ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For supplemental information regarding quarterly results of operations,
refer to Item 7, "Quarterly Results of Operations."
See accompanying notes to consolidated financial statements.
(1) Includes stock-based compensation of $3,755, $3,216, and $1,700,
respectively
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
References in these financial statement footnotes to "we", "us", and "our"
refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries. We were
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, we give franchisees the right to
use the name Buffalo Wild Wings.
At December 30, 2007, December 31, 2006, and December 25, 2005, we operated
161, 139, and 122 Company-owned restaurants, respectively, and had 332, 290, and
248 franchised restaurants, respectively.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Buffalo Wild
Wings, Inc. and its wholly owned subsidiaries (collectively, the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(c) Fiscal Year
We utilize a 52- or 53-week accounting period that ends on the last Sunday
in December. The fiscal years ended December 30, 2007, and December 25, 2005,
comprised 52 weeks. The fiscal year ended December 31, 2006 was a 53-week year
with the quarter ended December 31, 2006 comprising fourteen weeks. The 53rd
week of fiscal 2006 contributed $5,663 in restaurant sales and $768 in royalties
and fees.
(d) Restaurant Sales Concentration
As of December 30, 2007, we operated 25 Company-owned restaurants and had
61 franchised restaurants in the state of Ohio. The Company-owned restaurants in
Ohio aggregated 16.3%, 18.6%, and 22.3%, respectively, of our restaurant sales
in fiscal 2007, 2006, and 2005. We are subject to adverse trends in that state.
(e) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
(f) Marketable Securities
Marketable securities consist of available-for-sale securities and trading
securities that are carried at fair value and held-to-maturity securities that
are stated at amortized cost, which approximates market.
Available-for-sale securities are classified as current assets based upon
our 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
2007, 2006, and 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 result in these investments having a value at or near par value
(cost).
Trading securities are stated at fair value, with gains or losses resulting
from changes in fair value recognized currently in earnings as interest income.
In 2006, we funded a deferred compensation plan using trading assets in a
marketable equity portfolio. This portfolio is held to generate returns that
seek to offset changes in liabilities related to the equity market risk of
certain deferred compensation arrangements. These deferred compensation
liabilities were $1,579 and $1,237 as of December 30, 2007 and December 31,
2006, respectively, and are included in accrued compensation and benefits in the
accompanying consolidated balance sheets.
(g) Accounts Receivable
Accounts receivable - franchisees represents royalty receivables from our
franchisees. Accounts receivable - other consists primarily of
contractually-determined receivables for leasehold improvements, credit cards,
vendor rebates, and purchased interest on investments.
38
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(h) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
We purchase 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
purchase requirements do not create a market risk. The primary food product used
by Company-owned and franchised restaurants is fresh chicken wings. Fresh
chicken wings are purchased by us based on a chicken wing contact which fixes
80-90% of our chicken wing purchases at $1.23 per pound. This agreement is set
to expire in March 2008. We have not been able to negotiate a satisfactory
long-term pricing agreement for chicken wings and may float at market for the
remainder of 2008. However, we will continue to pursue options for a long-term
price contract. For fiscal 2007, 2006, and 2005, fresh chicken wings were 24%,
24%, and 27% of restaurant cost of sales, respectively.
(i) Property and Equipment
Property and equipment are recorded at cost. Leasehold improvements include
the cost of improvements funded by landlord incentives or allowances and during
the build-out period leasehold improvements are amortized using the
straight-line method over the lesser of the term of the lease, without
consideration of renewal options, or the estimated useful lives of the assets,
which typically range from five to ten years. Furniture and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets, which range from two to eight years. Maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
accumulated depreciation are eliminated from the respective accounts and the
related gains or losses are credited or charged to earnings.
We review property and equipment, along with other long-lived assets,
quarterly to determine if the carrying value of these assets may not be
recoverable based on estimated future undiscounted cash flows. Assets are
reviewed at the lowest level for which cash flows can be identified, which is
the individual restaurant level. In determining future cash flows, significant
estimates are made by us with respect to future operating results of each
restaurant over its remaining lease term. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Fair value
is generally determined by estimated discounted future cash flows.
