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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the fiscal year ended December 31, 2006
or
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the transition period from to .
Commission File Number: 000-24743
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BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
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Minnesota No. 31-1455915
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1600 Utica Avenue South, Suite 700, Minneapolis, MN 55416
(Address of Principal Executive Offices)
Registrant's telephone number (952) 593-9943
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Securities registered under Section 12(b) of the Exchange Act:
Common Stock, no par value
Securities registered under Section 12(g) of the Exchange Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the voting stock held by non-affiliates was
$244 million based on the closing sale price of the Company's Common Stock as
reported on the NASDAQ Stock Market on June 23, 2006.
The number of shares outstanding of the registrant's common stock as of
March 1, 2007: 8,716,385 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PART I Page
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Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Consolidated Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53
Item 9A. Controls and Procedures 53
PART III
Item 10. Directors, Executive Officers and Corporate Governance 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions, and Director Independence 55
Item 14. Principal Accountant Fees and Services 55
PART IV
Item 15. Exhibits and Financial Statement Schedules 56
Signatures 57
2
PART I
ITEM 1. BUSINESS
General
References in this document to "Buffalo Wild Wings," "company," "we," "us"
and "our" refer to the business of Buffalo Wild Wings, Inc. and our
subsidiaries. We maintain an Internet website address at
www.buffalowildwings.com. We make available free of charge through our website
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as they are reasonably
available after these materials are electronically filed with or furnished to
the Securities and Exchange Commission, ("SEC"). These materials are also
accessible on the SEC's web site at www.sec.gov. The public may read and copy
any materials we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information for the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
We are an established and growing owner, operator and franchisor of
restaurants featuring a variety of boldly-flavored, made-to-order menu items
including our Buffalo, New York-style chicken wings spun in any of our signature
sauces. Our restaurants create an inviting neighborhood atmosphere that includes
an extensive multi-media system, a full bar and an open layout, which appeals to
sports fans and families alike. Our concept offers elements of the quick casual
and casual dining restaurant concepts featuring a flexible service model that
allows our guests to choose among convenient dining options such as quick casual
counter service, casual dining table service or take-out. Our award-winning food
and inviting atmosphere, combined with our guests' ability to customize their
dining experience, drives guest visits and loyalty.
The widespread appeal of our concept establishes our restaurants as a
neighborhood destination with 429 restaurants in 37 states as of December 31,
2006. Our menu, competitively priced between the quick casual and casual dining
segments, features fresh chicken wings and other items including boneless wings,
chicken tenders, popcorn shrimp, specialty hamburgers and sandwiches, wraps,
Buffalito(R) soft tacos, appetizers and salads. Our made-to-order menu items are
enhanced by the bold flavor profile of our signature sauces, ranging from mild
Teriyaki(TM) to Blazin'(R). Our restaurants serve approximately 20 domestic and
imported beers on tap, including several local or regional micro-brews and a
wide selection of bottled beers, wines, and liquor. The inviting and energetic
environment of our restaurants is complemented by furnishings that can be easily
rearranged to accommodate parties of various sizes. Our guests have the option
of watching sporting events or other popular programs on our projection screens
and approximately 40 additional televisions, playing Buzztime(R) Trivia or video
games. The open layout of our restaurants offers dining and bar areas that
provide distinct seating choices for sports fans and families. Our unique
service model, which provides the flexibility of ordering at the counter or
table, allows our guests to customize their Buffalo Wild Wings(R) experience to
meet the different time demands or service preferences of a workday lunch, a
dine-in dinner, a take-out meal, an afternoon or evening enjoying a sporting
event or a late-night craving.
We have established our brand through coordinated marketing and
operational execution that ensures brand recognition and the quality and
consistency of our concept. These efforts include marketing programs and
irreverent, award-winning advertising to support both our company-owned and
franchised restaurants. We also prominently feature our trademark Buffalo
insignia and yellow and black colors in our restaurants and brand our company
materials. Our concept is further strengthened by our emphasis on operational
excellence supported by stringent operating guidelines and comprehensive
employee training in both company-owned and franchised restaurants.
Buffalo Wild Wings was founded in 1982 by Jim Disbrow and Scott Lowery at
a location near The Ohio State University. Our original name was Buffalo Wild
Wings & Weck(R) and we became more popularly known as bw-3(R). In 1991, we began
our franchising program. In November 2003, we completed an initial public
offering and became a publicly-held company.
Our Concept and Business Strategy
Our goal is to continue to grow and develop the Buffalo Wild Wings(R)
Grill & Bar concept into a leading national restaurant chain. To do so, we plan
to execute the following strategies:
o Open restaurants in new and existing markets;
o Offer boldly-flavored menu items with broad appeal;
o Create an inviting, neighborhood atmosphere;
o Enable our guests to customize their dining experience;
o Continue to strengthen the Buffalo Wild Wings brand;
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o Focus on operational excellence; and
o Increase same-store sales and average unit volumes.
Growth Strategy
Our growth strategy involves opening company-owned and franchised
restaurants in both new and existing markets. We believe that we have
established the necessary infrastructure and control systems to support our
disciplined growth strategy and that our concept can support over 1,000
restaurants in the United States. We have developed procedures for identifying
new market opportunities, determining our company and franchising strategy in
those markets and identifying sites for company-owned and franchised
restaurants. Our growth strategy for the near-term projects a mix of
approximately one-third company-owned restaurants and approximately two-thirds
franchised restaurants.
We intend to build additional company-owned restaurants in both new and
existing markets. In most of our existing markets, we plan to continue to
develop new company-owned restaurants until a market is penetrated to a point
that will enable us to gain marketing and cost efficiencies. We intend to enter
new markets by opening several restaurants within a one-year period to quickly
build our brand awareness. We intend to grow our franchise system through the
development of new restaurants by existing and new franchisees, focusing on
multiple-unit area development agreements.
The Buffalo Wild Wings Menu
Our restaurants feature a variety of menu items including our Buffalo, New
York-style chicken wings spun in one of our signature sauces (from sweet to
screamin' hot: Teriyaki(TM), Sweet BBQ(TM), Mild(TM), Medium(TM), Spicy
Garlic(TM), Caribbean Jerk(TM), Hot BBQ(TM), Hot(TM), Wild(R) and Blazin'(R) ,
and our newest sauces: Parmesan Garlic(TM), Honey BBQ(TM), Asian Zing(TM), and
Mango Habanero(TM)). Our fresh chicken wings can be ordered in sizes ranging
from six to 100 wings, with larger orders available for parties. Our sauces
complement and distinguish our chicken wings to create a bold flavor profile for
our guests. In addition to chicken wings, our menu features a wide variety of
food items including boneless wings, chicken tenders, popcorn shrimp, specialty
hamburgers and sandwiches, wraps, Buffalito soft tacos, finger foods and salads.
We also provide a 12 & Under Menu for kids.
Our restaurants feature a full bar which offers an extensive selection of
approximately 20 domestic and imported beers on tap as well as bottled beers,
wine and liquor. Additionally, in order to continually improve our menu, we have
a research and development department that tests and implements new menu items.
Our goal is to balance the established menu offerings that appeal to our loyal
guests with new menu items that increase guest frequency and attract new guests.
Restaurant Atmosphere and Layout
Our restaurants are designed to provide an inviting neighborhood
atmosphere and allow our guests the flexibility to customize their dining
experience. The inviting and energetic environment of our restaurants is created
using furnishings that can be easily rearranged to accommodate parties of
various sizes. Our restaurants also feature distinct dining and bar areas with
select restaurants having patio seating.
We strategically place approximately 40 televisions and up to seven
projection screen televisions throughout the restaurant to allow for easy
viewing. These televisions, combined with our sound system, Buzztime(R) Trivia
and assorted video games, provide a source of entertainment for our guests and
reinforce the energetic nature of our concept. We tailor the content and volume
of our video and audio programming to reflect our guests' tastes. We believe the
design of our restaurants enhances our guests' experiences, drives repeat visits
and solidifies the broad appeal of our concept.
All of our menu items are made-to-order and are available for take-out,
which approximated 16% of restaurant sales for company-owned restaurants in
2006. Many of our restaurants have separate parking spots for our take-out
guests.
Current Restaurant Locations
As of December 31, 2006, we owned or franchised 429 Buffalo Wild Wings
restaurants in 37 states, of which 139 were company-owned and 290 were
franchised. In 2007, we plan to achieve over 15% unit growth and open over 20
new company-owned restaurants.
Our company-owned restaurants range in size from 4,000 to 7,600 square
feet, with an average of approximately 5,600 square feet for restaurants that
have opened in the last three years. We anticipate that future restaurants will
range in size from 4,500 square feet to 6,400 square feet with an average cash
investment per restaurant of approximately $1.2 million, excluding preopening
expenses of approximately $180,000. From time to time, we expect that our
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restaurants may be smaller or larger or cost more or less than our targeted
range, depending on the particular circumstances of the selected site or market.
Also, from time to time, we expect to purchase the building or the land and
building for certain restaurants, in which case the cash investment would be
significantly higher.
Our restaurants are typically open on a daily basis from 11 a.m. to 2 a.m.
Closing times vary depending on the day of the week and city and state
regulations governing the sale of alcoholic beverages. Our franchise agreements
require franchisees to operate their restaurants for a minimum of 12 hours a
day.
Site Selection and Development
Our site selection process is integral to the successful execution of our
growth strategy. We have processes for identifying, analyzing and approving new
markets, as defined by the A.C. Nielson designated market areas in the United
States. In selecting designated market areas, we collect and review restaurant
industry data relating to restaurant sales, spending on food away from home and
expected restaurant growth in the market, as well as market demographics,
population data and relative media costs for radio and television advertising.
Once a market is identified, we use a trade area and site selection evaluation
system, which has been customized for the requirements of the Buffalo Wild Wings
system, to assist in identifying suitable trade areas within that market and
suitable sites within identified trade areas. Criteria examined to determine
appropriate trade areas include the presence of a casual dining corridor,
projected growth within the trade area, the locations of key big box retailers
and multi-screen movie theaters in the neighborhood, key demographics and
population density, drive time and trade area analysis and other quantitative
and qualitative measures. Once a suitable trade area is identified, we examine
site-specific details including visibility, signage, access and parking. Final
approval by two or more members of our executive management team is required for
each company-owned site. At least one senior franchise executive reviews each
franchise site.
Marketing and Advertising
We have created a unique marketing program designed to communicate a
distinctive and consistent brand that differentiates Buffalo Wild Wings from our
competitors and that showcases our food in a fun and energetic atmosphere. These
efforts include marketing campaigns and irreverent, award-winning advertising to
support both our company-owned and franchised restaurants. The primary goal of
these efforts is to build brand awareness throughout the United States. In
addition, advertising campaigns are also designed to: i) drive positive
same-store sales through additional visits by our existing guests and visits by
new guests, ii) increase margins, iii) increase average order size, and iv)
support strong restaurant openings.
Marketing Campaigns. Our primary marketing campaigns focus on a particular
menu item, day or daypart in an attempt to drive traffic and build brand
awareness. For example, in 2006 we developed a campaign to promote the rollout
of our new "Ribs & Combos" menu items. Our secondary marketing campaigns focus
on reaching beyond the core Buffalo Wild Wings guest. Given our strategy to be a
neighborhood destination, community marketing is also a key to developing brand
awareness in each market. Our restaurants actively sponsor local sporting teams
and sporting events to drive guest traffic associated with those activities.
Advertising. Our media advertising focuses on positioning the Buffalo Wild
Wings brand as an inviting neighborhood dining location. Our commercials, print
advertisements and radio spots are irreverent by design and have been recognized
in the restaurant and advertising industries for their creativity.
Franchise Involvement. System-wide campaigns and promotions are developed
and implemented with input from the Buffalo Wild Wings National Advertising
Advisory Board. This volunteer franchisee board is elected by franchisees
annually and meets regularly to review marketing strategies, provide input on
advertising messages and vendor co-op programs, and discuss marketing
objectives.
Operations
Our management team strives for operational excellence by recruiting,
training and supporting the highest quality management teams and employees and
through the implementation of operational best practices within our restaurants.
Restaurant Management. Our management structure consists of a general
manager, one assistant general manager and up to three other managers depending
on sales volume of the restaurant. We utilize regional managers to oversee our
general managers, ensuring that they receive the training and support necessary
to effectively operate their restaurants. Currently, we have 16 regional
managers who oversee four to nine restaurants each. As we expand geographically,
we expect to add additional regional managers. We have five Directors of
Operations who lead the Regional Managers.
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Kitchen Operations. An important aspect of our concept is the efficient
design, layout and execution of our kitchen operations. Due to the relatively
simple preparation of our menu items, the kitchen consists of fryers, grill and
food prep stations that are arranged assembly-line style for maximum
productivity. Given our menu and kitchen design, we are able to staff our
kitchen with hourly employees who require only basic training before reaching
full productivity. Additionally, we do not require the added expense of an
on-site chef. The ease and simplicity of our kitchen operations allows us to
achieve our goal of preparing casual dining quality food with minimal wait
times. We also believe the ease of our kitchen operations is a significant
factor in attracting franchisees.
Training. We provide extensive training for management and hourly
employees at company-owned restaurants, with the goal of providing an excellent
guest experience based on our service, food preparation and facilities
maintenance. Further, we require each franchisee to send their general manager,
assistant manager and "control person" to attend our management training
program.
Managers of our company-owned restaurants are trained using a two-part
process. This includes hands-on education during a five-week training period at
one of our certified training restaurants, coupled with an additional one-week
management skills class. During this training period, our manager trainees will
work in every aspect of the business, including line cook, server and manager.
Our hourly employees in company-owned restaurants complete a comprehensive
position certification process. A station certification process requires 16 to
20 hours of hands-on and classroom-style training. In addition, our hourly
employees are encouraged to participate in an on-the-job training program called
the Wing Certified Trainer, or WCT, program that utilizes both detailed training
guides and hands-on instruction by restaurant management. The certification
process requires that the employee have a high level of knowledge of all 10
components of restaurant operations. These 10 components represent the six
different job positions in our restaurant: cashier and greeter, bartender,
server, expedite station, grill and southwest station, and chip and shake
station. Monetary incentives and additional benefits are used to encourage
employees to participate in this certification process. Our objective is to have
at least four WCTs at each company-owned and franchised restaurant.
Career Opportunities. We attempt to motivate and retain our field
operations team by providing them with opportunities for increased
responsibilities and advancement. In addition, we offer performance-based cash
incentives tied to sales, profitability and qualitative measures such as mystery
shop scores. It is our preference to promote from within whenever possible.
Recruiting. We actively recruit and select individuals who demonstrate
enthusiasm and dedication and who share our passion for high quality guest
service delivered through teamwork and commitment. To attract high caliber
managers, we have developed a competitive compensation plan that includes a base
salary and an attractive benefits package, including participation in a
management incentive plan that rewards managers for achieving performance
objectives.
Food Preparation, Quality Control and Purchasing
We strive to maintain high quality standards. Our systems are designed to
protect our food supply throughout the preparation process. We provide detailed
specifications to suppliers for our food ingredients, products and supplies. Our
restaurant managers are certified in a comprehensive food safety and sanitation
course, ServSafe, developed by the National Restaurant Association Educational
Foundation.
We negotiate directly with independent suppliers for our supply of food
and paper products. We use members of UniPro Food Services, Inc., a national
cooperative of independent food distributors, to distribute these products from
the suppliers to our restaurants. To maximize our purchasing efficiencies and
obtain the lowest possible prices for our ingredients, products and supplies,
our purchasing team negotiates prices based on system-wide usage for both
company-owned and franchised restaurants. We believe that competitively priced,
high quality alternative manufacturers, suppliers, growers and distributors are
available should the need arise.
We utilize T. Marzetti company for the production of our signature sauces.
They maintain sufficient inventory levels to ensure consistent supply to our
restaurants. We have a confidentiality agreement with Marzetti which prevents
our sauces from being supplied to, or manufactured for, anyone else.
Fresh chicken wings are an important component of our cost of sales.
Prices are generally based on the underlying commodity price of chicken wings
plus additional costs for handling and distribution. Fresh chicken wings
accounted for approximately 24%, 27%, and 34% of our cost of sales in 2006,
2005, and 2004, respectively. We ensure consistent supply of high quality
chicken wings by utilizing four to six suppliers, with Peco Foods, Inc.
currently accounting for approximately 33% of the total system-wide supply.
Given our multiple suppliers and the commodity nature of fresh chicken wings, we
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believe we have sufficient supplier flexibility to maintain a consistent chicken
wing supply. We regularly review our buying procedures to ensure quality and
cost optimization.
Restaurant Franchise Operations
Our concept continues to attract a strong group of franchisees, many of
whom have substantial prior restaurant operations experience. Our franchisees
execute a separate franchise agreement for each restaurant opened, typically
providing for a 15 to 20-year initial term, with an opportunity to enter into a
renewal franchise agreement subject to certain conditions. Our agreement
currently requires franchisees to pay an initial franchise fee of $42,500 for
the first restaurant opened and $32,500 for each additional restaurant they
open. The $32,500 fee is reduced to $12,500 if the additional restaurant is in
the designated area of the franchisee's existing restaurant. If a franchisee has
entered into an area development agreement with us, the initial franchise fee is
$42,500 for the first restaurant, $32,500 for the second restaurant and $27,500
for each subsequent restaurant. These amounts are reduced to $32,500 for the
first restaurant and $12,500 for each subsequent restaurant if the franchisee is
an existing area developer signing an additional area development agreement. If
the franchisee is an existing franchisee that subsequently signs an area
development agreement, the franchise fee is $32,500 for the first restaurant and
$22,500 for each subsequent restaurant.
Franchisees also pay us a royalty fee of 5.0% of their restaurant sales.
Franchise agreements typically allow us to assess franchisees an advertising fee
in the amount of 3.5% of their restaurant sales, of which 3.0% was contributed
to our Advertising Fund in 2006 and the remaining 0.5% was spent directly by the
franchisee in the applicable local market. Our current form of franchise
agreement permits us to increase the required contribution to the Advertising
Fund by 0.5% once every three years. The amount contributed to the Advertising
Fund increased from 2.5% to 3.0% on December 26, 2005.
