- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
FORM 10-Q
--------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 1, 2007
Commission File No. 000-24743
--------------
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
--------------
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
--------------
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 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. (Check one):
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 number of shares outstanding of the registrant's common stock as of
August 1, 2007: 17,596,207 shares.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
PART I
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits 19
Signatures 20
Exhibit Index 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
(unaudited)
July 1, December 31,
2007 2006
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 6,602 11,756
Marketable securities 64,505 52,829
Accounts receivable - franchisees, net of allowance of $25 and $47, respectively 769 929
Accounts receivable - other 5,282 5,212
Inventory 1,952 1,767
Income tax receivable 1,529 --
Prepaid expenses 1,471 1,052
Deferred income taxes 2,132 1,405
------------ ------------
Total current assets 84,242 74,950
Property and equipment, net 82,464 78,137
Restricted cash 7,066 6,007
Other assets 1,752 1,720
Goodwill 369 369
------------ ------------
Total assets $ 175,893 161,183
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,364 2,347
Accounts payable 6,801 5,874
Income tax payable -- 264
Accrued compensation and benefits 9,846 10,963
Accrued expenses 5,219 5,538
Current portion of deferred lease credits 276 794
------------ ------------
Total current liabilities 24,506 25,780
Long-term liabilities:
Other liabilities 1,220 478
Marketing fund payables 7,066 6,007
Deferred income taxes 2,937 3,162
Deferred lease credits, net of current portion 9,967 9,540
------------ ------------
Total liabilities 45,696 44,967
------------ ------------
Commitments and contingencies (note 9)
Stockholders' equity:
Undesignated stock, 1,000,000 and 5,600,000 shares authorized, respectively -- --
Common stock, no par value. Authorized 20,200,000 and 15,600,000 shares,
respectively, issued and outstanding 17,889,682 and 17,591,180, respectively 79,629 75,030
Retained earnings 50,568 41,186
------------ ------------
Total stockholders' equity 130,197 116,216
------------ ------------
Total liabilities and stockholders' equity $ 175,893 161,183
============ ============
3
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands except share and per share data)
(unaudited)
Three months ended Six months ended
------------------------- -------------------------
July 1, June 25, July 1, June 25,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenue:
Restaurant sales $ 67,535 55,036 138,594 112,128
Franchise royalties and fees 8,464 7,224 17,307 14,393
----------- ----------- ----------- -----------
Total revenue 75,999 62,260 155,901 126,521
----------- ----------- ----------- -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 20,591 17,028 42,649 35,033
Labor 21,050 16,562 42,157 33,157
Operating 10,729 9,236 22,201 18,679
Occupancy 4,892 4,269 9,610 8,358
Depreciation 4,028 3,433 7,920 6,763
General and administrative (1) 8,538 7,441 17,155 14,519
Preopening 987 1,034 1,305 1,521
Loss on equipment disposal 153 44 232 254
----------- ----------- ----------- -----------
Total costs and expenses 70,968 59,047 143,229 118,284
----------- ----------- ----------- -----------
Income from operations 5,031 3,213 12,672 8,237
Interest income 755 500 1,455 970
----------- ----------- ----------- -----------
Earnings before income taxes 5,786 3,713 14,127 9,207
Income tax expense 1,945 1,281 4,745 3,259
----------- ----------- ----------- -----------
Net earnings $ 3,841 2,432 9,382 5,948
=========== =========== =========== ===========
Earnings per common share - basic $ 0.22 0.14 0.54 0.35
Earnings per common share - diluted 0.22 0.14 0.53 0.34
Weighted average shares outstanding - basic 17,560,163 17,111,178 17,504,096 17,087,382
Weighted average shares outstanding - diluted 17,743,876 17,509,790 17,715,613 17,492,466
- -----------------------------------------------
(1) Contains stock-based compensation of $1,065, $683, $2,332, and $1,539, respectively
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Six months ended
--------------------
July 1, June 25,
2007 2006
-------- --------
Cash flows from operating activities:
Net earnings $ 9,382 5,948
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 7,920 6,763
Amortization (43) (101)
Loss on equipment disposal 232 254
Deferred lease credits 391 220
Deferred income taxes (952) (1,742)
Stock-based compensation 2,332 1,539
Excess tax benefit from the exercise of stock options (720) (181)
Change in operating assets and liabilities:
Purchase of marketable securities (210) --
Accounts receivable (392) (560)
Inventory (185) (42)
Prepaid expenses (419) 1,385
Other assets (32) (36)
Unearned franchise fees 17 (42)
Accounts payable 217 1,992
Income tax payable (1,073) (18)
Accrued expenses 1,176 206
-------- --------
Net cash provided by operating activities 17,641 15,585
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (11,769) (12,381)
Purchase of marketable securities (93,339) (54,759)
Proceeds of marketable securities 81,916 54,108
-------- --------
Net cash used in investing activities (23,192) (13,032)
-------- --------
Cash flows from financing activities:
Issuance of common stock 860 490
Tax payments for restricted stock (1,183) (687)
Excess tax benefit from the exercise of stock options 720 181
-------- --------
Net cash provided by (used in) financing activities 397 (16)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,154) 2,537
Cash and cash equivalents at beginning of period 11,756 3,986
-------- --------
Cash and cash equivalents at end of period $ 6,602 6,523
======== ========
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 1, 2007 AND JUNE 25, 2006
(Dollar amounts in thousands except share and per share data)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of July 1, 2007 and December 31,
2006, and for the three-month and six-month periods ended July 1, 2007 and
June 25, 2006, have been prepared by Buffalo Wild Wings, Inc. pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"SEC"). The financial information for the three-month and six-month periods
ended July 1, 2007 and June 25, 2006 is unaudited, but, in the opinion of
management, reflects all adjustments and accruals necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the interim periods.
