Attached files
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission File No. 000-53577
DIVERSIFIED RESTAURANT HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 03-0606420 | |
(State or other jurisdiction | (I.R.S. employer | |
of incorporation or | identification number) | |
formation) |
27680 Franklin Road
Southfield, Michigan 48034
(Address of principal executive offices)
Southfield, Michigan 48034
(Address of principal executive offices)
Issuers telephone number: (248) 223-9160
Issuers facsimile number: (248) 223-9165
Issuers facsimile number: (248) 223-9165
No change
(Former name, former address and former
fiscal year, if changed since last report)
(Former name, former address and former
fiscal year, if changed since last report)
Copies to:
Michael T. Raymond, Esq.
Dickinson Wright, PLLC
301 East Liberty, Suite 500
Ann Arbor, Michigan 48104-2266
(734) 623-1663
www.dickinson-wright.com
Michael T. Raymond, Esq.
Dickinson Wright, PLLC
301 East Liberty, Suite 500
Ann Arbor, Michigan 48104-2266
(734) 623-1663
www.dickinson-wright.com
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 18,876,000 shares of $.0001 par value common stock outstanding as of
November 12, 2010.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
INDEX
1 | ||||||||
1 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
24 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 10.4 | ||||||||
Exhibit 10.5 | ||||||||
Exhibit 10.6 | ||||||||
Exhibit 10.7 | ||||||||
Exhibit 10.8 | ||||||||
Exhibit 10.12 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 26 | December 27 | |||||||
2010 | 2009 (a) | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 959,028 | $ | 1,594,362 | ||||
Accounts receivable related party |
| 376,675 | ||||||
Inventory |
308,497 | 307,301 | ||||||
Prepaid assets |
240,030 | 152,702 | ||||||
Other current assets |
111,407 | 42,382 | ||||||
Total current assets |
1,618,962 | 2,473,422 | ||||||
Property and equipment, net (Note 3) |
16,229,563 | 11,655,513 | ||||||
Intangible assets, net (Note 4) |
978,349 | 751,779 | ||||||
Other long-term assets |
56,144 | 49,280 | ||||||
Deferred income taxes (Note 8) |
450,534 | 246,754 | ||||||
Total assets |
19,333,552 | 15,176,748 | ||||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt (Note 6) |
1,256,097 | 2,193,057 | ||||||
Accounts payable |
888,618 | 527,151 | ||||||
Accrued liabilities |
1,137,697 | 674,768 | ||||||
Deferred rent |
125,788 | 104,940 | ||||||
Total current liabilities |
3,408,200 | 3,499,916 | ||||||
Accrued rent |
783,679 | 846,014 | ||||||
Deferred rent |
889,501 | 638,024 | ||||||
Related party payable |
| 430,351 | ||||||
Other liabilities interest rate swap |
582,628 | 213,604 | ||||||
Long-term debt, less current portion (Note 6) |
14,663,236 | 6,767,041 | ||||||
Total liabilities |
20,327,244 | 12,394,950 | ||||||
Commitments and contingencies (Notes 5, 6, 9, 10, and 11) |
||||||||
Stockholders (deficit) equity (Note 7) |
||||||||
Common stock $0.0001 par value; 100,000,000 shares
authorized, 18,876,000
and 18,626,000 shares, respectively, issued and outstanding |
1,888 | 1,863 | ||||||
Additional paid-in capital |
2,627,539 | 2,356,155 | ||||||
Retained earnings (accumulated deficit) |
(3,040,491 | ) | 423,780 | |||||
Comprehensive (loss) income |
(582,628 | ) | | |||||
Total stockholders (deficit) equity |
(993,692 | ) | 2,781,798 | |||||
Total liabilities and stockholders equity |
$ | 19,333,552 | $ | 15,176,748 | ||||
The accompanying notes are an integral part of these interim consolidated financial statements.
(a) Amounts are derived from audited financial
statements as of December 27, 2009.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26 | September 30 | September 26 | September 30 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 11,423,726 | $ | 10,477,157 | $ | 32,823,425 | $ | 31,310,192 | ||||||||
Total revenue |
11,423,726 | 10,477,157 | 32,823,425 | 31,310,192 | ||||||||||||
Operating expenses |
||||||||||||||||
Compensation costs |
3,346,237 | 2,890,306 | 9,780,263 | 8,655,533 | ||||||||||||
Food and beverage costs |
3,310,374 | 3,253,647 | 9,785,584 | 9,813,943 | ||||||||||||
General and administrative |
2,670,428 | 2,322,537 | 7,707,679 | 7,281,370 | ||||||||||||
Pre-opening |
66,129 | 131,277 | 283,308 | 133,078 | ||||||||||||
Occupancy |
765,289 | 741,744 | 2,165,555 | 2,187,465 | ||||||||||||
Depreciation and amortization |
696,161 | 567,099 | 1,941,765 | 1,594,297 | ||||||||||||
Total operating expenses |
10,854,618 | 9,906,610 | 31,664,154 | 29,665,686 | ||||||||||||
Operating profit |
569,108 | 570,547 | 1,159,271 | 1,644,506 | ||||||||||||
Interest expense |
(243,854 | ) | (198,699 | ) | (931,730 | ) | (578,654 | ) | ||||||||
Other income, net |
6,333 | 16,120 | 5,071 | 169,059 | ||||||||||||
Income before income taxes |
331,587 | 387,968 | 232,612 | 1,234,911 | ||||||||||||
Income tax provision |
(131,119 | ) | (204,796 | ) | (9,232 | ) | (419,803 | ) | ||||||||
Net income |
$ | 200,468 | $ | 183,172 | $ | 223,380 | $ | 815,108 | ||||||||
Basic earnings per share as reported |
$ | 0.011 | $ | 0.010 | $ | 0.012 | $ | 0.045 | ||||||||
Fully diluted earnings per share as reported |
$ | 0.007 | $ | 0.006 | $ | 0.008 | $ | 0.028 | ||||||||
Weighted average number of common shares
outstanding (Notes 1 and 7) |
||||||||||||||||
Basic |
18,870,505 | 18,070,000 | 18,870,505 | 18,070,000 | ||||||||||||
Diluted |
29,160,000 | 29,020,000 | 29,113,333 | 29,020,000 |
The accompanying notes are an integral part of these interim consolidated financial statements.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26 | September 30 | September 26 | September 30 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 200,468 | $ | 183,172 | $ | 223,380 | $ | 815,108 | ||||||||
Comprehensive income (loss) |
||||||||||||||||
Unrealized changes in fair
value of cash flow hedges |
(177,707 | ) | | (582,628 | ) | | ||||||||||
Comprehensive income (loss) |
$ | 22,761 | $ | 183,172 | $ | (359,248 | ) | $ | 815,108 | |||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(UNAUDITED)
Retained | ||||||||||||||||||||||||
Additional | Earnings | Total | ||||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | (Loss) Income | Equity (Deficit) | |||||||||||||||||||
Balances December 27, 2009 |
18,626,000 | $ | 1,863 | $ | 2,356,155 | $ | 423,780 | $ | | $ | 2,781,798 | |||||||||||||
Shares issued for warrants exercised at $1.00
per share (Note 7) |
250,000 | 25 | 249,975 | | | 250,000 | ||||||||||||||||||
Share-based compensation (Note 7) |
| | 21,409 | | | 21,409 | ||||||||||||||||||
Acquisition of BWW restaurants (Note 2) |
| | | (3,134,790 | ) | | (3,134,790 | ) | ||||||||||||||||
Distributions |
| | | (552,861 | ) | (552,861 | ) | |||||||||||||||||
Unrealized changes in fair value of cash
flow hedges |
| | | | (582,628 | ) | (582,628 | ) | ||||||||||||||||
Net income |
| | | 223,380 | | 223,380 | ||||||||||||||||||
Balances September 26, 2010 |
18,876,000 | $ | 1,888 | $ | 2,627,539 | $ | (3,040,491 | ) | $ | (582,628 | ) | $ | (993,692 | ) | ||||||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | ||||||||
September 26 | September 30 | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 223,380 | $ | 815,108 | ||||
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities |
||||||||
Depreciation and amortization |
1,941,765 | 1,590,246 | ||||||
Loss on disposal of property and equipment |
217,868 | 6,954 | ||||||
Share-based compensation |
21,409 | 24,234 | ||||||
Deferred income tax (provision) benefit |
(203,780 | ) | 322,020 | |||||
Changes in operating assets and
liabilities that
provided (used) cash |
||||||||
Accounts receivable related party |
376,675 | (48,469 | ) | |||||
Inventory |
(1,196 | ) | 25,076 | |||||
Prepaid assets |
(87,328 | ) | (28,963 | ) | ||||
Other current assets |
(69,025 | ) | (11,780 | ) | ||||
Intangible assets |
(111,198 | ) | (1,210 | ) | ||||
Other long-term assets |
(6,864 | ) | 196,104 | |||||
Accounts payable |
(68,884 | ) | (380,219 | ) | ||||
Accrued liabilities |
462,929 | 294,643 | ||||||
Accrued rent |
(62,335 | ) | 155,815 | |||||
Deferred rent |
272,325 | (84,435 | ) | |||||
Net cash provided by operating activities |
2,905,741 | 2,875,124 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(4,159,301 | ) | (593,301 | ) | ||||
Net cash used in investing activities |
(4,159,301 | ) | (593,301 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt |
2,035,876 | 1,992,203 | ||||||
Repayments of long-term debt |
(1,114,789 | ) | (3,263,664 | ) | ||||
Proceeds from issuance of common stock |
250,000 | | ||||||
Distributions |
(552,861 | ) | (936,000 | ) | ||||
Net cash provided by financing activities |
618,226 | (2,207,461 | ) | |||||
Net increase in cash and cash equivalents |
(635,334 | ) | 74,362 | |||||
Cash and cash equivalents, beginning of period |
1,594,362 | 1,029,459 | ||||||
Cash and cash equivalents, end of period |
$ | 959,028 | $ | 1,103,821 | ||||
The accompanying notes are an integral part of these interim consolidated financial statements.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (DRH) was formed on September 25, 2006. DRH and its three
wholly-owned subsidiaries, AMC Group, Inc, (AMC), AMC Wings, Inc. (WINGS), and AMC Burgers,
Inc. (BURGERS) (collectively referred to as the Company), develop, own, and operate Buffalo
Wild Wings (BWW) restaurants located throughout Michigan and Florida and the Companys own
restaurant concept, Bagger Daves Legendary Burger Tavern (Bagger Daves), as detailed below.
