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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 25, 2005
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: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
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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. |X|
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
$240 million based on the closing sale price of the Company's Common Stock as
reported on the NASDAQ Stock Market on June 24, 2005.
The number of shares outstanding of the registrant's common stock as of
February 1, 2006: 8,497,063 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2006 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 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52
Item 9A. Controls and Procedures 52
Item 9B. Other Information 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions 54
Item 14. Principal Accountant Fees and Services 54
PART IV
Item 15. Exhibits and Financial Statement Schedules 55
Signatures 56
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, or SEC.
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 370 restaurants in 35 states as of December 25,
2005. 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 up to 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,
providing 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;
o Focus on operational excellence;
o Increase same-store sales and average unit volumes.
3
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 and
select restaurants have patio seating.
We strategically place up to 50 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 in each dining area 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
2005. Many of our restaurants have separate parking spots for our take-out
guests.
CURRENT RESTAURANT LOCATIONS
As of December 25, 2005, we owned or franchised 370 Buffalo Wild Wings
restaurants in 35 states, of which 122 were company-owned and 248 were
franchised. In 2006, we plan to open 20 new company-owned restaurants and 50 to
55 new franchised 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 two years. We anticipate that future restaurants will
range in size from 5,000 square feet to 6,400 square feet with an average cash
investment per restaurant of approximately $1.1 million, excluding preopening
expenses of approximately $165,000. From time to time, we expect that our
restaurants may be smaller or larger or cost more or less than our targeted
range, depending on the particular circumstances of the selected site. 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.
4
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
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 one 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 goal of these
efforts is 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, iv) support strong restaurant openings, and v)
build brand awareness.
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 2005 we developed a campaign to promote the rollout
of our new "Naked Tenders(R)" menu item. 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.
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.
5
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 food 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 Education 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. The kitchen manager for each
restaurant places orders with approved local suppliers and their UniPro
distributor and orders are inspected at delivery. 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 31%, 34%, and 27% of our cost of sales in 2003,
2004, and 2005, respectively. We ensure consistent supply of high quality
chicken wings by utilizing four to six suppliers, with Peco Foods, Inc.
currently accounting for approximately 39% of the total system-wide supply.
Given our multiple suppliers and the commodity nature of fresh chicken wings, we
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.
6
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 3.0% of their restaurant
sales, of which 2.5% was contributed to our Advertising Fund in 2005 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, taking into account 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.
7
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 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 25, 2005, we employed 6,125 employees. We have 1,282
full-time and 4,710 part-time employees working in our company-owned restaurants
and 133 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.
Our executive officers as of March 2, 2006 are as follows:
Sally J. Smith has served as our Chief Executive Officer and President
since July 1996, as a director since August 1996 and as our Chief Financial
Officer from 1994 to 1996. Prior to joining the company, 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. Ms.
Smith serves on the board of the National Restaurant Association.
Mary J. Twinem has served as our Executive Vice President, Chief
Financial Officer and Treasurer since July 1996 and as our Controller from
January 1995 to July 1996. Ms. Twinem also served as a director of the company
from June 2002 to September 2003. Prior to joining the company, 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.
8
Kathleen M. Benning has served as our Senior Vice President, Marketing and
Brand Development since January 2002 and as Vice President of Marketing since
March 1997. 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 has served as our Senior Vice President, Information
Systems since January 2003, prior to which he served as our Director 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 has served as our Senior Vice President, Development and
Franchising since January 2002 and as Vice President of Franchising since 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 has served as our Senior Vice President and General
Counsel since January 2003 and as Vice President and General Counsel since April
2002. Mr. Schmidt has also served as our Secretary since September 2002, and
served as a director of the company 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 has served as our Senior Vice President, Operations
since March 2004, 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, where she was responsible for human
resources leadership to field operations.
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 2005 averaged 14% lower than 2004 as the average price
per pound dropped from $1.39 in 2004 to $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 31%, 34%,
and 27% of our cost of sales in 2003, 2004, and 2005, respectively, with an
annual average price per pound of $1.06, $1.39, and $1.20, respectively. A 10%
increase in the fresh chicken wing costs for 2005 would have increased
restaurant cost of sales by approximately $1.6 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."
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 or that new restaurants opened by either of
us will be operated profitably. 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. Further, any restaurants that we or
our franchisees open may not achieve operating results similar to those of our
existing restaurants. Our ability to expand successfully will depend on a number
of factors, many of which are beyond our control. These factors include:
9
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 site-selection criteria established by us. We
may make errors in selecting these criteria or applying these criteria to a
particular site, or we or our franchisees may not be able to find sufficient new
restaurant sites that satisfy these criteria to support 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. 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 the profitability of these
restaurants. We may not be successful in operating our restaurants in new
markets on a profitable basis.
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.
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 67% of our restaurants are franchised.
Franchising royalties and fees represented approximately 11% of our revenues
during fiscal 2003, 2004, and 2005. 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.
10
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 2003, 2004, and 2005, vendor allowances were recorded as a
reduction in inventoriable costs and cost of sales was reduced by $2.3 million,
$3.9 million, and $4.0 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;
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;
11
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. In the future, operating results may 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 25, 2005, 81, or approximately 22%, 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
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. A decrease in
guest traffic 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.
12
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
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 adversely affect our
financial condition or results of operations. Further, adverse publicity
resulting from these allegations may materially adversely affect us and our
restaurants.
13
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, 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.
14
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 November 1, 2007 with options to renew for two successive
five-year terms.
As of December 25, 2005, we owned and operated 122 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. In addition, 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.
The following table sets forth the 35 states in which Buffalo Wild Wings
restaurants are located and the number of restaurants in each state as of
December 25, 2005:
NUMBER OF RESTAURANTS OPEN
-------------------------------------------
COMPANY-OWNED FRANCHISED TOTAL
-------------- ---------- ---------
Alabama 1 5 6
Arkansas -- 2 2
Arizona -- 9 9
California -- 1 1
Colorado 7 1 8
Delaware -- 1 1
Florida -- 11 11
Georgia 7 -- 7
Illinois 1 18 19
Indiana 2 26 28
Iowa 3 -- 3
Kansas 6 -- 6
Kentucky 9 4 13
Louisiana -- 5 5
Maryland -- 2 2
Michigan -- 23 23
Minnesota 15 3 18
Mississippi 1 2 3
Missouri 3 8 11
Montana -- 1 1
Nebraska 5 2 7
Nevada -- 7 7
New York 4 1 5
North Carolina 8 3 11
North Dakota -- 4 4
Ohio 21 60 81
Oklahoma -- 4 4
Pennsylvania 3 -- 3
South Carolina -- 1 1
South Dakota -- 1 1
Tennessee 9 -- 9
Texas 12 24 36
Virginia -- 12 12
West Virginia -- 3 3
Wisconsin 5 4 9
-------------- ---------- ---------
Total 122 248 370
============== ========== =========
15
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
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 National Stock Market under the
symbol "BWLD". The following table sets forth, the high and low closing sale
prices of our Common Stock. These quotations represent inter-dealer prices and
do not include retail mark-ups, markdowns or commissions and may not necessarily
represent actual transactions.
2005 2004
---------------------- ----------------------
HIGH LOW HIGH LOW
----------- ---------- ---------- ----------
First Quarter $ 41.27 $ 32.01 $ 27.98 $ 23.29
Second Quarter 40.00 27.58 34.05 25.93
Third Quarter 34.75 27.04 31.49 26.20
Fourth Quarter 34.03 25.45 37.53 27.33
HOLDERS
As of February 1, 2006, there were approximately 150 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 capital stock and do
not anticipate declaring or paying any cash dividends in the foreseeable future.
We intend to retain future earnings for the development of our business.
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."
REPURCHASES
The following table sets out shares of our Common Stock repurchased by
us in 2005.
(d) Maximum Number
(c) Total Number of (or Approximate
Shares (or Units) Dollar Value) of
Purchased as Part Shares (or Units)
(a) Total Number of (b) Average Price of Publicly that May Yet Be
Shares (or Units) Paid per Share (or Announced Plans or Purchased Under the
Period Purchased(1) Unit) Programs Plans or Programs
- -------------------------- ------------------ ------------------ ------------------ -----------------
Feb. 1 - Feb. 28, 2005 1,362 $38.11 N/A N/A
March 1 - March 31, 2005 5,002 37.33 N/A N/A
August 1 - August 31, 2005 324 31.10 N/A N/A
-----------------
Total 6,688
=================
(1) All of the shares were repurchased by us in connection with payment of the
exercise price upon stock-for-stock option exercises or payment of taxes upon
vesting of restricted stock by employees, including seven executive officers.
INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
We completed an initial public offering of 3,450,000 shares of common
stock, of which 3,250,000 shares were offered by us and 200,000 were offered by
selling shareholders, at an aggregate offering price of $58.7 million or $17.00
per share pursuant to registration statement No. 333-108695, which was declared
effective on November 20, 2003. The managing underwriters for the IPO were RBC
Capital Markets, SG Cowen and McDonald Investments Inc.
17
We received net proceeds, after expenses, from the IPO of $49.7 million.
Offering expenses related to the IPO included an underwriting discount of $3.9
million and other offering expenses of $1.6 million. We used $10.6 million of
the net proceeds for the repayment of capital leases and bank notes. The
remaining proceeds are expected to be used for general corporate purposes,
including opening new restaurants and renovation and maintenance of existing
restaurants, acquiring existing restaurants from franchisees, research and
development, working capital, and capital expenditures. We invest our cash
balances in short-term investment instruments with the focus on protection of
principal, adequate liquidity and maximization of after-tax returns. These
investments include, but are not limited to high quality money market funds,
commercial paper, U.S. government-backed instruments, repurchase agreements,
municipal securities, and asset-backed securities.
We have experienced positive same store sales and solid financial
performance in both 2004 and 2005 with cash flow from operations of $21.4 and
$24.7 million, respectively. These amounts were adequate to fund expansion of
new company-owned restaurants.
18
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. 30, Dec. 29, Dec. 28, Dec. 26, Dec 25,
2001 2002 2003 2004 2005
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Revenue:
Restaurant sales $ 66,351 $ 85,493 $ 112,965 $ 152,221 $ 185,823
Franchising royalties and fees 8,219 10,614 13,532 18,827 23,877
----------- ----------- ----------- ----------- -----------
Total revenue 74,570 96,107 126,497 171,048 209,700
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 21,133 24,983 35,423 51,507 58,771
Labor 18,563 24,640 32,684 43,853 55,403
Operating 10,328 13,311 17,559 23,080 29,717
Occupancy 4,262 5,734 7,738 10,259 14,172
Depreciation 4,096 5,528 7,021 9,717 11,765
General and administrative 10,333 14,133 16,926 19,372 22,303
Preopening 653 1,085 1,155 2,042 2,599
Restaurant impairment and closures 289 708 868 573 1,991
----------- ----------- ----------- ----------- -----------
Total costs and expenses 69,657 90,122 119,374 160,403 196,721
----------- ----------- ----------- ----------- -----------
Income from operations 4,913 5,985 7,123 10,645 12,979
Other income (expense), net (713) (878) (1,246) 671 1,340
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 4,200 5,107 5,877 11,316 14,319
Income tax expense 1,499 2,030 2,294 4,115 5,439
----------- ----------- ----------- ----------- -----------
Net earnings 2,701 3,077 3,583 7,201 8,880
Accretion resulting from cumulative dividend and
mandatory redemption feature of preferred stock 1,317 1 ,457 1,452 -- --
----------- ----------- ----------- ----------- -----------
Net earnings available to common stockholders $ 1,384 $ 1,620 $ 2,131 $ 7,201 $ 8,880
=========== =========== =========== =========== ===========
Earnings per common share - basic $ 0.56 $ 0.64 $ 0.66 $ 0.88 $ 1.05
Weighted average shares outstanding - basic 2,469,000 2,529,000 3,222,000 8,165,000 8,446,000
Earnings per common share - diluted $ 0.50 $ 0.54 $ 0.55 $ 0.84 $ 1.02
Weighted average shares outstanding - diluted 2,781,000 2,976,000 3,842,000 8,603,000 8,708,000
CONSOLIDATED STATEMENTS OF CASH FLOW DATA:
Net cash provided by operating activities $ 11,870 $ 10,337 $ 17,753 $ 21,362 $ 24,700
Net cash used in investing activities (7,853) (9,592) (10,739) (59,915) (34,001)
Net cash provided by (used in) financing activities (1,267) (3,481) 37,872 1,572 730
As of(1)
---------------------------------------------------------------------------
Dec. 30, Dec. 29, Dec. 28, Dec. 26, Dec 25,
2001 2002 2003 2004 2005
----------- ----------- ----------- ----------- -----------
(in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Total current assets $ 12,469 $ 12,656 $ 55,663 $ 57,021 $ 61,079
Total assets 40,971 50,741 103,999 118,985 133,123
Total current liabilities 13,003 14,827 15,641 18,327 20,203
Total liabilities 23,717 30,390 28,932 33,278 36,275
Mandatorily redeemable Series A Preferred Stock 10,331 11,788 -- -- --
Retained earnings 5,081 6,701 8,832 16,033 24,913
Total common stockholders' equity 6,923 8,563 75,067 85,707 96,848
(1) The company utilizes a 52- or 53-week accounting period that ends on the
last Sunday in December. The fiscal years ended December 30, 2001, December
29, 2002, December 28, 2003, December 26, 2004, and December 25, 2005 were
comprised of 52 weeks. Fiscal 2006 will be a 53-week year.
19
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 2006 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 the our revenues as
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 25, 2005, we owned and operated 122 and franchised an
additional 248 Buffalo Wild Wings Grill & Bar restaurants in 35 states. Of the
370 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 1,000 locations, with 20% annual unit growth in the next
several 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 our cost of goods sold. The costs of goods sold
is difficult to predict, as it ranged 30.7% to 35.0% quarter to quarter in 2004
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 and menu price increases.
We will continue to monitor the cost of fresh chicken wing prices, 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.
[DATA REPRESENTING CHART]
[GRAPHIC OMITTED]
Average Quarterly Wing Prices
2001-2005
Q1 Q2 Q3 Q4
2005 1.45 1.14 1.08 1.17
2004 1.49 1.46 1.35 1.30
2003 1.01 1.02 1.00 1.21
2002 1.11 0.87 0.84 0.78
2001 1.14 1.22 1.22 1.16
2000 0.87 0.79 0.86 1.00
20
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 2006, 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.
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 flexible 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 2005. Food and nonalcoholic beverages accounted for
71% of restaurant sales. The remaining 29% of restaurant sales was
from alcoholic beverages. The menu item with the highest sales volume
is chicken wings at 25% 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 under-performing 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 five years ended December 25, 2005
were 52-week years. Our fiscal 2006 will be 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 2003, 2004, and 2005, we recognized $621,000, $453,000 and $1.7
million, respectively, of asset impairment charges.
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
2003, we recorded a reserve of $163,000, which included charges of $87,000 for a
restaurant closed in 2003 and an additional charge of $76,000 for the restaurant
closed in 2002.
21
The reconciliation of the store closing reserve for the years ended
December 28, 2003, December 26, 2004, and December 25, 2005 is as follows:
As of As of
Dec. 29, 2003 Costs Dec. 28,
2002 provision incurred 2003
---------- ---------- ---------- ----------
Remaining lease obligation and utilities $ 164 $ 210 $ (163) $ 211
Broker fees 58 (47) -- 11
---------- ---------- ---------- ----------
$ 222 $ 163 $ (163) $ 222
========== ========== ========== ==========
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
========== ========== ========== ==========
As of As of
Dec. 26, 2005 Costs Dec. 25,
2004 provision incurred 2005
---------- ---------- ---------- ----------
Remaining lease obligation and utilities $ 136 $ -- $ (136) $ --
Broker fees -- -- -- --
---------- ---------- ---------- ----------
$ 136 $ -- $ (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 2003,
2004, and 2005, vendor allowances were recorded as a reduction in inventoriable
costs, and cost of sales was reduced by $2.3 million, $3.9 million, and $4.0
million, respectively.
REVENUE RECOGNITION -- FRANCHISE OPERATIONS
Our franchise agreements have terms ranging from 10 to 20 years. These
agreements also convey extension terms of five 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 all our material obligations and initial services
to be provided by us have been performed. 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.
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. The company maintains
stop-loss coverage with third party insurers to limit its 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 severity or frequency of claims, differ from our
estimates, our financial results could be impacted.