(j) Goodwill and Other Assets
Goodwill represents the excess of cost over the fair value of identified
net assets of the business acquired. Goodwill and indefinite-life purchased
liquor licenses are subject to an annual impairment analysis. We identify
potential impairments for goodwill by comparing the fair value of a reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds the carrying amount, the asset is not impaired. If the
carrying amount exceeds the fair value, we calculate the possible impairment by
comparing the implied fair value of the asset with the carrying amount. If the
implied value of the asset is less than the carrying amount, a write-down is
recorded. In 2005, we recorded an impairment charge of $390 for goodwill not
considered recoverable based on estimated discounted future cash flows. The
remaining goodwill was considered recoverable as of December 30, 2007.
Other 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. We identify potential impairments for liquor
licenses by comparing the fair value with its carrying amount. If the fair value
exceeds the carrying amount, the liquor licenses are not impaired. If the
carrying amount exceeds the fair value, we calculate the possible impairment by
comparing the implied fair value of the liquor licenses with the carrying
amount. If the implied value of the asset is less than the carrying amount, a
write-down is recorded. The carrying amount of the liquor licenses not subject
to amortization as of December 30, 2007 and December 31, 2006 was $414 and $375,
respectively, and is included in other assets.
(k) Fair Values of Financial Instruments
The carrying amount of our financial assets and liabilities approximates
fair value, because of their short-term nature.
39
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(l) Asset Retirement Obligations
An asset retirement obligation associated with the retirement of a tangible
long-lived asset is recognized as a liability in the period incurred or when it
becomes determinable, with an associated increase in the carrying amount of the
related long-lived asset. We must recognize a liability for the fair value of a
conditional asset retirement obligation when incurred, if the liability's fair
value can be reasonably estimated. Conditional asset retirement obligations are
legal obligations to perform asset retirement activities when the timing and/or
method of settlement are conditional on a future event or may not be within our
control. Asset retirement costs are depreciated over the useful life of the
related asset. As of December 30, 2007 and December 31, 2006, we had asset
retirement obligations of $175 and $142, respectively.
(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. We provide 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 us have been performed. Area development fees
are dependent based on the number of restaurants in the territory, as are our
obligations under the area development agreement. Consequently, as obligations
are met, area development fees are recognized proportionally with expenses
incurred with the opening of each new restaurant and any royalty-free periods.
Royalties are accrued as earned and are calculated each period based on
restaurant sales.
Sales from Company-owned restaurant revenues are recognized as revenue at
the point of the delivery of meals and services. All sales taxes are presented
on a net basis and are excluded from revenue.
(n) Franchise Operations
We enter into franchise agreements with unrelated third parties to build
and operate restaurants using the Buffalo Wild Wings brand within a defined
geographical area. We believe that franchising is an effective and efficient
means to expand the Buffalo Wild Wings brand. 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
us. We do not provide loans, leases, or guarantees to the franchisee or the
franchisee's employees and vendors. If a franchisee becomes financially
distressed, we do not provide any financial assistance. If financial distress
leads to a franchisee's noncompliance with the franchise agreement and we elect
to terminate the franchise agreement, we have the right but not the obligation
to acquire the assets of the franchisee at fair value as determined by an
independent appraiser. We receive 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. We
have financial exposure for the collection of the royalty payments. Franchisees
generally remit franchise payments weekly for the prior week's sales, which
substantially minimizes our financial exposure. Historically, we have
experienced insignificant write-offs of franchisee royalties. Franchise and area
development fees are paid upon the signing of the related agreements.
(o) Advertising Costs
Advertising costs for Company-owned restaurants are expensed as incurred
and aggregated $10,548, $9,055, and $5,809, in fiscal years 2007, 2006, and
2005, respectively. Our 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.
