 % 14,006 6.7 % 462 3.3 % General and administrative expenses 11,648 5.6 % 11,695 5.6 % (47 ) (0.4 )% Restaurant preopening costs 1,026 0.5 % 1,259 0.6 % (233 ) (18.5 )% Depreciation and amortization 10,045 4.9 % 9,831 4.7 % 214 2.2 % Total costs and expenses 197,285 95.3 % 196,978 94.4 % 307 0.2 % Income from operations 9,818 4.7 % 11,707 5.6 % (1,889 ) (16.1 )% Net interest expense 492 0.2 % 601 0.3 % (109 ) (18.1 )% Income before income taxes 9,326 4.5 % 11,106 5.3 % (1,780 ) (16.0 )% Income tax expense 2,477 1.2 % 3,145 1.5 % (668 ) (21.2 )% Net income $ 6,849 3.3 % $ 7,961 3.8 % $ (1,112 ) (14.0 )% Certain percentage amounts may not sum due to rounding. Revenues. Revenues decreased $1.6 million, or 0.8%, to $207.1 million for the twenty-six weeks ended June 29, 2014, as compared to $208.7 million for the twenty-six weeks ended June 30, 2013. Comparable restaurant revenues decreased 5.0%, or $9.6 million, which was driven by a 6.9% decrease in guest counts. Partially offsetting the decrease in comparable restaurant revenues and guest counts was a net additional 105 operating weeks provided by eight company owned restaurants opened in 2013 and one restaurant opened in 2014, less the operating weeks of three restaurant closures in the first twenty-six weeks of both 2014 and 2013. Average check for the first twenty-six weeks of 2014 increased 2.4% as compared to the same period in the prior year. We consider a restaurant to be part of the comparable revenue base in the first full quarter following the eighteenth month of operations. For our BRAVO! brand, restaurant revenues decreased $5.1 million, or 6.3%, to $76.2 million for the twenty-six weeks ended June 29, 2014 as compared to $81.3 million for the twenty-six weeks ended June 30, 2013. Comparable revenues for the BRAVO! brand restaurants decreased 5.8%, or $4.4 million, to $73.3 million for the twenty-six weeks ended June 29, 2014 as compared to $77.7 million for the twenty-six weeks ended June 30, 2013. This decrease was due to a decrease in guest counts partially offset by an increase in average check. Revenues for BRAVO! brand restaurants not included in the comparable revenue base decreased $0.7 million to $2.9 million for the twenty-six weeks ended June 29, 2014 as compared to $3.6 million for the twenty-six weeks ended June 30, 2013. At June 29, 2014, there were 45 BRAVO! restaurants included in the comparable revenue base and two BRAVO! restaurants not included in the comparable revenue base. For our BRIO brand, restaurant revenues increased $3.6 million, or 2.8%, to $130.8 million for the twenty-six weeks ended June 29, 2014 as compared to $127.2 million for the twenty-six weeks ended June 30, 2013. Comparable revenues for the BRIO brand restaurants decreased 4.5%, or $5.2 million, to $110.3 million for the twenty-six weeks ended June 29, 2014 as compared to $115.5 million for the twenty-six weeks ended June 30, 2013. This decrease was due to a decrease in guest counts and a slight decrease in average check during the first twenty-six weeks of 2014. Revenues for BRIO brand restaurants not included in the comparable revenue base increased $8.8 million to $20.5 million for the twenty-six weeks ended June 29, 2014 as compared to $11.8 million for the twenty-six weeks ended June 30, 2013. At June 29, 2014, there were 49 BRIO restaurants included in the comparable revenue base and nine BRIO restaurants not included in the comparable revenue base. Cost of Sales. Cost of sales decreased approximately $0.2 million, or 0.5%, to $53.8 million for the twenty-six weeks ended June 29, 2014 as compared to $54.0 million for the twenty-six weeks ended June 30, 2013. The decrease was primarily due to - 13 --------------------------------------------------------------------------------- Table of Contents the decrease in revenues caused by the decrease in comparable sales and the closure of three company owned restaurants in the first twenty-six weeks of both 2014 and 2013; partially offset by a net additional 105 operating weeks in 2014 as compared to 2013. As a percentage of revenues, cost of sales increased to 26.0% for the twenty-six weeks ended June 29, 2014 as compared to 25.9% for the twenty-six weeks ended June 30, 2013. The percentage increase was primarily due to an increase in commodity costs in 2014 over 2013 which was mostly offset by a menu price increase over the same period. As a percentage of revenues, food costs increased 0.2% to 21.4% for the twenty-six weeks ended June 29, 2014 as compared to 21.2% for the twenty-six weeks ended June 30, 2013. Beverage costs, as a percentage of revenues, decreased 0.2% to 4.5% for the twenty-six weeks ended June 29, 2014 as compared to 4.7% for the twenty-six weeks ended June 30, 2013. Labor Costs. Labor costs decreased approximately $0.2 million, or 0.3%, to $73.3 million for the twenty-six weeks ended June 29, 2014, as compared to $73.5 million for the twenty-six weeks ended June 30, 2013. As a percentage of revenues, labor costs increased to 35.4% for the twenty-six weeks ended June 29, 2014 as compared to 35.2% for the twenty-six weeks ended June 30, 2013, primarily due to the deleveraging resulting from the decrease in our comparable revenues, offset by efficiencies in hourly labor. Operating Costs. Operating costs increased $0.4 