The following organizational chart outlines the corporate structure of the Company and its
subsidiaries, all of which are wholly-owned by the Company. A brief textual description of the
entities follows the organizational chart. DRH is incorporated in the State of Nevada. All other
entities are incorporated or organized in the State of Michigan.
AMC was formed on March 28, 2007 and serves as the operational and administrative center for the
Company. AMC renders management and advertising services to WINGS and its subsidiaries and BURGERS
and its subsidiaries. Prior to the February 1, 2010 acquisition (see Note 2 for details), AMC also
rendered management and advertising services to nine BWW restaurants affiliated with the Company
through common ownership and management control. Services rendered by AMC include marketing,
restaurant operations, restaurant management consultation, hiring and training of management and
staff, and other management services reasonably required in the ordinary course of restaurant
operations.
WINGS was formed on March 12, 2007 and serves as a holding company for its BWW restaurants. WINGS,
through its subsidiaries, holds 18 BWW restaurants that are currently in operation. The Company
also executed franchise agreements with Buffalo Wild Wings, Inc. (BWWI) to open three more
restaurants, one in Ft. Myers, Florida, one in Traverse City, Michigan and the other in Lakeland, Florida. These restaurants
will be held by AMC Traverse City, Inc. and AMC Lakeland, Inc., respectively.
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The Company is economically dependent on retaining its franchise rights with BWWI. The franchise
agreements have specific initial term expiration dates ranging from November 23, 2011 through
September 7, 2030, depending on the date each was executed and its initial term. The franchise
agreements are renewable at the option of the franchisor and are generally renewable if the
franchisee has complied with the franchise agreement. When factoring in any applicable renewals,
the franchise agreements have specific expiration dates ranging from January 29, 2019 through
September 7, 2045. The Company is in compliance with the terms of these agreements at September
26, 2010. The Company is under contract with BWWI to enter into 17 additional franchise agreements
by 2017 (see Note 11 for details). The Company held an option to purchase the nine affiliated
restaurants that were managed by AMC, which it exercised on February 1, 2010 (see Note 2 for
details).
BURGERS was formed on March 12, 2007 to own the Companys Bagger Daves restaurants, a
full-service, ultra-casual dining concept developed by the Company. BURGERS subsidiaries, Berkley
Burgers, Inc., Ann Arbor Burgers, Inc., and Troy Burgers, Inc., own restaurants currently in
operation in Berkley, Ann Arbor, and Novi, Michigan, respectively. Another restaurant location,
Brighton Burgers, Inc. (to be located in Brighton, Michigan) is scheduled to open during the first
quarter of 2011. BURGERS also has a wholly-owned subsidiary named Bagger Daves Franchising
Corporation that was formed to act as the franchisor for the Bagger Daves concept. We have filed
for rights to franchise in Michigan, Ohio, and Indiana, but have not yet franchised any Bagger
Daves restaurants.
We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB
sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, and cash flows. References to GAAP issued
by the FASB in these footnotes are to the FASB Accounting Standards Codification (Codification or
ASC). The FASB finalized the Codification effective for periods ending on or after September 15,
2009. Prior FASB standards, like FASB Statement No. 13,
Accounting for Leases, are no longer being
issued by the FASB. For further discussion of the ASC, refer to the Recent Accounting
Pronouncements section of this note.
Basis of Presentation
The consolidated financial statements as of September 26, 2010 and December 27, 2009, and for the
three-month and nine-month periods ended September 26, 2010 and September 30, 2009 have been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). The financial information as of September 26, 2010 and for the three-month and
nine-month periods ended September 26, 2010 and September 30, 2009 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 27, 2009 is derived from our audited consolidated
financial statements and notes thereto for the fiscal year ended December 27, 2009, which is
included in Item 8 in the Fiscal 2009 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 nine-month periods ended September 26, 2010 are
not necessarily indicative of the results of operations that may be achieved for the entire year
ending December 26, 2010.
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Principles of Consolidation
The interim consolidated financial statements include the accounts of DRH and its subsidiaries,
AMC, WINGS and its subsidiaries, and BURGERS and its subsidiaries. The interim consolidated
financial statements also include the account balances of the nine recently acquired, affiliated
restaurants resulting from the February 1, 2010 acquisition, as they are now subsidiaries of WINGS
(refer to Note 2 for details).
All significant intercompany accounts and transactions have been eliminated upon consolidation.
Fiscal Year
During 2009, the Company changed its fiscal year to utilize a 52- or 53-week accounting period that
ends on the last Sunday in December. Consequently, fiscal year 2009 ended on December 27, 2009,
comprising 51 weeks and three days. Prior to 2009, the Company reported on a calendar-year basis
and, accordingly, fiscal year 2008 ended on December 31, 2008, comprising 52 weeks and one day.
This quarterly report on Form 10-Q is for the nine-month period ended September 26, 2010,
comprising 39 weeks.
Segment Reporting
Reportable segments are strategic business units that offer different products and services, are
managed separately because each business requires different executional strategies, cater to
different clients needs, and are subject to regular review by our chief operating decision maker.
While DRH may be viewed as having two reporting segments, one as a BWW franchisee and the other as
a Bagger Daves franchisor, the Company has determined it does not meet the quantitative or
materiality thresholds to be considered separately reportable. As such, there are no separately
reportable business segments at September 26, 2010 and December 27, 2009.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company
considers all highly-liquid investments purchased with original maturities of three months or less
to be cash equivalents. The Company, at times throughout the year, may, in the ordinary course of
business, maintain cash balances in excess of federally-insured limits. Management does not
believe the Company is exposed to any unusual risks on such deposits.
Revenue Recognition
Revenues from food and beverage sales are recognized and generally collected at the point of sale.
Management and advertising fees are calculated by applying a percentage, as stipulated in a
management services agreement, to managed restaurant revenues. Revenues derived from management
and advertising fees are recognized in the period in which they are earned, which is the period in
which the management services are rendered. As a result of the February 1, 2010 acquisition,
management and advertising fees will no longer be recognized (refer to Note 2 for details).