40
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(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. 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
recorded 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 2007,
2006, and 2005, vendor allowances were recorded as a reduction in inventoriable
costs, and cost of sales was reduced by $4,636, $4,246, and $4,020,
respectively.
(r) National Advertising Fund
We have a system-wide marketing and advertising fund. Company-owned and
franchised restaurants are required to remit a designated portion of sales, to a
separate advertising fund that is used for marketing and advertising efforts
throughout the system. In 2007, 2006, and 2005 that amount was 3%, 3%, and 2.5%,
respectively. 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. We account for cash and
receivables of these funds as "restricted cash" with an offsetting "marketing
fund payables" on our accompanying consolidated balance sheet.
(s) Earnings Per Common Share
Basic earnings per common share excludes dilution and is computed by
dividing the net earnings available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share include dilutive common stock equivalents consisting of stock
options and warrants determined by the treasury stock method. Restricted stock
units are included for calculating both basic and diluted earnings per share at
the time that the performance criteria is met.
(t) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the balance sheet carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized.
(u) Deferred Lease Credits
Deferred lease credits consist of reimbursement of costs of leasehold
improvements from the Company's lessors. These reimbursements are amortized on a
straight-line basis over the term of the applicable lease, without consideration
of renewal options. In addition, this account includes adjustments to recognize
rent expense on a straight-line basis over the term of the lease commencing at
the start of our construction period for 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 we 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. In 2005, rent expense
recognized over the construction period was capitalized and depreciated over the
economic life of the asset, generally ten years.
(v) Accounting Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
41
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(w) Stock-Based Compensation
We maintain a stock equity incentive plan under which we may grant
non-qualified stock options, incentive stock options, and restricted stock units
to employees, non-employee directors and consultants. We also have an employee
stock purchase plan ("ESPP").
Prior to the December 26, 2005 adoption of the Financial Accounting
Standards Board ("FASB") Statement No. 123R, "Shared-Based Payment" ("SFAS
123R"), we accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, because the stock option grant price equaled the market price on
the date of grant, and any purchase discounts under our stock purchase plan were
within statutory limits, no compensation expense was recognized for stock-based
compensation related to stock options or ESPP shares. Restricted stock units
vesting upon the achievement of certain performance targets were expensed under
the requirements of APB 25. Stock-based compensation recognized for restricted
stock during 2005 was $1,700. Prior to the adoption of SFAS 123R, stock-based
compensation was included as a pro forma disclosure in the notes to the
consolidated financial statements.
Effective December 26, 2005, we adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition method. Under
this transition method, stock-based compensation expense is recognized in the
consolidated financial statements for granted, modified, or settled stock
options and for expense related to the ESPP, since the related purchase
discounts exceeded the amount allowed under SFAS 123R for non-compensatory
treatment. Compensation expense recognized includes the estimated expense for
the portion of stock options vesting in the period for options granted prior to,
but not vested as of December 26, 2005, based on the grant date fair value
estimated prior to the adoption of SFAS 123R. There were no new stock option
grants in 2007 or 2006. Restricted stock units vesting upon the achievement of
certain performance targets are expensed based on the fair value on the date of
grant. Results for prior periods have not been restated, as provided for under
the modified-prospective transition method.
Total stock-based compensation expense recognized in the consolidated
statement of earnings for fiscal year 2007 was $3,755 before income taxes and
consisted of restricted stock, stock options, and employee stock purchase plan
(ESPP) expense of $3,538, $37 and $180, respectively. The related total tax
benefit was $1,007 during 2007. All stock-based compensation is recognized as
general and administrative expense.
Total stock-based compensation expense recognized in the consolidated
statement of earnings for fiscal year 2006 was $3,216 before income taxes and
consisted of restricted stock, stock options, and employee stock purchase plan
(ESPP) expense of $3,000, $82 and $134, respectively. The related total tax
benefit was $1,153 during 2006.