All of our franchise agreements require that each franchised restaurant be
operated in accordance with our defined operating procedures, adhere to the menu
established by us, meet applicable quality, service, health and cleanliness
standards and comply with all applicable laws. We ensure these high standards
are being followed through a variety of means including mystery shoppers and
announced and unannounced quality assurance inspections. We also employ
franchise consultants to assist our franchisees in developing profitable
operations and maintaining our operating standards. We may terminate the
franchise rights of any franchisee who does not comply with our standards and
requirements. We believe that maintaining superior food quality, an inviting and
energetic atmosphere and excellent guest service are critical to the reputation
and success of our concept; therefore, we aggressively enforce the contractual
requirements of our franchise agreements.
The area development agreement establishes the number of restaurants that
must be developed in a defined geographic area and the deadlines by which these
restaurants must open. For area development agreements covering three to seven
restaurants, restaurants are usually required to open in 12-month intervals. For
larger development agreements, the interval is typically shorter. The area
development agreement can be terminated by us if, among other reasons, the area
developer fails to open restaurants on schedule.
Management Information Systems
We have our core management information systems in place and believe they
are scalable to support our future growth plans. We utilize a standard
point-of-sale system in all of our company-owned restaurants that helps
facilitate the operation of the restaurants by recording sales, cost of sales,
labor and other operating metrics and allows managers to create various reports.
We currently are reviewing the capabilities of our current point-of-sale system
to ensure it is sufficient to support our planned expansion. Certain information
from the point-of-sale system is transferred to our headquarters on a daily
basis and is reported daily to various levels of management through email and
our corporate intranet. Franchisees are required to report sales on a daily
basis through an on-line reporting network and submit their restaurant-level
financial statements on a quarterly or annual basis.
Competition
The restaurant industry is intensely competitive. We compete on the basis
of the taste, quality and price of food offered, guest service, ambience,
location, and overall dining experience. We believe that our attractive
price-value relationship, the atmosphere of our restaurant, our flexible service
model and the quality and distinctive flavor of our food enable us to
differentiate ourselves from our competitors. We believe we compete primarily
with local and regional sports bars and casual dining and quick casual
establishments, as well as with quick service restaurants such as wing-based
take-out concepts. Many of our direct and indirect competitors are
well-established national, regional or local chains and some have substantially
greater financial and marketing resources than we do. We also compete with many
restaurant and retail establishments for site locations and restaurant
employees.
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Proprietary Rights
We own the rights to the "Buffalo Wild Wings(R)" service mark and to
certain other service marks and trademarks used in our system. We attempt to
protect our sauce recipes as trade secrets by, among other things, requiring a
confidentiality agreement with our sauce supplier and executive officers. It is
possible that competitors could develop recipes and procedures that duplicate or
closely resemble our recipes and procedures. We believe that our trademarks,
service marks and other proprietary rights have significant value and are
important to our brand-building efforts and the marketing of our restaurant
concept. We vigorously protect our proprietary rights. We cannot predict,
however, whether steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of these rights or the use by others of
restaurant features based upon, or otherwise similar to, our concept. It may be
difficult for us to prevent others from copying elements of our concept and any
litigation to enforce our rights will likely be costly and may not be
successful. Although we believe that we have sufficient rights to all of our
trademarks and service marks, we may face claims of infringement that could
interfere with our ability to market our restaurants and promote our brand. Any
such litigation may be costly and divert resources from our business. Moreover,
if we are unable to successfully defend against such claims, we may be prevented
from using our trademarks or service marks in the future and may be liable for
damages.
Government Regulation
The restaurant industry is subject to numerous federal, state and local
governmental regulations, including those relating to the preparation and sale
of food and alcoholic beverages, sanitation, public health, fire codes, zoning
and building requirements. Each restaurant requires appropriate licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and each
restaurant requires food service licenses from local health authorities. Our
licenses to sell alcoholic beverages must be renewed annually and may be
suspended or revoked at any time for cause, including violation by us or our
employees of any law or regulation pertaining to alcoholic beverage control,
such as those regulating the minimum age of employees or patrons who may serve
or be served alcoholic beverages, the serving of alcoholic beverages to visibly
intoxicated patrons, advertising, wholesale purchasing and inventory control.
The failure of a restaurant to retain liquor or food service licenses could have
a material adverse effect on our operations. In order to reduce this risk,
restaurant employees are trained in standardized operating procedures designed
to assure compliance with all applicable codes and regulations.
We and our franchisees are also subject to laws governing our
relationships with employees, including laws and regulations relating to
benefits, wages, hours, workers' compensation insurance rates, unemployment and
other taxes, working and safety conditions and citizenship or immigration
status. We may also be subject in certain states to "dram-shop" statutes, which
generally allow a person injured by an intoxicated person to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. In addition, we are subject to various state and federal
laws relating to the offer and sale of franchises and the franchisor-franchisee
relationship. In general, these laws and regulations impose specific disclosure
and registration requirements prior to the sale and marketing of franchises and
regulate certain aspects of the relationship between franchisor and franchisee.
Employees
As of December 31, 2006, we employed 7,482 employees. We have 1,113
full-time and 6,210 part-time employees working in our company-owned restaurants
and 159 employees based out of our home office or in the field. Our employees
are not covered by any collective bargaining agreement and we have never
experienced an organized work stoppage or strike. We believe that our working
conditions and compensation packages are competitive and consider our relations
with our employees to be good.
Executive Officers
The following sets forth certain information about our executive officers:
Sally J. Smith, 49, has served as our Chief Executive Officer and
President since July 1996 and as a director since August 1996. She served as our
Chief Financial Officer from 1994 to 1996. Prior to joining Buffalo Wild Wings,
she was the Chief Financial Officer of Dahlberg, Inc., the manufacturer and
franchisor of Miracle-Ear hearing aids, from 1983 to 1994. Ms. Smith began her
career with KPMG LLP, an international accounting and auditing firm. Ms. Smith
is a CPA. She serves on the board of the National Restaurant Association and is
also a board member of Alerus Financial Corporation.
Mary J. Twinem, 46, has served as our Executive Vice President, Chief
Financial Officer and Treasurer since July 1996. She served as our Controller
from January 1995 to July 1996. Ms. Twinem also served as a director on our
Board from June 2002 to September 2003. Prior to joining Buffalo Wild Wings, she
served as the Director of Finance/Controller of Dahlberg, Inc. from 1989 to
December 1994. Ms. Twinem began her career in public accounting and is a CPA.
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Kathleen M. Benning, 44, has served as our Senior Vice President,
Marketing and Brand Development since January 2002. She joined us in March 1997
as Vice President of Marketing. Prior to joining us, Ms. Benning was employed by
Nemer, Fieger & Associates, an advertising agency, from 1992 to 1997, where she
was a partner from 1994 to 1997.
Craig W. Donoghue, 45, has served as our Senior Vice President,
Information Systems since January 2003, prior to which he served as our Director
of Information Systems and later as Vice President of Information Systems from
August 1998 to January 2003. From November 1996 until August 1998, Mr. Donoghue
was a self-employed computer consultant, using the trade name of Excelsior
Information Systems. From January 1996 until November 1996, Mr. Donoghue was
Manager of Information Systems for Varitronic Systems, Inc.
Lee Sanders, 54, has served as our Senior Vice President, Development and
Franchising since January 2002. He joined us as Vice President of Franchising in
August 2001. Prior to joining us, Mr. Sanders was National Director of
Franchising of Allied Domecq Quick Service Restaurants, a franchisor of Dunkin'
Donuts, Togo's Eateries and Baskin-Robbins, from September 1998 to August 2001.
From 1988 to 1998, Mr. Sanders was a Manager of Branded Retail Systems for
General Mills.
James M. Schmidt, 47, has served as our Executive Vice President and
General Counsel since December 2006, prior to which he served as Senior Vice
President and General Counsel joining us April 2002. Mr. Schmidt has also served
as our Secretary since September 2002, and he served as a director on our Board
from 1994 to September 2003. Mr. Schmidt has been a practicing attorney since
1985, most recently with the law firm of Robbins, Kelly, Patterson & Tucker,
which provides legal services to us from time to time.
Judith A. Shoulak, 47, has served as our Senior Vice President, Operations
since March 2004. She served as our Senior Vice President, Human Resources from
January 2003 to February 2004 and as Vice President of Human Resources from
October 2001 to January 2003. From 1993 to 2001, Ms. Shoulak served as Vice
President of Field Human Resources of OfficeMax.
Linda G. Traylor, 55, has served as our Senior Vice President, Human
Resources since October 2006. Prior to joining us, Ms. Traylor managed her own
consulting company, LG Traylor & Associates from 2005 to 2006. From 2001 to
2005, Ms. Traylor served as Senior Vice President, Human Resources of Denny's
Corporation and as its Vice President, Human Resources Planning and Development
from 1995 to 2001. From 1979 to 1995, Ms. Traylor held various leadership
positions with Burger King Corporation.
ITEM 1A. RISK FACTORS
The foregoing discussion and the discussion contained in Item 7 of this
Form 10-K contain various "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
based on current expectations or beliefs concerning future events. Such
statements can be identified by the use of terminology such as "anticipate,"
"believe," "estimate," "expect," "intend," "may," "could," "possible," "plan,"
"project," "will," "forecast" and similar words or expressions. Our
forward-looking statements generally relate to our growth strategy, financial
results, sales efforts, store openings and related expense, and cash
requirements. Although it is not possible to foresee all of the factors that may
cause actual results to differ from our forward-looking statements, such factors
include, among others, the risk factors that follow. Investors are cautioned
that all forward-looking statements involve risks and uncertainties.
Fluctuations in chicken wing prices could reduce our operating income.
The primary food product used by our company-owned and franchised
restaurants is fresh chicken wings. We purchase fresh chicken wings based on
current market prices that are subject to fluctuations. A material increase in
fresh chicken wings costs may adversely affect our operating results. Fresh
chicken wing prices in 2006 averaged 3% lower than 2005 as the average price per
pound dropped to $1.17 in 2006 from $1.20 in 2005. If there is a significant
rise in the price of fresh chicken wings, and we are unable to successfully
adjust menu prices or menu mix or otherwise make operational adjustments to
account for the higher wing prices, our operating results could be adversely
affected. For example, fresh chicken wings accounted for approximately 24%, 27%,
and 34% of our cost of sales in 2006, 2005, and 2004, respectively, with an
annual average price per pound of $1.17, $1.20, and $1.39, respectively. A 10%
increase in the fresh chicken wing costs for 2006 would have increased
restaurant cost of sales by approximately $1.8 million. If the avian flu were to
affect our supply of chicken wings, our operations may be negatively impacted,
as prices may rise due to limited supply. Additional information related to
chicken wing prices is included in Item 7 under "Results of Operations."
9
If we are unable to successfully open new restaurants, our revenue growth
rate and profits may be reduced.
To successfully expand our business, we must open new Buffalo Wild Wings
restaurants on schedule and in a profitable manner. In the past, we and our
franchisees have experienced delays in restaurant openings and we may experience
similar delays in the future. Delays or failures in opening new restaurants
could hurt our ability to meet our growth objectives, which may affect our
results of operations, the expectations of securities analysts and shareholders
and thus our stock price. We cannot guarantee that we or our franchisees will be
able to achieve our expansion goals. Further, any restaurants that we, or our
franchisees, open may not achieve operating results similar to those of our
existing restaurants. If we are unable to generate positive cash flow from a new
restaurant, we may be required to recognize an impairment loss with respect to
the assets for that restaurant. Our ability to expand successfully will depend
on a number of factors, many of which are beyond our control. These factors
include:
o Locating suitable restaurant sites in new and existing markets;
o Negotiating acceptable lease or purchase terms for new restaurants;
o Recruiting, training and retaining qualified home office, field and
restaurant personnel and management;
o Attracting and retaining qualified franchisees;
o Cost effective and timely planning, design and build-out of
restaurants;
o Obtaining building materials and hiring satisfactory construction
contractors;
o Obtaining and maintaining required local, state and federal
governmental approvals and permits related to the construction of the
sites and the sale of food and alcoholic beverages;
o Creating guest awareness of our restaurants in new markets;
o Competition in our markets; and
o General economic conditions.
We must identify and obtain a sufficient number of suitable new restaurant
sites for us to sustain our revenue growth rate.
We require that all proposed restaurant sites, whether for company-owned
or franchised restaurants, meet our site-selection criteria. We may make errors
in selecting these criteria or applying these criteria to a particular site, or
there may be an insignificant number of new restaurant sites meeting these
criteria that would enable us to achieve our planned expansion in future
periods. We face significant competition from other restaurant companies and
retailers for sites that meet our criteria and the supply of sites may be
limited in some markets. Further, we may be precluded from acquiring an
otherwise suitable site due to an exclusivity restriction held by another
tenant. As a result of these factors, our costs to obtain and lease sites may
increase, or we may not be able to obtain certain sites due to unacceptable
costs. Our inability to obtain suitable restaurant sites at reasonable costs may
reduce our growth rate.
Our restaurants may not achieve market acceptance in the new geographic
regions we enter.
Our expansion plans depend on opening restaurants in new markets where we
or our franchisees have little or no operating experience. We may not be
successful in operating our restaurants in new markets on a profitable basis.
The success of these new restaurants will be affected by the different
competitive conditions, consumer tastes and discretionary spending patterns of
the new markets as well as our ability to generate market awareness of the
Buffalo Wild Wings brand. Sales at restaurants opening in new markets may take
longer to reach average annual restaurant sales, if at all, thereby affecting
their profitability.
New restaurants added to our existing markets may take sales from existing
restaurants.
We and our franchisees intend to open new restaurants in our existing
markets, which may reduce sales performance and guest visits for existing
restaurants in those markets. In addition, new restaurants added in existing
markets may not achieve sales and operating performance at the same level as
established restaurants in the market.
10
Implementing our expansion strategy may strain our resources.
Our expansion strategy may strain our management, financial and other
resources. We must attract and retain talented operating personnel to maintain
the quality and service levels at our existing and future restaurants. We must
also continue to enhance our operational, financial and management systems. We
may not be able to effectively manage these or other aspects of our expansion.
If we fail to do so, our business, financial condition, operating results and
cash flows could suffer.
We are dependent on franchisees and their success.
Currently, approximately 68% of our restaurants are franchised.
Franchising royalties and fees represented approximately 11% of our revenues
during fiscal 2006, 2005, and 2004. Our performance depends upon i) our ability
to attract and retain qualified franchisees, ii) the franchisees' ability to
execute our concept and capitalize upon our brand recognition and marketing, and
iii) franchisees' ability to timely develop restaurants. We may not be able to
recruit franchisees who have the business abilities or financial resources
necessary to open restaurants on schedule, or who will conduct operations in a
manner consistent with our concept and standards. Also, our franchisees may not
be able to operate restaurants in a profitable manner.
Franchisees may take actions that could harm our business.
Franchisees are independent contractors and are not our employees. We
provide training and support to franchisees, but the quality of franchised
restaurant operations may be diminished if franchisees do not operate
restaurants in a manner consistent with our standards and requirements, or if
they do not hire and train qualified managers and other restaurant personnel. If
franchisees do not adequately manage their restaurants, our image and
reputation, and the image and reputation of other franchisees, may suffer
materially and system-wide sales could significantly decline. In addition, we
may also face potential claims and liabilities due to the acts of our
franchisees based on agency or vicarious liability theories.
We could face liability from our franchisees.
A franchisee or government agency may bring legal action against us based
on the franchisee/franchisor relationships. Various state and federal laws
govern our relationship with our franchisees and our potential sale of a
franchise. If we fail to comply with these laws, we could be liable for damages
to franchisees and fines or other penalties. Expensive litigation with our
franchisees or government agencies may adversely affect both our profits and our
important relations with our franchisees.
We may be unable to compete effectively in the restaurant industry.
The restaurant industry is intensely competitive. We believe we compete
primarily with regional and local sports bars, casual dining and quick casual
establishments, and quick service wing-based take-out concepts. Many of our
direct and indirect competitors are well-established national, regional or local
chains with a greater market presence than us. Further, some competitors have
substantially greater financial, marketing and other resources than us. In
addition, independent owners of local or regional establishments may enter the
wing-based restaurant business without significant barriers to entry and such
establishments may provide price competition for our restaurants. Competition in
the casual dining, quick casual and quick service segments of the restaurant
industry is expected to remain intense with respect to price, service, location,
concept and the type and quality of food. We also face intense competition for
real estate sites, qualified management personnel and hourly restaurant staff.
A reduction in vendor allowances currently received could affect our costs
of goods sold.
During fiscal 2006, 2005, and 2004, vendor allowances were recorded as a
reduction in inventoriable costs and cost of sales was reduced by $4.2 million,
$4.0 million, and $3.9 million, respectively. If the amount of vendor rebates is
reduced, inventoriable costs may increase, as may the cost of sales.
Our quarterly operating results may fluctuate due to the timing of special
events and other factors, including the recognition of impairment losses.
Our quarterly operating results depend, in part, on special events, such
as the Super Bowl(R) and other popular sporting events, and thus are subject to
fluctuations based on the dates for such events. Historically, sales in most of
our restaurants have been higher during fall and winter months based on the
relative popularity of national, regional and local sporting and other events.
Further, our quarterly operating results may fluctuate significantly because of
other factors, including:
o Increases or decreases in same-store sales;
o Fluctuations in food costs, particularly fresh chicken wings;
11
o The timing of new restaurant openings, which may impact margins due
to the related preopening costs and initially higher restaurant level
operating expense ratios;
o Labor availability and costs for hourly and management personnel;
o Changes in competitive factors;
o Disruption in supplies;
o General economic conditions and consumer confidence;
o Claims experience for self-insurance programs;
o Increases or decreases in labor or other variable expenses;
o The impact from natural disasters;
o Fluctuations in interest rates; and
o The timing and amount of asset impairment loss and restaurant closing
charges.
As a result of the factors discussed above, our quarterly and annual
operating results may fluctuate significantly. Accordingly, results for any one
quarter are not necessarily indicative of results to be expected for any other
quarter or for any year. These fluctuations may cause future operating results
to fall below the expectations of securities analysts and investors. In that
event, the price of our common stock would likely decrease.