Accounts Receivable Related Party
Accounts receivable related party are stated at the amount management expects to collect from
outstanding balances. Balances that are outstanding after management has used reasonable
collection efforts are written off with a corresponding charge to bad debt expense. The balances
at September 26, 2010 and December 27, 2009 relate principally to management and advertising fees
charged to and intercompany transactions with the related BWW restaurants that were managed by AMC
and arose in the ordinary course of business prior to the February 1, 2010 acquisition. Refer to
Note 2 for details on the recent acquisition, which essentially eliminated management and
advertising fees revenue. Management does not believe any allowances for doubtful accounts are
necessary at September 26, 2010 or December 27, 2009.
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Accounting for Gift Cards
The Company records the net increase or decrease in BWW gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. The gift card processor deducts
gift card sales dollars
from each restaurants bank account weekly and deposits gift card redemption dollars weekly. Under
this centralized system, any breakage would be recorded by Blazin Wings, Inc., a subsidiary of
BWWI, and be subject to the breakage laws in the state of Minnesota, where Blazin Wings, Inc. is
located.
The Company records the net increase or decrease in Bagger Daves gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. Michigan law states that gift
cards cannot expire and any post-sale fees cannot be assessed until five years after the date of
gift card purchase by the consumer. There is no breakage attributable to Bagger Daves restaurants
for the Company to record for the nine months ended September 26, 2010 and for the nine months
ended September 30, 2009, respectively.
The liability is included in accrued liabilities in the interim consolidated balance sheets. As of
September 26, 2010, the Companys gift card liability was approximately $5,134 compared to
approximately $30,067 at December 27, 2009.
Lease Accounting
Certain operating leases provide for minimum annual payments that increase over the life of the
lease. The aggregate minimum annual payments are expensed on a straight-line basis beginning when
we take possession of the property and extending over the term of the related lease. The amount by
which straight-line rent exceeds actual lease payment requirements in the early years of the lease
is accrued as deferred rent liability and reduced in later years when the actual cash payment
requirements exceed the straight-line expense. The Company also accounts, in its straight-line
computation, for the effect of any rental holidays or tenant incentives.
Inventory
Inventory, which consists mainly of food and beverage products, is accounted for at the lower of
cost or market using the first in, first out method of inventory valuation.
Prepaid, Intangible, and Other Assets
Prepaid assets consist principally of prepaid insurance and are recognized ratably as operating
expense over the period covered by the unexpired premium. Amortizable intangible assets consist
principally of franchise fees, trademarks, and loan fees and are deferred and amortized to
operating expense on a straight-line basis over the term of the related underlying agreements based
on the following:
Franchise fees |
10 to 20 years | |
Trademarks |
15 years | |
Loan fees |
2 to 7 years (loan term) |
Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and,
accordingly, are not amortized. Management annually reviews these assets to determine whether
carrying values have been impaired. During the period ended September 26, 2010, no impairments
relating to intangible assets with finite or infinite lives were recognized.
Property and Equipment
Property and equipment are stated at cost. Major improvements and renewals are capitalized, while
ordinary maintenance and repairs are expensed. Management annually reviews these assets to
determine whether carrying values have been impaired.
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The Company capitalizes, as restaurant construction in progress, costs incurred in connection with
the design, build out, and furnishing of its owned restaurants. Such costs consist principally of
leasehold
improvements, directly related costs such as architectural and design fees, construction period
interest (when applicable), and equipment, furniture and fixtures not yet placed in service.
Depreciation and Amortization
Depreciation on building, equipment, and furniture and fixtures is computed using the straight-line
method over the estimated useful lives of the related assets, which range from five to 39 years.
Restaurant leasehold improvements are amortized over the shorter of the lease term or the useful
life of the related improvement. Land is not depreciated. Restaurant construction in progress is
not amortized or depreciated until the related assets are placed into service.
Advertising
Advertising expenses are recognized in the period in which they are incurred. Advertising expense
was $467,764 for the three months ended September 26, 2010 and $534,933 for the three months ended
September 30, 2009. Advertising expense was $1,514,239 for the nine months ended September 26,
2010 and $1,514,789 for the nine months ended September 30, 2009.
Pre-opening Costs
Pre-opening costs are those costs associated with opening new restaurants and will vary based on
the number of new locations opening and under construction. These costs are expensed as incurred.
Pre-opening costs for the three months ended September 26, 2010 were $96,788 and $11,999 for the
three months ended September 30, 2009. For the nine months ended September 26, 2010, pre-opening
costs were $313,987 and $145,076 for the nine months ended September 30, 2009.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in the future, based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Earnings Per Share
Earnings per share are calculated under the provisions of FASB
ASC 260, Earnings Per Share.
ASC 260 requires a dual presentation of basic and diluted earnings per share on the face
of the income statement. Diluted reflects the potential dilution of all common stock equivalents
except in cases where the effect would be anti-dilutive.
Concentration Risks
Approximately 80% and 79% of the Companys revenues during the nine months ended September 26, 2010
and the nine months ended September 30, 2009, respectively, are generated from food and beverage
sales from restaurants located in Michigan.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial
statements and the reported
amounts of income and expenses during the reporting period. Actual results could differ from those
estimates.
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Financial Instrument
The Company utilizes interest rate swap agreements with a bank to fix interest rates on a portion
of the Companys portfolio of variable rate debt, which reduces exposure to interest rate
fluctuations. The Company does not use any other types of derivative financial instruments to
hedge such exposures, nor does it use derivatives for speculative purposes.
On May 5, 2010, the Company entered into a $15 million dollar debt facility with RBS Citizens Bank,
N.A. (RBS), as further described in Notes 2 and 6, in which $6 million is in the form of a
development line of credit (of which $1.4 million was subsequently termed out and affixed to a
fixed-rate swap arrangement) and $9 million is a senior secured term loan with a fixed-rate swap
arrangement. In conjunction with the new debt facility, the existing swap agreements were
terminated, resulting in a notional principal amount reduction of $214,074 and a termination fee of
$19,176. The termination fee was recorded as interest expense for the three- and nine-month period
ended September 26, 2010.
The new interest rate swap agreements qualify for hedge accounting. As such, the Company has
elected to account for the hedged instrument as cash flow hedges. Under the cash flow hedge
method, the effective portion of the derivative is marked to fair value, based on third-party
valuation models, as a component of accumulated other comprehensive income (loss). The interest
rate swap liabilities at December 27, 2009 were not elected to be treated as cash flow hedges and,
accordingly, fair value hedge accounting was used.
The Company records the fair value of its interest rate swaps on the balance sheet in other assets
or other liabilities depending on the fair value of the swaps. The notional value of interest rate
swap agreements in place at September 26, 2010 and December 27, 2009 was approximately $10,081,000
and $3,013,000, respectively.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 (ASU 2010-06),
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends ASC 820, Fair Value
Measurements and Disclosures, to require new
disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and
additional disclosure requirements related to Level 3 measurements. The guidance also clarifies
existing fair value measurement disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value. The additional disclosure requirements are
effective for the first reporting period beginning after December 15, 2009, except for the
additional disclosure requirements related to Level 3 measurements which are effective for fiscal
years beginning after December 15, 2010. The additional disclosure requirements did not have any
financial impact on our consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure
Requirements to eliminate the requirement for public companies to disclose the date through which
subsequent events have been evaluated. We will continue to evaluate subsequent events through the
date of the issuance of the financial statements; however, consistent with this guidance, the date
will no longer be disclosed.
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With the exception of the pronouncements noted above, no other accounting standards or
interpretations issued or recently adopted are expected to have a material impact on the Companys
financial position, operations, or cash flows.
Reclassifications
Certain reclassifications have been made to the prior year consolidated financial statements to
conform to the current years presentation.