Prior to the adoption of SFAS 123R, we presented all tax benefits resulting
from the exercise of stock options as operating cash inflows in the consolidated
statements of cash flows, in accordance with the provisions of the Emerging
Issues Task Force ("EITF") Issue No 00-15, "Classification in the Statement of
Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option." SFAS 123R requires the benefits of tax
deductions in excess of the compensation cost recognized for those options to be
classified as financing cash inflows, rather than operating cash inflows, on a
prospective basis. This amount is shown as "Excess tax benefit from stock
issuance" in the accompanying consolidated statement of cash flows for the
fiscal year ended December 30, 2007 and December 31, 2006.
42
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
The following table shows the effect on net earnings and earnings per share
for the 2005 fiscal period had compensation cost been recognized based upon the
estimated fair value on the grant date of stock options and ESPP.
Fiscal Year Ended
-----------------
December 25,
2005
-------------
Net earnings, as reported $ 8,880
Add:
Total stock-based compensation expense included in
reported earnings, net of related tax effects 1,054
Deduct:
Total stock-based compensation expense determined
under the fair value-based method for stock
options, restricted stock, and ESPP, net of
related tax effects (1,210)
-------------
Pro forma net earnings $ 8,724
=============
Net earnings per common share:
As reported (basic) $ 0.53
Pro forma (basic) 0.52
As reported (dilutive) 0.51
Pro forma (dilutive) 0.50
|
Pro forma disclosures for the fiscal years ended December 30, 2007 and
December 31, 2006 are not presented because stock-based compensation is
recognized in the consolidated financial statements.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes-Merton ("BSM") option valuation model with the following
assumptions:
Stock Options
------------------------------------------
December 30, December 31, December 25,
2007* 2006* 2005
Expected dividend yield N/A N/A 0.0%
Expected stock price volatility N/A N/A 40.1%
Risk-free interest rate N/A N/A 3.5%
Expected life of options N/A N/A 5 years
Employee Stock Purchase Plan
------------------------------------------
December 30, December 31, December 25,
2007 2006 2005
------------- ------------- --------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 41.4 - 44.4% 39.2 - 41.4% 38.0% - 41.8%
Risk-free interest rate 3.6 - 4.9% 4.3 - 5.2% 3.1% - 4.3%
Expected life of options 0.5 years 0.5 years 0.5 years
|
* No stock options were granted in 2007 or 2006.
43
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
The expected term of the options represents the estimated period of time
until exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on historical
volatility of our stock. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an equivalent remaining
term. We have not paid dividends in the past.
(x) New Accounting Pronouncements
In 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 believe the adoption of SFAS
159 will not have a significant impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations."
SFAS No. 141R provides companies with principles and requirements on how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree as well as the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R also requires certain disclosures to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. Acquisition costs associated with the business
combination will generally be expensed as incurred. SFAS No. 141R is effective
for business combinations occurring in fiscal years beginning after December 15,
2008. Early adoption of SFAS No. 141R is not permitted. We are currently
evaluating the impact SFAS No. 141R will have on any future business
combinations.
(2) Marketable Securities
Marketable securities were comprised as follows:
December 30, December 31,
2007 2006
--------------- -------------
Held-to-maturity
Municipal securities 23,718 33,522
Available-for-sale
Municipal securities 41,206 18,019
Trading
Mutual funds 1,589 1,288
--------------- -------------
Total $ 66,513 52,829
=============== =============
|
Purchases of available for-sale securities totaled $132,346 in 2007 with
sales totaling $109,181. Purchases of held-to-maturity securities totaled
$25,824 in 2007 with proceeds from maturities totaling $35,661. All
held-to-maturity debt securities mature within one year and had an aggregate
fair value of $23,753 at December 30, 2007.
44
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
Purchases of available for-sale securities totaled $71,585 in 2006 with
sales totaling $87,205. Purchases of held-to-maturity securities totaled $36,743
in 2006 with proceeds from maturities totaling $18,054. All held-to-maturity
debt securities mature within one year and had an aggregate fair value of
$33,512 at December 31, 2006.