References in the remainder of this document to "Buffalo Wild Wings,"
"company," "we," "us" and "our" refer to the business of Buffalo Wild Wings,
Inc. and our subsidiaries.
The financial information as of December 31, 2006 is derived from our
audited consolidated financial statements and notes thereto for the fiscal
year ended December 31, 2006, which is included in item 8 in the Fiscal 2006
Annual Report on Form 10-K, and should be read in conjunction with such
financial statements.
The results of operations for the three-month and six-month periods ended
July 1, 2007 are not necessarily indicative of the results of operations
that may be achieved for the entire year ending December 30, 2007.
(2) Summary of Significant Accounting Policies
(a) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
We purchase our products from a number of suppliers and believe
there are alternative suppliers. We have minimum purchase
commitments from 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 our
restaurants and our franchised restaurants is fresh chicken wings. A
pricing agreement with one of our chicken suppliers effectively
establishes a price of $1.23 per pound for 80-90% of the wings used
by company-owned restaurants. This agreement limits the price
volatility of chicken wings. For the three-month periods ended July
1, 2007 and June 25, 2006, fresh chicken wings were 23.0% and 22.5%,
respectively, of restaurant cost of sales. For the six-month periods
ended July 1, 2007 and June 25, 2006, fresh chicken wings were 24.2%
and 23.2%, respectively, of restaurant cost of sales.
(b) New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Early adoption
is permitted. We believe the adoption of SFAS 157 will not have a
significant impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain
warranty and insurance contracts at fair value on a
contract-by-contract basis. A business entity is required to report
unrealized gains and losses on items for which the fair value option
has been elected in earnings at each subsequent reporting date. The
objective of this Statement is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We have not yet
determined the effect on our financial statements, if any, upon
adoption of SFAS 159.
6
(3) Marketable Securities
Marketable securities were comprised of the following:
As of
---------------------------
July 1, December 31,
2007 2006
------------ ------------
Held-to-maturity:
Municipal securities $ 22,663 33,522
Available-for-sale:
Municipal securities 40,343 18,019
Trading:
Mutual funds 1,499 1,288
------------ ------------
Total $ 64,505 52,829
============ ============
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $22,652 and $33,512 as of July 1, 2007 and
December 31, 2006, respectively. Trading securities represents investments
held for future needs of a non-qualified deferred compensation plan.
(4) Property and Equipment
Property and equipment consists of the following:
As of
----------------------------
July 1, December 31,
2007 2006
------------ ------------
Construction in-process $ 3,279 1,037
Leasehold improvements 82,287 77,794
Furniture, fixtures, and equipment 58,419 53,994
------------ ------------
143,985 132,825
Less acumulated depreciation and amortization (61,521) (54,688)
------------ ------------
$ 82,464 78,137
============ ============
(5) Stockholders' Equity
(a) Stock Options
We have 2.9 million shares of common stock reserved for issuance under a
stock-based compensation plan for employees, officers, and directors. The
option price for shares issued under this plan is to be not less than the
fair market value on the date of grant with respect to incentive stock
options, or 85% of fair market value for nonqualified stock options.
Incentive stock options become exercisable in four equal installments from
the date of the grant and have a contractual life of ten years. Nonqualified
stock options issued pursuant to the plan have varying vesting periods from
immediately to four years and have a contractual life of ten years. In 2003,
our shareholders approved amendments to the plan to allow the granting of
restricted stock and extended the plan to 2013. We issue new shares of
common stock upon exercise of stock options and disbursement of restricted
stock units. Option activity is summarized for the six months ended July 1,
2007:
Weighted Weighted Average Aggregate
Number average Remaining Intrinsic
of shares exercise price Contractual Life Value
---------------- ---------------- ---------------- ----------------
Outstanding, December 31, 2006 420,986 $ 4.23 3.9 $ 9,419
Granted -- --
Exercised (196,541) 2.86
Cancelled (2,012) 8.32
---------------- ---------------- ---------------- ----------------
Outstanding, July 1, 2007 222,433 5.40 4.4 8,049
Exercisable, July 1, 2007 215,966 5.14 4.3 7,872
7
The aggregate intrinsic value in the table above is before applicable income
taxes, based on our closing stock price of $41.59 as of the last business
day of the quarter ended July 1, 2007, which would have been received by the
optionees had all options been exercised on that date. As of July 1, 2007,
total unrecognized stock-based compensation expense related to nonvested
stock options was approximately $30, which is expected to be recognized over
a weighted average period of approximately nine months. During the six-month
periods ended July 1, 2007 and June 25, 2006, the total intrinsic value of
stock options exercised was $5,012 and $1,104, respectively. During the
six-month periods ended July 1, 2007 and June 25, 2006, the total fair value
of options vested was $480 and $375, respectively.
The plan has 676,470 shares available for grant as of July 1, 2007.
(b) Restricted Stock
Restricted stock units are granted annually at the discretion of the Board
under a stock based compensation plan. These units are subject to annual
vesting upon achievement of performance targets established by the Board of
Directors. We record compensation expense for the restricted stock units if
vesting, based on the achievement of performance targets, is probable. The
restricted stock units may vest one-third annually over a ten-year period as
determined by meeting performance targets; however, the second third of the
restricted stock units is not subject to vesting until the first one-third
has vested and the final one-third is not subject to vesting until the first
two-thirds of the award has vested.