We may not be able to attract and retain qualified personnel to operate
and manage our restaurants.
Our success and the success of our individual restaurants depends on our
ability to attract, motivate and retain a sufficient number of qualified
restaurant employees, including restaurant managers, kitchen staff and wait
staff. The inability to recruit and retain these individuals may delay the
planned openings of new restaurants or result in high employee turnover in
existing restaurants. This could inhibit our expansion plans and business
performance and, to the extent that a labor shortage may force us to pay higher
wages, harm our profitability. Further, the loss of any of our executive
officers could adversely impact us.
We may not be able to obtain and maintain licenses and permits necessary
to operate our restaurants.
The restaurant industry is subject to various federal, state and local
government regulations, including those relating to the sale of food and
alcoholic beverages. The failure to obtain and maintain these licenses, permits
and approvals, including food and liquor licenses, could adversely affect our
operating results. Difficulties or failure to obtain the required licenses and
approvals could delay or result in our decision to cancel the opening of new
restaurants. Local authorities may revoke, suspend or deny renewal of our food
and liquor licenses if they determine that our conduct violates applicable
regulations.
Changes in employment laws or regulation could harm our performance.
Various federal and state labor laws govern our relationship with our
employees and affect operating costs. These laws include minimum wage
requirements, overtime pay, unemployment tax rates, workers' compensation rates,
citizenship requirements and sales taxes. A number of factors could adversely
affect our operating results, including additional government-imposed increases
in minimum wages, overtime pay, paid leaves of absence and mandated health
benefits, increased tax reporting and tax payment requirements for employees who
receive tips, a reduction in the number of states that allow tips to be credited
toward minimum wage requirements, and increased employee litigation including
claims relating to the Fair Labor Standards Act.
The Americans with Disabilities Act is a federal law that prohibits
discrimination on the basis of disability in public accommodations and
employment. Although our restaurants are designed to be accessible to the
disabled, we could be required to make modifications to our restaurants to
provide service to, or make reasonable accommodations for disabled persons.
We are susceptible to adverse trends and economic conditions in Ohio.
As of December 31, 2006, 81, or approximately 19%, of our company-owned
and franchised restaurants were located in Ohio. As a result, we are susceptible
to adverse trends and economic conditions in that state. In addition, given our
12
geographic concentration in the Midwest, negative publicity regarding any of our
restaurants could have a material effect on our business and operations
throughout the region, as could other regional occurrences such as local
strikes, new or revised laws or regulations, or disruptions in the supply of
food products.
Changes in consumer preferences or discretionary consumer spending could
harm our performance.
Our success depends, in part, upon the continued popularity of Buffalo,
New York-style chicken wings, our other menu items, sports bars and casual
dining restaurant styles. We also depend on trends toward consumers eating away
from home more often. Shifts in these consumer preferences could negatively
affect our future profitability. Such shifts could be based on health concerns
related to the cholesterol, carbohydrate or fat content of certain food items,
including items featured on our menu. Negative publicity over the health aspects
of such food items may adversely affect consumer demand for our menu items and
could result in a decrease in guest traffic to our restaurants, which could
materially harm our business. Smoking bans imposed by state or local laws could
also adversely impact our restaurants' performance. In addition, our success
depends to a significant extent on numerous factors affecting discretionary
consumer spending, including economic conditions, disposable consumer income and
consumer confidence. A decline in consumer spending or in economic conditions
could reduce guest traffic or impose practical limits on pricing, either of
which could harm our business, financial condition, operating results or cash
flow.
Changes in public health concerns may impact our performance.
Changes in public health concerns may affect consumer preferences for our
products. For example, if incidents of the avian flu occur in the United States,
consumer preferences for poultry products may be negatively impacted, resulting
in a decline in demand for our products. Similarly, public health concerns over
smoking have seen a rise in smoking bans. Such smoking bans may adversely affect
our operations to the extent that such bans are imposed in specific locations,
rather than state-wide, or that exceptions to the ban are given to bars or other
establishments, giving patrons the ability to choose nearby locations that have
no such ban. Further, growing movements to lower blood alcohol levels may result
in a decline in alcohol consumption at our stores or increase the number of dram
shop claims made against us, either of which may negatively impact operations.
A decline in visitors to any of the business districts near the locations
of our restaurants could negatively affect our restaurant sales.
Some of our restaurants are located near high activity areas such as
retail centers, big box shopping centers and entertainment centers. We depend on
high visitor rates at these businesses to attract guests to our restaurants. If
visitors to these centers decline due to economic conditions, road construction,
changes in consumer preferences or shopping patterns, changes in discretionary
consumer spending or otherwise, our restaurant sales could decline significantly
and adversely affect our results of operations.
The acquisition of existing restaurants from our franchisees may have
unanticipated consequences that could harm our business and our financial
condition.
We may seek to selectively acquire existing restaurants from our
franchisees. To do so, we would need to identify suitable acquisition
candidates, negotiate acceptable acquisition terms and obtain appropriate
financing. Any acquisition that we pursue, whether or not successfully
completed, may involve risks, including:
o material adverse effects on our operating results, particularly in
the fiscal quarters immediately following the acquisition as the
acquired restaurants are integrated into our operations;
o risks associated with entering into markets or conducting operations
where we have no or limited prior experience; and
o the diversion of management's attention from other business concerns.
Future acquisitions of existing restaurants from our franchisees, which
may be accomplished through a cash purchase transaction, the issuance of our
equity securities or a combination of both, could result in potentially dilutive
issuances of our equity securities, the incurrence of debt and contingent
liabilities and impairment charges related to goodwill and other intangible
assets, any of which could harm our business and financial condition.
Improper food handling may affect our business adversely.
There are health risks associated with eating contaminated or improperly
handled or prepared food items. Negative publicity over illness caused by
improper handling or preparation of food items could harm our future revenue and
13
profitability. While we currently maintain insurance for these types of
incidents, we cannot guarantee our insurance is sufficient to cover all adverse
outcomes.
Complaints or litigation may hurt us.
Occasionally, our guests file complaints or lawsuits against us alleging
that we are responsible for an illness or injury they suffered at or after a
visit to our restaurants. We are also subject to a variety of other claims
arising in the ordinary course of business, including personal injury claims,
contract claims, employment-related claims, claims by franchisees, and claims
arising from an incident at a franchised restaurant. The restaurant industry has
also been subject to a growing number of claims that the menus and actions of
restaurant chains have led to the obesity of certain of their guests. In
addition, we are subject to "dram shop" statutes. These statutes generally allow
a person injured by an intoxicated person to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. Recent litigation against restaurant chains has resulted in significant
judgments and settlements under dram shop statutes. Regardless of whether any
claims against us are valid or whether we are liable, claims may be expensive to
defend and may divert time and money away from our operations and hurt our
performance. A judgment significantly in excess of our insurance coverage or for
which we do not have insurance coverage could materially affect our financial
condition or results of operations. Further, adverse publicity resulting from
these allegations may adversely affect us and our restaurants.
Our current insurance may not provide adequate levels of coverage against
claims.
We currently maintain insurance 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 economically reasonable to insure, such as
losses due to natural disasters. Such damages could have a material adverse
effect on our business and results of operations.
Natural disasters and other events could harm our performance.
A natural disaster, such as a hurricane, a serious and widespread disease,
such as an avian flu pandemic, or other events, such as a serious terrorist
attack, could have a material adverse effect on our business and results of
operations.
We may not be able to protect our trademarks, service marks or trade
secrets.
We place considerable value on our trademarks, service marks and trade
secrets. We intend to actively enforce and defend our marks and if violations
are identified, to take appropriate action to preserve and protect our goodwill
in our marks. We attempt to protect our sauce recipes as trade secrets by, among
other things, requiring confidentiality agreements with our sauce suppliers and
executive officers. However, we cannot be sure that we will be able to
successfully enforce our rights under our marks or prevent competitors from
misappropriating our sauce recipes. We can also not be sure that: i) our marks
are valuable, ii) using our marks does not, or will not, violate others' marks,
iii) the registrations of our marks would be upheld if challenged, or iv) we
would not be prevented from using our marks in areas of the country where others
might have already established rights to them. Any of these uncertainties could
have an adverse effect on us and our expansion strategy.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We are headquartered in Minneapolis, Minnesota. Our home office has 17,198
square feet of office space. We occupy this facility under a lease that
terminates on October 1, 2007.
On February 2, 2007, we signed a lease agreement for approximately 44,000
square feet of office space at a new location. The new lease terminates on
November 30, 2017, with an option to renew for one five-year term. We intend to
move into this new location in September of 2007.
As of December 31, 2006, we owned and operated 139 restaurants. We lease
the land and building for nearly all of these sites. The majority of our
existing leases are for 10 or 15-year terms, generally including options to
extend the terms. We typically lease our restaurant facilities under "triple
net" leases that require us to pay minimum rent, real estate taxes, maintenance
costs and insurance premiums and, in some instances, percentage rent based on
sales in excess of specified amounts. Most of our leases include "exclusive use"
provisions prohibiting our landlords from leasing space to other restaurants
that fall within certain specified criteria. Under our franchise agreements, we
have certain rights to gain control of a restaurant site in the event of default
under the lease or franchise agreement.
14
The following table sets forth the 37 states in which Buffalo Wild Wings
restaurants are located and the number of restaurants in each state as of
December 31, 2006:
Number of Restaurants Open
--------------------------------------------------
Company-owned Franchised Total
--------------- -------------- -------------
Alabama 1 7 8
Arkansas -- 4 4
Arizona -- 10 10
California -- 1 1
Colorado 10 1 11
Connecticut -- 1 1
Delaware -- 3 3
Florida -- 14 14
Georgia 7 -- 7
Illinois 2 25 27
Indiana 2 28 30
Iowa 6 -- 6
Kansas 7 -- 7
Kentucky 9 5 14
Louisiana -- 6 6
Maryland -- 2 2
Michigan -- 26 26
Minnesota 16 3 19
Mississippi 2 3 5
Missouri 3 10 13
Montana -- 1 1
Nebraska 5 2 7
Nevada -- 9 9
New York 4 3 7
North Carolina 8 3 11
North Dakota -- 4 4
Ohio 22 59 81
Oklahoma -- 5 5
Oregon -- 1 1
Pennsylvania 3 1 4
South Carolina -- 2 2
South Dakota -- 1 1
Tennessee 9 -- 9
Texas 17 28 45
Virginia -- 14 14
West Virginia -- 3 3
Wisconsin 6 5 11
--------------- -------------- -------------
Total 139 290 429
=============== ============== =============
ITEM 3. LEGAL PROCEEDINGS
Occasionally, we are a defendant in litigation arising in the ordinary
course of our business, including claims arising from personal injuries,
contract claims, franchise-related claims, dram shop claims, employment-related
claims and claims from guests or employees alleging injury, illness or other
food quality, health or operational concerns. To date, none of these types of
litigation, most of which are typically covered by insurance, has had a material
effect on us. We have and continue to insure against most of these types of
claims. A judgment on any claim not covered by or in excess of our insurance
coverage could adversely affect our financial condition or results of
operations.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock trades on the NASDAQ Global Market under the symbol
"BWLD". The following table sets forth, the high and low closing sale prices of
our Common Stock.
2006 2005
----------------------- -----------------------
High Low High Low
----------- ----------- ----------- -----------
First Quarter $ 41.46 $ 29.92 $ 41.27 $ 32.01
Second Quarter 43.78 35.54 40.00 27.58
Third Quarter 39.75 31.26 34.75 27.04
Fourth Quarter 58.02 37.23 34.03 25.45
Holders
As of February 1, 2007, there were approximately 186 record holders of our
Common Stock, excluding shareholders whose stock is held either in nominee name
and/or street name brokerage accounts. Based on information which we have
obtained from our transfer agent, there are approximately 17,000 holders of our
Common Stock whose stock is held either in nominee name and/or street name
brokerage accounts.
Dividends
We have never declared or paid cash dividends on our Common Stock It is
our policy to preserve cash for development and other working capital needs and,
therefore, do not currently have plans to pay any cash dividends. Our future
dividend policy will be determined by our Board of Directors and will depend on
various factors, including our results of operations, financial condition,
anticipated cash needs and plans for expansion.
Securities Authorized for Issuance Under Equity Compensation Plans
For information on our equity compensation plans, refer to Item 12,
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters."
Repurchases
We did not engage in any repurchases of our Common Stock during the
fourth quarter of 2006. The following table sets out shares of our Common Stock
repurchased by us in during 2006 that have not been previously disclosed.
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
Purchased as Part that May Yet Be
(a) Total Number of (b) Average Price of Publicly Purchased Under
Shares (or Units) Paid per Share Announced Plans or the Plans or
Period Purchased(1) (or Unit) Programs Programs
--------------------- -------------------- -------------------- -------------------- --------------------
April 1-April 30 504 $42.35 N/A N/A
--------------------
Total 504
====================
(1) All of the shares were repurchased by us in connection with payment of the
exercise price upon stock-for-stock option exercises by one executive officer.
16
Stock Performance Chart
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our Common Stock during the period ended
December 31, 2006 with the cumulative total return on the Nasdaq U.S. Index and
the S&P 600 Restaurants Index. The comparison assumes $100 was invested on
November 21, 2003, the date of our initial public offering, in Buffalo Wild
Wings Common Stock and in each of the foregoing indices and assumes reinvestment
of dividends.
[SEE SUPPLEMENTAL PDF FOR STOCK PERFORMANCE CHART]
11/21/03 12/28/03 12/26/04 12/25/05 12/31/06
-------- -------- -------- -------- --------
Buffalo Wild Wings, Inc. $100.00 $139.41 $203.88 $198.82 $312.94
Nasdaq U.S. Index $100.00 $104.45 $114.09 $117.43 $133.53
S&P 600 Restaurants Index $100.00 $103.07 $132.93 $142.49 $154.72
The preceding stock performance chart is not deemed filed with the
Securities and Exchange Commission. Notwithstanding anything to the contrary set
forth in any of our previous filings made under the Securities Act of 1933 or
the Securities Exchange Act of 1934 that incorporate future filings made by the
Company under those statutes, the above stock performance chart is not to be
incorporated by reference in any prior filings, nor shall it be incorporated by
reference into any future filings made by the Company under those statutes.
17
ITEM 6. SELECTED FINANCIAL DATA
The following summary information should be read in conjunction with the
Consolidated Financial Statements and related notes thereto set forth in Item 8
of this Form 10-K.
Fiscal Years Ended (1)
-----------------------------------------------------------
Dec. 31, Dec. 25, Dec. 26, Dec. 28, Dec. 29,
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share data)
Consolidated Statements of Earnings Data:
Revenue:
Restaurant sales $ 247,150 $ 185,823 $ 152,221 $ 112,965 $ 85,493
Franchising royalties and fees 31,033 23,877 18,827 13,532 10,614
----------- ----------- ----------- ----------- -----------
Total revenue 278,183 209,700 171,048 126,497 96,107
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 76,087 58,771 51,507 35,423 24,983
Labor 73,030 55,403 43,853 32,684 24,640
Operating 41,087 29,717 23,080 17,559 13,311
Occupancy 17,529 14,172 10,259 7,738 5,734
Depreciation 14,492 11,765 9,717 7,021 5,528
General and administrative 30,374 22,303 19,372 16,926 14,133
Preopening 3,077 2,599 2,042 1,155 1,085
Restaurant impairment and closures 1,008 1,991 573 868 708
----------- ----------- ----------- ----------- -----------
Total costs and expenses 256,684 196,721 160,403 119,374 90,122
----------- ----------- ----------- ----------- -----------
Income from operations 21,499 12,979 10,645 7,123 5,985
Other income (expense), net 2,339 1,340 671 (1,246) (878)
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 23,838 14,319 11,316 5,877 5,107
Income tax expense 7,565 5,439 4,115 2,294 2,030
----------- ----------- ----------- ----------- -----------
Net earnings 16,273 8,880 7,201 3,583 3,077
Accretion resulting from cumulative dividend and mandatory redemption
feature of preferred stock -- -- -- 1,452 1,457
----------- ----------- ----------- ----------- -----------
Net earnings available to common stockholders $ 16,273 $ 8,880 $ 7,201 $ 2,131 $ 1,620
=========== =========== =========== =========== ===========
Earnings per common share - basic $ 1.90 $ 1.05 $ 0.88 $ 0.66 $ 0.64
Weighted average shares outstanding - basic 8,578,000 8,446,000 8,165,000 3,222,000 2,529,000
Earnings per common share - diluted $ 1.85 $ 1.02 $ 0.84 $ 0.55 $ 0.54
Weighted average shares outstanding - diluted 8,814,000 8,708,000 8,603,000 3,842,000 2,976,000
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities $ 33,031 $ 24,618 $ 20,754 $ 17,753 $ 10,337
Net cash used in investing activities (26,829) (33,919) (59,307) (10,739) (9,592)
Net cash provided by (used in) financing activities 1,568 730 1,572 37,872 (3,481)
As Of (1)
-----------------------------------------------------------
Dec. 31, Dec. 25, Dec. 26, Dec. 28, Dec. 29,
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(in thousands)
Consolidated Balance Sheets Data:
Total current assets $ 74,950 $ 61,079 $ 57,021 $ 55,663 $ 12,656
Total assets 161,183 133,123 118,985 103,999 50,741
Total current liabilities 25,780 20,203 18,327 15,641 14,827
Total liabilities 44,967 36,275 33,278 28,932 30,390
Mandatorily redeemable Series A Preferred Stock -- -- -- -- 11,788
Retained earnings 41,186 24,913 16,033 8,832 6,701
Total common stockholders' equity 116,216 96,848 85,707 75,067 8,563
-----------------------------------------------
(1) We utilize a 52- or 53-week accounting period that ends on the last Sunday
in December. The fiscal years ended December 25, 2005, December 26, 2004,
December 28, 2003, and December 29, 2002 were comprised of 52 weeks. The
fiscal year ended December 31, 2006 is a 53-week year.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes. This discussion and analysis contains
certain statements that are not historical facts, including, among others, those
relating to our anticipated financial performance for fiscal 2007 and our
expected store openings. Such statements are forward-looking and involve risks
and uncertainties including but not limited to those discussed in Item 1 of this
10-K under "Risk Factors/Forward-Looking Statements." Information included in
this discussion and analysis includes commentary on company-owned and franchised
restaurant units, restaurant sales, same-store sales, and average weekly sales
volumes. Management believes such sales information is an important measure of
our performance, and is useful in assessing consumer acceptance of the Buffalo
Wild Wings(R) Grill & Bar concept and the overall health of the concept.