million, or 1.1%, to $33.1 million for the twenty-six weeks ended June 29, 2014, as compared to $32.7 million for the twenty-six weeks ended June 30, 2013. This increase was primarily due to a net additional 105 operating weeks in 2014 as compared to 2013 and increases in utilities (gas) and insurance expense. As a percentage of revenues, operating costs increased to 16.0% for the twenty-six weeks ended June 29, 2014 as compared to 15.7% for the twenty-six weeks ended June 30, 2013. The increase as a percentage of revenues was primarily related to higher repairs and maintenance and utilities, as well as the deleveraging from the decrease in comparable sales in the first twenty-six weeks of 2014 as compared to the same period in the prior year. Occupancy Costs. Occupancy costs increased $0.5 million, or 3.3%, to $14.5 million for the twenty-six weeks ended June 29, 2014, as compared to $14.0 million for the twenty-six weeks ended June 30, 2013. This increase was primarily due to a net additional 105 operating weeks in 2014 as compared to 2013, partially offset by the net effect of restaurant closures resulting in the accelerated recognition of deferred lease incentives that exceeded restaurant closure costs. As a percentage of revenues, occupancy costs increased to 7.0% for the twenty-six weeks ended June 29, 2014 as compared to 6.7% for the twenty-six weeks ended June 30, 2013 due to the deleveraging from the decrease in comparable sales in the first twenty-six weeks of 2014 as compared to the same period in the prior year. General and Administrative. General and administrative expenses decreased by $0.1 million, or 0.4%, to $11.6 million for the twenty-six weeks ended June 29, 2014, as compared to $11.7 million for the twenty-six weeks ended June 30, 2013. The decrease in general and administrative expenses was attributable to lower travel and employee relocation costs as compared to the prior period. As a percentage of revenues, general and administrative expenses remained flat at 5.6% for the twenty-six weeks ended June 29, 2014 as compared to the twenty-six weeks ended June 30, 2013. Restaurant Pre-opening Costs. Pre-opening costs decreased by approximately $0.3 million, to $1.0 million for the twenty-six weeks ended June 29, 2014 as compared to $1.3 million for the twenty-six weeks ended June 30, 2013. Year over year changes in pre-opening costs are driven by the timing and number of restaurant openings in a given period. During the first twenty-six weeks of 2014, we opened one restaurant and had three additional restaurants under construction. In the first twenty-six weeks of 2013, we opened three restaurants and had five additional restaurants under construction. Depreciation and Amortization. Depreciation and amortization expenses increased $0.2 million, to $10.0 million for the twenty-six weeks ended June 29, 2014 as compared to $9.8 million for the twenty-six weeks ended June 30, 2013. As a percentage of revenues, depreciation and amortization expenses increased to 4.9% for the twenty-six weeks ended June 29, 2014 as compared to 4.7% for the twenty-six weeks ended June 30, 2013. The increase, as a percentage of revenues, was due to the deleveraging resulting from the decrease in comparable sales during the first twenty-six weeks of 2014, while the increase in dollars was due to the growth in the number of our restaurants. Net Interest Expense. Net interest expense decreased $0.1 million to $0.5 million for the twenty-six weeks ended June 29, 2014 as compared to $0.6 million for the twenty-six weeks ended June 30, 2013. This decrease was due to lower average outstanding debt during the first twenty-six weeks of 2014 as compared to the same period in the prior year. Income Taxes. Income tax expense was $2.5 million, or 26.6% of income before income taxes, for the twenty-six weeks ended June 29, 2014 as compared to $3.1 million, or 28.3% of income before income taxes, for the twenty-six weeks ended June 30, 2013. The decrease in tax expense as a percentage of income before income taxes was due to the relative impact of the general business credits on lower income before income taxes for the twenty-six weeks ended June 29, 2014 compared to the twenty-six weeks ended June 30, 2013. - 14 --------------------------------------------------------------------------------- Table of Contents Liquidity Our principal sources of cash have been net cash provided by operating activities and borrowings under our senior credit facilities. As of June 29, 2014, we had approximately $5.8 million in cash and cash equivalents and approximately $37.6 million of availability under our senior credit facilities (after giving effect to $2.4 million of outstanding letters of credit at June 29, 2014). Our need for capital resources is driven by our restaurant expansion plans, on-going maintenance of our restaurants, investment in our corporate infrastructure 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 over the next twelve months. Consistent with many other restaurant and retail chain store operations, we use operating lease arrangements for the majority of our restaurant locations. We believe that these operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. Currently, operating lease obligations are not reflected as indebtedness on our