22
RESULTS OF OPERATIONS
Our operating results for 2003, 2004 and 2005 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. 28, Dec. 26, Dec. 25,
2003 2004 2005
---------- ---------- ----------
Revenue:
Restaurant sales 89.3% 89.0% 88.6%
Franchising royalties and fees 10.7 11.0 11.4
---------- ---------- ----------
Total revenue 100.0 100.0 100.0
---------- ---------- ----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 31.4 33.8 31.6
Labor 28.9 28.8 29.8
Operating 15.5 15.2 16.0
Occupancy 6.9 6.7 7.6
Depreciation 5.6 5.7 5.6
General and administrative 13.4 11.3 10.6
Preopening 0.9 1.2 1.2
Restaurant impairment and closures 0.7 0.3 0.9
---------- ---------- ----------
Total costs and expenses 94.4 93.8 93.8
---------- ---------- ----------
Income from operations 5.6 6.2 6.2
---------- ---------- ----------
Other income (expense):
Interest income 0.1 0.4 0.6
Interest expense (0.8) -- --
Cost of debt extinguishment (0.3) -- --
---------- ---------- ----------
Total other income (expense), net (1.0) 0.4 0.6
---------- ---------- ----------
Earnings before income taxes 4.6 6.6 6.8
Income tax expense 1.8 2.4 2.6
---------- ---------- ----------
Net earnings 2.8 4.2 4.2
Accretion resulting from cumulative
dividend and mandatory redemption
feature of preferred stock 1.1 -- --
---------- ---------- ----------
Net earnings available to common stockholders 1.7% 4.2% 4.2%
========== ========== ==========
The number of company-owned and franchised restaurants open are as follows:
As of
-----------------------------------------
Dec. 28, Dec. 26, Dec. 25,
2003 2004 2005
---------- ---------- ----------
Company-owned restaurants 84 103 122
Franchised restaurants 161 203 248
23
The restaurant sales for company-owned and franchised restaurants are as
follows (in thousands of dollars):
Fiscal Years Ended
----------------------------------------
Dec. 28, Dec. 26, Dec. 25,
2003 2004 2005
------------ ------------ ------------
Company-owned restaurant sales $ 112,965 $ 152,221 $ 185,823
Franchised restaurant sales 252,165 359,175 470,667
Increases in comparable same-store sales are as follows (based on
restaurants operating at least fifteen months):
Fiscal Years Ended
----------------------------------------
Dec. 28, Dec. 26, Dec. 25,
2003 2004 2005
------------ ------------ ------------
Company-owned same-store sales 4.3% 9.7% 3.2%
Franchised same-store sales 5.6 7.6 2.2
The annual average prices paid per pound for fresh chicken wings are as
follows:
Fiscal Years Ended
----------------------------------------
Dec. 28, Dec. 26, Dec. 25,
2003 2004 2005
------------ ------------ ------------
Annual average price per pound $ 1.06 $ 1.39 $ 1.20
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.
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.
24
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, which demonstrates our
ability to leverage existing corporate infrastructure. 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
and incurred cost of approximately $38,000 for restaurants that will open 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. In 2006, due to the expensing of preopening rent, we
expect the average preopening expense per restaurant to be $165,000.
Restaurant impairment and closures increased by $1.4 million, or 247.5%,
to $2 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 under-performing restaurants in Atlanta. No future cash
expenditures are expected as a result of this impairment. In addition, the
assets and goodwill impairment of one under-performing 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 are 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. For 2006, we believe our effective tax rate will be
between 38% and 39%.
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
Restaurant sales increased by $39.3 million, or 34.8%, to $152.2 million
in 2004 from $113.0 million in 2003. The increase in restaurant sales was due to
a $29.3 million increase associated with the opening of 19 new company-owned
restaurants in 2004 and the 24 company-owned restaurants opened before 2004 that
did not meet the criteria for same-store sales and $10.0 million related to a
9.7% increase in same-store sales. The increase in same-store sales from 4.3% in
2003 to 9.7% in 2004 was due to additional marketing media and promotions, new
menu items, and menu price increases.
Franchise royalties and fees increased by $5.3 million, or 39.1%, to $18.8
million in 2004 from $13.5 million in 2003. The increase was due primarily to
additional royalties collected from the 42 new franchised restaurants that
opened in 2004 and a full year of operations for the 36 franchised restaurants
that opened in 2003. Same-store sales for franchised restaurants increased 7.6%.
Cost of sales increased by $16.1 million, or 45.4%, to $51.5 million in
2004 from $35.4 million in 2003 due primarily to more restaurants being operated
in 2004. Cost of sales as a percentage of restaurant sales increased to 33.8% in
2004 from 31.4% in 2003. The increase in cost of sales as a percentage of
restaurant sales was primarily due to higher fresh chicken wing costs. Fresh
chicken wings were 34% of cost of goods sold in 2004 compared to 31% in 2003.
This increase was primarily due to the rise in average wing costs to $1.39 per
pound in 2004 from $1.06 per pound in 2003.
Labor expenses increased by $11.2 million, or 34.2%, to $43.9 million in
2004 from $32.7 million in 2003 due primarily to more restaurants being operated
in 2004. Labor expenses as a percentage of restaurant sales were essentially
flat year over year, at 28.8% in 2004 compared to 28.9% in 2003. Labor trends in
our restaurants opened 15 months or longer were better than prior year but were
offset by a tripling of our worker's compensation rates under the state-run
insurance program for our 21 Ohio stores. Our labor trends for company-owned
restaurants opened less than 15 months remain high as we continue to build our
brand in new markets.
Operating expenses increased by $5.5 million, or 31.4%, to $23.1 million
in 2004 from $17.6 million in 2003 due primarily to more restaurants being
operated in 2004. Operating expenses as a percentage of restaurant sales
decreased to 15.2% in 2004 from 15.5% in 2003. The decrease in operating
expenses as a percentage of restaurant sales was primarily due to the fact that
expenses for local store marketing and supplies, insurance costs, and cable
subscriptions on sports packages did not increase at the same rate relative to
our sales growth.
25
Occupancy expenses increased by $2.5 million, or 32.6%, to $10.3 million
in 2004 from $7.7 million in 2003 due primarily to more restaurants being
operated in 2004. Occupancy expenses as a percentage of restaurant sales
decreased to 6.7% in 2004 from 6.9% in 2003.
Depreciation increased by $2.7 million, or 38.4%, to $9.7 million in 2004
from $7.0 million in 2003. The increase was primarily due to the additional
depreciation on 19 new restaurants in 2004 and 15 new restaurants opened in 2003
and operated for a full year in 2004.
General and administrative expenses increased by $2.4 million, or 14.5%,
to $19.4 million in 2004 from $16.9 million in 2003. General and administrative
expenses as a percentage of total revenue decreased to 11.3% in 2004 from 13.4%
in 2003. This decrease was primarily due to a planned decrease in general and
administrative expense growth relative to sales growth, and to our ability to
leverage existing corporate infrastructure. However, this decrease was partially
offset by $909,000 of stock-based compensation related to the restricted stock
plan implemented in 2004.
Preopening costs increased by $887,000, or 76.8%, to $2.0 million in 2004
from $1.2 million in 2003. 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. In
2003, we opened 15 new company-owned restaurants and incurred cost of
approximately $39,000 for 5 restaurants that opened in 2004. Average preopening
cost per restaurant was $94,000 and $77,000 in 2004 and 2003, respectively.
Restaurant impairment and closures decreased by $295,000, or 34.0%, to
$573,000 in 2004 from $868,000 in 2003. 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. The expense in 2003 represented the asset impairment of one
underperforming restaurant, closure of one restaurant, additional reserves
related to a restaurant which closed in 2002, and impairment of liquor licenses
in Ohio.
Interest income increased by $559,000 to $671,000 in 2004 from $112,000 in
2003. The increase was due to interest income generated on the higher cash
balances as a result of the initial public offering of common stock in November
2003. Cash and marketable securities balances at the end of the year were $49.0
million in 2004 compared to $49.5 million in 2003.
Interest expense decreased to zero in 2004 from $947,000 in 2003. All
long-term debt and capital lease obligations were repaid in early December 2003
with proceeds from the initial public offering. In addition to the interest
expense, we incurred a cost of debt extinguishment of $411,000 in 2003 relating
to the repayment.
Provision for income taxes increased $1.8 million to $4.1 million in 2004
from $2.3 million in 2003. The effective tax rate as a percentage of income
before taxes decreased from 39.0% in 2003 to 36.4% in 2004. The rate decrease
was primarily a result of favorable resolutions of prior year state income tax
matters and an increase in FICA tax credits for employee-reported tips.
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 the fiscal year
ended 2005 was $52.4 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 25, 2005, nearly all excess cash was
invested in high quality municipal securities. We repaid all long-term capital
lease obligations and long-term debt in December 2003.
During fiscal 2003, 2004, and 2005, net cash provided by operating
activities was $17.8 million, $21.4 million, and $24.7 million, respectively.
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.