Franchise information also provides an understanding of our revenues because
franchise royalties and fees are based on the opening of franchised units and
their sales. However, franchise sales and same-store sales information does not
represent sales in accordance with U. S. Generally Accepted Accounting
Principles (GAAP), should not be considered in isolation or as a substitute for
other measures of performance prepared in accordance with GAAP and may not be
comparable to financial information as defined or used by other companies.
Overview
As of December 31, 2006, we owned and operated 139 and franchised an
additional 290 Buffalo Wild Wings Grill & Bar restaurants in 37 states. Of the
429 system-wide restaurants, 81 of those restaurants are located in Ohio. The
restaurants have elements of both the quick casual and casual dining styles,
both of which are part of a growing industry. Our long-term focus is to grow to
a national chain of over 1,000 locations, with 15% annual unit growth over the
next three years, continuing the strategy of developing both company-owned and
franchised restaurants.
Our growth and success depend on several factors and trends. First, we
continue to monitor and react to changes in our cost of goods sold. The costs of
goods sold is difficult to predict, as it ranged from 30.3% to 33.8% of
restaurant sales per quarter in 2006 and 2005, mostly due to the price
fluctuation in chicken wings. We are working to counteract the volatility of
chicken wing prices with the introduction of popular new menu items, effective
marketing promotions, focused efforts on food costs and waste, and menu price
increases. We will continue to monitor the cost of fresh chicken wings, as it
can significantly change our cost of sales and cash flow from company-owned
restaurants. We also are exploring purchasing strategies to lessen the severity
of cost increases and fluctuations, and are reviewing menu additions and other
strategies that may decrease the percentage that fresh chicken wings represent
in terms of total restaurant sales. The chart below illustrates the fluctuation
in fresh chicken wing prices from quarter to quarter in the last five years.
[SEE SUPPLEMENTAL PDF FOR AVERAGE QUARTERLY WING PRICES CHART]
19
A second factor is our success in new markets. There are inherent risks in
opening new restaurants, especially in new markets, for various reasons,
including the lack of experience, logistical support, and brand awareness in a
new market. These factors may result in lower than anticipated sales and cash
flow for new restaurants in new markets. In 2007, we plan to develop
company-owned restaurants primarily in markets where we currently have either
company-owned or franchised restaurants. We believe this development focus,
together with our implementation of revised new restaurant opening procedures,
will help to mitigate the overall risk associated with opening restaurants in
new markets.
Third, we will continue our focus on trends in company-owned and
franchised same-store sales as an indicator of the continued acceptance of our
concept by consumers. We also review the overall trend in average weekly sales
as an indicator of our ability to increase the sales volume, and, therefore,
cash flow per location. We remain committed to high quality operations and guest
hospitality, as evidenced by the implementation of our new choice service-style
in company-owned and franchised restaurants.
Our revenue is generated by:
o Sales at our company-owned restaurants, which represented 89% of
total revenue in 2006. Food and nonalcoholic beverages accounted for
72% of restaurant sales. The remaining 28% of restaurant sales was
from alcoholic beverages. The menu item with the highest sales volume
is chicken wings at 23% of total restaurant sales.
o Royalties and franchise fees received from our franchisees.
We generate cash from the operation of our company-owned restaurants and
also from franchise royalties and fees. We highlight the specific costs
associated with the on-going operation of our company-owned restaurants in the
statement of earnings under "Restaurant operating costs." Nearly all of our
depreciation expense relates to assets used by our company-owned restaurants.
Preopening costs are those costs associated with opening new company-owned
restaurants and will vary annually based on the number of new locations opened.
Restaurant closures and impairment expense is related to company-owned
restaurants, and includes the write-down of underperforming locations, the costs
associated with closures of locations and normal asset retirements. Certain
other expenses, such as general and administrative, relate to both company-owned
restaurant and franchising operations.
As a growing company, we review our trend in general and administrative
expenses, and are focused on reducing this expense as a percentage of revenue.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in
December. Each of the fiscal years in the four years ended December 25, 2005
were 52-week years. Our fiscal year ended December 31, 2006 was a 53-week year.
Critical Accounting Policies and Use of Estimates
Our significant accounting policies are described in Note 1 of the
Consolidated Financial Statements, which were prepared in accordance with GAAP.
Critical accounting policies are those that we believe are both important to the
portrayal of our financial condition and results and require our most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
We believe that the following discussion represents our more critical
accounting policies and estimates used in the preparation of our consolidated
financial statements, although it is not inclusive.
Valuation of Long-Lived Assets and Store Closing Reserves
We review long-lived assets quarterly to determine if the carrying value
of these assets may not be recoverable based on estimated future cash flows.
Assets are reviewed at the lowest level for which cash flows can be identified,
which is at the individual restaurant level. In the absence of extraordinary
circumstances, restaurants are included in the impairment analysis after they
have been open for 15 months. We evaluate the recoverability of a restaurant's
long-lived assets, including leasehold improvements, equipment and fixtures over
its remaining lease term, after considering the potential impact of planned
operational improvements, marketing programs, and anticipated changes in the
trade area. In determining future cash flows, significant estimates are made by
us with respect to future operating results of each restaurant over its
remaining lease term. If assets are determined to be impaired, the impairment
charge is measured by calculating the amount by which the asset carrying amount
exceeds its fair value based on our estimate of discounted future cash flows.
The determination of asset fair value is also subject to significant judgment.
During fiscal 2006, 2005, and 2004, we recognized $481,000, $1.7 million, and
$453,000 million, respectively, of asset impairment charges.
20
In addition to the valuation of long-lived assets, we also record a store
closing reserve when a restaurant is abandoned. The store closing reserve is
subject to significant judgment as accruals are made for lease payments on
abandoned leased facilities. Many factors, including the local business
environment, other available lease sites, and the willingness of lessors to
negotiate lease buyouts are considered in making the accruals. We estimate
future lease obligations based on these factors and evaluate quarterly the
adequacy of the estimated reserve based on current market conditions. During
2006, we recorded a reserve of $54,000 for a restaurant that closed in the
fourth quarter of 2006.
The reconciliation of the store closing reserve for the years ended
December 31, 2006, December 25, 2005, and December 26, 2004 is as follows (in
thousands):
As of As of
Dec. 25, 2006 Costs Dec. 31,
2005 provision incurred 2006
-------- --------- -------- --------
Remaining lease obligation and utilities $ -- $ 54 $ -- $ 54
-------- --------- -------- --------
$ -- $ 54 $ -- $ 54
======== ========= ======== ========
As of As of
Dec. 26, 2005 Costs Dec. 25,
2004 provision incurred 2005
-------- --------- -------- --------
Remaining lease obligation and utilities $136 $ -- $(136) $ --
-------- --------- -------- --------
$136 $ -- $(136) $ --
======== ========= ======== ========
As of As of
Dec. 28, 2004 Costs Dec. 26,
2003 provision incurred 2004
-------- --------- -------- --------
Remaining lease obligation and utilities $211 $ 1 $(76) $136
Broker fees 11 (11 ) -- --
-------- --------- -------- --------
$222 $(10 ) $(76) $136
======== ========= ======== ========
Vendor Allowances
Vendor allowances include allowances and other funds received from
vendors. Certain of these funds are determined based on various quantitative
contract terms. We also receive vendor allowances from certain manufacturers and
distributors calculated based upon purchases made by franchisees. Amounts that
represent a reimbursement of costs incurred, such as advertising, are recorded
as a reduction of the related expense. Amounts that represent a reduction of
inventory purchase costs are recorded as a reduction of inventoriable costs. We
record an estimate of earned vendor allowances that are calculated based upon
monthly purchases. We generally receive payment from vendors approximately 30
days from the end of a month for that month's purchases. During fiscal 2006,
2005, and 2004, vendor allowances were recorded as a reduction in inventoriable
costs, and cost of sales was reduced by $4.2 million, $4.0 million, and $3.9
million, respectively.
Revenue Recognition -- Franchise Operations
Our franchise agreements have terms ranging from 10 to 20 years. These
agreements also convey extension terms of 5 or 10 years depending on contract
terms and if certain conditions are met. We provide training, preopening
assistance and restaurant operating assistance in exchange for area development
fees, franchise fees and royalties of 5% of the franchised restaurant's sales.
Franchise fee revenue from individual franchise sales is recognized upon the
opening of the restaurant when we have performed all of our material obligations
and initial services. Area development fees are dependent upon the number of
restaurants granted in the agreement as are our obligations under the area
development agreement. Consequently, as our obligations are met, area
development fees are recognized in relation to the expenses incurred with the
opening of each new restaurant and any royalty-free periods. Royalties are
accrued as earned and are calculated each period based on reported franchisees'
sales.
21
Self-Insurance Liability
We are self-insured for a significant portion of our risks and associated
liabilities with respect to workers' compensation, general liability, and
employee health benefits. The accrued liabilities associated with these programs
are based on our estimate of the ultimate costs to settle known claims as well
as claims that may have arisen but have not yet been reported to us as of the
balance sheet date. Our estimated liabilities are not discounted and are based
on information provided by our insurance brokers and insurers, combined with our
judgments regarding a number of assumptions and factors, including the frequency
and severity of claims, and claims development history. We maintain stop-loss
coverage with third-party insurers to limit our total exposure for each of these
programs. Significant judgment is required to estimate claims incurred but not
reported as parties have yet to assert such claims. If actual claims trends,
including the frequency or severity of claims, differ from our estimates, our
financial results could be impacted.
Results of Operations
Our operating results for 2006, 2005, and 2004 are expressed as a
percentage of total revenue below, except for the components of restaurant
operating costs, which are expressed as a percentage of restaurant sales.
Fiscal Years Ended
------------------------------
Dec. 31, Dec. 25, Dec. 26,
2006 2005 2004
--------- --------- ----------
Revenue:
Restaurant sales 88.8% 88.6% 89.0%
Franchising royalties and fees 11.2 11.4 11.0
--------- --------- ----------
Total revenue 100.0 100.0 100.0
--------- --------- ----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 30.8 31.6 33.8
Labor 29.5 29.8 28.8
Operating 16.6 16.0 15.2
Occupancy 7.1 7.6 6.7
Depreciation 5.2 5.6 5.7
General and administrative 10.9 10.6 11.3
Preopening 1.1 1.2 1.2
Restaurant impairment and closures 0.4 0.9 0.3
--------- --------- ----------
Total costs and expenses 92.3 93.8 93.8
--------- --------- ----------
Income from operations 7.7 6.2 6.2
Interest income 0.8 0.6 0.4
--------- --------- ----------
Earnings before income taxes 8.6 6.8 6.6
Income tax expense 2.7 2.6 2.4
--------- --------- ----------
Net earnings 5.8% 4.2% 4.2%
========= ========= ==========
The number of company-owned and franchised restaurants open are as follows:
As of
------------------------------
Dec. 31, Dec. 25, Dec. 26,
2006 2005 2004
--------- --------- ----------
Company-owned restaurants 139 122 103
Franchised restaurants 290 248 203
22
The restaurant sales for company-owned and franchised restaurants are as
follows (in thousands of dollars):
Fiscal Years Ended
----------------------------------
Dec. 31, Dec. 25, Dec. 26,
2006 2005 2004
--------- --------- ----------
Company-owned restaurant sales $ 247,150 $ 185,823 $ 152,221
Franchised restaurant sales 621,897 470,667 359,175
Increases in comparable same-store sales are as follows (based on
restaurants operating at least fifteen months):
Fiscal Years Ended
----------------------------------
Dec. 31, Dec. 25, Dec. 26,
2006 2005 2004
---------- ---------- ----------
Company-owned same-store sales 10.4% 3.2% 9.7%
Franchised same-store sales 6.1 2.2 7.6
The annual average prices paid per pound for fresh chicken wings are as
follows:
Fiscal Years Ended
----------------------------------
Dec. 31, Dec. 25, Dec. 26,
2006 2005 2004
---------- ---------- ----------
Annual average price per pound $ 1.17 $ 1.20 $ 1.39
Fiscal Year 2006 Compared to Fiscal Year 2005
Restaurant sales increased by $61.3 million, or 33.0%, to $247.2 million in
2006 from $185.8 million in 2005. The increase in restaurant sales was due to a
$37.6 million increase associated with the opening of 18 new company-owned
restaurants in 2006 and the 29 company-owned restaurants opened before 2006 that
did not meet the criteria for same-store sales and $18.1 million increase caused
by a 10.4% increase in same-store sales, and $5.7 million related to sales in
the 53rd week of fiscal 2006.
Franchise royalties and fees increased by $7.2 million, or 30.0%, to $31.0
million in 2006 from $23.9 million in 2005. The increase was due primarily to
additional royalties collected from the 45 new franchised restaurants that
opened in 2006 and a full year of operations for the 47 franchised restaurants
that opened in 2005. Same-store sales for franchised restaurants increased 6.1%.
In the 53rd week of fiscal 2006, we recognized $768,000 of franchise royalties
and fees.
Cost of sales increased by $17.3 million, or 29.5%, to $76.1 million in
2006 from $58.8 million in 2005 due primarily to more restaurants being operated
in 2006. Cost of sales as a percentage of restaurant sales decreased to 30.8% in
2006 from 31.6% in 2005. The decrease in cost of sales as a percentage of
restaurant sales was primarily due to the reduction of chicken wing prices and
the leverage of food costs related to menu price increases. Fresh chicken wings
were 24% of cost of goods sold in 2006 compared to 27% in 2005. This decrease
was primarily due to the decrease in average wing costs to $1.17 per pound in
2006 from $1.20 per pound in 2005 and menu price increases taken in the fall of
2006.
Labor expenses increased by $17.6 million, or 31.8%, to $73.0 million in
2006 from $55.4 million in 2005 due primarily to more restaurants being operated
in 2006. Labor expenses as a percentage of restaurant sales decreased to 29.5%
in 2006 from 29.8% in 2005. Labor costs for our restaurants were lower than the
prior year primarily due to lower health insurance costs partially offset by
higher incentive compensation costs.
Operating expenses increased by $11.4 million, or 38.3%, to $41.1 million
in 2006 from $29.7 million in 2005 due primarily to more restaurants being
operated in 2006. Operating expenses as a percentage of restaurant sales
increased to 16.6% in 2006 from 16.0% in 2005. The increase in operating
expenses as a percentage of restaurant sales was primarily due to the 0.5%
increase in contributions to the advertising fund. Increases in other operating
costs, such as credit card fees, repair and maintenance costs, and supplies were
offset by lower insurance and utility costs.
Occupancy expenses increased by $3.4 million, or 23.7%, to $17.5 million in
2006 from $14.2 million in 2005 due primarily to more restaurants being operated
in 2006. Occupancy expenses as a percentage of restaurant sales decreased to
7.1% in 2006 from 7.6% in 2005. The decrease in occupancy expense as a
percentage of restaurant sales was primarily due to better leverage of costs
with the higher sales levels.
Depreciation increased by $2.7 million, or 23.2%, to $14.5 million in 2006
from $11.8 million in 2005. The increase was primarily due to the additional
depreciation on 18 new restaurants opened in 2006 and 19 restaurants opened in
2005 and operated for a full year in 2006.
23
General and administrative expenses increased by $8.1 million, or 36.2%, to
$30.4 million in 2006 from $22.3 million in 2005. General and administrative
expenses as a percentage of total revenue increased to 10.9% in 2006 from 10.6%
in 2005. We adopted the fair value recognition provisions of SFAS 123R, using
the modified-prospective transition method. Under this transition method, we
recognized $3.2 million of stock-based compensation in 2006. In 2005, we
recognized $1.7 million of stock-based compensation under APB 25 and other
related pronouncements. Exclusive of stock-based compensation, our general and
administrative expenses remained flat as a percentage of total revenue at 9.8%
in 2006 and 2005.
Preopening costs increased by $478,000, or 18.4%, to $3.1 million in 2006
from $2.6 million in 2005. In 2006, we opened 18 new company-owned restaurants
and incurred costs of approximately $29,000 for restaurants opening in 2007. In
2005, we opened 19 new company-owned restaurants and incurred costs of
approximately $38,000 for restaurants that opened in 2006 and incurred $44,000
for restaurants that opened in 2004. Average preopening cost per restaurant was
$170,000 and $132,000 in 2006 and 2005, respectively. The increase in average
preopening cost per restaurant is primarily due to the expensing of preopening
rent under a new accounting pronouncement for 2006.
Restaurant impairment and closures decreased by $983,000, or 49.4%, to $1.0
million in 2006 from $2.0 million in 2005. The expense in 2006 included the
asset impairment of one underperforming restaurant in Atlanta of $481,000, and
the disposal of miscellaneous equipment, and the closure costs for one store.
The expense in 2005 included a $1 million impairment loss with respect to
certain assets of three underperforming restaurants in Atlanta and the disposal
of miscellaneous equipment. In addition, the assets and goodwill impairment of
$621,000 for one underperforming restaurant in North Carolina occurred in 2005.
Interest income increased by $1.0 million to $2.3 million in 2006 from $1.3
million in 2005. The increase was primarily due to the rise in short-term
interest rates during the first half of 2006. Cash and marketable securities
balances at the end of the year were $64.6 million in 2006 compared to $52.4
million in 2005.
Provision for income taxes increased $2.1 million to $7.6 million in 2006
from $5.4 million in 2005. The effective tax rate as a percentage of income
before taxes decreased to 31.7% in 2006 from 38.0% in 2005. The effective tax
rate decrease was primarily due to higher federal tax credits, increased
tax-exempt income and reduced state income tax due to changes in state
apportionment factors. The reduction in state taxes is a result of new
restaurants opening in states with favorable income tax rates and the phase-out
of the Ohio income tax and phase-in of the Ohio franchise tax (Commercial
Activity Tax). For 2007, we believe our effective tax rate will be between 34%
and 35%.