Restricted stock activity is summarized for the six months ended July 1,
2007:
Weighted
average
Number grant date
of shares fair value
------------ ------------
Outstanding, December 31, 2006 168,212 $ 17.10
Granted 164,094 26.75
Vested (14,000) 26.60
Cancelled (25,470) 21.06
------------ ------------
Outstanding, July 1, 2007 292,836 $ 21.71
As of July 1, 2007, the total stock-based compensation expense related to
nonvested awards not yet recognized was $4,665, which is expected to be
recognized over a weighted average period of 1.2 years. During the six-month
periods ended July 1, 2007 and June 25, 2006, the total fair value of vested
shares were $372 and $219, respectively. The weighted average grant date
fair value of restricted stock units granted during the six months ended
June 25, 2006 was $16.90.
(c) Employee Stock Purchase Plan
We have reserved 600,000 shares of common stock for issuance under the
employee stock purchase plan (ESPP). The ESPP is available to substantially
all employees subject to employment eligibility requirements. Participants
may purchase our 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 the first six months of 2007 and 2006, we issued 12,744 and
21,952 shares of common stock under the plan. As of July 1, 2007, we have
449,698 shares available for future issuance.
(6) Earnings Per Share
The following is a reconciliation of basic and fully diluted earnings per
share for the three-month and six-month periods ended July 1, 2007 and June
25, 2006:
Three months ended July 1, 2007
------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
-------------- -------------- --------------
Net earnings available to common shareholders $ 3,841
--------------
Earnings per common share--basic 3,841 17,560,163 $ 0.22
Effect of dilutive securities
Stock options -- 183,713
-------------- --------------
Earnings per common share--diluted $ 3,841 17,743,876 0.22
============== ==============
8
Three months ended June 25, 2006
------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
-------------- -------------- --------------
Net earnings available to common shareholders $ 2,432
--------------
Earnings per common share--basic 2,432 17,111,178 $ 0.14
Effect of dilutive securities
Stock options -- 398,612
-------------- --------------
Earnings per common share--diluted $ 2,432 17,509,790 0.14
============== ==============
Six months ended July 1, 2007
------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
-------------- -------------- --------------
Net earnings available to common shareholders $ 9,382
--------------
Earnings per common share--basic 9,382 17,504,096 $ 0.54
Effect of dilutive securities
Stock options -- 211,517
-------------- --------------
Earnings per common share--diluted $ 9,382 17,715,613 0.53
============== ==============
Six months ended June 25, 2006
------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
-------------- -------------- --------------
Net earnings available to common shareholders $ 5,948
--------------
Earnings per common share--basic 5,948 17,087,382 $ 0.35
Effect of dilutive securities
Stock options -- 405,084
-------------- --------------
Earnings per common share--diluted $ 5,948 17,492,466 0.34
============== ==============
292,836 shares and 335,594 shares for the three-month periods ended July
1, 2007 and June 25, 2006, respectively, and 292,836 shares and 335,720
shares for the six-month periods ended July 1, 2007 and June 25, 2006,
respectively, have been excluded from the fully diluted calculation
because the effect on net earnings per share would not have been dilutive.
(7) Supplemental Disclosures of Cash Flow Information
Six months ended
-------------------
July 1, June 25,
2007 2006
-------- --------
Cash paid during the period for:
Income taxes $ 6,411 5,130
Noncash financing and investing transactions:
Property and equipment not yet paid for 710 --
Tax withholding and payment of restricted stock units 1,086 --
Adjustment of restricted stock units to fair value on grant date -- 2,568
(8) Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), on January 1, 2007 and did not
need to recognize an adjustment in the liability for unrecognized income tax
benefits. The total unrecognized tax benefits reflected on the Company's
balance sheet as of the January 1, 2007 adoption date amounted to $419. The
Company recognizes potential accrued interest and penalties related to
unrecognized tax benefits within its operations in income tax expense.
Interest and penalties related to unrecognized tax benefits were $146 at
January 1, 2007. There were no significant changes in the unrecognized tax
benefit for the three month and six month periods. Included in the balance
at January 1, 2007, are unrecognized tax benefits of $337, which if
recognized, would affect the annual effective tax rate. The Company files a
consolidated return in the United States Federal jurisdiction and in many
state jurisdictions. With few exceptions, the Company is no longer subject
to Federal or state income tax examinations for years before 2003.
9
The Company does not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of
statute of limitations prior to June 29, 2008.
(9) Contingencies
We are involved in various legal actions 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 our consolidated
financial position, results of operations, or cash flows.
(10) Designation of Shares and Stock Split
On May 17, 2007, the Board of Directors authorized 4,600,000 shares of the
5,600,000 undesignated shares be designated as additional common stock.
On June 15, 2007, we effected a two-for-one stock split of our common
stock for holders of record on June 1, 2007. All applicable share and
per-share data in these consolidated financial statements and related
disclosures have been retroactively adjusted to give effect to this stock
split.