Purchases of available for-sale securities totaled $63,738 in 2005 with
sales totaling $46,743. Purchases of held-to-maturity securities totaled $27,800
in 2005 with proceeds from maturities totaling $32,742. All held-to-maturity
debt securities mature within one year and had an aggregate fair value of
$14,862 at December 25, 2005.
Trading securities represent investments held for future needs of a
non-qualified deferred compensation plan.
The fair value of available-for-sale investments in debt securities by
contractual maturities at December 30, 2007, is as follows:
Maturity date Fair Value
------------------------------------------ -----------
1-5 years $1,210
5-10 years 6,664
After 10 years 33,332
-----------
Total $41,206
===========
|
(3) Property and Equipment
Property and equipment consisted of the following:
December 30, December 31,
2007 2006
---------------- ---------------
Construction in process $ 1,851 1,037
Furniture, fixtures, and equipment 69,962 53,994
Leasehold improvements 97,916 77,794
---------------- ---------------
169,729 132,825
Less accumulated depreciation (66,987) (54,688)
---------------- ---------------
$ 102,742 78,137
================ ===============
|
(4) Lease Commitments
We lease all of our restaurants and corporate offices under operating
leases that have various expiration dates. In addition to base rents, leases
typically require us to pay our 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 30, 2007 were as follows:
Restaurants
Operating under
leases development
----------- -------------
Fiscal year ending:
2008 $ 18,588 1,034
2009 17,677 1,729
2010 16,913 1,729
2011 15,898 1,682
2012 15,074 1,629
Thereafter 68,427 9,653
----------- -------------
Total future minimum lease payments $ 152,577 17,456
=========== =============
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45
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
In 2007, 2006, and 2005, we 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. We
also rent 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 our proportionate share of real estate taxes and building
operating expenses, was as follows:
Fiscal Years Ended
--------------------------------------------
December 30, December 31, December 25,
2007 2006 2005
-------------- -------------- --------------
Minimum rents $ 16,729 14,600 11,702
Percentage rents 250 238 170
-------------- -------------- --------------
Total $ 16,979 14,838 11,872
============== ============== ==============
Equipment and auto leases $ 359 273 218
============== ============== ==============
|
(5) Income Taxes
We adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), on January 1, 2007 and upon adoption did
not need to recognize an adjustment in the previously recorded liability for
unrecognized income tax benefits. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
(in millions)
-----------------
Balance at January 1, 2007 $ 419
Additions based on tax positions related to the current year 88
Reductions for tax positions of prior years (204)
Settlements (62)
-----------------
Balance at December 30, 2007 $ 241
=================
|
We recognize 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 totaled $146 at January 1,
2007. Included in the balance at January 1, 2007 and December 30, 2007, are
unrecognized tax benefits of $337 and $157, respectively, which if recognized,
would affect the annual effective tax rate. The difference between these amounts
and the amount reflected in the tabular reconciliation above relates to the
deferred U.S. federal income tax benefit on unrecognized tax benefits related to
U.S. state income taxes.