We estimate the 53rd week in fiscal 2006 contributed approximately $0.16 of
earnings per diluted share.
Fiscal Year 2005 Compared to Fiscal Year 2004
Restaurant sales increased by $33.6 million, or 22.1%, to $185.8 million in
2005 from $152.2 million in 2004. The increase in restaurant sales was due to a
$29.1 million increase associated with the opening of 19 new company-owned
restaurants in 2005 and the 27 company-owned restaurants opened before 2005 that
did not meet the criteria for same-store sales and $4.5 million related to a
3.2% increase in same-store sales.
Franchise royalties and fees increased by $5.1 million, or 26.8%, to $23.9
million in 2005 from $18.8 million in 2004. The increase was due primarily to
additional royalties collected from the 47 new franchised restaurants that
opened in 2005 and a full year of operations for the 42 franchised restaurants
that opened in 2004. Same-store sales for franchised restaurants increased 2.2%.
Cost of sales increased by $7.3 million, or 14.1%, to $58.8 million in 2005
from $51.5 million in 2004 due primarily to more restaurants being operated in
2005. Cost of sales as a percentage of restaurant sales decreased to 31.6% in
2005 from 33.8% in 2004. The decrease in cost of sales as a percentage of
restaurant sales was primarily due to lower fresh chicken wing costs and product
mix changes. Fresh chicken wings were 27% of cost of goods sold in 2005 compared
to 34% in 2004. This decrease was primarily due to a drop in average wing costs
to $1.20 per pound in 2005 from $1.39 per pound in 2004. Also, boneless wings
sales have increased as a part of our menu mix, providing better margins and a
corresponding lower cost of goods percentage.
Labor expenses increased by $11.6 million, or 26.3%, to $55.4 million in
2005 from $43.9 million in 2004 due primarily to more restaurants being operated
in 2005. Labor expenses as a percentage of restaurant sales also increased to
29.8% in 2005 compared to 28.8% in 2004. Labor in our restaurants was higher
than prior year due to restaurants having higher hourly and management costs
along with slightly higher medical costs and payroll taxes.
24
Operating expenses increased by $6.6 million, or 28.8%, to $29.7 million in
2005 from $23.1 million in 2004 due primarily to more restaurants being operated
in 2005. Operating expenses as a percentage of restaurant sales also increased
to 16.0% in 2005 from 15.2% in 2004. The increase in operating expenses as a
percentage of restaurant sales was primarily due to higher advertising with a
focus on community marketing, higher credit card use by customers and higher
utility costs.
Occupancy expenses increased by $3.9 million, or 38.1%, to $14.2 million in
2005 from $10.3 million in 2004 due primarily to more restaurants being operated
in 2005. Occupancy expenses as a percentage of restaurant sales also increased
to 7.6% in 2005 from 6.7% in 2004, primarily due to higher rent expense as a
percentage of their current sales levels for restaurants in new markets.
Depreciation increased by $2.0 million, or 21.1%, to $11.8 million in 2005
from $9.7 million in 2004. The increase was primarily due to the additional
depreciation on 19 new restaurants in 2005 and 19 new restaurants opened in 2004
and operated for a full year in 2005.
General and administrative expenses increased by $2.9 million, or 15.1%, to
$22.3 million in 2005 from $19.4 million in 2004. General and administrative
expenses as a percentage of total revenue decreased to 10.6 % in 2005 from 11.3%
in 2004. This decrease was primarily due to a planned decrease in general and
administrative expense growth relative to sales growth. However, this decrease
was partially offset by an incremental $792,000 of stock-based compensation
expense in 2005 related to the vesting of additional restricted stock units.
Preopening costs increased by $557,000, or 27.3%, to $2.6 million in 2005
from $2.0 million in 2004. In 2005, we opened 19 new company-owned restaurants,
incurred cost of approximately $38,000 for restaurants opening in 2006 and
incurred $44,000 for restaurants that opened in 2004. In 2004, we opened 19 new
company-owned restaurants, incurred costs of approximately $100,000 for
restaurants opening in 2005, and incurred costs of approximately $30,000 for
restaurants that opened in 2003. Average preopening cost per restaurant was
$132,000 and $94,000 in 2005 and 2004, respectively. The increase was reflective
of additional training and development of managers and team members at new
locations.
Restaurant impairment and closures increased by $1.4 million, or 247.5%, to
$2.0 million in 2005 from $573,000 in 2004. On January 10, 2006, we concluded
that we should recognize a $1 million impairment loss with respect to certain
assets of three underperforming restaurants in Atlanta. In addition, the
write-down of the assets and goodwill of one underperforming restaurant in North
Carolina was recognized during the third quarter of 2005. The expense in 2004
represented the asset impairment of two underperforming restaurants, additional
reserves related to a restaurant which closed in 2002, and the write-off of
miscellaneous equipment.
Interest income increased by $669,000 to $1.3 million in 2005 from $671,000
in 2004. The majority of our investments were in short-term municipal
securities. The increase in interest income was primarily due to the rise in
short-term interest rates throughout 2005. Cash and marketable securities
balances at the end of the year were $52.4 million in 2005 compared to $49.0
million in 2004.
Provision for income taxes increased $1.3 million to $5.4 million in 2005
from $4.1 million in 2004. The effective tax rate as a percentage of income
before taxes increased from 36.4% in 2004 to 38.0% in 2005. The rate increase
was primarily a result of favorable resolutions of prior year state income tax
matters which lowered the overall 2004 tax rate and increased provisions in 2005
for tax exposure items.
Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for new restaurant
construction, remodeling and maintaining our existing company-owned restaurants,
working capital and other general business needs. Our main sources of liquidity
and capital during the last three years have been cash flows from operations and
the issuance of common stock through an initial public offering in November
2003. The cash and marketable securities balance at December 31, 2006 was $64.6
million. We invest our cash balances in debt securities with the focus on
protection of principal, adequate liquidity and maximization of after-tax
returns. As of December 31, 2006, nearly all excess cash was invested in high
quality municipal securities.
During fiscal 2006, 2005, and 2004, net cash provided by operating
activities was $33.0 million, $24.6 million, and $20.8 million, respectively.
Net cash provided by operating activities in 2006 consisted primarily of net
earnings adjusted for non-cash expenses, an increase in accrued expenses and
income taxes payable, partially offset by an increase in accounts receivable and
a decrease in accounts payable. The increase in accrued expenses was due to a
greater number of restaurants and related payroll and operating costs, and
higher incentive and deferred compensation costs partially offset by lower
health insurance costs. The increase in income taxes payable and decrease in
accounts payable was due to timing of payments. The increase in accounts
receivable was due to higher credit card sales and tenant allowances compared to
prior year. The purchase of marketable securities in 2006 relates to trading
securities for a deferred compensation plan.
25
Net cash provided by operating activities in 2005 consisted primarily of
net earnings adjusted for non-cash expenses and an increase in accounts payable
and income taxes payable, partially offset by an increase in accounts
receivable. The increase in accounts payable was due primarily to additional
restaurants and the timing of payments. The increase in income taxes payable was
also due to the timing of payments. The increase in accounts receivable was due
to higher credit card usage and construction allowance receivables.
Net cash provided by operating activities in 2004 consisted primarily of
net earnings adjusted for non-cash expenses and an increase in unearned
franchise fees, accounts payable, and accrued expenses partially offset by an
increase in accounts receivable and income tax receivables. The increase in
unearned franchise fees was due to a number of area development and franchise
agreements sold but for which the restaurants had not yet opened. The increase
in accounts payable is relative to the growth in the number of company-owned
restaurants. The increase in accrued expenses was due primarily to higher
incentive compensation costs resulting from company performance, higher
professional fees resulting from SOX 404 implementation, and a higher gift card
liability due to strong fourth quarter gift card sales. The increase in accounts
receivable was primarily due to higher credit card receivables partially offset
by lower landlord receivables for tenant improvements. The increase in income
tax receivables was due to the timing of payments.
Net cash used in investing activities for 2006, 2005, and 2004 was $26.8
million, $33.9 million, and $59.3 million, respectively. Investing activities
included purchases of property and equipment related to the opening of new
restaurants in all periods. In 2006, 2005, and 2004, we opened 18, 19, and 19
new restaurants, respectively. In 2007, we expect capital expenditures for over
20 new company-owned restaurants to cost approximately $1.2 million per location
and expenditures of approximately $12 million for the maintenance and remodels
of existing restaurants and the relocation of our home office in Minneapolis. In
2006, we purchased $108.3 million of marketable securities and received proceeds
of $105.3 million as investments in marketable securities matured or were sold.
In 2005, we purchased $91.5 million of marketable securities and received
proceeds of $79.5 million as investments in marketable securities matured or
were sold. In 2004, we purchased $95.5 million of marketable securities and
received proceeds of $58.9 million as investments in marketable securities
matured.
Net cash provided by financing activities for 2006, 2005 and 2004 was $1.6
million, $730,000, and $1.6 million, respectively. Net cash provided by
financing activities for 2006 resulted primarily from the issuance of common
stock for options exercised and employee stock purchases of $1.1 million and
excess tax benefits for restricted stock issuances of $1.2 million partially
offset by tax payments for restricted stock of $686,000. Net cash provided by
financing activities for 2005 resulted from the issuance of common stock for
options exercised and employee stock purchases of $1.0 million partially offset
by tax payments for restricted stock of $284,000. Net cash provided by financing
activities for 2004 resulted primarily from the issuance of common stock for
warrants exercised, stock options exercised, and employee stock purchases of
$1.6 million. No additional funding from the issuance of common stock (other
than from the exercise of options and employee stock purchases) is anticipated
in 2007.
Our liquidity is impacted by minimum cash payment commitments resulting
from operating lease obligations for our restaurants and our corporate offices.
Lease terms are generally 10 to 15 years with renewal options and generally
require us to pay a proportionate share of real estate taxes, insurance, common
area maintenance and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds. Except for one restaurant
building, we do not currently own any of the land or buildings in which our
restaurants operate and therefore do not have the ability to enter into
sale-leaseback transactions as a potential source of cash.
The following table presents a summary of our contractual operating lease
obligations and commitments as of December 31, 2006:
Payments Due By Period
(in thousands)
-------------------------------------------------
Less than After 5
Total one year 1-3 years 3-5 years years
------------ ------------ ----------- ----------- ---------
Operating lease obligations $ 130,956 16,010 29,726 25,647 59,573
Commitments for restaurants under
development 11,896 534 2,115 2,136 7,111
------------ ------------ ----------- ----------- ---------
Total $ 142,852 16,544 31,841 27,783 66,684
============ ============ =========== =========== =========
Prior to our initial public offering, we operated with a net working
capital deficit utilizing our cash from operations and proceeds from equity
financings and equipment leasing to fund our operations and our expansion. Since
our initial public offering, we have maintained a cash and marketable securities
balance in excess of $49 million and have funded our capital expenditures from
26
cash provided by operations. We believe the cash flows from our operating
activities in 2007 will also be sufficient to fund our capital expenditures for
the current year.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109," which seeks to reduce the
diversity in practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and we will adopt the new requirements in the first
quarter of 2007. The cumulative effect, if any, of adopting FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the period
of adoption. The adoption of FIN 48 is not expected to have a significant impact
on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures above fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Early
adoption is permitted. We have not yet determined the effect on our financial
statements, if any, upon adoption of SFAS 157.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). The intent of
SAB 108 is to reduce the diversity in practice for the method used to quantify
financial statement misstatements, including the effect of prior year
uncorrected errors. SAB 108 establishes an approach that requires quantification
of financial statement errors using both an income statement and a cumulative
balance sheet approach. SAB 108 is effective for fiscal years ending after
November 15, 2006, and we adopted the new requirements in fiscal 2006. The
adoption of SAB 108 did not have an impact on our consolidated financial
statements.
Quarterly Results of Operations
The following table sets forth, by quarter, the unaudited quarterly results
of operations for the two most recent years, as well as the same data expressed
as a percentage of our total revenue for the periods presented. Restaurant
operating costs are expressed as a percentage of restaurant sales. The
information for each quarter is unaudited and we have prepared it on the same
basis as the audited financial statements appearing elsewhere in this document.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included to present fairly the unaudited
quarterly results. All amounts, except per share amounts, are expressed in
thousands.
Quarterly and annual operating results may fluctuate significantly as a
result of a variety of factors, including increases or decreases in same-store
sales, changes in fresh chicken wing prices, the timing and number of new
restaurant openings and their related expenses, asset impairment charges, store
closing charges, general economic conditions and seasonal fluctuations.
27
Results of Quarterly Operations (unaudited)
Mar. 27, Jun. 26, Sep. 25, Dec. 25, Mar. 26, Jun. 25, Sep. 24, Dec. 31,
2005 2005 2005 2005 2006 2006 2006 2006(1)
-------- -------- -------- -------- -------- -------- -------- --------
Revenue:
Restaurant sales $45,073 $42,570 $45,892 $52,288 $57,092 $55,036 $60,800 $74,222
Franchise royalties
and fees 5,720 5,653 5,840 6,664 7,169 7,224 7,548 9,092
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 50,793 48,223 51,732 58,952 64,261 62,260 68,348 83,314
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Restaurant
operating costs:
Cost of sales 15,231 13,291 14,096 16,153 18,005 17,028 18,557 22,497
Labor 13,217 12,976 13,743 15,467 16,595 16,562 18,265 21,608
Operating 6,857 6,666 7,529 8,665 9,443 9,236 10,291 12,117
Occupancy 3,156 3,395 3,616 4,005 4,089 4,269 4,450 4,721
Depreciation 2,675 2,832 2,998 3,260 3,330 3,433 3,649 4,080
General and
administrative 5,626 5,634 5,383 5,660 7,078 7,441 7,600 8,255
Preopening 313 600 818 868 487 1,034 755 801
Restaurant
impairment and
closures 18 4 849 1,120 210 44 102 652
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses 47,093 45,398 49,032 55,198 59,237 59,047 63,669 74,731
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 3,700 2,825 2,700 3,754 5,024 3,213 4,679 8,583
Interest income 272 337 349 382 470 500 556 813
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income
taxes 3,972 3,162 3,049 4,136 5,494 3,713 5,235 9,396
Income tax expense 1,521 1,226 1,174 1,518 1,978 1,281 1,709 2,597
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings $ 2,451 $ 1,936 $ 1,875 $ 2,618 $ 3,516 $ 2,432 $ 3,526 $ 6,799
======== ======== ======== ======== ======== ======== ======== ========
Earnings per common
share - basic 0.29 0.23 0.22 0.31 0.41 0.28 0.41 0.79
Earnings per common
share - diluted 0.28 0.22 0.22 0.30 0.40 0.28 0.40 0.77
Weighted average shares
outstanding - basic 8,367 8,448 8,473 8,482 8,532 8,556 8,598 8,624
Weighted average shares
outstanding - diluted 8,677 8,675 8,678 8,711 8,736 8,755 8,762 8,839
(1) We utilize a thirteen-week quarterly accounting period. However, fiscal
2006 is a 53-week year, with the quarter ending December 31, 2006
comprising fourteen weeks.
28
Results of Quarterly Operations (unaudited)
Mar. 27, Jun. 26, Sep. 25, Dec. 25, Mar. 26, Jun. 25, Sep. 24, Dec. 31,
2005 2005 2005 2005 2006 2006 2006 2006(1)
-------- -------- -------- -------- -------- -------- -------- --------
Revenue:
Restaurant sales 88.7% 88.3% 88.7% 88.7% 88.8% 88.4% 89.0% 89.1%
Franchise royalties and fees 11.3 11.7 11.3 11.3 11.2 11.6 11.0 10.9
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Restaurant operating costs:
Cost of sales 33.8 31.2 30.7 30.9 31.5 30.9 30.5 30.3
Labor 29.3 30.5 29.9 29.6 29.1 30.1 30.0 29.1
Operating 15.2 15.7 16.4 16.6 16.5 16.8 16.9 16.3
Occupancy 7.0 8.0 7.9 7.7 7.2 7.8 7.3 6.4
Depreciation 5.3 5.9 5.8 5.5 5.2 5.5 5.3 4.9
General and administrative 11.1 11.7 10.4 9.6 11.0 12.0 11.1 9.9
Preopening 0.6 1.2 1.6 1.5 0.8 1.7 1.1 1.0
Restaurant impairment and
closures 0.0 0.0 1.6 1.9 0.3 0.1 0.1 0.8
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses 92.7 94.1 94.8 93.6 92.2 94.8 93.2 89.7
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 7.3 5.9 5.2 6.4 7.8 5.2 6.8 10.3
Interest income 0.5 0.7 0.7 0.6 0.7 0.8 0.8 1.0
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income taxes 7.8 6.6 5.9 7.0 8.5 6.0 7.7 11.3
Income tax expense 3.0 2.5 2.3 2.6 3.1 2.1 2.5 3.1
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings 4.8% 4.0% 3.6% 4.4% 5.5% 3.9% 5.2% 8.2%
======== ======== ======== ======== ======== ======== ======== ========
(1) We utilize a thirteen-week quarterly accounting period. However, fiscal
2006 is a 53-week year, with the quarter ending December 31, 2006
comprising fourteen weeks.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to our cash and cash equivalents and
marketable securities. We invest our excess cash in highly liquid short-term
investments with maturities of less than one year. These investments are not
held for trading or other speculative purposes. Changes in interest rates affect
the investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations.
Financial Instruments
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of municipal securities. We do not believe there
is a significant risk of non-performance by these municipalities because of our
investment policy restrictions as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food, labor,
and restaurant operating costs. Substantial increases in these costs could
impact operating results to the extent that such increases cannot be passed
along through higher menu prices. A large number of our restaurant personnel are
paid at rates based on the applicable federal and state minimum wages, and
increases in the minimum wage rates and tip-credit wage rates could directly
affect our labor costs. Many of our leases require us to pay taxes, maintenance,
repairs, insurance and utilities, all of which are generally subject to
inflationary increases. During 2005, we were affected by higher diesel and
natural gas prices. We believe inflation has not had a material impact on our
results of operations in recent years.