(11) Acquisition of Las Vegas Franchise
On May 18, 2007, the Company exercised a right of first refusal to acquire
the assets of nine Buffalo Wild Wings franchised restaurants in the Las
Vegas, Nevada area. One of the nine restaurants is currently under
construction and is expected to open in the fourth quarter of 2007. The
Company expects the acquisition, if completed, to close in the fourth
quarter of 2007. The purchase price is approximately $26 million and will be
funded with available cash and marketable securities. The acquisition is
subject to purchase price adjustments and a holdback that would protect the
Company if opening of the unfinished unit is delayed. The transaction also
remains dependent on execution of a definitive asset purchase agreement,
receipt of necessary approvals for gaming and liquor licenses (which are
expected to take several months), lease assignments, and other customary
closing conditions.
10
ITEM 2. 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 included in Item 1 of Part 1 of this Quarterly
Report and the audited consolidated financial statements and related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006. This discussion and analysis contains certain statements that
are not historical facts, including, among others, those relating to our
anticipated financial performance for 2007 and our expected store openings. Such
statements are forward-looking and involve risks and uncertainties including but
not limited to those discussed in this Form 10-Q under Item 2 of Part I and
later under Item 1A of Part II under the heading "Risk Factors/Forward-Looking
Statements" as well as in Item 1A of Part I of the fiscal 2006 Form 10-K.
Critical Accounting Policies and Use of Estimates
Our most critical accounting policies, which are those that require significant
judgment, include: valuation of long-lived assets and store closing reserves,
vendor allowances, revenue recognition from franchise operations, and
self-insurance liability. An in-depth description of these can be found in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2006. There
have been no changes to those policies during this period.
Overview
As of July 1, 2007, we owned and operated 145 company-owned and franchised an
additional 301 Buffalo Wild Wings (R) Grill & Bar restaurants in 37 states. Of
the 446 system-wide restaurants, 83 are located in Ohio. The restaurants have
elements of both the quick casual and casual dining styles, both of which are
part of a growing industry. Our long-term focus is to grow to a national chain
of over 1,000 locations, with 15% annual unit growth in the next three years,
continuing the strategy of developing both company-owned and franchised
restaurants.
Our growth and success depend on several factors and trends. First, we continue
to monitor and react to our cost of goods sold. The cost of goods sold is
difficult to predict, as it ranged from 30.3% to 31.5% of restaurant sales per
quarter in 2007 and 2006, historically due to the price fluctuation in chicken
wings. We work to counteract the effect of the volatility of chicken wing
prices, which can significantly change our cost of sales and cash flow, with the
introduction of popular new menu items, effective marketing promotions, focused
efforts on food costs and waste, and menu price increases. We also explore
purchasing strategies to reduce the severity of cost increases and fluctuations.
In March 2007, we entered into a pricing agreement with one of our chicken
suppliers with the intent to limit the price volatility that we have experienced
in our quarterly cost of sales percentage. If our past buying trend with this
supplier continues, we expect the price for 80-90% of the wings used by our
company-owned restaurants to be $1.23 per pound during the remaining term of the
agreement. However, the pricing agreement does not obligate the supplier to sell
us any chicken, nor are we bound to purchase any chicken from such supplier. We
will review the agreement periodically during its term and may modify it with
the mutual consent of both parties. Thus, the cost of wings per pound in the
future may be higher or lower than our expectations and market pricing.
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. 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 mitigate
the overall risk associated with opening restaurants.
Third, trends in company-owned and franchised same-store sales continue to be
indicators of the 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. While management
believes that these and similar sales metrics are important measures of our
performance and overall health of our concept, such sales information may not be
comparable to similar sales information as defined or used by other companies.
For our purposes, in calculating same-store sales, a restaurant is included in
the first month following its fifteenth month of operation.
Our revenue is generated by:
o Sales at our company-owned restaurants, which were 89% of total
revenue in the second quarter of 2007. Food, nonalcoholic beverages,
and retail accounted for 74% of restaurant sales. The remaining 26%
of restaurant sales was from alcoholic beverages. The menu item with
the highest sales volume is chicken wings at 23% of total restaurant
sales.
11
o Royalties and franchise fees received from our franchisees.
We generate cash from the operation of company-owned restaurants and 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 quarterly based on the number of new locations opened. Loss on
equipment disposal is related to company-owned restaurants and includes the
write-down of miscellaneous assets. Certain other expenses, such as general and
administrative, relate to both company-owned and franchising operations.
As a growing company, we review our trend in general and administrative
expenses, exclusive of stock-based compensation expense, 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.
Both of the second quarters of 2007 and 2006 consisted of thirteen weeks. We had
a 53-week fiscal year in 2006, with the fourth quarter having 14 weeks.
Quarterly Results of Operations
Our operating results for the periods indicated are expressed below as a
percentage of total revenue, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant sales. The information
for each three-month and six-month period is unaudited, and we have prepared it
on the same basis as the audited financial statements. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results.
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 related expenses, asset impairment charges, store closing charges,
general economic conditions, stock-based compensation, 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.