consolidated balance sheet. The use of operating lease arrangements will impact our capacity to borrow money under our senior credit facilities. However, restaurant real estate operating leases are expressly excluded from the restrictions under our senior credit facilities related to the incurrence of funded indebtedness. Our liquidity may be adversely affected by a number of factors, including a decrease in guest traffic or average check per guest due to changes in economic conditions, as described in our 2013 Annual Report on Form 10-K under the heading "Risk Factors." The following table presents a summary of our cash flows for the twenty-six weeks ended June 29, 2014 and June 30, 2013 (dollars in thousands): Twenty-Six Weeks Ended, June 29, June 30, 2014 2013 Net cash provided by operating activities $ 20,843 $ 14,228 Net cash used in investing activities (11,128 ) (14,149 ) Net cash used in financing activities (11,559 ) (7,935 ) Net decrease in cash and cash equivalents (1,844 ) (7,856 ) Cash and cash equivalents at beginning of period 7,640 13,717 Cash and cash equivalents at end of period $ 5,796 $ 5,861 Operating Activities. Net cash provided by operating activities was $20.8 million for the twenty-six weeks ended June 29, 2014, compared to net cash provided by operating activities of $14.2 million for the twenty-six weeks ended June 30, 2013. The increase in net cash provided by operating activities in the first twenty-six weeks of 2014 was due to repayment of tenant allowances and the timing of rent payments in the first twenty-six weeks ended June 30, 2013. Cash receipts from operations for the first twenty-six weeks of 2014 and 2013 were, including the net redemption of gift cards, $203.6 million and $205.3 million, respectively. Cash expenditures from operations during the first twenty-six weeks of 2014 and 2013 were $186.4 million and $194.0 million, respectively. Investing Activities. Net cash used in investing activities was $11.1 million for the twenty-six weeks ended June 29, 2014, compared to $14.1 million for the twenty-six weeks ended June 30, 2013. We invest cash to purchase property and equipment related to our restaurant expansion plans. The decrease in spending was related to the timing of spending related to our new restaurants as well as the number of restaurants that were opened and under construction during 2014 versus 2013. During the first twenty-six weeks of 2014, we opened one restaurant and had three additional restaurants under construction. In the first twenty-six weeks of 2013, we opened three restaurants and had five additional restaurants under construction. Financing Activities. Net cash used in financing activities was $11.6 million for the twenty-six weeks ended June 29, 2014, compared to net cash used in financing activities of $7.9 million for the twenty-six weeks ended June 30, 2013. For the twenty-six weeks ended June 29, 2014, $4.9 million was used to pay down our term debt and $6.4 million was used to repurchase Company shares as part of our stock buyback program. For the twenty-six weeks ended June 30, 2013, $6.9 million was used to pay down our term debt and $1.0 million was used to repurchase Company shares as part of our stock buyback program. As of June 29, 2014, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts. - 15 --------------------------------------------------------------------------------- Table of Contents Capital Resources Future Capital Requirements. Our capital requirements are primarily dependent upon the pace of our real estate development program and resulting new restaurants. Our real estate development program is dependent upon many factors, including economic conditions, real estate markets, site locations and the nature of lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance and capacity additions in our existing restaurants as well as information technology and other general corporate capital expenditures. We anticipate that each new restaurant on average will require a total cash investment of $1.5 million to $2.5 million (net of estimated lease incentives). We expect to spend approximately $0.4 million to $0.5 million per restaurant for cash pre-opening costs. The projected cash investment per restaurant is based on historical averages. We currently estimate capital expenditures, net of estimated lease incentives, for the remainder of 2014 to be in the range of approximately $15.0 million to $17.0 million, for a total of $22.0 million to $24.0 million for the year. This is primarily related to the opening of five additional restaurants in the last two quarters of 2014, the start of construction of restaurants to be opened in early 2015, as well as normal maintenance related capital expenditures relating to our existing restaurants. In conjunction with these restaurant openings, the Company anticipates expensing approximately $2.5 million to $3.0 million in pre-opening costs for the remainder of 2014 for a total of $3.5 million to $4.0 million for the year. Current Resources. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverage and supplies, therefore reducing the need for incremental working capital to support growth. We had a net working capital deficit of $35.8 million at June 29, 2014, compared to a net working capital deficit of $26.2 million at December 29, 2013. In connection with our initial public offering, we entered into a credit agreement with a syndicate of financial institutions with respect to our senior credit facilities. Our senior credit facilities provide for (i) a $45.0 million term loan facility, maturing in 2015, and (ii) a revolving credit facility under which we may borrow up to $40.0 million (including a sublimit cap of up to $10.0 million for letters of credit and up to $10.0 million for swing-line loans), maturing in 2015. Under the credit agreement, we are also entitled to incur additional incremental term loans and/or increases in the revolving credit facility of up to $20.0 million if no event of default exists and certain other requirements are satisfied. Our revolving credit facility is (i) jointly and severally guaranteed by each of our existing or subsequently acquired or formed subsidiaries, (ii) secured by a first priority lien on substantially all of our subsidiaries' tangible and intangible personal property, (iii) secured by a first priority security interest on all owned real property and (iv) secured by a pledge of all of the capital stock of our subsidiaries. Our credit agreement also requires us to meet financial tests, including a maximum consolidated total leverage ratio, a minimum consolidated fixed charge coverage ratio and a maximum consolidated capital expenditures limitation. At June 29, 2014, we were in compliance with our applicable financial covenants. Additionally, our credit agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements and customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, defaults under other material debt, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the senior credit facilities to be in full force and effect, and a change of control of our business. On October 9, 2012, we entered into an amendment to our credit agreement. The amendment eliminated dollar restrictions in paying dividends, distributions to shareholders, or repurchasing of our common share subject to the defined leverage ratio. Borrowings under our senior credit facilities bear interest at our option of either (i) the Alternate Base Rate (as such term is defined in the credit agreement) plus the applicable margin of 1.75% to 2.25% or (ii) at a fixed rate for a period of one, two, three or six months equal to LIBOR plus the applicable margin of 2.75% to 3.25%. The applicable margins with respect to our senior credit facilities vary from time to time in accordance with agreed upon pricing grids based on our consolidated total leverage ratio. Swing-line loans under our senior credit facilities bear interest only at the Alternate Base Rate plus the applicable margin. Interest on loans based upon the Alternate Base Rate are payable on the last day of each calendar quarter in which such loan is outstanding. Interest on loans based on LIBOR is payable on the last day of the applicable LIBOR period and, in the case of any LIBOR period greater than three months in duration, interest is payable quarterly. In addition to paying any outstanding principal amount under our senior credit facilities, we are required to pay an unused facility fee to the lenders equal to 0.50% to 0.75% per annum on the aggregate amount of the unused revolving credit facility, excluding swing-line loans, commencing on October 26, 2010, payable quarterly in arrears. As of June 29, 2014, we had an outstanding principal balance of approximately $10.8 million on our term loan facility and no outstanding balance on our revolving credit facility. - 16 --------------------------------------------------------------------------------- Table of Contents Based on our forecasts, management believes that we will be able to maintain compliance with our applicable financial covenants for the next twelve months. Management believes that the cash provided by operating activities as well as available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs over the same period. OFF-BALANCE SHEET ARRANGEMENTS As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities ("VIEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 29, 2014, we were not involved in any VIE transactions and did not otherwise have any off-balance sheet arrangements. CRITICAL ACCOUNTING POLICIES There have been no material changes to our critical accounting policies from what was previously reported in our 2013 Annual Report on Form 10-K. Accounting Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The pronouncement is effective for annual and interim reporting periods beginning after December 15, 2016. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact this guidance will have on our financial statements as well as the expected adoption method. In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operation has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This update also expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. This update is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We adopted the provisions of ASU 2014-08 during the thirteen weeks ended June 29, 2014; the adoption of this standard has not had an impact on our Condensed Consolidated Financial Statements. - 17 --------------------------------------------------------------------------------- Table of Contents |