Commodity Price Risk
Many of the food products purchased by us are affected by weather,
production, availability and other factors outside our control. We believe that
almost all of our food and supplies are available from several sources, which
helps to control food product risks. We negotiate directly with independent
suppliers for our supply of food and paper products. We use members of UniPro
Food Services, Inc., a national cooperative of independent food distributors, to
distribute these products from the suppliers to our restaurants. We have minimum
purchase requirements with some of our vendors, but the terms of the contracts
and nature of the products are such that our purchase requirements do not create
a market risk. The primary food product used by company-owned and franchised
restaurants is fresh chicken wings. We purchase fresh chicken wings based on
current market prices that are subject to monthly fluctuation. A material
increase in fresh chicken wing costs may adversely affect our operating results.
Fresh chicken wing prices in 2006 averaged 3% lower than 2005 as the average
price per pound dropped to $1.17 in 2006 from $1.20 in 2005. If there is a
significant rise in the price of fresh chicken wings, and we are unable to
successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices, our operating results could
be adversely affected. Fresh chicken wings accounted for approximately 24%, 27%,
and 34% of our cost of sales in 2006, 2005, and 2004, respectively, with an
annual average price per pound of $1.17, $1.20, and $1.39, respectively. A 10%
increase in fresh chicken wing costs during 2006, would have increased
restaurant cost of sales by approximately $1.8 million for fiscal 2006.
Additional information related to chicken wing prices and our approaches to
managing the volatility thereof is included in Item 7 under "Results of
Operations."
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For supplemental information regarding quarterly results of operations,
refer to Item 7, "Quarterly Results of Operations."
BUFFALO WILD WINGS, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 32
Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005 33
Consolidated Statements of Earnings for the Years Ended December 31, 2006, December 25, 2005, and December 26,
2004 34
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006, December 25, 2005, and
December 26, 2004 35
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, December 25, 2005, and December
26, 2004 36
Notes to Consolidated Financial Statements 37
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Buffalo Wild Wings, Inc.:
We have audited the accompanying consolidated balance sheets of Buffalo
Wild Wings, Inc. and subsidiaries (the Company) as of December 31, 2006 and
December 25, 2005, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the fiscal years in the
three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Buffalo Wild
Wings, Inc. and subsidiaries as of December 31, 2006 and December 25, 2005, and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment," on December 26, 2005.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"), and our report dated March 8, 2007 expressed an unqualified opinion on
management's assessment of, and the effective operation of internal controls
over financial reporting.
/S/ KPMG LLP
Minneapolis, Minnesota
March 8, 2007
32
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands)
December 31, December 25,
2006 2005
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 11,756 3,986
Marketable securities 52,829 48,418
Accounts receivable - franchisees, net of
allowance of $47 and $25, respectively 929 731
Accounts receivable - other 5,212 3,700
Inventory 1,767 1,502
Prepaid expenses 1,052 1,972
Deferred income taxes 1,405 770
------------ ------------
Total current assets 74,950 61,079
Property and equipment, net 78,137 68,693
Restricted cash 6,007 2,115
Other assets 1,720 867
Goodwill 369 369
------------ ------------
Total assets $ 161,183 133,123
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,347 2,194
Accounts payable 5,874 6,628
Income taxes payable 264 102
Accrued compensation and benefits 10,963 6,775
Accrued expenses 5,538 3,900
Current portion of deferred lease credits 794 604
------------ ------------
Total current liabilities 25,780 20,203
Long-term liabilities:
Other liabilities 478 --
Marketing fund payables 6,007 2,115
Deferred income taxes 3,162 4,755
Deferred lease credits, net of current portion 9,540 9,202
------------ ------------
Total liabilities 44,967 36,275
------------ ------------
Commitments and contingencies (notes 4 and 13)
Stockholders' equity:
Undesignated stock, 5,600,000 shares authorized;
none issued -- --
Common stock, no par value. Authorized 15,600,000
shares; issued and outstanding 8,795,590, and
8,616,222, respectively 75,030 74,503
Deferred compensation -- (2,568)
Retained earnings 41,186 24,913
------------ ------------
Total stockholders' equity 116,216 96,848
------------ ------------
Total liabilities and stockholders' equity $ 161,183 133,123
============ ============
See accompanying notes to consolidated financial statements.
33
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal years ended December 31, 2006, December 25, 2005, and December 26, 2004
(Dollar amounts in thousands except share and per share data)
Fiscal years ended
----------------------------------------
December 31, December 25, December 26,
2006 2005 2004
------------ ------------ ------------
Revenue:
Restaurant sales $ 247,150 185,823 152,221
Franchise royalties and fees 31,033 23,877 18,827
------------ ------------ ------------
Total revenue 278,183 209,700 171,048
------------ ------------ ------------
Costs and expenses:
Restaurant operating costs:
Cost of sales 76,087 58,771 51,507
Labor 73,030 55,403 43,853
Operating 41,087 29,717 23,080
Occupancy 17,529 14,172 10,259
Depreciation 14,492 11,765 9,717
General and administrative (1) 30,374 22,303 19,372
Preopening 3,077 2,599 2,042
Restaurant impairment and closures 1,008 1,991 573
------------ ------------ ------------
Total costs and expenses 256,684 196,721 160,403
------------ ------------ ------------
Income from operations 21,499 12,979 10,645
Interest income 2,339 1,340 671
------------ ------------ ------------
Earnings before income taxes 23,838 14,319 11,316
Income tax expense 7,565 5,439 4,115
------------ ------------ ------------
Net earnings 16,273 8,880 7,201
============ ============ ============
Earnings per common share - basic $ 1.90 1.05 0.88
Earnings per common share - diluted 1.85 1.02 0.84
Weighted average shares outstanding - basic 8,578,328 8,446,200 8,165,078
Weighted average shares outstanding - diluted 8,814,337 8,708,494 8,603,881
(1) Includes stock-based compensation of $3,216, $1,700, and $909, respectively
See accompanying notes to consolidated financial statements.
34
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal years ended December 31, 2006, December 25, 2005, and December 26, 2004
(Dollar amounts in thousands)
Common Stock
------------------------ Deferred Retained
Shares Amount Compensation Earnings Total
----------- ----------- -------------- ---------- ---------
Balance at December 28, 2003 7,981,945 $ 66,235 -- 8,832 75,067
Net earnings -- -- -- 7,201 7,201
Shares issued under employee stock purchase plan 28,453 522 -- -- 522
Net issuances of restricted stock 78,639 2,726 (2,726) -- --
Exercise of warrants 132,455 317 -- -- 317
Exercise of stock options 204,279 733 -- -- 733
Tax benefit from stock issued -- 958 -- -- 958
Stock-based compensation -- -- 909 -- 909
----------- ----------- -------------- ---------- ---------
Balance at December 26, 2004 8,425,771 $ 71,491 (1,817) 16,033 85,707
Net earnings -- -- -- 8,880 8,880
Shares issued under employee stock purchase plan 21,238 506 -- -- 506
Net issuances of restricted stock 64,851 1,589 (2,451) -- (862)
Exercise of stock options 104,362 508 -- -- 508
Tax benefit from stock issued -- 409 -- -- 409
Stock-based compensation -- -- 1,700 -- 1,700
----------- ----------- -------------- ---------- ---------
Balance at December 25, 2005 8,616,222 $ 74,503 (2,568) 24,913 96,848
Net earnings -- -- -- 16,273 16,273
Shares issued under employee stock purchase plan 18,402 528 -- -- 528
Net issuances of restricted stock 74,977 (4,943) 2,568 -- (2,375)
Exercise of stock options 85,989 573 -- -- 573
Tax benefit from stock issued -- 1,153 -- -- 1,153
Stock-based compensation -- 3,216 -- -- 3,216
----------- ----------- -------------- ---------- ---------
Balance at December 31, 2006 8,795,590 $ 75,030 -- 41,186 116,216
=========== =========== ============== ========== =========
See accompanying notes to consolidated financial statements.
35
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended December 31, 2006, December 25, 2005, and December 26, 2004
(Dollar amounts in thousands)
Fiscal years ended
----------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $ 16,273 8,880 7,201
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 14,492 11,765 9,717
Amortization (54) 90 151
Restaurant impairment and closures 1,008 1,991 573
Deferred lease credits 393 362 142
Deferred income taxes (2,228) (1,473) 1,947
Stock-based compensation 3,216 1,700 909
Tax benefit from stock issuance -- 409 958
Excess tax benefit from stock issuance (1,153) -- --
Change in operating assets and liabilities:
Purchase of marketable securities (1,288) -- --
Accounts receivable (1,575) (1,064) (1,023)
Inventory (265) (295) (229)
Prepaid expenses 920 (502) (240)
Other assets (853) (93) (72)
Unearned franchise fees 153 (239) 474
Accounts payable (1,884) 1,163 (166)
Income taxes 1,315 1,829 (1,360)
Accrued expenses 4,561 95 1,772
-------------- -------------- --------------
Net cash provided by operating activities 33,031 24,618 20,754
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (23,760) (21,865) (22,702)
Purchase of marketable securities (108,328) (91,539) (95,475)
Proceeds of marketable securities 105,259 79,485 58,870
-------------- -------------- --------------
Net cash used in investing activities (26,829) (33,919) (59,307)
-------------- -------------- --------------
Cash flows from financing activities:
Issuance of common stock 1,101 1,014 1,572
Tax payments for restricted stock (686) (284) --
Excess tax benefit from stock issuance 1,153 -- --
-------------- -------------- --------------
Net cash provided by financing activities 1,568 730 1,572
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 7,770 (8,571) (36,981)
Cash and cash equivalents at beginning of year 3,986 12,557 49,538
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 11,756 3,986 12,557
============== ============== ==============
See accompanying notes to consolidated financial statements.
36
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
The Company was organized for the purpose of operating Buffalo Wild
Wings(R) restaurants, as well as selling Buffalo Wild Wings restaurant
franchises. In exchange for the initial and continuing franchise fees received,
the Company gives franchisees the right to use the name Buffalo Wild Wings.
At December 31, 2006, December 25, 2005, and December 26, 2004, the Company
operated 139, 122, and 103 Company-owned restaurants, respectively, and had 290,
248, and 203 franchised restaurants, respectively.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Buffalo Wild
Wings, Inc. and its wholly owned subsidiaries (collectively, the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(c) Fiscal Year
The Company utilizes a 52- or 53-week accounting period that ends on the
last Sunday in December. The fiscal year ended December 31, 2006 was a 53-week
year with the quarter ended December 31, 2006 comprising fourteen weeks. The
fiscal years ended December 25, 2005, and December 26, 2004, comprised 52 weeks.
The 53rd week of fiscal 2006 contributed $5,663 in restaurant sales and $768 in
royalties and fees.
(d) Restaurant Sales Concentration
As of December 31, 2006, the Company operated 22 Company-owned restaurants
and had 59 franchised restaurants in the state of Ohio. The Company-owned
restaurants in Ohio aggregated 18.6%, 22.3%, and 26.5%, respectively, of the
Company's restaurant sales in fiscal 2006, 2005, and 2004. The Company is
subject to adverse trends and economic conditions in that state.
(e) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
(f) Marketable Securities
Marketable securities consist of available-for-sale securities and trading
securities that are carried at fair value and held-to-maturity securities that
are stated at amortized cost, which approximates market.
Available-for-sale securities are classified as current assets based upon
the Company's intent and ability to use any and all of the securities as
necessary to satisfy the operational requirements of its business. Realized
gains and losses from the sale of available-for-sale securities were not
material for fiscal 2006. Unrealized losses are charged against net earnings
when a decline in fair value is determined to be other than temporary. The
available-for-sale investments carry short-term repricing features which
generally result in these investments having a value at or near par value
(cost).
Trading securities are stated at fair value, with gains or losses resulting
from changes in fair value recognized currently in earnings as interest income.
In 2006, we funded a deferred compensation plan using trading assets in a
marketable equity portfolio. This portfolio is held to generate returns that
seek to offset changes in liabilities related to the equity market risk of
certain deferred compensation arrangements. These deferred compensation
liabilities were $1,237 in 2006 and are included in accrued compensation and
benefits on the consolidated balance sheets.
(g) Accounts Receivable
Accounts receivable - franchisees represents royalty receivables from the
Company's franchisees. Accounts receivable - other consists primarily of
contractually-determined receivables for leasehold improvements, credit cards,
vendor rebates, and purchased interest on investments.
37
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(h) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
The Company purchases its product from a number of suppliers and believes
there are alternative suppliers. The Company has minimum purchase commitments
from some of its vendors but the terms of the contracts and nature of the
products are such that purchase requirements do not create a market risk. The
primary food product used by Company- owned and franchised restaurants is fresh
chicken wings. Fresh chicken wings are purchased by the Company based on current
market conditions and are subject to fluctuation. Material increases in fresh
chicken wing costs may adversely affect the Company's operating results. For
fiscal 2006, 2005, and 2004, fresh chicken wings were 24%, 27%, and 34% of
restaurant cost of sales, respectively.
(i) Property and Equipment
Property and equipment are recorded at cost. Leasehold improvements include
the cost of improvements funded by landlord incentives or allowances and during
the build-out period leasehold improvements are amortized using the
straight-line method over the lesser of the term of the lease, without
consideration of renewal options, or the estimated useful lives of the assets,
which typically range from five to ten years. Furniture and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets, which range from two to eight years. Maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
accumulated depreciation are eliminated from the respective accounts and the
related gains or losses are credited or charged to earnings.
The Company reviews property and equipment, along with other long-lived
assets, quarterly to determine if the carrying value of these assets may not be
recoverable based on estimated future undiscounted cash flows. Assets are
reviewed at the lowest level for which cash flows can be identified, which is
the individual restaurant level. In determining future cash flows, significant
estimates are made by the Company with respect to future operating results of
each restaurant over its remaining lease term. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Fair value
is generally determined by estimated discounted future cash flows.
(j) Goodwill and Other Assets
Goodwill represents the excess of cost over the fair value of identified
net assets of the business acquired. Goodwill and purchased liquor licenses are
subject to an annual impairment analysis. The Company identifies potential
impairments by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds the
carrying amount, the asset is not impaired. If the carrying amount exceeds the
fair value, the Company calculates the possible impairment by comparing the
implied fair value of the asset with the carrying amount. If the implied value
of the asset is less than the carrying amount, a write-down is recorded. In
2005, the Company recorded an impairment charge of $390 for goodwill not
considered recoverable based on estimated discounted future cash flows. The
remaining goodwill was considered recoverable as of December 31, 2006.
Other intangible assets consist primarily of liquor licenses. These
licenses are either amortized over their annual renewal period or, if purchased,
are carried at the lower of fair value or cost. The carrying amount of the
liquor licenses not subject to amortization as of December 31, 2006 and December
25, 2005 was $375 and $275, respectively, and is included in other assets.
(k) Fair Values of Financial Instruments
The carrying value of the Company's financial assets and liabilities
approximates fair value, because of their short-term nature.
(l) Asset Retirement Obligations
An asset retirement obligation associated with the retirement of a tangible
long-lived asset is recognized as a liability in the period incurred or when it
becomes determinable, with an associated increase in the carrying amount of the
related long-lived asset. The Company must recognize a liability for the fair
value of a conditional asset retirement obligation when incurred, if the
38
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
liability's fair value can be reasonably estimated. Conditional asset retirement
obligations are legal obligations to perform asset retirement activities when
the timing and/or method of settlement are conditional on a future event or may
not be within the control of the Company. Asset retirement costs are depreciated
over the useful life of the related asset. As of December 31, 2006, the
Company's asset retirement obligation was $142.
(m) Revenue Recognition
Franchise agreements have terms ranging from ten to twenty years. These
agreements also convey multiple extension terms of five or ten years, depending
on contract terms and if certain conditions are met. The Company provides the
use of the Buffalo Wild Wings trademarks, system, training, preopening
assistance, and restaurant operating assistance in exchange for area development
fees, franchise fees, and royalties of 5% of a restaurant's sales.
Franchise fee revenue from individual franchise sales is recognized upon
the opening of the franchised restaurant when all material obligations and
initial services to be provided by the Company have been performed. Area
development fees are dependent based on the number of restaurants in the
territory, as are the Company's obligations under the area development
agreement. Consequently, as obligations are met, area development fees are
recognized proportionally with expenses incurred with the opening of each new
restaurant and any royalty-free periods. Royalties are accrued as earned and are
calculated each period based on restaurant sales.
Sales from Company-owned restaurant revenues are recognized as revenue at
the point of the delivery of meals and services. All sales taxes are presented
on a net basis and are excluded from revenue.
(n) Franchise Operations
The Company enters into franchise agreements with unrelated third parties
to build and operate restaurants using the Buffalo Wild Wings brand within a
defined geographical area. The Company believes that franchising is an effective
and efficient means to expand the Buffalo Wild Wings brand. Franchised
restaurants open for a full year averaged $2,299 in sales in 2006. The
franchisee is required to operate their restaurants in compliance with their
franchise agreement that includes adherence to operating and quality control
procedures established by the Company. The Company does not provide loans,
leases, or guarantees to the franchisee or the franchisee's employees and
vendors. If a franchisee becomes financially distressed, the Company does not
provide any financial assistance. If financial distress leads to a franchisee's
noncompliance with the franchise agreement and the Company elects to terminate
the franchise agreement, the Company has the right but not the obligation to
acquire the assets of the franchisee at fair value as determined by an
independent appraiser. The Company receives a 5% royalty of gross sales as
defined in the franchise agreement and in most cases, allowances directly from
the franchisees' vendors that generally are less than 0.6% of the franchisees'
gross sales. The Company has financial exposure for the collection of the
royalty payments. Franchisees generally remit franchise payments weekly for the
prior week's sales, which substantially minimizes the Company's financial
exposure. Historically, the Company has experienced insignificant write-offs of
franchisee royalties. Franchise and area development fees are paid upon the
signing of the related agreements.
(o) Advertising Costs
Advertising costs for Company-owned restaurants are expensed as incurred
and aggregated $9,055, $5,809, and $4,278, in fiscal years ended 2006, 2005, and
2004, respectively. The Company's advertising costs exclude amounts collected
from franchisees as part of the system-wide marketing and advertising fund.
(p) Preopening Costs
Costs associated with the opening of new Company-owned restaurants are
expensed as incurred.
(q) Payments Received from Vendors
Vendor allowances include allowances and other funds received from vendors.