2. SIGNIFICANT BUSINESS TRANSACTIONS
Acquisition of Nine Affiliated BWW Restaurants
On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW
restaurants it previously used to manage (Affiliates Acquisition). Under the terms of the
agreements (Purchase Agreements), the purchase price for each of the affiliated restaurants was
determined by multiplying each restaurants average annual earnings before interest, taxes,
depreciation and amortization (EBITDA) for the previous three (3) fiscal years (2007, 2008, and
2009) by two, and subtracting the long-term debt of the respective restaurant. Two of the
affiliated restaurants did not have a positive purchase price under the above formula. As a
result, the purchase price for those restaurants was set at $1.00 per membership interest
percentage. The total purchase price for these nine restaurants was $3,134,790. The Affiliates
Acquisition was approved by resolution of the disinterested directors of the Company, who
determined that the acquisition terms were at least as favorable as those that could be obtained
through arms-length negotiations with an unrelated party. The Company paid the purchase price for
each of the affiliated restaurants to each selling shareholder by issuing an unsecured promissory
note for the pro-rata value of the equity interest in the affiliated restaurants. The promissory
notes bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly
installments, with principal and interest fully amortized over six years.
In accordance with FASB ASC 805-50, Business Combinations: Transactions Between Entities Under
Common Control, the Company accounted for the Affiliates Acquisition, a transaction between
entities under common control, as if the transaction had occurred at the beginning of the period
(i.e., December 28, 2009). Further, prior years amounts also have been retrospectively adjusted to
furnish comparative information while the entities were under common control. Because the
Affiliates Acquisition was amongst related parties, goodwill could not be recognized.
Alternatively, the goodwill associated with the Affiliates Acquisition was recognized as a decrease
in stockholders equity.
Execution of $15 Million Comprehensive Debt Facility
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a credit
facility (the Credit Facility) with RBS Citizens, N.A. (RBS), a national banking association.
The Credit Facility consists of a $6 million development line of credit (DLOC) and a $9 million
senior secured term loan (Senior Secured Term Loan). The Credit Facility is secured by a senior
lien on all Company assets.
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The Company plans to use the DLOC to increase its number of BWW franchise restaurant locations in
the states of Michigan and Florida and to develop additional Bagger Daves restaurant locations.
The DLOC is for a term of 18 months (the Draw Period) and amounts borrowed bear interest at 4%
over LIBOR as adjusted monthly. During the Draw Period, the Company may make interest-only payments
on the amounts borrowed. The Company may convert amounts borrowed during the Draw Period into one
or
more term loans bearing interest at 4% over LIBOR as adjusted monthly, with principal and interest
amortized over the life of the loan and with a maturity date of May 5, 2017. Any amounts borrowed by the
Company during the Draw Period that are not converted into a term loan by November 5, 2011, will
automatically be converted to a term loan on the same terms as outlined above. The DLOC includes a
carrying cost of .25% per year of any available but undrawn amounts, payable quarterly. On
September 24, 2010, the Company converted $1,424,000 into a term loan through a fixed-rate swap
arrangement. The termination date is May 5, 2017 and bears interest at a fixed rate of 5.91%.
Principal and interest payments are amortized over the life of the loan, with monthly payments of
approximately $21,000.
The Company used approximately $8.7 million of the Senior Secured Term Loan to repay substantially
all of its outstanding senior debt and early repayment fees owed to unrelated parties and the
remaining $0.3 million was used for working capital. The Senior Secured Term Loan is for a term of
seven years and, through a fixed-rate swap arrangement, bears interest at a fixed rate of 7.10%.
Principal and interest payments are amortized over seven years, with monthly payments of
approximately $120,000.
Purchase of Building in Brandon, Florida
On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned
subsidiary of WINGS, completed the
purchase of its previously-leased BWW location at 2055 Badlands Drive, Brandon, FL 33511 (the
Brandon Property) pursuant to the terms of a Purchase and Sale Agreement (the Purchase and Sale
Agreement) dated March 25, 2010, between MCA Brandon Enterprises, Inc. and Florida Wings Group,
LLC. The Brandon Property includes 2.01 useable acres of land, and is improved by a free-standing,
6,600 square foot BWW restaurant built in 2004. On April 28, 2010, the land and building appraised
at $2.6 million. The Company has operated a BWW restaurant at the Brandon Property since June 2004.
The total purchase price of the Brandon Property was $2,573,062, exclusive of additional fees,
taxes, due diligence, and closing costs. The purchase price was paid through a combination of
commercial financing, seller financing, and working capital. MCA
Brandon Enterprises, Inc. entered into a Real Estate Loan Agreement (the Real Estate Loan
Agreement) with Bank of America, a 504 Loan Agreement (the 504 Loan Agreement) with the U.S.
Small Business Administration, and a Promissory Note (Promissory Note) with Florida Wings Group,
LLC.
The Real Estate Loan Agreement provides for a loan in the total principal amount of $1,150,000,
matures on June 23, 2030, and requires equal monthly payments of interest and principal amortized
over 25 years. The outstanding amounts borrowed under the Real Estate Loan Agreement bear interest
at an initial rate of 6.72% per year. The interest rate will adjust to the U.S. Treasury Securities
Rate plus 4% on June 23, 2017, and on the same date every seven years thereafter. After each
adjustment date, the interest rate remains fixed until the next adjustment date. The Real Estate
Loan Agreement is secured by a senior mortgage on the Brandon Property; the corporate guaranties of
the Company, WINGS, and AMC; and the personal guaranty of T. Michael Ansley, President, CEO,
Chairman of the Board of Directors, and a principal shareholder of the Company.
The 504 Loan Agreement provides for a loan in the total principal amount of $927,000, has a 20-year
maturity, and requires interest-only payments until maturity. The outstanding amounts borrowed
under the 504 Loan Agreement bear interest at a rate of 3.58%. The 504 Loan Agreement is
secured by a junior mortgage on the Brandon Property.
The Promissory Note is in the principal amount of $245,754, matures on August 1, 2013, is amortized
over 15 years, and requires monthly principal and interest installments of $2,209 with the balance
due at maturity. The outstanding amounts borrowed under the Promissory Note bear interest at 7% per
annum. The Promissory Note is unsecured.
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The remainder of the purchase price for the Brandon Property was financed using the Companys
working capital.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following assets:
September 26 | December 27 | |||||||
2010 | 2009 | |||||||
Land |
$ | 385,959 | $ | | ||||
Building |
2,255,246 | | ||||||
Equipment |
7,752,192 | 6,710,092 | ||||||
Furniture and fixtures |
2,051,927 | 1,833,347 | ||||||
Leasehold improvements |
13,334,481 | 11,585,978 | ||||||
Restaurant construction in progress |
652,909 | 126,804 | ||||||
Total |
26,432,714 | 20,256,221 | ||||||
Less accumulated depreciation |
(10,203,151 | ) | (8,600,708 | ) | ||||
Property and equipment, net |
$ | 16,229,563 | $ | 11,655,513 | ||||
4. INTANGIBLES
Intangible assets are comprised of the following:
September 26 | December 27 | |||||||
2010 | 2009 | |||||||
Amortized Intangibles: |
||||||||
Franchise fees |
$ | 373,750 | $ | 358,750 | ||||
Trademark |
7,475 | 2,500 | ||||||
Loan fees |
155,100 | 66,565 | ||||||
Total |
536,325 | 427,815 | ||||||
Less accumulated amortization |
(104,813 | ) | (122,064 | ) | ||||
Amortized Intangibles, net |
431,512 | 305,751 | ||||||
Unamortized Intangibles: |
||||||||
Liquor licenses |
546,837 | 446,028 | ||||||
Total Intangibles, net |
$ | 978,349 | $ | 751,779 | ||||
Amortization expense for the nine months ended September 26, 2010 and September 30, 2009 was
$27,078 and $48,235, respectively. Based on the current intangible assets and their estimated
useful lives, amortization expense for fiscal years 2010, 2011, 2012, 2013, and 2014 is projected
to total approximately $47,500 per year.
5. RELATED PARTY TRANSACTIONS
The Affiliates Acquisition (see Note 2) was accomplished by issuing unsecured promissory notes
to each selling shareholder that bear interest at 6% per year, mature on February 1, 2016, and are
payable in quarterly installments, with principal and interest fully amortized over six years.
Fees for monthly accounting and financial statement compilation services are paid to an entity
owned by a director and stockholder of the Company. Fees paid during the three months ended
September 26, 2010 and the three months ended September 30, 2009 were $45,905 and $40,791,
respectively. Fees paid during the nine months ended September 26, 2010 and the nine months
ended September 30, 2009 were $155,499 and $132,587, respectively.