26
Net cash provided by operating activities in 2003 consisted primarily of
net earnings adjusted for non-cash expenses, an increase in accounts payable,
accrued expenses, and unearned franchise fees partially offset by an increase in
prepaid expenses. The increase in accounts payable is relative to the growth in
the number of company-owned restaurants. The increase in accrued expenses was
due to larger gift card liabilities, professional fees, and relocation costs.
The increase in unearned franchise fees was due to an increased number of
franchise agreements sold but not yet opened. The increase in prepaid expenses
was due to higher insurance costs as we completed our initial public offering.
Net cash used in investing activities for 2003, 2004, and 2005 was $10.7
million, $59.9 million, and $34.0 million, respectively. Investing activities
included purchases of property and equipment related to the opening of new
restaurants in all periods. In 2003, 2004, and 2005, we opened 15, 19, and 19
new restaurants, respectively. We expect capital expenditures to increase to
approximately $26 million in fiscal 2006 due to the addition of new
company-owned restaurants and the renovation and maintenance of existing
restaurants. In 2006, we plan to open 20 new company-owned restaurants and 50 to
55 new franchised restaurants. During 2004, we began investing in marketable
securities with maturities longer than 90 days. In 2004, we purchased $95.5
million of marketable securities and received proceeds of $58.9 million as
investments in marketable securities matured. 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.
Net cash provided by financing activities for 2003, 2004 and 2005 was
$37.9 million, $1.6 million, and $730,000, respectively. 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. No additional funding from the
issuance of common stock (other than from the exercise of options and employee
stock purchases) is anticipated in 2006. 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. Net cash provided by financing activities for 2003 resulted
primarily from the issuance of common stock from the initial public offering
($49.8 million) and proceeds from the exercise of warrants and stock options
($1.2 million), partially offset by payments and payoff of all long-term debt
and capital lease obligations ($13.2 million).
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 properties on 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 25, 2005:
Payments Due By Period
(in thousands)
--------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
------------- ---------- ---------- ---------- -----------
Operating lease obligations $ 121,825 13,793 26,571 23,235 58,226
Commitments for restaurants under
development 14,353 1,008 2,719 2,762 7,864
------------- ---------- ----------- ---------- ----------
Total $ 136,178 14,801 29,290 25,997 66,090
============= ========== =========== ========== ==========
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
cash provided by operations. We believe the cash flows from our operating
activities in 2006 will also be sufficient to fund our capital expenditures for
the current year.
27
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting
for Rental Costs Incurred During a Construction Period" ("FSP 13-1"). FSP 13-1
is effective for the first reporting period beginning after December 15, 2005.
FSP 13-1 states that rental costs associated with operating leases must be
recognized as rental expense allocated on a straight-line basis over the lease
term, which includes the construction period. We will adopt this new
pronouncement in our first quarter of fiscal 2006. The adoption of FSP 13-1 is
expected to increase our preopening costs by $30,000 per company-owned
restaurant opening in 2006.
In November 2005, the FASB issued Staff Position No. FAS 115-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("FSP 115-1"). FSP 115-1 provides accounting guidance for
identifying and recognizing other-than-temporary impairments of debt and equity
securities, as well as cost method investments in addition to disclosure
requirements. FSP 115-1 is effective for reporting periods beginning after
December 15, 2005, and earlier application is permitted. We will adopt this new
pronouncement in our first quarter of fiscal 2006. The adoption of FSP 115-1 is
not expected to have a material impact on our consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004) (SFAS No.
123R), Shared-Based Payment. SFAS 123R will require us to, among other things,
measure all employee stock-based compensation awards using a fair value method
and record the expense in our consolidated financial statements. The provisions
of SFAS 123R, as amended by SEC Staff Accounting Bulletin No. 107, "Share-Based
Payment," are effective no later than the beginning of the next fiscal year that
begins after June 15, 2005. We will adopt the new requirements using the
modified prospective transition method in our first fiscal quarter of 2006,
which ends March 26, 2006. Under that method, we will recognize compensation
costs for new grants of stock-based awards, awards modified after the effective
date, and the remaining portion of the fair value of the unvested awards at the
adoption date. In addition to the recognition of expense in the financial
statements, under SFAS 123R, any excess tax benefits received upon exercise of
options will be presented as a financing activity inflow in the statement of
cash flows rather than as an adjustment of operating activity as currently
presented. As SFAS 123R applies to the calculation of stock-based compensation
for restricted stock units, beginning in the first quarter of 2006, the value of
our restricted stock units will be based on the fair value of the shares on the
grant date instead of the fair value of the shares when vesting as the expense
is now calculated. Based on our current analysis and information, management has
determined that after adoption of SFAS 123R, our total stock-based compensation
will be approximately $3.0 million in 2006.
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. As a
result, our quarterly results of operations are not necessarily indicative of
the results that may be achieved for any future period.
28
RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
Mar. 28, Jun. 27, Sep. 26, Dec. 26, Mar. 27, Jun. 26, Sept. 25, Dec. 25,
2004 2004 2004 2004 2005 2005 2005 2005
------- ------- ------- ------- ------- ------- -------- -------
Restaurant sales $35,926 $35,291 $37,900 $43,104 $45,073 $42,570 $ 45,892 $52,288
Franchise royalties and fees 4,257 4,261 4,807 5,502 5,720 5,653 5,840 6,664
------- ------- ------- ------- ------- ------- -------- -------
Total revenue 40,183 39,552 42,707 48,606 50,793 48,223 51,732 58,952
------- ------- ------- ------- ------- ------- -------- -------
Costs and expenses:
Restaurant operating costs:
Cost of sales 12,427 12,342 12,755 13,983 15,231 13,291 14,096 16,153
Labor 9,959 10,095 11,203 12,596 13,217 12,976 13,743 15,467
Operating 5,422 5,358 5,925 6,375 6,857 6,666 7,529 8,665
Occupancy 2,293 2,582 2,719 2,665 3,156 3,395 3,616 4,005
Depreciation 2,033 2,156 2,245 3,283 2,675 2,832 2,998 3,260
General and administrative 4,054 4,569 5,009 5,740 5,626 5,634 5,383 5,660
Preopening 343 451 585 663 313 600 818 868
Restaurant impairment
and closures 11 28 508 26 18 4 849 1,120
------- ------- ------- ------- ------- ------- -------- -------
Total costs and expenses 36,542 37,581 40,949 45,331 47,093 45,398 49,032 55,198
------- ------- ------- ------- ------- ------- -------- -------
Income from operations 3,641 1,971 1,758 3,276 3,700 2,825 2,700 3,754
Other income:
Interest income 133 155 174 209 272 337 349 382
------- ------- ------- ------- ------- ------- -------- -------
Total other income 133 155 174 209 272 337 349 382
------- ------- ------- ------- ------- ------- -------- -------
Earnings before income taxes 3,774 2,126 1,932 3,485 3,972 3,162 3,049 4,136
Income tax expense 1,472 829 753 1,061 1,521 1,226 1,174 1,518
------- ------- ------- ------- ------- ------- -------- -------
Net earnings $ 2,302 $ 1,297 $ 1,179 $ 2,424 $ 2,451 $ 1,936 $ 1,875 $ 2,618
======= ======= ======= ======= ======= ======= ======== =======
Earnings per common share--basic 0.29 0.16 0.14 0.29 0.29 0.23 0.22 0.31
Earnings per common share--diluted 0.27 0.15 0.14 0.28 0.28 0.22 0.22 0.30
Weighted average shares
outstanding--basic 7,815 8,097 8,253 8,318 8,367 8,448 8,473 8,482
Weighted average shares
outstanding--diluted 8,382 8,575 8,599 8,645 8,677 8,675 8,678 8,711
29
RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
Mar. 28, Jun. 27, Sep. 26, Dec. 26, Mar. 27, Jun. 26, Sept. 25, Dec. 25,
2004 2004 2004 2004 2005 2005 2005 2005
------- ------- ------- ------- ------- ------- -------- -------
Revenue:
Restaurant sales 89.4% 89.2% 88.7% 88.7% 88.7% 88.3% 88.7% 88.7%
Franchise royalties and fees 10.6 10.8 11.3 11.3 11.3 11.7 11.3 11.3
------- ------- ------- ------- ------- ------- -------- -------
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 34.6 35.0 33.7 32.4 33.8 31.2 30.7 30.9
Labor 27.7 28.6 29.6 29.2 29.3 30.5 29.9 29.6
Operating 15.1 15.2 15.6 14.8 15.2 15.7 16.4 16.6
Occupancy 6.4 7.3 7.2 6.2 7.0 8.0 7.9 7.7
Depreciation 5.1 5.5 5.3 6.8 5.3 5.9 5.8 5.5
General and administrative 10.1 11.5 11.7 11.8 11.1 11.7 10.4 9.6
Preopening 0.9 1.1 1.4 1.4 0.6 1.2 1.6 1.5
Restaurant impairment and
closures -- 0.1 1.2 0.1 0.0 0.0 1.6 1.9
------- ------- ------- ------- ------- ------- -------- -------
Total costs and expenses 90.9 95.0 95.9 93.3 92.7 94.1 94.8 93.6
------- ------- ------- ------- ------- ------- -------- -------
Income from operations 9.1 5.0 4.1 6.7 7.3 5.9 5.2 6.4
Other income:
Interest income 0.3 0.4 0.4 0.4 0.5 0.7 0.7 0.6
------- ------- ------- ------- ------- ------- -------- -------
Total other income 0.3 0.4 0.4 0.4 0.5 0.7 0.7 0.6
------- ------- ------- ------- ------- ------- -------- -------
Earnings before income taxes 9.4 5.4 4.5 7.2 7.8 6.6 5.9 7.0
Income tax expense 3.7 2.1 1.8 2.2 3.0 2.5 2.3 2.6
------- ------- ------- ------- ------- ------- -------- -------
Net earnings 5.7% 3.3% 2.8% 5.0% 4.8% 4.0% 3.6% 4.4%
======= ======= ======= ======= ======= ======= ======== =======
30
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.