Three months ended Six months ended
---------------------- ----------------------
July 1, June 25, July 1, June 25,
2007 2006 2007 2006
--------- --------- --------- ---------
Revenue:
Restaurant sales 88.9% 88.4% 88.9% 88.6%
Franchising royalties and fees 11.1 11.6 11.1 11.4
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
Costs and expenses:
Restaurant operating costs:
Cost of sales 30.5 30.9 30.8 31.2
Labor 31.2 30.1 30.4 29.6
Operating 15.9 16.8 16.0 16.7
Occupancy 7.2 7.8 6.9 7.5
Depreciation 5.3 5.5 5.1 5.3
General and administrative 11.2 12.0 11.0 11.5
Preopening 1.3 1.7 0.8 1.2
Loss on equipment disposal 0.2 0.1 0.1 0.2
--------- --------- --------- ---------
Total costs and expenses 93.4 94.8 91.9 93.5
--------- --------- --------- ---------
Income from operations 6.6 5.2 8.1 6.5
Interest income 1.0 0.8 0.9 0.8
--------- --------- --------- ---------
Earnings before income taxes 7.6 6.0 9.1 7.3
Income tax expense 2.6 2.1 3.0 2.6
--------- --------- --------- ---------
Net earnings 5.1 3.9 6.0 4.7
========= ========= ========= =========
12
The number of company-owned and franchised restaurants open are as follows:
As of
-------------------------------
July 1, June 25,
2007 2006
--------------- ---------------
Company-owned restaurants 145 129
Franchised restaurants 301 270
The restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
Three months ended Six months ended
--------------------- --------------------
July 1, June 25, July 1, June 25,
2007 2006 2007 2006
Company-owned restaurant sales $67,535 55,036 138,594 112,128
Franchised restaurant sales 169,859 145,001 347,316 289,755
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended Six months ended
----------------------- -----------------------
July 1, June 25, July 1, June 25,
2007 2006 2007 2006
-----------------------------------------------
Company-owned same-store sales 8.1% 8.2% 8.4% 8.0%
Franchised same-store sales 4.0 4.7 3.7 5.7
The quarterly average prices paid per pound for fresh chicken wings are as
follows:
Three months ended Six months ended
-----------------------------------------------------
July 1, June 25, July 1, June 25,
2007 2006 2007 2006
-----------------------------------------------------
Average price per pound $1.25 1.10 1.32 1.16
Results of Operations for the Three Months Ended July 1, 2007 and June 25, 2006
Restaurant sales increased by $12.5 million, or 22.7%, to $67.5 million in 2007
from $55.0 million in 2006. The increase in restaurant sales was due to an $8.3
million increase associated with the opening of six new company-owned
restaurants in the first six months of 2007 and the 18 company-owned restaurants
opened before 2007 that did not meet the criteria for same-store sales and $4.2
million related to an 8.1% increase in same-store sales.
Franchise royalties and fees increased by $1.2 million, or 17.2%, to $8.5
million in 2007 from $7.2 million in 2006. The increase was due primarily to
additional royalties collected from the 15 new franchised restaurants that
opened in 2007 and the 23 franchised restaurants that opened in the last six
months of 2006. Same-store sales for franchised restaurants increased 4.0% in
2007.
Cost of sales increased by $3.6 million, or 20.9%, to $20.6 million in 2007 from
$17.0 million in 2006 due primarily to more restaurants in operation in 2007.
Cost of sales as a percentage of restaurant sales decreased to 30.5% in 2007
from 30.9% in 2006. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to the leverage of food and alcohol costs as a result of
price increases and a continued focus on cost controls particularly alcohol at
the unit-level. This decrease was partially offset by wing prices which averaged
$1.25 per pound, 14% higher than 2006 when wing prices averaged $1.10 per pound.
Labor expenses increased by $4.5 million, or 27.1%, to $21.1 million in 2007
from $16.6 million in 2006 due primarily to more restaurants in operation in
2007. Labor expenses as a percentage of restaurant sales increased to 31.2% in
2007 from 30.1% in 2006. The increase in labor expenses as a percentage of
restaurant sales was primarily due to higher than expected health insurance and
workers' compensation costs, along with higher unit level bonus.
Operating expenses increased by $1.5 million, or 16.2%, to $10.7 million in 2007
from $9.2 million in 2006 due primarily to more restaurants in operation in
2007. Operating expenses as a percentage of restaurant sales decreased to 15.9%
in 2007 from 16.8% in 2006. The decrease in operating expenses as a percentage
of restaurant sales was primarily due to lower general liability insurance
costs, credit card fees, utility costs, and local store marketing expenses.
Occupancy expenses increased by $623,000, or 14.6%, to $4.9 million in 2007 from
$4.3 million in 2006 due primarily to more restaurants in operation in 2007.
Occupancy expenses as a percentage of restaurant sales decreased to 7.2% in 2007
from 7.8% in 2006.
13
Depreciation increased by $595,000, or 17.3%, to $4.0 million in 2007 from $3.4
million in 2006. The increase was primarily due to the additional depreciation
on six new restaurants opened in 2007 and the 11 new restaurants that opened in
the last six months of 2006.
General and administrative expenses increased by $1.1 million, or 14.7%, to $8.5
million in 2007 from $7.4 million in 2006 due to higher corporate headcount,
accrued incentive, and stock-based compensation. General and administrative
expenses as a percentage of total revenue decreased to 11.2% in 2007 from 12.0%
in 2006. Exclusive of stock-based compensation, we reduced our general and
administrative expenses as a percentage of total revenue to 9.8 % from 10.9%.
Preopening costs decreased by $47,000, to $987,000 in 2007 from $1.0 million in
2006. We opened five new company-owned restaurants in the second quarter of
2007, incurred costs of $1,000 for openings before the second quarter of 2007,
and incurred $216,000 for restaurants that will open in the third quarter of
2007 or later. In the second quarter 2006, we opened five new company-owned
restaurants, incurred no costs for restaurants that opened before the second
quarter of 2006, and incurred costs of $353,000 for restaurants that opened in
the third quarter of 2006 or later.
Loss on equipment disposal increased by $109,000 to $153,000 in 2007 from
$44,000 in 2006. The amount expensed in 2007 and 2006 represents miscellaneous
equipment disposals and retirements.