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The Company is a guarantor of debt of two entities that are affiliated through common ownership
and management control. Under the terms of the guarantees, the Companys maximum liability is equal
to the unpaid principal and any unpaid interest. There are currently no separate agreements that
provide recourse for the Company to recover any amounts from third parties should the Company be
required to pay any amounts or otherwise perform under the guarantees and there are no assets held
either as collateral or by third parties that, under the guarantees, the Company could liquidate to
recover all or a portion of any amounts required to be paid under the
guarantees. The event or
circumstance that would require the Company to perform under the
guarantees is an event of
default. An event of default is defined in the related note agreements principally as a)
default of any liability, obligation, or covenant with a bank, including failure to pay, b) failure
to maintain adequate collateral security value, or c) default of any material liability or
obligation to another party. As of September 26, 2010 and December 27, 2009, the carrying amount
of the underlying debt obligation of the related entity was
$2,016,795 and 2,938,000, respectively.
The Companys guarantees extend for the full term of the debt
agreements, which expire in 2017.
This amount is also the maximum potential amount of future payments the Company could be required
to make under the guarantees. As noted above, the Company, and the
related entities for which it has
provided the guarantees, operates under common ownership and management control and, in accordance
with FASB ASC 460 (ASC 460), Guarantees, the initial
recognition and measurement provisions of
ASC 460 do not apply. At September 26, 2010, payments on the debt obligation were current.
Long-term debt (Note 6) contains two promissory notes in the amount of $100,000 each, along
with accrued interest, due to two of the Companys stockholders. The notes commenced in January
2009, bear interest at a rate of 3.2% per annum, and are being repaid in monthly installments of
approximately $4,444 each over a two-year period.
Current debt (Note 6) also includes a promissory note to a DRH stockholder in the amount of
$250,000. The note is a demand note that does not require principal or interest payments.
Interest is accrued at 8% per annum and is compounded quarterly. The Company has 180 days from the
date of demand to pay the principal and accrued interest.
See Note 9 for related party operating lease transactions.
6. LONG-TERM DEBT
Long-term debt consists of the following obligations:
September 26 | December 27 | |||||||
2010 | 2009 | |||||||
Note payable to a bank secured by a senior
lien on all company assets. Scheduled
monthly principal and interest payments are
approximately $120,000 through maturity in
May 2017. Interest is charged based on a
swap arrangement designed to yield a fixed
annual rate of 7.10%. |
$ | 8,656,879 | | |||||
Note payable to a bank secured by a senior
mortgage on the Brandon Property, corporate
guaranties, and a personal guaranty.
Scheduled monthly principal and interest
payments are approximately $8,000 for the
period beginning July 2010 through maturity
in June 2030, at which point a balloon
payment of $413,550 is due. Interest is
charged based on a fixed rate of 6.72%, per
annum, through June 2017, at which point
the rate will adjust to the U.S. Treasury
Securities Rate plus 4% (and every seven
years thereafter). |
1,145,737 | | ||||||
Note payable
to a bank secured by a junior mortgage on the Brandon Property. Matures in 2030
and requires monthly principal and interest
installments of approximately $6,100 until
maturity. Interest is charged at a rate of
3.58% per annum. |
923,435 | |
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September 26 | December 27 | |||||||
2010 | 2009 | |||||||
DLOC to a bank, secured by a senior lien on
all company assets. Scheduled interest
payments are charged at a rate of 4% over
the 30-day LIBOR (the rate at September 26,
2010 was approximately 4.26%). In November
2011, the DLOC will convert into a term
loan bearing interest at 4% over the 30-day
LIBOR and will mature in May 2017. The DLOC
includes a carrying cost of .25% per year
of any available but undrawn amounts. |
305,947 | | ||||||
Note payable to a bank secured by a senior
lien on all company assets. Scheduled
monthly principal and interest payments are
approximately $22,000 through maturity in
May 2017. Interest is charged based on a
swap arrangement designed to yield a fixed
annual rate of 5.91%. |
1,424,000 | |||||||
Unsecured note payable that matures in
August 2013 and requires monthly principal
and interest installments of approximately
$2,200, with the balance due at maturity.
Interest is 7% per annum. |
244,199 | | ||||||
Note payable to a bank secured by the
property and equipment of Bearcat
Enterprises, Inc. as well as personal
guarantees of certain stockholders and
various related parties. Scheduled monthly
principal and interest payments are
approximately $4,600 including annual
interest charged at a variable rate of
3.70% above the 30-day LIBOR rate. The
rate at September 26, 2010 was
approximately 3.96%. The note matures in
September 2014. |
0 | 72,975 | ||||||
Note payable to Ford Credit secured by a
vehicle purchased by Flyer Enterprises,
Inc. to be used in the operation of the
business. This is an interest-free loan
under a promotional 0% rate. Scheduled
monthly principal payments are
approximately $430. The note matures in
April 2013. |
13,304 | 17,167 | ||||||
Various notes payable to a bank or leasing
company secured by property and equipment
as well as corporate and personal
guarantees of DRH; the Companys
subsidiaries; certain stockholders; and/or
various related parties. The various
agreements called for either monthly
interest only, principal, and/or interest
payments in the aggregate amount of
$117,169. Interest charges ranged from
LIBOR plus 2% to a fixed rate of 9.15% per
annum. The various notes were scheduled to
mature between February 2011 and December
2015. These various notes were paid off
upon the execution of the May 5, 2010
Credit Facility. |
| 7,821,912 | ||||||
Obligations under capital leases (Note 10) |
| 693,196 | ||||||
Notes payable related parties (Note 5) |
3,205,832 | 354,848 | ||||||
Total long-term debt |
15,919,333 | 8,960,098 | ||||||
Less current portion |
(1,256,097 | ) | (2,193,057 | ) | ||||
Long-term debt, net of current portion |
$ | 14,663,236 | $ | 6,767,041 | ||||
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Scheduled principal maturities of long-term debt for each of the five years succeeding
December 27, 2009, and thereafter, are summarized as follows:
Year | Amount | |||
2010 |
$ | 1,256,097 | ||
2011 |
1,608,262 | |||
2012 |
1,810,478 | |||
2013 |
2,130,654 | |||
2014 |
2,040,548 | |||
Thereafter |
7,073,294 | |||
Total |
$ | 15,919,333 | ||
Interest
expense was $243,854 and $198,699 (including related party interest expense of
$50,729 for the three months ended September 26, 2010 and $20,189 for the three months ended
September 30, 2009; refer to Note 5) for the three months ended September 26, 2010 and the three
months ended September 30, 2009, respectively. Interest expense
was $931,730 and $578,654
(including related party interest expense of $114,102 for the nine months ended September 26, 2010
and $60,660 for the nine months ended September 30, 2009; refer to Note 5) for the nine months
ended September 26, 2010 and the nine months ended September 30, 2009, respectively.
The above agreements contain various customary financial covenants generally based on the
performance of the specific borrowing entity and other related entities. The more significant
covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage
ratio, both of which we are in compliance with as of September 26, 2010.
7. CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)
On July 30, 2007, DRH granted options for the purchase of 150,000 shares of common stock to
the directors of the Company. These options vest ratably over a three-year period and expire six
years from issuance. At September 26, 2010, these options are fully vested and can be exercised at
a price of $2.50 per share.
On July 31, 2010, DRH granted options for the purchase of 210,000 shares of common stock to
the directors of the Company. These options vest ratably over a three-year period and expire six
years from issuance. Once vested, the options can be exercised at a price of $2.50 per share.
Stock option expense of $5,253 and $8,077, as determined using the Black-Scholes model, was
recognized during the three months ended September 26, 2010 and the three months ended September
30, 2009, respectively, as compensation cost in the consolidated statements of operations and as
additional paid-in capital on the consolidated statement of stockholders equity to reflect the
fair value of shares vested as of September 26, 2010. The fair value of unvested shares, as
determined using the Black-Scholes model, is $42,676 as of September 26, 2010. The fair value of
the unvested shares will be amortized ratably over the remaining vesting term. The valuation
methodology used an assumed term based upon the stated term of three years, a risk-free rate of
return represented by the U.S. Treasury Bond rate and volatility factor of 0 based on the concept
of minimum value as defined in FASB ASC 718, Compensation-Stock
Compensation. A dividend yield of
0% was used because the Company has never paid a dividend and does not anticipate paying dividends
in the reasonably foreseeable future.