We file a consolidated return in the United States Federal jurisdiction and
in many state jurisdictions. The Internal Revenue Service has completed their
examination of our 2005 U.S. Federal Income Tax Return. No proposed changes were
made. With few exceptions, we are no longer subject to state income tax
examinations for years before 2004. We do 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 December 28, 2008. Income tax
expense (benefit) is comprised of the following:
Fiscal Years Ended
-----------------------------------------------
December 30, December 31, December 25,
2007 2006 2005
--------------- --------------- ---------------
Current:
Federal $ 8,320 8,801 5,400
State 1,438 992 1,512
Deferred:
Federal (869) (1,705) (1,287)
State (25) (523) (186)
--------------- --------------- ---------------
Total income tax expense $ 8,864 7,565 5,439
=============== =============== ===============
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46
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
A reconciliation of the expected federal income taxes (benefits) at the
statutory rate of 35% to the actual provision for income taxes is as follows:
Fiscal Years Ended
--------------------------------------------
December 30, December 31, December 25,
2007 2006 2005
--------------- -------------- -------------
Expected federal income tax expense $ 9,981 8,343 5,012
State income tax expense, net of federal effect 919 305 862
Nondeductible expenses 144 115 80
Tax exempt income (824) (602) (350)
General business credits (1,121) (772) (528)
Statutory rate changes, deferred tax impact -- -- 148
Other, net (235) 176 215
--------------- -------------- -------------
Total income tax expense $ 8,864 7,565 5,439
=============== ============== =============
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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 30, December 31,
2007 2006
-------------- --------------
Deferred tax assets:
Unearned franchise fees $ 880 892
Accrued vacation 264 197
Accrued compensation 600 470
Deferred lease credits 1,262 1,029
Other 484 611
-------------- --------------
$ 3,490 3,199
============== ==============
Deferred tax liability:
Depreciation $ 4,353 4,956
-------------- --------------
Total $ 4,353 4,956
============== ==============
(6) Stockholders' Equity
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(a) Stock Options
We have 2.9 million shares of common stock reserved for issuance under the
Equity Incentive Plan (the plan) for employees, officers, and directors. The
option price for shares issued under this plan is to be not less than the fair
market value on the date of grant with respect to incentive stock options, or
85% of fair market value for nonqualified stock options. Incentive stock options
become exercisable in four equal installments from the date of the grant and
have a contractual life of ten years. Nonqualified stock options issued pursuant
to the plan have varying vesting periods from immediately to one year and have a
contractual life of ten years. We issue new shares of common stock upon exercise
of stock options. In 2003, our 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:
47
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
Average
Weighted remaining Aggregate
Number average contractual Intrinsic
of shares exercise price life (years) Value
--------------- -------------- --------------- -------------
Outstanding, December 31, 2006 420,986 $ 4.23
Granted -- --
Exercised (241,434) 3.15
Cancelled (2,949) 9.63
--------------- -------------- --------------- -------------
Outstanding, December 30, 2007 176,603 $ 5.61 3.9 $ 3,096
Exercisable, December 30, 2007 172,086 5.37 3.9 3,058
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The aggregate intrinsic value in the table above is before applicable
income taxes, based on our closing stock price of $23.14 as of December 30,
2007, which would have been received by the optionees had all options been
exercised on that date. As of December 30, 2007, total unrecognized stock-based
compensation expense related to nonvested stock options was approximately $16,
which is expected to be recognized over a weighted average period of
approximately seven months. During 2007, 2006, and 2005, the total intrinsic
value of stock options exercised was $5,978, $2,707, and $3,226, respectively.
During 2007 and 2006, the total fair value of options vested was $201 and $587,
respectively.
The following table summarizes our stock options outstanding at December
30, 2007:
Options outstanding Options exercisable
----------------------------------------------- -------------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life (years) price Shares price
---------------- -------------- --------------- ---------------- -------------- ----------------
$ 1.68 - 3.75 82,534 2.66 $ 2.88 82,534 $ 2.88
5.63 - 6.38 51,171 4.49 5.76 51,171 5.76
9.08 - 14.13 40,698 5.69 10.31 37,331 9.99
17.41 2,200 7.01 17.41 1,050 17.41
-------------- --------------
176,603 3.94 5.61 172,086 5.37
============== ==============
The plan has 693,811 shares available for grant as of December 30, 2007.