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 2005 averaged 14% lower than 2004 as the average
price per pound dropped from $1.39 in 2004 to $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 31%, 34%,
and 27% of our cost of sales in 2003, 2004, and 2005, respectively, with an
annual average price per pound of $1.06, $1.39, and $1.20, respectively. A 10%
increase in fresh chicken wing costs during 2005, would have increased
restaurant cost of sales by approximately $1.6 million for fiscal 2005.
Additional information related to chicken wing prices is included in Item 7
under "Results of Operations."
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 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.
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.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BUFFALO WILD WINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 33
Consolidated Balance Sheets as of December 26, 2004 and December 25, 2005 34
Consolidated Statements of Earnings for the Years Ended December 28, 2003, December 26, 2004, and December 25, 2005 35
Consolidated Statements of Stockholders' Equity for the Years Ended December 28, 2003, December 26, 2004, and
December 25, 2005 36
Consolidated Statements of Cash Flows for the Years Ended December 28, 2003, December 26, 2004, and December 25, 2005 37
Notes to Consolidated Financial Statements 38
32
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 26, 2004 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 25, 2005. 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 26, 2004 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 25, 2005, in conformity with U.S.
generally accepted accounting principles.
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 25, 2005,
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 February 24, 2006 expressed an unqualified
opinion on management's assessment of, and the effective operation of internal
controls over financial reporting.
/S/ KPMG LLP
Minneapolis, Minnesota
February 24, 2006
33
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS)
December 26, December 25,
2004 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 12,557 3,986
Marketable securities 36,454 48,418
Accounts receivable--franchisees, net of allowance of $25 689 731
Accounts receivable--other 2,077 3,700
Inventory 1,207 1,502
Income taxes receivable 1,727 --
Prepaid expenses 1,470 1,972
Deferred income taxes 840 770
--------- ---------
Total current assets 57,021 61,079
Property and equipment, net 59,649 68,693
Restricted cash 782 2,115
Other assets 774 867
Goodwill 759 369
--------- ---------
Total assets $ 118,985 133,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned franchise fees $ 2,433 2,194
Accounts payable 5,383 6,628
Accrued income tax payable -- 102
Accrued compensation and benefits 6,339 6,775
Accrued expenses 3,663 3,900
Current portion of deferred lease credits 509 604
--------- ---------
Total current liabilities 18,327 20,203
Long-term liabilities:
Marketing fund payables 782 2,115
Deferred income taxes 6,298 4,755
Deferred lease credits, net of current portion 7,871 9,202
--------- ---------
Total liabilities 33,278 36,275
--------- ---------
Commitments and contingencies (notes 4, 12, and 14)
Stockholders' equity:
Undesignated stock, 5,600,000 shares authorized; none issued -- --
Common stock, no par value. Authorized 15,600,000 shares;
issued and outstanding
8,425,771, and 8,616,222, respectively 71,491 74,503
Deferred compensation (1,817) (2,568)
Retained earnings 16,033 24,913
--------- ---------
Total stockholders' equity 85,707 96,848
--------- ---------
Total liabilities and stockholders' equity $ 118,985 133,123
========= =========
See accompanying notes to consolidated financial statements.
34
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 26,
2004, AND DECEMBER 25, 2005 (DOLLAR AMOUNTS
IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
2003 2004 2005
----------- ---------- ----------
Revenue:
Restaurant sales $ 112,965 152,221 185,823
Franchise royalties and fees 13,532 18,827 23,877
----------- ---------- ----------
Total revenue 126,497 171,048 209,700
----------- ---------- ----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 35,423 51,507 58,771
Labor 32,684 43,853 55,403
Operating 17,559 23,080 29,717
Occupancy 7,738 10,259 14,172
Depreciation 7,021 9,717 11,765
General and administrative (1) 16,926 19,372 22,303
Preopening 1,155 2,042 2,599
Restaurant impairment and closures 868 573 1,991
----------- ---------- ----------
Total costs and expenses 119,374 160,403 196,721
----------- ---------- ----------
Income from operations 7,123 10,645 12,979
----------- ---------- ----------
Other income (expense):
Interest income 112 671 1,340
Interest expense (947) -- --
Cost of debt extinguishment (411) -- --
----------- ---------- ----------
Total other income (expense), net (1,246) 671 1,340
----------- ---------- ----------
Earnings before income taxes 5,877 11,316 14,319
Income tax expense 2,294 4,115 5,439
----------- ---------- ----------
Net earnings 3,583 7,201 8,880
Accretion resulting from cumulative dividend and mandatory
redemption feature of preferred stock 1,452 -- --
----------- ---------- ----------
Net earnings available to common stockholders $ 2,131 7,201 8,880
=========== ========== ==========
Earnings per common share--basic $ 0.66 0.88 1.05
Earnings per common share--diluted 0.55 0.84 1.02
Weighted average shares outstanding--basic 3,222,445 8,165,078 8,446,200
Weighted average shares outstanding--diluted 3,841,961 8,603,881 8,708,494
(1) Contains stock-based compensation of $0, $909, and $1,700
See accompanying notes to consolidated financial statements.
35
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FISCAL YEARS ENDED DECEMBER 28,
2003, DECEMBER 26, 2004, AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS)
Common Stock
---------------------- Deferred Retained
Shares Amount Compensation Earnings Total
--------- -------- ------------ ----------- -----------
Balance at December 29, 2002 2,534,929 $ 1,862 -- 6,701 8,563
Net earnings -- -- -- 3,583 3,583
Accretion resulting from cumulative dividend and mandatory
redemption feature of preferred stock -- -- -- (1,452) (1,452)
Conversion of preferred stock 1,849,415 13,240 -- -- 13,240
Issuance of common stock 3,250,000 49,766 -- -- 49,766
Exercise of warrants 177,169 456 -- -- 456
Exercise of stock options 170,432 725 -- -- 725
Tax benefit from stock issued -- 163 -- -- 163
Stock-based compensation -- 23 -- -- 23
--------- ------- ------ ------ ------
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
========= ======= ====== ====== ======
See accompanying notes to consolidated financial statements.
36
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 2003, DECEMBER 26, 2004, AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS)
Fiscal years ended
--------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------- --------- ---------
Cash flows from operating activities:
Net earnings $ 3,583 7,201 8,880
Adjustments to reconcile net
earnings to cash provided by operations:
Depreciation 7,021 9,717 11,765
Amortization -- 151 90
Restaurant impairment and closures 868 573 1,991
Deferred lease credits 1,437 142 362
Deferred income taxes 916 1,947 (1,473)
Tax benefit from stock issuance 163 958 409
Stock-based compensation 23 909 1,700
Change in operating assets and liabilities:
Accounts receivable (15) (1,023) (1,064)
Inventory (194) (229) (295)
Prepaid expenses (697) (240) (502)
Other assets (21) (72) (93)
Unearned franchise fees 916 474 (239)
Accounts payable 1,640 442 1,245
Income taxes 478 (1,360) 1,829
Accrued expenses 1,635 1,772 95
-------- --------- --------
Net cash provided by operating activities 17,753 21,362 24,700
-------- --------- --------
Cash flows from investing activities:
Acquisition of property and equipment (10,739) (23,310) (21,947)
Purchase of marketable securities -- (95,475) (91,539)
Proceeds of marketable securities -- 58,870 79,485
-------- --------- --------
Net cash used in investing activities (10,739) (59,915) (34,001)
-------- --------- --------
Cash flows from financing activities:
Issuance of common stock 51,110 1,572 1,014
Tax payments for restricted stock -- -- (284)
Payments on notes payable (706) -- --
Payments on capital lease obligations (12,532) -- --
-------- --------- --------
Net cash provided by
financing activities 37,872 1,572 730
-------- --------- --------
Net increase (decrease) in cash
and cash equivalents 44,886 (36,981) (8,571)
Cash and cash equivalents
at beginning of year 4,652 49,538 12,557
-------- --------- --------
Cash and cash equivalents at end of year $ 49,538 12,557 3,986
======== ========= ========
See accompanying notes to consolidated financial statements.