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Table of Contents
In October 2009, one member of the Board of Directors exercised 6,000 vested options at a
price of $2.50 per share. Consequently, at September 26, 2010, 354,000 shares of authorized common
stock are reserved for issuance to provide for the exercise of the Companys stock options.
On November 30, 2006, pursuant to a private placement, DRH issued warrants to purchase 800,000
common shares at a purchase price of $1 per share. These warrants vested over a three-year period
from the issuance date and expired on November 30, 2009. The fair value of these warrants, which
totaled approximately $145,000 as determined using the Black-Scholes model, was recognized as an
offering cost in 2006. The valuation methodology used an assumed term based upon the stated term
of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate and
volatility factor of 0 based on the concept of minimum value as defined in FASB ASC 505-50, Equity
Based Payments to Non-Employees. A dividend yield of 0% was used because the Company has never
paid a dividend and does not anticipate paying dividends in the reasonably foreseeable future. An
extension of time to exercise warrants until December 31, 2009 was approved by resolution of the
disinterested directors of the Company. As of September 26, 2010, all 800,000 warrants were
exercised at the option price of $1 per share.
The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001. No
preferred shares are issued or outstanding as of September 26, 2010. Any preferences, rights,
voting powers, restrictions, dividend limitations, qualifications, and terms and conditions of
redemption shall be set forth and adopted by a board of directors resolution prior to issuance of
any series of preferred stock.
8. INCOME TAXES
The benefit (provision) for income taxes consists of the following components for the three
and nine months ended September 26, 2010 and the three and nine months ended September 30, 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26 | September 30 | September 26 | September 30 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Federal |
||||||||||||||||
Current |
$ | | $ | | $ | | $ | | ||||||||
Deferred |
(69,280 | ) | (73,816 | ) | 121,327 | (178,943 | ) | |||||||||
State |
||||||||||||||||
Current |
(36,502 | ) | (69,772 | ) | (123,105 | ) | (216,350 | ) | ||||||||
Deferred |
(25,337 | ) | (61,208 | ) | (7,454 | ) | (24,510 | ) | ||||||||
(61,839 | ) | (130,559 | ) | |||||||||||||
Income Tax
Provision |
$ | (131,119 | ) | $ | (204,796 | ) | $ | (9,232 | ) | $ | (419,803 | ) | ||||
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The benefit (provision) for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to loss before income taxes. The items causing this
difference are as follows:
September 26 | December 27 | |||||||
2010 | 2009 | |||||||
Income tax provision at federal statutory rate |
$ | (78,957 | ) | $ | (207,455 | ) | ||
State income tax provision |
(130,559 | ) | (57,585 | ) | ||||
Permanent differences |
9,535 | (32,111 | ) | |||||
Tax credits |
105,000 | 93,500 | ||||||
Other |
85,749 | (48,413 | ) | |||||
Income tax provision |
$ | (9,232 | ) | $ | (252,064 | ) | ||
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The Company expects the deferred tax assets to be fully realizable within
the next several years. Significant components of the Companys deferred income tax assets and
liabilities are summarized as follows:
September 26 | December 27 | |||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carry forwards |
$ | 830,660 | $ | 954,370 | ||||
Deferred rent expense |
94,862 | 78,998 | ||||||
Start-up costs |
244,294 | 104,327 | ||||||
Tax credit carry forwards |
297,544 | 164,366 | ||||||
Swap loss recognized for book |
| 56,970 | ||||||
Other including state deferred tax assets |
154,776 | 193,781 | ||||||
Total deferred assets |
1,622,136 | 1,552,812 | ||||||
Deferred tax liabilities: |
||||||||
Other including state deferred tax
liabilities |
7,910 | 146,325 | ||||||
Tax depreciation in excess of book |
1,163,692 | 1,159,733 | ||||||
Total deferred tax liabilities: |
1,171,602 | 1,306,058 | ||||||
Net deferred income tax assets |
$ | 450,534 | $ | 246,754 | ||||
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If deemed necessary by management, the Company establishes valuation allowances in accordance
with the provisions of FASB ASC 740, Income Taxes. Management continually reviews realizability of
deferred tax assets and the Company recognizes these benefits only as reassessment indicates that
it is more likely than not that such tax benefits will be realized.
The Company expects to use net operating loss and general business tax credit carry-forwards
before its 20-year expiration. A significant amount of net operating loss carry forwards were used
when the Company purchased nine affiliated restaurants, which were previously managed by DRH. Net
operating loss carry forwards of $2,443,119 will expire in 2028. General business tax credits of
$105,000, $86,678, $59,722 and $46,144 will expire in 2030, 2029, 2028 and 2027, respectively.
On January 1, 2007, the Company adopted the provisions of FASB ASC 740
(ASC 740), Income Taxes, regarding the accounting for uncertainty in income taxes. There was no impact on the
Companys consolidated financial statements upon adoption.
The Company classifies all interest and penalties as income tax expense. There are no accrued
interest amounts or penalties related to uncertain tax positions as of September 26, 2010.
In July 2007, the State of Michigan signed into law the Michigan Business Tax Act (MBTA),
replacing the Michigan Single Business Tax, with a business income tax and a modified gross
receipts tax. This new tax took effect January 1, 2008, and, because the MBTA is based on or
derived from income-based measures, the provisions of ASC 740 apply as of the enactment date. The
law, as amended, established a deduction to the business income tax base if temporary differences
associated with certain assets results in a net deferred tax liability as of December 31, 2007 (the
year of enactment of this new tax). This deduction has a carry-forward period to at least tax year
2029. This benefit amounts to $33,762.
The Company is a member of a unitary group with other parties related by common ownership
according to the provisions of the MBTA. This group will file a single tax return for all members.
An allocation of the current and deferred Michigan business tax incurred by the unitary group has
been made based on an estimate of Michigan business tax attributable to the Company and has been
reflected as state income tax expense in the accompanying interim consolidated financial statements
consistent with the provisions of ASC 740.
The Company files income tax returns in the United States federal jurisdiction and various
state jurisdictions.
9. OPERATING LEASES (INCLUDING RELATED PARTY)
Lease terms are generally 10 to 15 years (with the exception of our office lease, which is a
four-year term), 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.
The Company previously leased its office facilities under a lease that required monthly
payments of $3,835; this lease expired on April 30, 2010. The Company relocated its general
offices, effective March 1, 2010, signed a new four-year lease for 5,340 sq. ft. of office space
that commenced in March 2010, requires monthly payments of $4,400, expires in May 2014, and
contains two two-year options to extend.
The
Company renegotiated its lease for AMC Northport, Inc. Effective
March 1, 2009, the monthly base
rent is approximately $6,129, reduced from approximately $12,267, through February 2011. For
consideration of the above rent modification, DRH agreed to guarantee the rent for a period of five
years beginning March 1, 2009. The lease contains two five-year options to extend.
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The Company renegotiated its lease for AMC Riverview, Inc. Effective April 2009, the base rent
was reduced from approximately $12,800 to approximately $9,600 through March 2010. An extension to
this
rent reduction was later granted through May 2010. Beginning in June 2010, the rent reverted back
to its original $12,800 amount. The lease contains two five-year options to extend.
Flyer Enterprises, Inc. signed a 10-year lease that commenced in December 1999, requires
monthly payments of $11,116 (with 3% annual increases), and expired in December 2009. An option
was exercised on the lease, extending the expiration date to December 2014.
TMA Enterprises of Novi, Inc. signed a 12-year lease that commenced in June 2002, requires
monthly payments of approximately $14,493 (with an approximate 9% rent increase in June 2012),
expires in 2014, and contains one five-year renewal option.
Bearcat Enterprises, Inc. signed a 15-year lease, from an entity related through common
ownership, which commenced in February 2004, requires monthly payments of approximately $20,197,
expires in 2019, and contains three five-year options to extend.
TMA Enterprises of Ferndale, LLC signed a 10-year lease that commenced in March 2005, requires
monthly payments of approximately $8,864, expires in 2015, and contains two five-year options to
extend.