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(b) Restricted Stock
Restricted stock units are granted annually at the discretion of the Board
under the plan. These units are subject to annual vesting upon achieving
performance targets established by the Board of Directors. We record
compensation expense for the restricted stock units if vesting, based on the
achievement of performance targets, is probable. The restricted stock units may
vest one-third annually over a ten-year period as determined by meeting
performance targets. However, the second third of the restricted stock units is
not subject to vesting until the first one-third has vested and the final
one-third is not subject to vesting until the first two-thirds of the award has
vested. We issue new shares of common stock upon the disbursement of restricted
stock units. Restricted stock activity is summarized for fiscal year 2007:
Weighted
average
Number grant date
of shares fair value
-------------- ------------
Outstanding, December 31, 2006 168,212 $ 17.10
Granted 166,950 24.88
Vested (149,740) 20.96
Cancelled (44,730) 21.20
-------------- ------------
Outstanding, December 30, 2007 140,692 20.92
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48
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
As of December 30, 2007, the total stock-based compensation expense related
to nonvested awards not yet recognized was $3,044, which is expected to be
recognized over a weighted average period of 1.3 years. During fiscal year 2007,
the total fair value of shares vested was $3,139. The weighted average grant
date fair value of restricted stock units granted during 2006 and 2005 was
$16.99 and $17.42, respectively. During 2007, we recognized $399 of expense and
paid $1,066 for liability classified share-based compensation.
(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
2007, 2006, and 2005, we issued 30,836, 36,804, and 42,476 shares, respectively,
of common stock under the ESPP and have 432,978 available for future sale.
(7) Earnings Per Common Share
The following is a reconciliation of basic and fully diluted earnings per
common share for fiscal 2007, 2006, and 2005:
Fiscal year ended December 30, 2007
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------- -----------
Net earnings $ 19,654
------------
Earnings per common share 19,654 17,553,998 $ 1.12
Effect of dilutive securities--stock options, restricted stock
and warrants -- 278,827
------------ -------------
Earnings per common share--assuming dilution $19,654 17,832,825 1.10
============ =============
Fiscal year ended December 31, 2006
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------- -----------
Net earnings $ 16,273
------------
Earnings per common share 16,273 17,156,656 $ 0.95
Effect of dilutive securities--stock options and restricted
stock -- 472,018
------------ -------------
Earnings per common share--assuming dilution $ 16,273 17,628,674 0.92
============ =============
Fiscal year ended December 25, 2005
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------- -----------
Net earnings $ 8,880
------------
Earnings per common share 8,880 16,892,400 $ 0.53
Effect of dilutive securities--stock options and restricted
stock -- 524,588
------------ -------------
Earnings per common share--assuming dilution $ 8,880 17,416,988 0.51
============ =============
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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 have been
anti-dilutive:
December 30, December 31, December 25,
2007 2006 2005
------------ ------------ ------------
Stock options -- 2,972 4,052
Restricted stock 140,692 168,212 151,928
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49
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(8) Supplemental Disclosures of Cash Flow Information
Fiscal Years Ended
----------------------------------------
December 30, December 31, December 25,
2007 2006 2005
------------ ------------ ------------
Cash paid during the period for:
Income taxes $ 10,783 8,803 4,801
Noncash financing and investing transactions:
Property and equipment not yet paid for 1,135 1,130 82
Tax withholding for restricted stock units 1,100 2,267 578
Adjustment of restricted stock units to fair value
on grant date -- 2,568 --
Adjustment of restricted stock units to fair value -- -- 2,451
Capitalization of preopening rent expense -- -- 463
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(9) Loss on Asset Disposals and Impairment
In 2007, 2006 and 2003, we closed restaurants. As a result, a charge was
taken for remaining lease obligations, broker fees, and utilities. These charges
were recognized as a part of the loss on asset disposals and impairment and were
based on remaining lease obligations.