Interest income increased by $255,000 to $755,000 in 2007 from $500,000 in 2006.
The increase was primarily due to higher interest rates and overall cash and
marketable securities balance levels. Cash and marketable securities balances at
the end of the second quarter were $71.1 million in 2007 compared to $55.7
million for the second quarter of 2006.
Provision for income taxes increased $664,000 to $1.9 million in 2007 from $1.3
million in 2006. The effective tax rate as a percentage of income before taxes
decreased to 33.6% in 2007 from 34.5% in 2006. The decrease in the effective tax
rate was due to lower state tax rates. Our effective tax rate reflects the full
federal and state statutory rates on taxable income. For 2007, we believe our
effective tax rate will be between 33% and 34%.
Results of Operations for the Six Months Ended July 1, 2007 and June 25, 2006
Restaurant sales increased by $26.5 million, or 23.6%, to $138.6 million in 2007
from $112.1 million in 2006. The increase in restaurant sales was due to a $17.6
million increase associated with the opening of six new company-owned
restaurants in the first six months of 2007 and the 25 company-owned restaurants
opened before 2007 that did not meet the criteria for same-store sales and $8.9
million related to an 8.4% increase in same-store sales.
Franchise royalties and fees increased by $2.9 million, or 20.2%, to $17.3
million in 2007 from $14.4 million in 2006. The increase was due primarily to
additional royalties collected from the 15 new franchised restaurants that
opened in 2007 and the 23 franchised restaurants that opened in the last six
months of 2006. Same-store sales for franchised restaurants increased 3.7% in
2007.
Cost of sales increased by $7.6 million, or 21.7%, to $42.6 million in 2007 from
$35.0 million in 2006 due primarily to more restaurants in operation in 2007.
Cost of sales as a percentage of restaurant sales decreased to 30.8% in 2007
from 31.2% in 2006. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to the leverage of food and alcohol costs as a result of
price increase and a sales shift to better margined products.
Labor expenses increased by $9.0 million, or 27.1%, to $42.2 million in 2007
from $33.2 million in 2006 due primarily to more restaurants in operation in
2007. Labor expenses as a percentage of restaurant sales increased to 30.4% in
2007 from 29.6% in 2006. The increase in labor expenses as a percentage of
restaurant sales was primarily due to higher than expected health insurance and
workers' compensation costs, and higher hourly and management costs.
Operating expenses increased by $3.5 million, or 18.9%, to $22.2 million in 2007
from $18.7 million in 2006 due primarily to more restaurants in operation in
2007. Operating expenses as a percentage of restaurant sales decreased to 16.0%
in 2007 from 16.7% in 2006. The decrease in operating expenses as a percentage
of restaurant sales was primarily due to lower general liability insurance
costs, credit card fees, and utility costs.
Occupancy expenses increased by $1.3 million, or 15.0%, to $9.6 million in 2007
from $8.4 million in 2006 due primarily to more restaurants in operation in
2007. Occupancy expenses as a percentage of restaurant sales decreased to 6.9%
from 7.5% in 2006.
Depreciation increased by $1.2 million, or 17.1%, to $7.9 million in 2007 from
$6.8 million in 2006. The increase was primarily due to the additional
depreciation on six new restaurants opened in 2007 and the 11 new restaurants
that opened in the last six months of 2006.
14
General and administrative expenses increased by $2.6 million, or 18.2%, to
$17.2 million in 2007 from $14.5 million in 2006 due to higher corporate
headcount, and accrued incentive and stock-based compensation. General and
administrative expenses as a percentage of total revenue decreased to 11.0% in
2007 from 11.5% in 2006. Exclusive of stock-based compensation, we reduced our
general and administrative expenses as a percentage of sales to 9.5% from 10.3%
with better leverage of our wages and overhead costs.
Preopening costs decreased by $216,000, to $1.3 million in 2007 from $1.5
million in 2006. We opened six new company-owned restaurants in the first half
of 2007, incurred no costs for openings in 2006, and incurred costs of $217,000
for restaurants that will open in the third quarter of 2007 or later. In the
first half of 2006, we opened seven new company-owned restaurants, incurred
costs of $295,000 for restaurants that opened in 2005, and incurred costs of
$388,000 for restaurants that opened in the third quarter of 2006 or later.
Loss on equipment disposal decreased by $22,000 to $232,000 in 2007 from
$254,000 in 2006. The expense in 2007 and 2006 represented miscellaneous
equipment disposals and retirements.
Interest income increased by $485,000 to $1.5 million in 2007 from $970,000 in
2006. The increase was primarily due to higher interest rates and overall cash
and marketable securities balance levels. Cash and marketable securities
balances at the end of the quarter were $71.1 million in 2007 compared to $55.7
million for the second quarter of 2006.
Provision for income taxes increased $1.5 million to $4.7 million in 2007 from
$3.3 million in 2006. The effective tax rate as a percentage of income before
taxes decreased to 33.6% in 2007 from 35.4% in 2006. The decrease in the
effective tax rate was due to lower state tax rates. Our effective tax rate
reflects the full federal and state statutory rates on taxable income. For 2007,
we believe our effective tax rate will be between 33% and 34%.
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.
The cash and marketable securities balance at July 1, 2007 was $71.1 million. We
invest our cash and marketable securities balances in debt securities with a
focus on protection of principal, adequate liquidity, and maximization of
after-tax returns. As of July 1, 2007, nearly all excess cash was invested in
high-quality municipal securities.