Buckeye Group II, LLC signed a 10-year lease that commenced in April 2006, requires monthly
payments of approximately $15,102, expires in 2016, and contains two five-year options to extend.
AMC Warren, LLC signed a 10-year lease that commenced in July 2006, requires monthly payments
of approximately $15,755, expires in 2016, and contains two five-year options to extend.
Berkley Burgers, Inc. signed a 15-year lease, from an entity related through common ownership,
which commenced in February 2008, requires monthly payments of approximately $6,300, expires in
February 2023, and contains three five-year options to extend.
AMC Grand Blanc, Inc. signed a 10-year lease that commenced in March 2008, requires monthly
payments of approximately $10,300, expires in 2018, and contains two five-year options to extend.
AMC Troy, Inc. and Ann Arbor Burgers, Inc. both signed 10-year leases that commenced in August
2008, require monthly payments of approximately $13,750 and $6,890, respectfully, expire in 2018,
and contain two five-year options to extend.
AMC Petoskey, Inc. signed a 10-year lease that commenced in August 2008, requires monthly
payments of approximately $9,000, expires in 2018, and contains two five-year options to extend.
AMC Flint, Inc.s signed a 10-year lease that commenced in December 2008, requires monthly
payments of approximately $4,800, expires in 2018, and contains three five-year options to extend.
The Company renegotiated its lease for Buckeye Group, LLC. Effective April 2009, the base
rent was reduced from approximately $13,333 to approximately $9,333. The term of the lease was
also extended through 2017 and contains two five-year options to extend.
AMC Port Huron, Inc. signed a 10-year lease that commenced in June 2009, requires monthly
payments of approximately $6,500, expires in 2019, and contains three five-year options to extend.
Troy Burgers, Inc. signed a 10-year lease that commenced in February 2010, requires monthly
payments of approximately $7,000 (rent is based on a percentage of revenues, not to exceed
approximately $7,000 per month), expires in 2020, and contains two five-year options to extend.
The Company renegotiated its lease for Anker, Inc. Effective March 2010, the base rent was
reduced from approximately $9,354 to approximately $6,800 through April 2021. The term of the
lease was also extended through April 2021 and contains two five-year options to extend.
AMC Marquette, Inc. signed a 15-year lease that commenced in June 2010, requires monthly payments
of approximately $8,700, expires in 2025, and contains three five-year options to extend.
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AMC Chesterfield, Inc. signed a 10-year lease that commenced in August 2010, requires monthly
payments of approximately $8,300, expires in 2020, and contains three five-year options to extend.
Total rent expense was $765,289 and $741,744 for the three months ended September 26, 2010 and
September 30, 2009, respectively (of which $92,899 and $96,669 for the three months ended September
26, 2010 and September 30, 2009, respectively, were paid to a related party). Rent expense was
$2,165,555 and $2,187,465 for the nine months ended September 26, 2010 and September 30, 2009,
respectively (of which $252,864 and $276,474 for the nine months ended September 26, 2010 and
September 30, 2009, respectively, were paid to a related party).
Scheduled future minimum lease payments for each of the five years and thereafter for
non-cancelable operating leases with initial or remaining lease terms in excess of one year at
September 26, 2010 are summarized as follows:
Year | Amount | |||
2010 |
$ | 2,664,473 | ||
2011 |
2,563,968 | |||
2012 |
2,646,047 | |||
2013 |
2,711,991 | |||
2014 |
2,583,552 | |||
Thereafter |
8,791,561 | |||
Total |
$ | 21,961,592 | ||
10. CAPITAL LEASES
Starting January 2009 through February 2010, the Company entered into agreements to sell and
immediately lease back various equipment and furniture at its Flint BWW, Port Huron BWW, and Novi
Bagger Daves locations, respectively. These leases required between 36 and 48 monthly payments of
approximately $29,787 combined, including applicable taxes, with options to purchase the assets
under lease for a range of $1 to $100 at the conclusion of the lease. These transactions, prior to
the Credit Facility, were reflected in the interim consolidated financial statements as capital
leases with a combined asset values recorded at their combined purchase price of $1,108,780 and
depreciated as purchased furniture and equipment, and the lease obligations included in long-term
debt at its present value. As a result of the Senior Secured Term Loan of the Credit Facility,
these lease obligations were paid in full, along with applicable prepayment penalties, and are
properly reflected in the interim consolidated financial statements as a component of the Senior
Secured Term Loan of the Credit Facility.
11. COMMITMENTS AND CONTINGENCIES
Prior to the Affiliates Acquisition on February 1, 2010, the Company had management service
agreements in place with nine BWW restaurants located in Michigan and Florida. These management
service agreements contained options that allowed WINGS to purchase each restaurant for a price
equal to a factor of twice the average EBITDA of the restaurant for the previous three fiscal years
(2007, 2008, and 2009) less long-term debt. These options were exercised on February 1, 2010, six
months prior to the expiration of the options and in line with the Companys strategic plan. Refer
to Note 2 for further details.
The Company assumed, from a related entity, an Area Development Agreement with BWWI in which
the Company undertakes to open 23 BWW restaurants within its designated development territory, as
defined by the agreement, by October 1, 2016. On December 12, 2008, this agreement was amended
adding nine additional restaurants and extending the date of fulfillment to March 1, 2017. Failure
to develop restaurants in accordance with the schedule detailed in the agreement could lead to
potential
penalties of $50,000 for each undeveloped restaurant, payment of the initial franchise fees for
each undeveloped restaurant, and loss of rights to development territory. As of September 26,
2010, of the 38 restaurants required to be opened, 18 of these restaurants had been opened for
business.
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The Company is required to pay BWWI royalties (5% of net sales) and advertising fund
contributions (3% of net sales) for the term of the individual franchise agreements. The Company
incurred $533,833 and $453,986 in royalty expense for the three months ended September 26, 2010 and
the three months ended September 30, 2009, respectively. The Company incurred $1,528,560 and
$1,497,895 in royalty expense for the nine months ended September 26, 2010 and the nine months
ended September 30, 2009, respectively. Advertising fund contribution expenses were $328,574 and
$304,805 for the three months ended September 26, 2010 and the three months ended September 30,
2009, respectively. Advertising fund contribution expenses were $941,194 and $924,198 for the
three months ended September 26, 2010 and the three months ended September 30, 2009, respectively.
The Company is required by its various BWWI franchise agreements to modernize the restaurants
during the term of the agreements. The individual agreements generally require improvements
between the fifth year and the tenth year to meet the most current design model that BWWI has
approved. The modernization costs can range from approximately $50,000 to approximately $500,000
depending on the individual restaurants needs.
The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and
threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of
any litigation is uncertain. While unfavorable outcomes could have adverse effects on the
Companys business, results of operations, and financial condition, management believes that the
Company is adequately insured and does not believe that any pending or threatened proceedings would
adversely impact the Companys results of operations, cash flows, or financial condition.
12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was $243,854 and $198,699 during the three months ended September 26,
2010 and the three months ended September 30, 2009, respectively. Cash paid for interest was
$931,730 and $578,654 during the nine months ended September 26, 2010 and the nine months ended
September 30, 2009, respectively.
Cash paid for income taxes was $36,502 and $0 during the three months ended September 26, 2010 and
the three months ended September 30, 2009, respectively. Cash paid for income taxes was $146,937
and $0 during the nine months ended September 26, 2010 and the nine months ended September 30,
2009, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Capital expenditures of $250,000 were funded by capital lease borrowing during the nine months
ended September 26, 2010.
Promissory notes of $3,134,790 were issued to fund the February 1, 2010 Affiliates Acquisition.
The Brandon Property transaction resulted in $2,322,800 of notes payable.
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13. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of September 26, 2010 and December 27, 2009, our financial instruments consisted of cash
equivalents, accounts receivable, accounts payable and debt. The fair value of cash equivalents,
accounts receivable, accounts payable and short-term debt approximate its carrying value, due to
its short-term nature. Also, the fair value of notes payable related party approximates the
carrying value due to its
short-term maturities. As of September 26, 2010, our total debt, less related party debt, was
approximately $12.7 million and had a fair value of approximately $8.6 million. As of December 27,
2009, our total debt, less related party debt, was approximately $5.6 million and had a fair value of approximately $5.7
million. The Company estimates the fair value of its fixed-rate debt using discounted cash flow
analysis based on the Companys incremental borrowing rate.