37
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 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 28, 2003, December 26, 2004, and December 25, 2005, the
Company operated 84, 103, and 122, respectively, Company-owned restaurants and
had 161, 203, and 248, respectively, franchised restaurants.
(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 years ended December 28, 2003, December 26,
2004, and December 25, 2005, were comprised of 52 weeks.
(D) RESTAURANT SALES CONCENTRATION
As of December 25, 2005, the Company operated 21 Company-owned restaurants
and had 60 franchised restaurants in the state of Ohio. The Company-owned
restaurants in Ohio aggregated 31.9%, 26.5%, and 22.3%, respectively, of the
Company's restaurant sales in fiscal 2003, 2004, and 2005. 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
maturities at purchase of three months or less.
(F) MARKETABLE SECURITIES
Marketable securities consist of available-for-sale 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 2005. 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 results in these investments having a value at or near par value
(cost).
(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.
(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 our purchase requirements do not create a market risk.
The primary food product used by Company-owned and franchised restaurants is
38
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 2003, 2004, and 2005, fresh chicken wings were 31%, 34%, and 27%,
respectively, of restaurant cost of sales.
(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 range from one to ten years. Furniture and equipment, including equipment
under capital leases, 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.
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews 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.
(K) GOODWILL AND OTHER ASSETS
Goodwill represents the excess of cost over the fair value of identified
net assets of 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 book value,
including goodwill. If the fair value of the reporting unit exceeds the carrying
amount, the asset is not impaired. If the carrying value 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 value, a write-down is recorded. In the third quarter
of 2005, the Company recorded an impairment charge of $390 for goodwill not
considered recoverable based on estimated discounted cash flows. The remaining
goodwill was considered recoverable as of December 25, 2005.
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. In 2003, a decline in the value
of liquor licenses occurred in Ohio and a charge of $31 was recorded to reduce
the carrying value to fair value. The carrying value of the liquor licenses not
subject to amortization as of December 25, 2005 was $275 and is included in
other assets.
(L) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial assets and liabilities,
because of their short-term nature, approximates fair value.
(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 upon 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
39
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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.
(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 $2.1 million in sales in 2005. 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 aggregate $3,401, $4,278, and $5,809, in fiscal years ended 2003, 2004, and
2005, 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
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 2003, 2004, and 2005, vendor
allowances were recorded as a reduction in inventoriable costs, and cost of
sales was reduced by $2,338, $3,913, and $4,020, 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, which in 2005 was 2.5%, to a separate advertising fund that is
used for marketing and advertising efforts throughout the system. 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. As of December 26, 2005, the contribution
to the advertising fund will increase from 2.5% to 3% of sales.
40
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(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 and dilutive
convertible securities. Restricted stock units are included for calculating both
basic and diluted earnings per share at the time that the performance criteria
is met. Both basic and diluted earnings per common share are calculated after
deducting the accretion resulting from cumulative dividend and mandatory
redemption feature of the Company's Series A preferred stock, which was
converted to common stock in November 2003.
(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.
(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. Rent expense
recognized over the construction period is 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.
(W) STOCK-BASED COMPENSATION
The Company began granting performance-based restricted stock units in
June 2004. These units are subject to annual vesting upon the Company achieving
performance targets established by the Board of Directors. The Company records
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. However, the second one-third of
the restricted stock units is not subject to vesting until the first one-third
vests and the final one-third is not subject to vesting until the first
two-thirds of the award have vested. In 2004 and 2005, the Company granted
restricted stock units of 80,053 and 81,729, respectively. An aggregate 50,310
restricted stock units vested in 2005 and 75,964 restricted stock units are
subject to performance vesting requirements in future periods.
The Company applies the intrinsic-value method in accounting for its
employee stock option grants and records compensation expense for option grants
to employees under its stock option plan if the current market value of the
underlying stock at the grant date exceeds the stock option exercise price. No
such grants have been issued. Accordingly, no compensation cost has been
recognized for its stock options in the financial statements.
41
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Pro forma disclosure of the net earnings impact of applying an alternative
method of recognizing stock compensation expense over the vesting period is
based on the fair value of all stock-based awards on the date of grant. If the
Company had elected to recognize compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
earnings would have been decreased to the pro forma amounts indicated in the
table below.
The impact of calculating compensation cost for stock options under SFAS
No. 123 is reflected over the options' vesting period, typically four years.
Fiscal Years Ended
----------------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- -------------- -------------
Net earnings, as reported $ 3,583 7,201 8,880
Add:
Total stock-based employee compensation expense
included in reported 81
earnings, net of related tax effects 23 5 1,054
Deduct:
Total stock-based employee compensation
expense determined under the fair
value-based method for stock option and purchase
plans, net of related tax effects (253) (739) (1,210)
-------------- -------------- -------------
Pro forma net earnings $ 3,353 7,043 8,724
============== ============== =============
Net earnings per common share:
As reported (basic) $ 0.66 0.88 1.05
Pro forma (basic) 0.59 0.86 1.03
As reported (dilutive) 0.55 0.84 1.02
Pro forma (dilutive) 0.49 0.82 1.00
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Stock Options
----------------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- -------------- -------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 39.0% 38.0% 40.1%
Risk-free interest rate 2.5% 2.9% 3.5%
Expected life of options 5 years 5 years 5 years
Employee Stock Purchase Plan
----------------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- -------------- -------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 39.0% 38.0% - 39.0% 38.0% - 41.8%
Risk-free interest rate 2.5% 2.5% - 3.4% 3.1% - 4.3%
Expected life of options 0.5 years 0.5 years 0.5 years
The per-share weighted average fair value of stock options granted during
2003, 2004, and 2005 was $5.41, $10.44, and $14.02, respectively. Volatility was
calculated based on an analysis of the Company's industry peers and its own
stock price since the initial public offering in fiscal 2003.
42
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(X) NEW ACCOUNTING PRONOUNCEMENTS
In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting
for Rental Costs Incurred During a Construction Period" ("FSP 13-1"). FSP 13-1
is effective for the first reporting period beginning after December 15, 2005.
FSP 13-1 states that rental costs associated with operating leases must be
recognized as rental expense allocated on a straight-line basis over the lease
term, which includes the Company's construction period. The Company will adopt
this new pronouncement in its first quarter of fiscal 2006. The adoption of FSP
13-1 is expected to increase pre-opening costs by $30,000 per Company-owned
restaurant opening in 2006.
In November 2005, the FASB issued Staff Position No. FAS 115-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("FSP 115-1"). FSP 115-1 provides accounting guidance for
identifying and recognizing other-than-temporary impairments of debt and equity
securities, as well as cost method investments in addition to disclosure
requirements. FSP 115-1 is effective for reporting periods beginning after
December 15, 2005, and earlier application is permitted. The Company will
adopt this new pronouncement in the first quarter of fiscal 2006. The adoption
of FSP 115-1 is not expected to have a material impact on the Company's
consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004) (SFAS No.
123R), Shared-Based Payment. SFAS 123R will require the Company to, among other
things, measure all employee stock-based compensation awards using a fair value
method and record the expense in its consolidated financial statements. The
provisions of SFAS 123R, as amended by SEC Staff Accounting Bulletin No. 107,
"Share-Based Payment," are effective no later than the beginning of the next
fiscal year that begins after June 15, 2005. The Company will adopt the new
requirements using the modified prospective transition method in its first
fiscal quarter of 2006, which ends March 26, 2006. Under that method, the
Company will recognize compensation costs for new grants of stock-based awards,
awards modified after the effective date, and the remaining portion of the fair
value of the unvested awards at the adoption date. In addition to the
recognition of expense in the financial statements, under SFAS 123R, any excess
tax benefits received upon exercise of options will be presented as a financing
activity inflow in the statement of cash flows rather than as an adjustment of
operating activity as currently presented. As SFAS 123R applies to the
calculation of stock-based compensation for restricted stock units, beginning in
the first quarter of 2006, the value of the Company's restricted stock units
will be based on the fair value of the shares on the grant date instead of the
fair value of the shares when vesting as the expense is now calculated. Based on
the Company's current analysis and information, management has determined that
after adoption of SFAS 123R, the Company's total stock-based compensation will
be approximately $3.0 million in 2006.
