BUFFALO WILD WINGS INC - 10-Q Quarterly Report

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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 fiscal year quarter ended March 28, 2004

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

Incorporation or Organization)

(IRS Employer

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) 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ¨ NO x

The number of shares outstanding of the registrant’s common stock as of April 30, 2004: 8,037,948 shares.

Table of Contents

TABLE OF CONTENTS


PART I		Page

Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		5
Item 3. Quantitative and Qualitative Disclosures About Market Risk		11
Item 4. Controls and Procedures		12

PART II

Item 1. Legal Proceedings		12
Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities		12
Item 6. Exhibits and Reports on Form 8-K		13

Signatures		14
Exhibit Index		15

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)


Assets	December 28, 2003		March 28, 2004
Current assets:
Cash and cash equivalents	$	49,538	47,833
Accounts receivable—franchisees, net of allowance of $25		694	787
Accounts receivable—other		1,634	2,730
Inventory		978	1,106
Income taxes receivable		367	—
Prepaid expenses		1,230	984
Deferred income taxes		1,222	1,222

Total current assets		55,663	54,662
Property and equipment, net		44,450	48,364
Restricted cash		2,425	2,930
Other assets		702	717
Goodwill		759	759

Total assets	$	103,999	107,432

Liabilities and Stockholders’ Equity
Current liabilities:
Unearned franchise fees	$	1,959	2,360
Accounts payable		4,941	4,817
Accrued income taxes		—	792
Accrued compensation and benefits		4,670	4,111
Accrued expenses		3,580	3,365
Current portion of deferred lease credits		491	508

Total current liabilities		15,641	15,953

Long-term liabilities:
Marketing fund payables		2,425	2,930
Deferred income taxes		4,733	4,818
Deferred lease credits, net of current portion		6,133	6,177

Total liabilities		28,932	29,878


Commitments and contingencies (note 6)

Common stockholders’ equity:
Undesignated stock, 5,600,000 shares authorized		—	—
Common stock, no par value. Authorized 15,600,000 shares; issued and outstanding 7,981,945 and 8,034,648, respectively		66,235	66,420
Retained earnings		8,832	11,134

Total common stockholders’ equity		75,067	77,554

Total liabilities and stockholders’ equity	$	103,999	107,432

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollar amounts in thousands except share and per share data)

(unaudited)


	Three months ended
	March 30, 2003			March 28, 2004
Revenue:
Restaurant sales	$	26,587		35,926
Franchise royalties and fees		2,988		4,257

Total revenue		29,575		40,183


Costs and expenses:
Restaurant operating costs:
Cost of sales		8,128		12,427
Labor		7,775		9,959
Operating		4,282		5,422
Occupancy		1,792		2,293
Depreciation and amortization		1,648		2,033
General and administrative		3,641		4,054
Preopening		280		343
Restaurant closures and impairment		1		11

Total costs and expenses		27,547		36,542

Income from operations		2,028		3,641

Other (income) expense:
Interest expense		(252	)	—
Interest income		12		133

		(240	)	133

Earnings before income taxes		1,788		3,774
Income tax expense		697		1,472

Net earnings		1,091		2,302
Accretion resulting from cumulative dividend and mandatory redemption feature of preferred Stock		401		—

Net earnings available to common stockholders
	$	690		2,302

Earnings per common share—basic	$	0.27		0.29
Earnings per common share—diluted		0.22		0.27

Weighted average shares outstanding—basic		2,552,261		7,815,430
Weighted average shares outstanding—diluted		5,010,842		8,381,545

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(unaudited)


	Three months ended
	March 30, 2003			March 28, 2004
Cash flows from operating activities:
Net earnings	$	1,091		2,302
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation and amortization		1,648		2,033
Restaurant closures and impairment		1		11
Deferred lease credits		(33	)	(96	)
Deferred income taxes		—		85
Change in operating assets and liabilities:
Accounts receivable		1,639		(1,072	)
Inventory		(64	)	(128	)
Prepaid expenses		(499	)	246
Other assets		30		(15	)
Unearned franchise fees		454		401
Accounts payable		(1,498	)	(124	)
Income taxes		1,574		1,159
Accrued expenses		(1,431	)	(774	)

Net cash provided by operating Activities		2,912		4,028


Cash flows from investing activities:
Acquisition of property and equipment		(1,252	)	(5,958	)

Net cash used in investing activities		(1,252	)	(5,958	)