For the six months ended July 1, 2007, net cash provided by operating activities
was $17.6 million. Net cash provided by operating activities consisted primarily
of net earnings adjusted for non-cash expenses, an increase in accrued expenses,
partially offset by a decrease in income tax payable. The decrease in accrued
expenses was due primarily to the payout of accrued incentive compensation. The
decrease in income tax payable was due to the timing of tax payments.
For the six months ended June 25, 2006, net cash provided by operating
activities was $15.6 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, a decrease
in prepaid expenses, and an increase in accounts payable partially offset by an
increase in accounts receivable. The decrease in prepaid expenses is due to the
timing of insurance payments. The increase in accounts payable is due to the
timing of payments and increased level of construction activity. The increase in
accounts receivable was due to higher credit card and vendor related
receivables.
For the six months ended July 1, 2007 and June 25, 2006, net cash used in
investing activities was $23.2 million and $13.0 million, respectively.
Investing activities consisted of purchases of property and equipment related to
the opening of new company-owned restaurants and restaurants under construction,
purchases of marketable securities, and sales or maturities of those securities.
During the first six months of 2007 and 2006, we opened six and seven
restaurants, respectively during each of those periods. We expect capital
expenditures for the entire year of 2007 to approximate $1.25 million for each
new company-owned restaurants and the renovation and maintenance of existing
restaurants and the relocation of our home office in Minneapolis to be $12 to
$13 million for the year. In addition, the purchase of the nine Las Vegas
restaurants will cost $26 million. For the first six months of 2007, we
purchased $93.3 million of marketable securities and received proceeds of $81.9
million as these investments matured or were sold. For the first six months of
2006, we purchased $54.8 million of marketable securities and received proceeds
of $54.1 million as these investments matured or were sold.
For the six months ended July 1, 2007 and June 25, 2006, net cash provided by
(used in) financing activities was $397,000 and ($16,000), respectively. Net
cash provided by financing activities for 2007 consisted of the issuance of
common stock from the exercise of stock options and employee stock purchase plan
purchases of $860,000 and excess tax benefits for stock issuance of $720
partially offset by tax payments of restricted stock of $1,183. No additional
funding from the issuance of common stock (other than from the exercise of
options and employee stock purchases) is anticipated for the remainder of 2007.
Net cash provided by financing activities for 2006 resulted from the issuance of
common stock from the exercise of stock options and the employee stock purchase
plan purchases of $490,000.
15
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.
The following table presents a summary of our contractual operating lease
obligations and commitments as of July 1, 2007 (amounts in thousands):
Payments Due By Period
--------------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
--------------------------------------------------------
Operating lease obligations $ 130,414 16,538 30,276 26,058 57,542
Lease commitments for restaurants under development 30,434 1,843 5,358 5,466 17,767
--------------------------------------------------------
Total $ 160,848 18,381 35,634 31,524 75,309
========================================================
We believe the cash flows from our operating activities and our balance of cash
and marketable securities will be sufficient to fund our operations and building
commitments and meet our obligations for the foreseeable future. Our future cash
outflows related to income tax uncertainties amounts to $419. These amounts are
excluded from the contractual obligations table due to the high degree of
uncertainty regarding the timing of these liabilities.
Risk Factors/Forward-Looking Statements
The foregoing discussion and other statements in this report 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
long-term goal of over 1,000 locations, expected annual unit growth of over 15%,
efforts to manage cost of sales particularly related to chicken wing costs, our
expectations as to chicken wing costs, plans for entry into new markets,
expansion and improving existing markets, estimated tax rates for 2007, expected
store openings for 2007 and related capital expenditures, and sources of funding
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 following risk factors (each of which is
discussed in greater detail in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 as updated in Item 1A of Part II of this Form
10-Q):
o Fluctuations in chicken wing prices could reduce our operating income.
o If we are unable to successfully open new restaurants, our revenue growth
rate and profits may be reduced.
o We must identify and obtain a sufficient number of suitable new restaurant
sites for us to sustain our revenue growth rate.
o Our restaurants may not achieve market acceptance in the new geographic
regions we enter.
o New restaurants added to our existing markets may take sales from existing
restaurants.
o Implementing our expansion strategy may strain our resources.
o We are dependent on franchisees and their success.
o We may not be able to attract and retain qualified personnel to operate and
manage our restaurants.
o Franchisees may take actions that could harm our business.
o We could face liability from our franchisees.
16
o Our quarterly operating results may fluctuate due to the timing of special
events and other factors, including the recognition of impairment losses.
o Changes in consumer preferences or discretionary consumer spending could
harm our performance.
o Changes in employment laws or regulation could harm our performance.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties and speak only as of the date they are made. We undertake no
obligation to update publicly or revise any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to our cash and cash equivalents and
marketable securities. We invest our excess cash in highly liquid short-term
investments with maturities of less than one year. These investments are not
held for trading or other speculative purposes. Changes in interest rates affect
the investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations.