(2) MARKETABLE SECURITIES
Marketable securities were comprised as follows:
December 26, December 25,
2004 2005
------- --------
Held-to-maturity
Federal agencies $ 5,645 --
Municipal securities 14,184 14,887
------- ------
19,829 14,887
------- ------
Available-for-sale
Municipal securities 16,625 33,531
------- ------
Total $36,454 48,418
======= ======
Purchases of available for-sale securities totaled $63.7 million in 2005
with sales totaling $46.7 million. Purchases of held-to-maturity securities
totaled $27.8 million in 2005 with proceeds from maturities totaling $32.7
million. All held-to-maturity debt securities are due within one year and had
aggregate fair values of $14.9 million at December 25, 2005.
43
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Purchases of available for-sale securities totaled $69.9 million in 2004
with sales totaling $53.2 million. Purchases of held-to-maturity securities
totaled $25.5 million in 2004 with proceeds from maturities totaling $5.6
million. All held-to-maturity debt securities are due within one year and had
aggregate fair values of $19.8 million at December 26, 2004. The fair value of
available-for-sale investments in debt securities by contractual maturities at
December 25, 2005, is as follows:
Maturity Date Fair Value
- ----------------------------------------------------------------------------------------------- --------------
1-5 years $ 2,760
5-10 years 6,434
After 10 years 24,337
--------------
Total $ 33,531
==============
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of
---------------------------------
December 26, December 25,
2004 2005
---------------- ----------------
Construction in process $ 3,088 956
Leasehold improvements 51,736 64,535
Furniture, fixtures, and equipment 36,296 45,279
----------------- ---------------
91,120 110,770
Less accumulated depreciation (31,471) (42,077)
----------------- ----------------
$ 59,649 68,693
================= ================
(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 25, 2005 are as follows:
Restaurants
Operating Under
Leases Development
-------------- -------------
Fiscal year ending:
2006 $ 13,793 1,008
2007 13,665 1,352
2008 12,906 1,367
2009 12,111 1,375
2010 11,124 1,387
Thereafter 58,226 7,864
-------------- -------------
Total future minimum lease payments $ 121,825 14,353
============== =============
44
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
In 2003, 2004, and 2005, 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, was as follows:
Fiscal Years Ended
------------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- ------------ -------------
Minimum rents $ 6,439 8,653 11,702
Percentage rents 78 138 170
-------------- ------------ -------------
Total $ 6,517 8,791 11,872
============== ============ =============
Equipment and auto leases $ 243 211 218
============== ============ =============
(5) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
Fiscal Years Ended
------------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- ------------ -------------
Current:
Federal $ 871 1,291 5,400
State 507 877 1,512
Deferred:
Federal 707 1,710 (1,287)
State 209 237 (186)
-------------- ------------ -------------
Total tax expense $ 2,294 4,115 5,439
============== ============ =============
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 28, December 26, December 25,
2003 2004 2005
-------------- ------------ -------------
Expected federal income tax expense $ 1,997 3,847 5,012
State income tax expense, net of federal effect 472 823 862
Nondeductible expenses 162 67 80
Tax exempt income -- (115) (350)
General business credits (329) (325) (528)
Statutory rate changes, deferred tax impact -- -- 148
Other (8) (182) 215
-------------- ------------ -------------
$ 2,294 4,115 5,439
============== ============ =============
45
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 26, December 25,
2004 2005
----------------- --------------
Deferred tax assets:
Unearned franchise fees $ 900 834
Accrued vacation 248 149
Accrued compensation 231 335
Deferred lease credits 705 896
Other 205 214
----------------- --------------
$ 2,289 2,428
================= ==============
Deferred tax liability:
Depreciation $ 7,320 6,185
Prepaid expense 374 228
Other 53 --
----------------- --------------
Total $ 7,747 6,413
================= ==============
The Company believes that, as a result of its historical income and
reversal of deferred tax liabilities, it is more likely than not that the
Company will realize its deferred tax assets.
(6) MANDATORILY REDEEMABLE PREFERRED STOCK
In 1999 and 2000, the Company issued 3,082,344 shares of Series A
preferred stock (Series A) at $2.75764. Series A was entitled to a cumulative
dividend of 12% before dividends could be paid on any other class of capital
stock. Series A was redeemable at the discretion of its holders in December 2004
for $15,100. The Company increased the carrying value of the Series A over the
four-year period for the difference between the issuance price and the
redemption value. For fiscal 2003, the carrying value of the Series A increased
by $1,452, with a corresponding decrease to retained earnings.
Each Series A share was convertible without the accrued dividend into 0.6
shares of common stock at any time or could be automatically converted into
common stock upon the issuance of common stock in an underwritten public
offering where the gross proceeds received by the Company equal or exceed $15
million and the public offering price equals or exceeds $11.65 per share. In
November 2003, the Company completed its public offering of common stock and the
Series A shares were automatically converted into 1,849,415 shares of common
stock. At the time of conversion, the Series A carrying value, including
cumulative dividends in arrears, amounted to $13,240 and was reclassed to common
stock.
(7) STOCKHOLDERS' EQUITY
(A) STOCK OPTIONS
The Company has 1.1 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. 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
46
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
from immediately to one year and have a contractual life of ten years. 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:
Weighted
Number Average
of Shares Exercise Price
-------------- ----------------
Outstanding, December 29, 2002 828,169 $ 5.10
Granted 52,457 16.08
Exercised (181,132) 4.58
Cancelled (47,536) 7.14
-------------
Outstanding, December 28, 2003 651,958 6.07
Granted 11,050 27.63
Exercised (208,131) 4.09
Cancelled (39,962) 8.41
-------------
Outstanding, December 26, 2004 414,915 7.42
Granted 2,400 34.81
Exercised (106,048) 5.36
Cancelled (8,971) 16.73
-------------
Outstanding, December 25, 2005 302,296 8.08
=============
The following table summarizes the Company's stock options outstanding at
December 25, 2005:
Options outstanding Options exercisable
---------------------------------------------------- ---------------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life(years) price Shares price
- ----------------------- ------------------- ------------- -------------- ----------------- --------------
$ 2.50 - 3.90 82,412 3.74 $3.63 82,412 $3.63
4.15 - 7.50 125,975 3.77 5.85 125,975 5.85
11.25 - 18.15 80,041 6.72 13.05 52,081 12.65
18.65 - 34.81 13,868 8.29 26.14 3,385 24.25
------------------- ------------- -------------- ----------------- --------------
2.50 - 34.81 302,296 4.75 8.08 263,853 6.73
=================== =================
The plan has 159,582 shares available for grant as of December 25, 2005.
(B) 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.
(C) 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 requirement. 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
2004 and 2005, the Company issued 28,453 shares and 21,238 shares, respectively,
of common stock under the plan and has 250,309 available for future sale.
47
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(8) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and fully diluted earnings per
common share for fiscal 2003, 2004, and 2005:
Fiscal year ended December 28, 2003
------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -------------
Net earnings $ 3,583
Less accretion resulting from cumulative dividend
and mandatory redemption feature of preferred stock (1,452)
-------------
Earnings per common share 2,131 3,222,445 $0.66
Effect of dilutive securities--stock options and warrants -- 619,516
------------- -------------
Earnings per common share--assuming dilution $ 2,131 3,841,961 0.55
============= =============
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 and warrants -- 438,803
------------- --------------
Earnings per common share--assuming dilution $ 7,201 8,603,881 0.84
============= ==============
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 warrants -- 262,294
------------- -------------
Earnings per common share--assuming dilution $ 8,880 8,708,494 1.02
============= =============
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:
As of
----------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
-------------- ----------------- --------------
Options 17,500 -- 2,026
Restricted stock -- 52,426 75,964
48
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Fiscal Years Ended
----------------------------------------------
December 28, December 26, December 25,
2003 2004 2005
--------------- ----------------- -------------
Cash paid during the period for:
Interest 973 -- --
Income taxes 1,582 2,621 4,801
Noncash financing and investing transactions:
Capital lease obligations incurred 3,879 -- --
Increase in cumulative dividend and mandatory redemption
feature of preferred stock 1,452 -- --
Conversion of preferred stock to common stock 13,240 -- --
Adjustment of restricted stock units to fair value -- 2,726 2,451
Capitalization of preopening rent expense -- 2,199 463
(10) RESTAURANT IMPAIRMENT AND CLOSURES
In 2002 and 2003, the Company closed restaurants due to poor performance.