Certain of these funds are determined based on various quantitative contract
terms. The Company also receives vendor allowances from certain manufacturers
and distributors calculated based upon purchases made by franchisees. Amounts
that represent a reimbursement of costs incurred, such as advertising, are
recorded as a reduction of the related expense. Amounts that represent a
reduction of inventory purchase costs are recorded as a reduction of
inventoriable costs. The Company recorded an estimate of earned vendor
39
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
allowances that are calculated based upon monthly purchases. The Company
generally receives payment from vendors approximately 30 days from the end of a
month for that month's purchases. During fiscal 2006, 2005, and 2004, vendor
allowances were recorded as a reduction in inventoriable costs, and cost of
sales was reduced by $4,246, $4,020, and $3,913, respectively.
(r) National Advertising Fund
The Company has a system-wide marketing and advertising fund. Company-owned
and franchised restaurants are required to remit a designated portion of sales,
to a separate advertising fund that is used for marketing and advertising
efforts throughout the system. In 2006, that amount was 3%. Certain payments
received from various vendors are deposited into the National Advertising Fund.
These funds are used for development and implementation of system-wide
initiatives and programs. The Company accounts for cash and receivables of these
funds as "restricted cash" with an offsetting "marketing fund payables" on its
balance sheet. On December 26, 2005, the contribution to the advertising fund
increased from 2.5% to 3.0% of sales.
(s) Earnings Per Common Share
Basic earnings per common share excludes dilution and is computed by
dividing the net earnings available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share include dilutive common stock equivalents consisting of stock
options and warrants determined by the treasury stock method. Restricted stock
units are included for calculating both basic and diluted earnings per share at
the time that the performance criteria is met.
(t) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the balance sheet carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized. (u) Deferred Lease Credits
Deferred lease credits consist of reimbursement of costs of leasehold
improvements from the Company's lessors. These reimbursements are amortized on a
straight-line basis over the term of the applicable lease, without consideration
of renewal options. In addition, this account includes adjustments to recognize
rent expense on a straight-line basis over the term of the lease commencing at
the start of the Company's construction period of the restaurant, without
consideration of renewal options.
Leases typically have an initial lease term of between 10 to 15 years and
contain renewal options under which the Company may extend the terms for periods
of three to five years. Certain leases contain rent escalation clauses that
require higher rental payments in later years. Leases may also contain rent
holidays, or free rent periods, during the lease term. Rent expense is
recognized on a straight-line basis over the initial lease term. Prior to Staff
Position No. FAS 13-1, "Accounting for Rental Costs Incurred During a
Construction Period," rent expense recognized over the construction period was
capitalized and depreciated over the economic life of the asset, generally ten
years.
(v) Accounting Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
40
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(w) Stock-Based Compensation
We maintain a stock equity incentive plan under which we may grant
non-qualified stock options, incentive stock options, and restricted stock units
to employees, non-employee directors and consultants. We also have an employee
stock purchase plan ("ESPP").
Prior to the December 26, 2005 adoption of the Financial Accounting
Standards Board ("FASB") Statement No. 123R, "Shared-Based Payment" ("SFAS
123R"), we accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, because the stock option grant price equaled the market price on
the date of grant, and any purchase discounts under our stock purchase plan were
within statutory limits, no compensation expense was recognized for stock-based
compensation related to stock options or ESPP shares. Restricted stock units
vesting upon the achievement of certain performance targets were expensed under
the requirements of APB 25. Stock-based compensation recognized for restricted
stock during 2005 and 2004 were $1,700 and $909, respectively. As permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
stock-based compensation was included as a pro forma disclosure in the notes to
the consolidated financial statements.
Effective December 26, 2005, we adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition method. Under
this transition method, stock-based compensation expense is recognized in the
consolidated financial statements for granted, modified, or settled stock
options and for expense related to the ESPP, since the related purchase
discounts exceeded the amount allowed under SFAS 123R for non-compensatory
treatment. Compensation expense recognized includes the estimated expense for
the portion of stock options vesting in the period for options granted prior to,
but not vested as of December 26, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123. There were no
new stock option grants in 2006. Restricted stock units vesting upon the
achievement of certain performance targets are expensed based on the fair value
on the date of grant. Results for prior periods have not been restated, as
provided for under the modified-prospective transition method.
Total stock-based compensation expense recognized in the consolidated
statement of earnings for fiscal year 2006 was $3,216 before income taxes and
consisted of restricted stock, stock options, and employee stock purchase plan
(ESPP) expense of $3,000, $82 and $134, respectively. The related total tax
benefit was $1,153 during 2006. All stock-based compensation is recognized as
general and administrative expense.
Prior to the adoption of SFAS 123R, we presented all tax benefits resulting
from the exercise of stock options as operating cash inflows in the consolidated
statements of cash flows, in accordance with the provisions of the Emerging
Issues Task Force ("EITF") Issue No 00-15, "Classification in the Statement of
Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option." SFAS 123R requires the benefits of tax
deductions in excess of the compensation cost recognized for those options to be
classified as financing cash inflows, rather than operating cash inflows, on a
prospective basis. This amount is shown as "Excess tax benefit from stock
issuance" on the consolidated statement of cash flows for the fiscal year ended
December 31, 2006.
41
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
The following table shows the effect on net earnings and earnings per share
for the 2005 and 2004 fiscal periods had compensation cost been recognized based
upon the estimated fair value on the grant date of stock options and ESPP.
Fiscal Years Ended
--------------------------
December 25, December 26,
2005 2004
------------ ------------
Net earnings, as reported $ 8,880 7,201
Add:
Total stock-based compensation expense included in
reported earnings, net of related tax effects 1,054 581
Deduct:
Total stock-based compensation expense determined under
the fair value-based method for stock options,
restricted stock, and ESPP, net of related tax effects (1,210) (739)
------------ ------------
Pro forma net earnings $ 8,724 7,043
============ ============
Net earnings per common share:
As reported (basic) $ 1.05 0.88
Pro forma (basic) 1.03 0.86
As reported (dilutive) 1.02 0.84
Pro forma (dilutive) 1.00 0.82
Pro forma disclosures for the fiscal year ended December 31, 2006 are not
presented because stock-based compensation is recognized in the consolidated
financial statements.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes-Merton ("BSM") option valuation model with the following
assumptions:
Stock Options
-----------------------------------------
December 31, December 25, December 26,
2006* 2005 2004
------------ ------------- ------------
Expected dividend yield N/A 0.0% 0.0%
Expected stock price volatility N/A 40.1% 38.0%
Risk-free interest rate N/A 3.5% 2.9%
Expected life of options N/A 5 years 5 years
Employee Stock Purchase Plan
-------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
------------- ------------- -------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 39.2 - 41.4% 38.0% - 41.8% 38.0% - 39.0%
Risk-free interest rate 4.3 - 5.2% 3.1% - 4.3% 2.5% - 3.4%
Expected life of options 0.5 years 0.5 years 0.5 years
* No stock options were granted in 2006.
42
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
The expected term of the options represents the estimated period of time
until exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on historical
volatility of our stock. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an equivalent remaining
term. We have not paid dividends in the past.
(x) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109", which seeks to reduce the
diversity in practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and we will adopt the new requirements in the first
quarter of 2007. The cumulative effect, if any, of adopting FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the period
of adoption. The adoption of FIN 48 is not expected to have a significant impact
on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures above fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Early
adoption is permitted. We have not yet determined the effect on our financial
statements, if any, upon adoption of SFAS 157.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). The intent of
SAB 108 is to reduce the diversity in practice for the method used to quantify
financial statement misstatements, including the effect of prior year
uncorrected errors. SAB 108 establishes an approach that requires quantification
of financial statement errors using both an income statement and a cumulative
balance sheet approach. SAB 108 is effective for fiscal years ending after
November 15, 2006, and we adopted the new requirements in fiscal 2006. The
adoption of SAB 108 did not have a significant impact on our consolidated
financial statements.
(y) Reclassifications
Certain balances in prior fiscal years have been reclassified to conform to
the presentation adopted in the current year.
The acquisition of property and equipment not yet paid for in the
consolidated statements of cash flows for 2005 and 2004 has been reclassified as
non-cash transactions. This reduced the amounts for the acquisition of property
and equipment by $82 for 2005 and $608 for 2004.
Tax withholding for restricted stock units in the consolidated statements
of cash flows for 2005 was reclassified as a non-cash transaction. The 2005
amount of $578 was previously netted as a cash flow from financing activities
and is now listed as a non-cash transaction.
43
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(2) Marketable Securities
Marketable securities were comprised as follows:
December 31, December 25,
2006 2005
-------------- --------------
Held-to-maturity
Municipal securities 33,522 14,887
Available-for-sale
Municipal securities 18,019 33,531
Trading
Mutual funds 1,288 --
-------------- --------------
Total $ 52,829 48,418
============== ==============
Purchases of available for-sale securities totaled $71,585 in 2006 with
sales totaling $87,205. Purchases of held-to-maturity securities totaled $36,743
in 2006 with proceeds from maturities totaling $18,054. All held-to-maturity
debt securities mature within one year and had aggregate fair values of $33,512
at December 31, 2006.
Purchases of available for-sale securities totaled $63,738 in 2005 with
sales totaling $46,743. Purchases of held-to-maturity securities totaled $27,800
in 2005 with proceeds from maturities totaling $32,742. All held-to-maturity
debt securities mature within one year and had aggregate fair values of $14,862
at December 25, 2005.
Purchases of available for-sale securities totaled $69,948 in 2004 with
sales totaling $53,244. Purchases of held-to-maturity securities totaled $25,527
in 2004 with proceeds from maturities totaling $5,626. All held-to-maturity debt
securities mature within one year and had aggregate fair values of $19,812 at
December 26, 2004.
The fair value of available-for-sale investments in debt securities by
contractual maturities at December 31, 2006, is as follows:
Maturity date Fair Value
------------------------------------------------------ ----------
1-5 years $ 503
5-10 years 2,965
After 10 years 14,551
----------
Total $ 18,019
==========
(3) Property and Equipment
Property and equipment consisted of the following:
December 31, December 25,
2006 2005
-------------- --------------
Construction in process $ 1,037 956
Leasehold improvements 77,794 64,535
Furniture, fixtures, and equipment 53,994 45,279
-------------- --------------
132,825 110,770
Less accumulated depreciation (54,688) (42,077)
-------------- --------------
$ 78,137 68,693
============== ==============
44
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(4) Lease Commitments
The Company leases all of its restaurants and corporate offices under
operating leases that have various expiration dates. In addition to base rents,
leases typically require the Company to pay its share of maintenance and real
estate taxes and certain leases include provisions for contingent rentals based
upon sales.
Future minimum rental payments due under noncancelable operating leases
for existing restaurants and commitments for restaurants under development as of
December 31, 2006 are as follows:
Restaurants
Operating under
leases development
Fiscal year ending:
2007 $ 16,010 534
2008 15,335 1,056
2009 14,391 1,059
2010 13,380 1,063
2011 12,267 1,073
Thereafter 59,573 7,111
------------ -------------
Total future minimum lease payments $ 130,956 11,896
============ =============
In 2006, 2005, and 2004, the Company rented office space under operating
leases which, in addition to the minimum lease payments, require payment of a
proportionate share of the real estate taxes and building operating expenses.
The Company also rents restaurant space under operating leases, some of which,
in addition to the minimum lease payments and proportionate share of real estate
and operating expenses, require payment of percentage rents based upon sales
levels. Rent expense, excluding the Company's proportionate share of real estate
taxes and building operating expenses, is as follows:
Fiscal Years Ended
-------------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
--------------- --------------- -----------------
Minimum rents $ 14,600 11,702 8,653
Percentage rents 238 170 138
--------------- --------------- -----------------
Total $ 14,838 11,872 8,791
=============== =============== =================
Equipment and auto
leases $ 273 218 211
=============== =============== =================
(5) Income Taxes
Income tax expense (benefit) is comprised of the following:
Fiscal Years Ended
--------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Current:
Federal $ 8,801 5,400 1,291
State 992 1,512 877
Deferred:
Federal (1,705) (1,287) 1,710
State (523) (186) 237
-------------- -------------- --------------
Total tax expense $ 7,565 5,439 4,115
============== ============== ==============
45
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
A reconciliation of the expected federal income taxes (benefits) at the
statutory rate of 35% with the provision for income taxes is as follows:
Fiscal Years Ended
--------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Expected federal income tax expense $ 8,343 5,012 3,847
State income tax expense, net of
federal effect 305 862 823
Nondeductible expenses 115 80 67
Tax exempt income (602) (350) (115)
General business credits (772) (528) (325)
Statutory rate changes, deferred
tax impact -- 148 --
Other 176 215 (182)
-------------- -------------- --------------
$ 7,565 5,439 4,115
============== ============== ==============
Deferred tax assets and liabilities are classified as current and
noncurrent on the basis of the classification of the related asset or liability
for financial reporting. Deferred income taxes are provided for temporary
differences between the basis of assets and liabilities for financial reporting
purposes and income tax purposes. Temporary differences comprising the net
deferred tax assets and liabilities on the balance sheets are as follows:
Fiscal Years Ended
----------------------------------
December 31, December 25,
2006 2005
---------------- ----------------
Deferred tax assets:
Unearned franchise fees $ 892 834
Accrued vacation 197 149
Accrued compensation 470 335
Deferred lease credits 1,029 896
Other 611 214
---------------- ----------------
$ 3,199 2,428
================ ================
Deferred tax liability:
Depreciation $ 4,956 6,185
Prepaid expense -- 228
---------------- ----------------
Total $ 4,956 6,413
================ ================
46
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(6) Stockholders' Equity
(a) Stock Options
We have 1.5 million shares of common stock reserved for issuance under a
stock-based compensation plan for employees, officers, and directors. The option
price for shares issued under this plan is to be not less than the fair market
value on the date of grant with respect to incentive stock options, or 85% of
fair market value for nonqualified stock options. Incentive stock options become
exercisable in four equal installments from the date of the grant and have a
contractual life of ten years. Nonqualified stock options issued pursuant to the
plan have varying vesting periods from immediately to one year and have a
contractual life of ten years. We issue new shares of common stock upon exercise
of stock options. In 2003, the Company's shareholders approved amendments to the
plan to allow the granting of restricted stock and extended the plan to 2013.
Option activity is summarized as follows:
Average
Weighted remaining Aggregate
Number average contractual Intrinsic
of shares exercise price life (years) Value
Outstanding, December 25, 2005 302,296 $ 8.08
Granted -- --
Exercised (86,493) 6.88
Cancelled (5,310) 12.98
--------- -------------- ------------ ---------
Outstanding, December 31, 2006 210,493 $ 8.45 3.9 $ 9,419
Exercisable, December 31, 2006 198,048 7.63 3.7 9,024
The aggregate intrinsic value in the table above is before applicable
income taxes, based on our closing stock price of $53.20 as of December 31,
2006, which would have been received by the optionees had all options been
exercised on that date. As of December 31, 2006, total unrecognized stock-based
compensation expense related to nonvested stock options was approximately $63,
which is expected to be recognized over a weighted average period of
approximately eight months. During 2006, 2005, and 2004, the total intrinsic
value of stock options exercised was $2,707, $3,226, and $5,130, respectively.
During 2006, the total fair value of options vested was $587.
The following table summarizes the Company's stock options outstanding at
December 31, 2006:
Options outstanding Options exercisable
---------------------------------------------- ------------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life (years) price Shares price
--------------- -------------- --------------- --------------- -------------- ---------------
$ 3.35 - 4.15 89,277 2.09 $ 3.87 89,277 $ 3.87
5.00 - 11.25 88,235 4.66 8.96 88,235 8.96
12.75 - 28.25 31,631 6.56 18.86 20,233 18.09
34.81 1,350 8.00 34.81 303 34.81
-------------- --------------
210,493 3.88 8.45 198,048 7.63
============== ==============
The plan has 423,308 shares available for grant as of December 31, 2006.
47
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(b) Restricted Stock
We adopted a stock performance plan in June 2004, under which restricted
stock units are granted annually at the discretion of the Board. These units are
subject to annual vesting upon achieving performance targets established by the
Board of Directors. We record compensation expense for the restricted stock
units if vesting, based on the achievement of performance targets, is probable.
The restricted stock units may vest one-third annually over a ten-year period as
determined by meeting performance targets. However, the second third of the
restricted stock units is not subject to vesting until the first one-third has
vested and the final one-third is not subject to vesting until the first
two-thirds of the award has vested. We issue new shares of common stock upon the
disbursement of restricted stock units. Restricted stock activity is summarized
for fiscal year 2006:
Weighted
average
Number grant date
of shares fair value
-------------- ----------------
Outstanding, December 25, 2005 75,964 $ 32.56
Granted 103,448 33.98
Vested (83,948) 32.55
Cancelled (11,358) 34.26
-------------- ----------------
Outstanding, December 31, 2006 84,106 34.19
As of December 31, 2006, the total stock-based compensation expense
related to nonvested awards not yet recognized was $2,720, which is expected to
be recognized over a weighted average period of 1.4 years. During fiscal year
2006, the total fair value of shares vested was $2,733. The weighted average
grant date fair value of restricted stock units granted during 2005 and 2004 was
$34.83 and $28.20, respectively.
(c) Warrants
In connection with various financing activities prior to 2000, the Company
granted warrants to acquire an aggregate of 377,685 shares of the Company's
common stock at an exercise price of $2.50 to $4.65 per share. During the year
ended December 26, 2004, warrants to acquire 132,455 common shares were
exercised. No warrants remained outstanding as of December 26, 2004.
(d) Employee Stock Purchase Plan
On September 4, 2003, the Company's board of directors adopted the 2003
Employee Stock Purchase Plan, which was approved by its shareholders on October
24, 2003. The Company has reserved 300,000 shares of common stock for issuance
under the Plan. This Plan is available to substantially all employees subject to
employment eligibility requirements. The Plan became effective upon the
effective date of the Company's initial public offering (IPO). Participants may
purchase the Company's common stock at 85% of the beginning or ending closing
price, whichever is lower, for each six-month period ending in May and November.
During 2006, 2005, and 2004, the Company issued 18,402, 21,238, and 28,453
shares, respectively, of common stock under the plan and has 231,907 available
for future sale.