The rollforward of the store closing reserve for the years ended December
30, 2007, December 31, 2006, and December 25, 2005 is as follows:
As of As of
December 31, 2007 Costs December 30,
2006 reserve incurred 2007
------------- ----------- ------------- -------------
Remaining lease obligation and
utilities $ 54 85 (139) --
------------- ----------- ------------- -------------
$ 54 85 (139) --
============= =========== ============= =============
As of As of
December 25, 2006 Costs December 31,
2005 reserve incurred 2006
------------- ----------- ------------- -------------
Remaining lease obligation and
utilities $ -- 54 -- 54
------------- ----------- ------------- -------------
$ -- 54 -- 54
============= =========== ============= =============
As of As of
December 26, 2005 Costs December 25,
2004 reserve incurred 2005
------------- ----------- ------------- -------------
Remaining lease obligation and
utilities $ 136 -- (136) --
------------- ----------- ------------- -------------
$ 136 -- (136) --
============= =========== ============= =============
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During 2006, we recorded an impairment charge for the assets of one
underperforming restaurant. An impairment charge of $481 was recorded to the
extent that the carrying amount of the assets was not considered recoverable
based on estimated discounted future cash flows and the underlying fair value of
the assets.
During 2005, we recorded an impairment charge for the assets of four
underperforming restaurants. An impairment charge of $1,268 was recorded to the
extent that the carrying amount of the assets was not considered recoverable
based on estimated discounted future cash flows and the underlying fair value of
the assets.
50
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
A summary of the loss on asset disposals and impairment charges recognized
by us is as follows:
Fiscal Years Ended
---------------------------------------------
December 30, December 31, December 25,
2007 2006 2005
-------------- --------------- --------------
Store closing charges $ 85 54 --
Long-lived asset impairment -- 481 1,268
Goodwill impairment -- -- 390
Other asset write-offs 902 473 333
-------------- --------------- --------------
$ 987 1,008 1,991
============== =============== ==============
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(10) Defined Contribution Plans
We have a defined contribution 401(k) plan whereby eligible employees may
contribute pretax wages in accordance with the provisions of the plan. We match
100% of the first 3% and 50% of the next 2% of contributions made by eligible
employees. Matching contributions of approximately $840, $394, and $312 were
made by us during 2007, 2006, and 2005, respectively.
Under our Management Deferred Compensation Plan, our executive officers and
other named officers are entitled to receive an amount equal to a percentage of
an officer's base salary which is credited on a monthly basis to that officer's
deferred compensation account. The maximum deferral is 7.5% of the base salary
of each Vice President, 10% of the base salary of each Senior Vice President,
and 12.5% of the base salary of Chief Executive Officer, Chief Financial
Officer, and Executive Vice Presidents. Such amounts are subject to certain
vesting provisions, depending on length of employment and circumstances of
employment termination. Cash contributions relating to salary deferrals of $261,
$245, and $228 were made by us during 2007, 2006, and 2005, respectively.
(11) Related Party Transactions
It is our 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.
We sublease a portion of our main offices to Carefree Capital Partners,
Limited Partnership (Carefree) on a month-to-month lease on the same rental
basis as we are. A member of our board of directors is chairman and sole
stockholder of Carefree.
A member of our board of directors, Warren Mack, is an officer and director
at our primary law firm.
(12) 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 the accompanying consolidated financial statements and related disclosures
have been retroactively adjusted to give effect to this stock split.
(13) Contingencies
We are 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 our consolidated financial
position and results of operations.
51
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Dollar amounts in thousands, except per-share amounts)
(14) Commitment - Acquisition of Las Vegas Franchised Restaurants
On May 18, 2007, we exercised a right of first refusal to acquire the
assets of nine Buffalo Wild Wings franchised restaurants in the Las Vegas,
Nevada area. We expect the acquisition, if completed, to close in 2008. The
purchase price is approximately $26,000 and will be funded with available cash
and proceeds from marketable securities. The acquisition is subject to purchase
price adjustments. The transaction also remains dependent on execution of a
definitive asset purchase agreement, receipt of necessary approvals for gaming
and liquor licenses, lease assignments, and other customary closing conditions.
(15) Subsequent Event
During February 2008, we acquired certain leases and assets of eight
locations from Avado Brands, Inc. for approximately $1,200 in cash. Due to this
acquisition, we anticipate an asset impairment charge of approximately $400
relating to the relocation of one of our restaurants in the first quarter of
2008.
52