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 28, 2003, December 26, 2004, and December 25, 2005 is as follows:
As of As of
December 29, 2003 Costs December 28,
2002 provision incurred 2003
--------------- ------------ ------------- -------------
Remaining lease obligation and utilities $ 164 210 (163) 211
Broker fees 58 (47) -- 11
--------------- ------------ ------------- -------------
$ 222 163 (163) 222
=============== ============ ============= =============
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
=============== ============ ============= =============
As of As of
December 26, 2005 Costs December 25,
2004 provision incurred 2005
--------------- ------------ ------------- -------------
Remaining lease obligation and utilities $ 136 -- (136) --
Broker fees -- -- -- --
--------------- ------------ ------------- -------------
$ 136 -- (136) --
=============== ============ ============= =============
During 2004, the Company recorded an impairment charge for the assets of
two underperforming restaurants. An impairment charge of $453,000 was recorded
to the extent that the carrying value of the assets was not considered
recoverable based on estimated discounted future cash flows and the underlying
fair value of the assets.
49
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
During 2005, the Company recorded an impairment charge for the assets of
four underperforming restaurants. An impairment charge of $1.3 million was
recorded to the extent that the carrying value 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 28, December 26, December 25,
2003 2004 2005
-------------- ---------------- ------------
Store closing charges $ 163 (10) --
Long-lived asset impairment 621 453 1,268
Goodwill impairment -- -- 390
Other asset write-offs 84 130 333
------------- ---------------- ------------
$ 868 573 1,991
============= ================ ============
(11) 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. During 2003 and 2004, the Company matched 50% of the first 4% of
contributions made by eligible employees. 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. Matching contributions of approximately $105, $128, and $312
were made by the Company during 2003, 2004, and 2005 respectively.
(12) 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 and Chief Financial Officer. 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 2005 annual base salary commitments under employment
agreements were $1.2 million.
(13) 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.
50
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004 AND DECEMBER 25, 2005
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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 president and sole
stockholder of Carefree. The Company paid a service fee of $14 in 2003 to
Carefree for services provided to the Company by an employee of Carefree. This
arrangement was discontinued in June 2003.
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 2003, 2004, and 2005.
The services provided by the law firm were at fair value.
(14) 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.
51
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 25, 2005. 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 25, 2005. 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.
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
25, 2005, 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.
52
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 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 25, 2005, 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 25, 2005, 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 26, 2004 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 25, 2005, and our report dated February 24,
2006 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Minneapolis, Minnesota
February 24, 2006
ITEM 9B. OTHER INFORMATION
In December 2005, our Board of Directors, based upon recommendations of
the Compensation Committee, approved the 2006 compensation and bonus plan for
our executive officers, including our Chief Executive Officer. The executive
compensation and bonus plan are described in documents filed as exhibits to this
report. Also in December 2005, the Board of Directors revised its compensation.
The Board of Directors' compensation is described in a document filed as an
exhibit to this report.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Additional information required by this item is contained in Item 1 of
this document and the sections entitled "Election of Directors" and "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 2006 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 2006 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 2006 Annual Meeting of Shareholders. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled
"Certain Transactions" appearing in our Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on or about May 11, 2006. 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 2006 Annual
Meeting of Shareholders. Such information is incorporated herein by reference.
54
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 February 24, 2006
Consolidated Balance Sheets as of December 26, 2004 and
December 25, 2005
Consolidated Statements of Earnings for the Years Ended December 28,
2003, December 26, 2004, and December 25, 2005
Consolidated Statements of Stockholders' Equity for the Years Ended
December 28, 2003, December 26, 2004, and December 25, 2005
Consolidated Statements of Cash Flows for the Years Ended December
28, 2003, December 26, 2004, and December 25, 2005
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 February 24, 2006
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.
55
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 2, 2006 BUFFALO WILD WINGS, INC.
By /s/ SALLY J. SMITH
-------------------------------------
SALLY J. SMITH
HIEF 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 3/2/06
- ------------------------------ Director (Principal Executive Officer)
Sally J. Smith
/S/ Mary J. Twinem Executive Vice President, Chief Financial 3/2/06
- ------------------------------ Officer and Treasurer (Principal Financial
Mary J. Twinem and Accounting Officer)
/S/ Dale M. Applequist Director 3/2/06
- -----------------------------
Dale M. Applequist
/S/ Kenneth H. Dahlberg Director, Chairman of the Board 3/2/06
- ------------------------------
Kenneth H. Dahlberg
/S/ Warren E. Mack Director 3/2/06
- ------------------------------
Warren E. Mack
/S/ J. Oliver Maggard Director 3/2/06
- ------------------------------
J. Oliver Maggard
/S/ Robert W. Macdonald Director 3/2/06
- ------------------------------
Robert W. Macdonald
Director
- ------------------------
Michael P. Johnson
56
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 February 24, 2006 we reported on the consolidated
balance sheets of Buffalo Wild Wings, Inc. and subsidiaries (the Company) as of
December 26, 2004 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 25, 2005 as contained in the annual
report on Form 10-K for fiscal 2005. 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 the 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.
/s/ KPMG LLP
Minneapolis, Minnesota
February 24, 2006
BUFFALO WILD WINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged
at to Costs Deductions Balance
Beginning and From at End of
of Period Expenses Reserves Period
- ------------------------------------------------------ ---------- ----------- ---------- --------
Allowance for doubtful accounts 2005 $ 25 -- -- 25
2004 25 3 3 25
2003 21 12 8 25
Store closing reserves 2005 136 -- 136 --
2004 222 (10) 76 136
2003 222 163 163 222
57
BUFFALO WILD WINGS, INC.
EXHIBIT INDEX TO FORM 10-K
For the Fiscal Year Ended: Commission File No.
December 25, 2005 000-24743
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
4.1 Form of specimen certificate representing Buffalo Wild Wings, Inc.'s
common stock (1)
10.1 2003 Equity Incentive Plan and related forms of stock option
agreements (1)(2)
10.2 Management Deferred Compensation Plan and Amendment No. 1 (1)(2)
10.3 Employment Agreement, dated as of December 1, 1999 with Sally J.
Smith (1)(2)
10.4 Employment Agreement, dated as of December 1, 1999 with Mary J.
Twinem (1)(2)
10.5 Employment Agreement, dated as of December 1, 1999 with Kathleen M.
Benning (formerly Alberga) (1)(2)
10.6 Employment Agreement, dated as of April 22, 2002 with James M.
Schmidt (1)(2)
10.8 Employment Agreement, dated as of August 20, 2001 with Emil Lee
Sanders (1)(2)
10.9 Employment Agreement, dated as of February 25, 2002 with Judith A.
Shoulak (1)(2)
10.10 Employment Agreement, dated as of December 1, 1999, with Craig W.
Donoghue (1)(2)
10.11* Form of Franchise Agreement
10.12* Form of Area Development Agreement
10.13 Employee Stock Purchase Plan and Amendment No. 1 (1) (2)
10.14 Amendment to Management Deferred Compensation Plan, dated as of
December 4, 2003 (incorporated by reference 10.14 to Exhibit 10.20
to our Form 10-K for the fiscal year ended December 28, 2003) (2)
10.15 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)
10.16* Form of Restricted Stock Unit Award Notice to Directors and
Employees currently used under the 2003 Equity Incentive Plan (2)
10.17* Director Compensation Arrangements as of December 1, 2005 (2)
10.18* 2006 Executive Bonus Plan (2)
10.19* Compensation Arrangements For Executive Officers for Fiscal Year
2006 (2)
10.20 Director Compensation Arrangements as of June 28, 2004 (incorporated
by reference to Exhibit 10.17 to our Form 10-K for the fiscal year
ended December 26, 2004) (2)
10.21 2004/2005 Executive Bonus Plan (incorporated by reference to Exhibit
10.18 to our Form 10-K for the fiscal year ended December 26, 2004)
(2)
10.22 Compensation Arrangements for Executive Officers for Fiscal Year
2005 (incorporated by reference to Exhibit 10.22 10.19 to our Form
10-K for the fiscal year ended December 26, 2004) (2)
10.23 List of Subsidiaries (incorporated by reference to Exhibit 21.1 to
our Form 10-K for the fiscal year ended 10.23 December 26, 2004)
23.1* Consent of 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.
58