48
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(7) Earnings Per Common Share
The following is a reconciliation of basic and fully diluted earnings per
common share for fiscal 2006, 2005, and 2004:
Fiscal year ended December 31, 2006
---------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- ------------- -----------
Net earnings $ 16,273
-------------
Earnings per common share 16,273 8,578,328 $ 1.90
Effect of dilutive securities--stock options and
restricted stock -- 236,009
------------- -------------
Earnings per common share--assuming
dilution $ 16,273 8,814,337 1.85
============= =============
Fiscal year ended December 25, 2005
---------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- ------------- -----------
Net earnings $ 8,880
-------------
Earnings per common share 8,880 8,446,200 $ 1.05
Effect of dilutive securities--stock options and
restricted stock -- 262,294
------------- -------------
Earnings per common share--assuming
dilution $ 8,880 8,708,494 1.02
============= =============
Fiscal year ended December 26, 2004
---------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- ------------- -----------
Net earnings $ 7,201
-------------
Earnings per common share 7,201 8,165,078 $ 0.88
Effect of dilutive securities--stock options,
restricted stock and warrants -- 438,803
------------- -------------
Earnings per common share--assuming
dilution $ 7,201 8,603,881 0.84
============= =============
The following is a summary of those securities outstanding at the end of
the respective periods, which have been excluded from the fully diluted
calculations because the effect on net earnings per common share would not have
been dilutive:
December 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Options 1,486 2,026 --
Restricted stock 84,106 75,964 52,426
49
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(8) Supplemental Disclosures of Cash Flow Information
Fiscal Years Ended
--------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Cash paid during the period for:
Income taxes $ 8,803 4,801 2,621
Noncash financing and investing transactions:
Property and equipment not yet paid for 1,130 82 608
Tax withholding for restricted stock units 2,267 578 --
Adjustment of restricted stock units to
fair value on grant date 2,568 -- --
Adjustment of restricted stock units to
fair value -- 2,451 2,726
Capitalization of preopening rent expense -- 463 2,199
(9) Restaurant Impairment and Closures
In 2006, 2003 and 2002, the Company closed restaurants. As a result, a
charge was taken for remaining lease obligations, broker fees, and utilities.
These charges were recognized as a part of restaurant impairment and closures
and were based on remaining lease obligations.
The reconciliation of the store closing reserve for the years ended
December 31, 2006, December 25, 2005, and December 26, 2004 is as follows:
As of As of
December 25, 2006 Costs December 31,
2005 provision incurred 2006
-------------- ----------- ---------- ------------
Remaining lease obligation
and utilities $ -- 54 -- 54
-------------- ----------- ---------- ------------
$ -- 54 -- 54
============== =========== ========== ============
As of As of
December 26, 2005 Costs December 25,
2004 provision incurred 2005
-------------- ----------- ---------- ------------
Remaining lease obligation
and utilities $ 136 -- (136) --
-------------- ----------- ---------- ------------
$ 136 -- (136) --
============== =========== ========== ============
As of As of
December 28, 2004 Costs December 26,
2003 provision incurred 2004
-------------- ----------- ---------- ------------
Remaining lease obligation
and utilities $ 211 1 (76) 136
Broker fees 11 (11) -- --
-------------- ----------- ---------- ------------
$ 222 (10) (76) 136
============== =========== ========== ============
During 2006, the Company recorded an impairment charge for the assets of
one underperforming restaurant. An impairment charge of $481 was recorded to the
extent that the carrying amount of the assets was not considered recoverable
based on estimated discounted future cash flows and the underlying fair value of
the assets.
During 2005, the Company recorded an impairment charge for the assets of
four underperforming restaurants. An impairment charge of $1,268 was recorded to
the extent that the carrying amount of the assets was not considered recoverable
based on estimated discounted future cash flows and the underlying fair value of
the assets.
50
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
During 2004, the Company recorded an impairment charge for the assets of
two underperforming restaurants. An impairment charge of $453 was recorded to
the extent that the carrying amount of the assets was not considered recoverable
based on estimated discounted future cash flows and the underlying fair value of
the assets.
A summary of restaurant impairment and closures charges recognized by the
Company is as follows:
Fiscal Years Ended
---------------------------------------------
December 31, December 25, December 26,
2006 2005 2004
-------------- --------------- --------------
Store closing charges $ 54 -- (10 )
Long-lived asset impairment 481 1,268 453
Goodwill impairment -- 390 --
Other asset write-offs 473 333 130
-------------- --------------- --------------
$ 1,008 1,991 573
============== =============== ==============
(10) Employee Benefit Plan
The Company has a defined contribution 401(k) plan whereby eligible
employees may contribute pretax wages in accordance with the provisions of the
plan. In 2005, the Company amended the plan and matched 100% of the first 3% and
50% of the next 2% of contributions made by eligible employees. During 2004, the
Company matched 50% of the first 4% of contributions made by eligible employees.
Matching contributions of approximately $394, $312, and $128 were made by the
Company during 2006, 2005, and 2004, respectively.
(11) Employment Agreements
The Company has entered into employment agreements with each of its
executive officers. These agreements are for a one-year term and include an
automatic extension for successive one-year terms. The agreements also include
termination and resignation provisions, a confidentiality clause, a non-compete
provision and a severance package that includes salary payments for either one
year in the case of the Chief Executive Officer and Chief Financial Officer or
six months in the case of Senior Vice Presidents, and a non-compete period of
equal duration.
The Company's executive officers are entitled to receive an annual bonus
upon the achievement of certain board-established performance milestones,
including revenue, net income, restaurant openings, same-store sales, and
employee turnover. Further, under the Company's Management Deferred Compensation
Plan, an amount equal to a percentage of an officer's base salary is credited on
a monthly basis to that officer's deferred compensation account. The maximum
deferral is 7.5% of the base salary of each Vice President, 10% of the base
salary of each Senior Vice President, and 12.5% of the base salary of Chief
Executive Officer, Chief Financial Officer, and Executive Vice Presidents. Such
amounts are subject to certain vesting provisions, depending on length of
employment and circumstances of employment termination.
The employment agreements further provide that the Company shall pay its
executive officers annual base salary, which will be reviewed not less than
annually and may be increased or reduced; provided, (i) any reduction relating
to the Chief Executive Officer or Chief Financial Officer will be permitted only
if the Company reduces the base compensation of its executive employees
generally and will not exceed the average percentage reduction for such
employees; and (ii) with respect to the Company's other executive officers, any
reduction will be permitted only if the Company reduces the base compensation of
its employees generally and will not exceed the average percentage reduction for
all such employees. In addition to the base salary, executive officers are
entitled to participate in additional equity incentive plans and other employee
benefit plans. Fiscal 2006 annual base salary commitments under employment
agreements were $1,437.
51
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006 and December 25, 2005
(Dollar amounts in thousands, except per-share amounts)
(12) Related Party Transactions
It is the Company's policy that all related party transactions must be
disclosed and approved by the disinterested directors, and the terms and
considerations for such related party transactions are compared and evaluated to
terms available or the amounts that would have to be paid or received, as
applicable, in arms-length transactions with independent third-parties.
The Company subleases a portion of its main offices to Carefree Capital
Partners, Limited Partnership (Carefree) on a month-to-month lease on the same
rental basis as the Company. A director of the Company is chairman and sole
stockholder of Carefree.
A member of the board of directors is an officer and director at the
Company's primary law firm. Legal fees incurred with this firm were less than 5%
of the law firm's or the Company's total revenue in fiscal 2006, 2005, and 2004.
The services provided by the law firm were at fair value.
(13) Contingencies
The Company is involved in various legal matters arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position and results of operations.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures that
are designed to ensure that material information relating to us and our
subsidiaries required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required disclosure. We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective as
of the date of such evaluation.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, our chief
executive and chief financial officers and effected by our board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles and includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with the
authorizations of our management and directors; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on this assessment, our management concluded that our internal
control over financial reporting was effective as of December 31, 2006. Our
independent registered public accounting firm, KPMG LLP, has issued an audit
report on management's assessment of our internal control over financial
reporting. That report appears below.
Change in Internal Control Over Financial Reporting
There were no changes in the our internal control over financial reporting
that occurred during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Buffalo Wild Wings, Inc.:
We have audited management's assessment, included in the accompanying
report entitled "Management's Report on Internal Control Over Financial
Reporting", that Buffalo Wild Wings, Inc. and subsidiaries (the Company)
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Buffalo Wild Wings, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Buffalo Wild Wings, Inc. and subsidiaries as of December 31, 2006 and
December 25, 2005, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the fiscal years in the
three-year period ended December 31, 2006, and our report dated March 8, 2007
expressed an unqualified opinion on those consolidated financial statements. Our
report stated the Company adopted Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment," on December 26, 2005.
/s/ KPMG LLP
Minneapolis, Minnesota
March 8, 2007
54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Additional information required by this item is contained in Item 1 of
this document and the sections entitled "Election of Directors," "Compliance
with Section 16(a) of the Exchange Act," and "Corporate Governance" appearing in
the company's Proxy Statement to be delivered to shareholders in connection with
the 2007 Annual Meeting of Shareholders. Such information is incorporated herein
by reference.
Our Board of Directors has adopted a Code of Ethics & Business Conduct for
all employees and directors. A copy of this document is available on our website
at www.buffalowildwings.com, free of charge, under the Investor Relations
section. We will satisfy any disclosure requirements under Item 10 or Form 8-K
regarding an amendment to, or waiver from, any provision of the Code with
respect to our principal executive officer, principal financial officer,
principal accounting officer and persons performing similar functions by
disclosing the nature of such amendment or waiver on our website or in a report
on Form 8-K.
Our Board of Directors has determined that Mr. J. Oliver Maggard, a member
of the audit committee and an independent director, is an audit committee
financial expert, as defined under 401(h) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the section entitled
"Executive Compensation" appearing in our Proxy Statement to be delivered to
shareholders in connection with the 2007 Annual Meeting of Shareholders. Such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item relating to the security ownership
of certain holders is contained in the section entitled "Principal Shareholders
and Management Shareholdings" and "Equity Compensation Plan Information"
appearing in our Proxy Statement to be delivered to shareholders in connection
with the 2007 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is contained in the sections
entitled "Corporate Governance" and "Certain Transactions" appearing in our
Proxy Statement to be delivered to shareholders in connection with the 2007
Annual Meeting of Shareholders. Such information is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained in the section entitled
"Independent Registered Public Accounting Firm" appearing in our Proxy Statement
to be delivered to shareholders in connection with the 2007 Annual Meeting of
Shareholders. Such information is incorporated herein by reference.
55
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements. The following consolidated financial statements
of ours are filed with this report and can be found at Item 8 of this Form 10-K.
Report of Independent Registered Public Accounting Firm dated March
8, 2007
Consolidated Balance Sheets as of December 31, 2006 and December 25,
2005
Consolidated Statements of Earnings for the Years Ended December 31,
2006, December 25, 2005, and December 26, 2004
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2006, December 25, 2005, and December 26, 2004
Consolidated Statements of Cash Flows for the Years Ended December
31, 2006, December 25, 2005, and December 26, 2004
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules. The following schedule is included
following the exhibits to this Form 10-K.
Schedule II - Valuation and Qualifying Accounts
Report of Independent Registered Public Accounting Firm on Financial
Statement Schedule dated March 8, 2007
All other schedules for which provision is made in the applicable
accounting regulations of the SEC have been omitted as not required or not
applicable, or the information required has been included elsewhere by reference
in the financial statements and related notes.
(c) Exhibits. See "Exhibit Index" following the signature page of this
Form 10-K for a description of the documents that are filed as Exhibits to this
report on Form 10-K or incorporated by reference herein.
56
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 12, 2007 BUFFALO WILD WINGS, INC.
By /s/ SALLY J. SMITH
---------------------------------------
Sally J. Smith
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated below.
Each person whose signature appears below constitutes and appoints Sally
J. Smith and Mary J. Twinem as the undersigned's true and lawful attorneys-in
fact and agents, each acting alone, with full power of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all amendments to this Annual Report on Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granted unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Name Title Date
---------------------------- ------------------------------------------- ------------------
/s/ SALLY J. SMITH Chief Executive Officer, President and 3/12/07
---------------------------- Director (principal executive officer)
Sally J. Smith
/s/ MARY J. TWINEM Executive Vice President, Chief Financial 3/12/07
---------------------------- Officer and Treasurer (principal financial
Mary J. Twinem and accounting officer)
/s/ DALE M. APPLEQUIST Director 3/12/07
----------------------------
Dale M. Applequist
/s/ KENNETH H. DAHLBERG Director, Chairman of the Board 3/12/07
----------------------------
Kenneth H. Dahlberg
/s/ JAMES M. DAMIAN Director 3/12/07
----------------------------
James M. Damian
/s/ MICHAEL P. JOHNSON Director 3/12/07
----------------------------
Michael P. Johnson
/s/ ROBERT W. MACDONALD Director 3/12/07
----------------------------
Robert W. MacDonald
/s/ WARREN E. MACK Director 3/12/07
----------------------------
Warren E. Mack
/s/ J. OLIVER MAGGARD Director 3/12/07
----------------------------
J. Oliver Maggard
57
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule
The Board of Directors and Stockholders Buffalo
Wild Wings, Inc.:
Under the date of March 8, 2007 we reported on the consolidated balance
sheets of Buffalo Wild Wings, Inc. and subsidiaries (the Company) as of December
31, 2006 and December 25, 2005 and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the fiscal years in
the three-year period ended December 31, 2006, which is included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment," on December 26, 2005.
/s/ KPMG LLP
Minneapolis, Minnesota
March 8, 2007
Buffalo Wild Wings, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged
at to Costs Deductions Balance
Beginning and From at End of
Description of Period Expenses Reserves Period
------------------------------------ ----------- ---------- ---------- -----------
Allowance for doubtful accounts 2006 $ 25 51 29 47
2005 25 -- -- 25
2004 25 3 3 25
Store closing reserves 2006 -- 54 -- 54
2005 136 -- 136 --
2004 222 (10) 76 136
58
BUFFALO WILD WINGS, INC.
EXHIBIT INDEX TO FORM 10-K
For the Fiscal Year Ended: Commission File No.
December 31, 2006 000-24743
Exhibit
Number Description
--------- --------------------------------------------------------------
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws, as Amended (incorporated by reference to Exhibit
3.1 to our current report on Form 8-K filed February 28, 2007)
4.1 Form of specimen certificate representing Buffalo Wild Wings, Inc.'s
common stock (1)
10.1 2003 Equity Incentive Plan forms of stock option agreements (1)(2)
10.2 Employment Agreement, dated as of December 1, 1999 with Sally J.
Smith (1)(2)
10.3 Employment Agreement, dated as of December 1, 1999 with Mary J.
Twinem (1)(2)
10.4 Employment Agreement, dated as of December 1, 1999 with Kathleen M.
Benning (formerly Alberga) (1)(2)
10.5 Employment Agreement, dated as of April 22, 2002 with James M.
Schmidt (1)(2)
10.6 Employment Agreement, dated as of August 20, 2001 with Emil Lee
Sanders (1)(2)
10.7 Employment Agreement, dated as of February 25, 2002 with Judith A.
Shoulak (1)(2)
10.8 Employment Agreement, dated as of December 1, 1999, with Craig W.
Donoghue (1)(2)
10.9 Form of 2005 Franchise Agreement (incorporated by reference to
Exhibit 10.11 to our Form 10-K for the fiscal year ended December
25, 2005)
10.10 Form of 2005 Area Development Agreement (incorporated by reference
to Exhibit 10.12 to our Form 10-K for the fiscal year ended December
25, 2005)
10.11 Employee Stock Purchase Plan and Amendment No. 1 (1) (2)
10.12 Amendment No. 1 to 2003 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to our Form 10-Q for the fiscal quarter
ended June 27, 2004) (2)
10.13 Form of 2005 Restricted Stock Unit Award Notice to Directors and
Employees used under the 2003 Equity Incentive Plan (incorporated by
reference to Exhibit 10.16 to our Form 10-K for the fiscal year
ended December 25, 2005) (2)
10.14 Director Compensation Arrangements as of December 1, 2005
(incorporated by reference to Exhibit 10.17 to our Form 10-K for the
fiscal year ended December 25, 2005) (2)
10.15 2006 Executive Bonus Plan (incorporated by reference to Exhibit
10.18 to our Form 10-K for the fiscal year ended December 25,
2005) (2)
10.16 Compensation Arrangements For Executive Officers for Fiscal Year
2006 (incorporated by reference to Exhibit 10.19 to our Form 10-K
for the fiscal year ended December 25, 2005) (2)
10.17 The Executive Nonqualified Excess Plan (incorporated by reference to
Exhibit 10.1 to our Form 10-Q for the fiscal quarter ended September
24, 2006) (2)
10.18 The Executive Nonqualified Excess Plan Adoption Agreement
(incorporated by reference to Exhibit 10.2 to our Form 10-Q for the
fiscal quarter ended September 24, 2006) (2)
59
10.19 2003 Equity Incentive Plan, as Amended Through February 16, 2006
(incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed May 17, 2006) (2)
10.20* Form of Restricted Stock Unit Award Notice to Directors and
Employees under the 2003 Equity Incentive Plan as of January 1,
2007 (2)
10.21 2007 Executive Bonus Plan (incorporated by reference to Exhibit 10.1
to our current report on Form 8-K filed December 13, 2006) (2)
10.22* Director Compensation Arrangements as of January 1, 2007 (2)
10.23* Executive Officer Compensation Arrangements for Fiscal Year 2007 (2)
10.24* Employment Agreement, dated as of October 30, 2006, with Linda G.
Traylor (2)
10.25* Form of 2006 Franchise Agreement
10.26* Form of 2006 Area Development Agreement
21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 to
our Form 10-K for the fiscal year ended December 26, 2004)
23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm
24.1* Power of Attorney (included on the signature page)
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2* Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
------------------------------------
* Filed herewith.
(1) Incorporated by reference to the corresponding exhibit numbers to our
Registration Statement on Form S-1, Reg. No. 333-108695
(2) Management agreement or compensatory plan or arrangement.
60