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of municipal securities. We do not believe there is a
significant risk of non-performance by these municipalities because of our
investment policy restrictions as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food, labor, and
restaurant operating costs. Substantial increases in these costs could impact
operating results to the extent that such increases cannot be passed along
through higher menu prices. A large number of our restaurant personnel are paid
at rates based on the applicable federal and state minimum wages, and increases
in the minimum wage rates and tip-credit wage rates could directly affect our
labor costs. Many of our leases require us to pay taxes, maintenance, repairs,
insurance, and utilities, all of which are generally subject to inflationary
increases. We believe inflation has not had a material impact on our results of
operations in recent years.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production,
availability, and other factors outside our control. We believe that almost all
of our food and supplies are available from several sources, which helps to
control food product risks. We negotiate directly with independent suppliers for
our supply of food and paper products. We use members of UniPro Food Services,
Inc., a national cooperative of independent food distributors, to distribute
these products from the suppliers to our restaurants. We have minimum purchase
requirements with some of our vendors, but the terms of the contracts and nature
of the products are such that our purchase requirements do not create a market
risk. The primary food product used by company-owned and franchised restaurants
is fresh chicken wings. Fresh chicken wings accounted for approximately 23.0%
and 22.5% of our cost of sales in the second quarter of 2007 and 2006,
respectively, with an average price per pound of $1.25 and $1.10, respectively.
In March 2007, we entered into a pricing agreement with one of our chicken
suppliers with the intent to limit the price volatility that we have experienced
in our quarterly cost of sales percentage. If our past buying trend with this
supplier continues, we expect the price for 80-90% of the wings used by our
company-owned restaurants to be $1.23 per pound during the remaining term of the
agreement. However, the pricing agreement does not obligate the supplier to sell
us any chicken nor are we bound to purchase any chicken from such supplier. We
will review the agreement periodically during its term, and we may modify it
with the mutual consent of both parties. Thus, the cost of wings per pound in
the future may be higher or lower than our expectations and market pricing.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of our disclosure controls and
procedures as defined in Rules 13(a)-15(e) under the Securities Exchange Act of
1934 ("the Exchange Act"). Based on this evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There were no changes in our
internal controls over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. 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 insured and continue to insure against most of these types of claims. A
judgment significantly in excess of our insurance coverage or involving punitive
damages, which may not be covered by insurance, could materially adversely
affect our financial condition or results of operations.
ITEM 1A. RISK FACTORS
In Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December
31, 2006, we identified a number of risk factors related to our business. In
light of a pricing agreement that we have executed with our of our suppliers, we
have determined to update these risk factors by replacing the risk factor
entitled "Fluctuations in chicken wing prices could reduce our operating income"
with the following:
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
wing costs may adversely affect our operating results if we are unable to
successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices. For example, fresh chicken
wings accounted for approximately 23.0% and 22.5% of our cost of sales in the
second quarter of 2007 and 2006, respectively, with an annual average price per
pound of $1.25 and $1.10, respectively. The supply of chicken wings, and thus
the cost, may be adversely affected by a number of factors, including but not
limited to the avian flu and the availability and cost of corn or other feed for
the chickens. In an effort to limit the price volatility of chicken wings, we
entered into a pricing agreement with one of our chicken suppliers in March
2007. If our past buying trend with this supplier continues, we expect the price
for 80-90% of the wings used by our company-owned restaurants to be $1.23 per
pound during the remaining term of the agreement. However, the pricing agreement
does not obligate the supplier to sell us any chicken nor are we bound to
purchase any chicken from such supplier. We will review the agreement
periodically during its term, and we may modify it with the mutual consent of
both parties. Thus, the cost of wings per pound in the future may be higher or
lower than our expectations and market pricing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders meeting held on May 24, 2007, we submitted to a vote
of our shareholders the following matters, which received the indicated votes.
These votes are listed on a pre-split basis.
1. Approving setting the number of members of the Board of Directors at eight
(8):
For: 8,191,733 Against: 44,568 Abstain: 5,836 Broker Non-Vote: 0
2. Election of Directors:
For: Withheld:
------------------- -------------------
Sally J. Smith...................... 8,040,418 201,719
Kenneth H. Dahlberg................. 8,041,576 200,561
Dale M. Applequist.................. 8,035,344 206,793
Robert W. MacDonald................. 7,889,409 352,728
Warren E. Mack...................... 7,819,701 422,436
J. Oliver Maggard................... 7,843,464 398,673
Michael P. Johnson.................. 7,911,168 330,969
James Damian........................ 8,167,804 74,333
18
3. Approve amendment to the Equity Incentive Plan to add Section 162 (m)
provisions:
For: 5,759,714 Against: 111,003 Abstain: 19,979 Broker Non-Vote: 2,351,441
4. Approve the Cash Incentive Plan containing Section 162 (m) provisions:
For: 5,612,701 Against: 260,784 Abstain: 17,211 Broker Non-Vote: 2,351,441
ITEM 6. EXHIBITS
See Exhibit Index following the signature page of this report.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 8, 2007 BUFFALO WILD WINGS, INC.
By:
/s/ Sally J. Smith
------------------------------------------------
Sally J. Smith, President and Chief Executive
Officer (principal executive officer)
By:
/s/ Mary J. Twinem
------------------------------------------------
Mary J. Twinem, Executive Vice President, Chief
Financial Officer and Treasurer (principal
financial and accounting officer)
20
EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED JULY 1, 2007
Exhibit
Number Description
- --------- --------------------------------------------------------------------------------------
Restated Articles of Incorporation, as amended - incorporated by reference to Exhibit
3.1 3.1 to the Company's current report on Form 8-K dated May 24, 2007.
10.1 2003 Equity Incentive Plan, as amended through March 17, 2007.
Cash Incentive Plan - incorporated by reference to Appendix B to the Company's
10.2 Definitive Proxy Statement filed on April 20, 2007.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-
31.1 Oxley Act
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
31.2 Oxley Act
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-
32.1 Oxley Act
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-
32.2 Oxley Act
21