Cash flows from financing activities:
Issuance of common stock		55		185
Payments on notes payable		(50	)	—
Payments on capital lease obligations		(1,022	)	—
Proceeds from lessors		—		40

Net cash provided by (used in) financing activities		(1,017	)	225

Net increase (decrease) in cash and cash equivalents		643		(1,705	)
Cash and cash equivalents at beginning of period		4,652		49,538

Cash and cash equivalents at end of period	$	5,295		47,833

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 30, 2003 AND MARCH 28, 2004

(1)

Basis of Financial Statement Presentation

The consolidated statements as of December 28, 2003 and March 28, 2004, and for the three-month periods ended March 30, 2003 and March 28, 2004, have been prepared by Buffalo Wild Wings, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial information for the three-month periods ended March 30, 2003 and March 28, 2004, 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.

The financial information as of December 28, 2003, is derived from the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2003, included in item 8 in the Fiscal 2003 Annual Report on Form 10-K, and should be read in conjunction with such financial statements.

The results of operations for the three month period ended March 28, 2004, are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 26, 2004.

(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.

The Company purchases its product from a number of suppliers and believes there are alternative suppliers. The Company has no minimum purchase commitments from its vendors. The primary food product used by Company-owned and franchised restaurants is fresh chicken wings. Fresh chicken wings are purchased by the Company based on current market conditions and are subject to fluctuation. Material increases in fresh chicken wing costs may adversely effect the Company’s operating results. For the three-month periods ended March 30, 2003 and March 28, 2004, fresh chicken wings were 29% and 38% respectively, of restaurant cost of sales.

(b)

Stock-Based Compensation

The Company records compensation expense for option grants to employees under its stock option plan if the current market value of the underlying stock at the grant date exceeds the stock option exercise price. No such grants have been issued. The Company applies the intrinsic-value method in accounting for its employee stock option grants and, accordingly, no compensation cost has been recognized for its stock options in the financial statements.

Pro forma disclosure of the net earnings impact of applying an alternative method of recognizing stock compensation expense over the vesting period is based on the fair value of all stock-based awards on the date of grant. If the Company had elected to recognize compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net earnings would have been decreased to the pro forma amounts indicated in the table below.

The impact of calculating compensation cost for stock options under SFAS No. 123 is reflected over the options’ vesting period, typically four years.


	Three months ended
	March 30, 2003		March 28, 2004
Net earnings, as reported	$	1,091	2,302
Deduct:
Total stock-based employee compensation expense determined under fair value-based method for stock option and purchase plans, net of related tax effects		34	39

Pro forma net earnings	$	1,057	2,263

Net earnings per common share:
As reported (basic)	$	0.27	0.29
Pro forma (basic)		0.25	0.29

As reported (dilutive)		0.22	0.27
Pro forma (dilutive)		0.21	0.27

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


	Three months ended
	March 30, 2003	March 28, 2004
Expected dividend yield	0.0%	0.0%
Expected stock price volatility	39.2%	38.0%
Risk-free interest rate	2.6%	2.9%
Expected life of options	5 years	5 years

The per-share weighted average fair value of stock options granted during the three-month periods ended March 30, 2003 and March 28, 2004 was $3.16, and $9.82, respectively. Volatility was calculated based on an analysis of the Company’s industry peers and its own stock price since the initial public offering in fiscal 2003.

(3)

Property and Equipment

Property and equipment consists of the following:


	As of
	December 28, 2003			March 28, 2004
Construction in-process	$	1,080		2,912
Leasehold improvements		37,899		40,188
Furniture, fixtures, and equipment		27,541		29,083

		66,520		72,183
Less accumulated depreciation and amortization		(22,070	)	(23,819	)

	$	44,450		48,364

(4)

Earnings Per Share

The following is a reconciliation of basic and fully diluted earnings per share for the three-month periods ended March 30, 2003 and March 28, 2004:


	Three months ended March 30, 2003
	Earnings (numerator)			Shares (denominator)	Per-share amount
Net earnings	$	1,091
Less accretion resulting from cumulative dividend and mandatory redemption feature of preferred stock		(401	)

Earnings per common share—basic		690		2,552,261	$	0.27
Effect of dilutive securities
Stock options and warrants		—		609,166
Series A Preferred Stock		401		1,849,415

Earnings per common share—diluted	$	1,091		5,010,842		0.22


	Three months ended March 28, 2004
	Earnings (numerator)			Shares (denominator)	Per-share amount
Net earnings	$	2,302

Earnings per common share—basic		2,302		7,815,430	$