There was no impact for adoption of
FASB ASC 820 (ASC 820), Fair Value Measurements and
Disclosures, to the consolidated financial statements as of September 26, 2010. ASC 820 requires
fair value measurement to be classified and disclosed in one of the following three categories:
| Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. |
| Level 2: Quoted prices in markets that are not active or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no market
activity). |
Interest rate swaps held by the Company for risk management purposes are not actively traded.
The Company measures the fair value using broker quotes which are generally based on market
observable inputs including yield curves and the value associated with counterparty credit risk.
The interest rate swaps discussed in Notes 1 and 6 fall into the Level 2 category under the
guidance of ASC 820. The fair market value of the interest rate swaps as of September 26, 2010 was
a liability of $560,188, which is recorded in other liabilities on the consolidated balance sheet.
The fair value of the interest rate swaps at December 27, 2009 was a liability of $213,604.
Unrealized loss associated with interest rate swap positions in existence at September 26, 2010,
which are reflected in the statement of stockholders (deficit) equity, totaled $582,628 for the
nine months ended September 26, 2010 and are included in accumulated other comprehensive (loss)
income.
14. SUBSEQUENT EVENTS
The
Company opened its 19th BWW restaurant in Ft. Myers,
Florida on Sunday, November 7, 2010.
The Company evaluated subsequent events for potential recognition
and/or disclosure through the date of the issuance of these interim consolidated financial statements.
Item 2. Managements 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 interim 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 Managements Discussion and Analysis of Financial Condition and
Results from Operations contained in our Form 10-K for the fiscal year ended December 27, 2009.)
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q may contain information that includes
or is based upon certain forward-looking statements relating to our business. These
forward-looking statements represent managements current judgment and assumptions, and can be
identified by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements are frequently accompanied by the use of such words as anticipates,
plans, believes, expects, projects, intends, and similar expressions. Such
forward-looking statements involve known and unknown risks, uncertainties, and other factors,
including, while it is not possible to predict or identify all such risks, uncertainties, and other
factors, those relating to our ability to secure the additional financing adequate to execute our
business plan; our ability to locate and start up new restaurants; acceptance of our restaurant
concepts in new market places; the cost of food and other raw materials. Any one of these or other
risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be
materially different from those described herein or elsewhere by us. We caution readers not to
place
undue reliance on any such forward-looking statements, which speak only as of the date they were
made. Certain of these risks, uncertainties, and other factors may be described in greater detail
in our filings from time to time with the Securities and Exchange Commission, which we strongly
urge you to read and consider. Subsequent written and oral forward-looking statements attributable
to us or to persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth above and elsewhere in our reports filed with the Securities and
Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking
statements.
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OVERVIEW
Diversified Restaurant Holdings, Inc. (DRH or the Company) is a leading Buffalo Wild
Wings® (BWW) franchisee that is rapidly expanding through organic growth and
acquisitions. It operates 18 BWW restaurants; 13 in Michigan and five
in Florida. A location in Ft. Myers, Florida, is scheduled to
open on November 7, 2010. Locations in
Traverse City, Michigan and Lakeland, Florida are scheduled to open in early 2011. DRH also
created and launched its own unique, full-service, ultra-casual restaurant concept, Bagger Daves
Legendary Burger Tavern® (Bagger Daves), in January 2008. As of September 26, 2010,
the Company owned and operated three Bagger Daves® restaurants in Southeast Michigan with the most
recent store opening in February 2010. A location in Brighton, Michigan is scheduled to open in
February 2011. We also have Franchise Disclosure Documents approved and filed
in Michigan, Indiana, Illinois,
and Ohio for our Bagger Daves concept.
ACQUISITION OF NINE AFFILIATED BWW RESTAURANTS
On February 1, 2010, the Company, through its AMC Wings, Inc. subsidiary, acquired nine affiliated
BWW restaurants it previously managed (Affiliates Acquisition). The Affiliates Acquisition was
valued at $3,134,790. The acquisition of these restaurants was financed through six-year
promissory notes that mature on February 1, 2016 and bear interest at 6% per year (payable on a
quarterly basis). The stores range in age from four to 10 years. In 2009, these restaurants
generated $24.4 million in revenue and we received management and advertising fee revenue of $1.7
million. The acquisition of the affiliated BWW locations allows us to fully realize the economic
benefits associated with these nine BWW stores in 2010 and beyond.
The Company accounted for the Affiliates Acquisition, a transaction between entities under common
control, as if the transaction had occurred at the beginning of the period (i.e., December 28,
2009). Further, prior year amounts also have been retrospectively adjusted to furnish comparative
information while the entities were under common control. The impact of the acquisition to our
interim financial statements is reflected in the consolidated interim balance sheets, statements of
operations, statements of comprehensive (loss) income, statements of stockholders (deficit)
equity, statements of cash flows, and notes to the interim consolidated financial statements.
Refer to Note 2 in the notes to interim consolidated financial statements for further details.
EXECUTION OF $15 MILLION COMPREHENSIVE CREDIT FACILITY
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a $15
million Credit Facility with RBS Citizens, N.A., a national banking association. The Credit
Facility consists of a $6 million development line of credit and a $9 million senior secured term
loan. Refer to Note 2 in the notes to interim consolidated financial statements for further
details.
PURCHASE OF BUILDING IN BRANDON, FLORIDA
On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of AMC Wings, Inc.,
completed the purchase of its previously-leased BWW location at 2055 Badlands Drive, Brandon, FL
33511 pursuant to the terms of a Purchase and Sale Agreement dated March 25, 2010, between MCA
Brandon Enterprises, Inc. and Florida Wings Group, LLC. Refer to Note 2 in the notes to interim
consolidated financial statements for further details.
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RESULTS OF OPERATIONS
For the three months ended September 26, 2010 and for the nine months ended September 26, 2010,
revenue was generated from the operations of 18 BWW and three Bagger Daves restaurants. For the
three months ended September 30, 2009 and the nine months ended September 30, 2009, revenue was
generated from the operations of 16 BWW and two Bagger Daves restaurants.
REVENUE
Three Months Ended | Change | |||||||||||||||
September 26, 2010 | September 30, 2009 | $ | % | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 11,423,726 | $ | 10,477,157 | $ | 946,569 | 9.0 | % | ||||||||
Total revenue |
$ | 11,423,726 | $ | 10,477,157 | $ | 946,569 | 9.0 | % | ||||||||
Total revenue increased from 10.5 million to $11.4 million for a total growth of $947 thousand, or
9.0%. The increase in food and beverage sales is primarily due to the fact that two additional BWW
and 1 additional Bagger Daves restaurants were open in 2010 when compared to 2009.
Nine Months Ended | Change | |||||||||||||||
September 26, 2010 | September 30, 2009 | $ | % | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 32,823,425 | $ | 31,310,192 | $ | 1,513,233 | 4.8 | % | ||||||||
Total revenue |
$ | 32,823,425 | $ | 31,310,192 | $ | 1,513,233 | 4.8 | % | ||||||||
Total revenue increased from 31.3 million to $32.8 million for a total growth of $1.5 million, or
4.8%. The increase in food and beverage sales is primarily due to the fact that two additional BWW
and 1 additional Bagger Daves restaurants were open in 2010 when compared to 2009.
OPERATING EXPENSES
Three Months Ended | Change | % Total Revenue | ||||||||||||||||||||||
September 26, 2010 | September 30, 2009 | $ | % | 2010 | 2009 | |||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
$ | 3,346,237 | $ | 2,890,306 | $ | 455,931 | 15.8 | % | 29.3 | % | 27.6 | % | ||||||||||||
Food and beverage costs |
3,310,374 | 3,253,647 | 56,727 | 1.7 | 29.0 | 31.1 | ||||||||||||||||||
General and administrative |
2,670,428 | 2,322,537 | 347,891 | 15.0 | 23.4 | 22.2 | ||||||||||||||||||
Pre-opening |
66,129 | 131,277 | (65,148 | ) | (49.6 | ) | 0.6 | 1.3 | ||||||||||||||||
Occupancy |
765,289 | 741,744 | 23,545 | 3.2 | 6.7 | 7.1 | ||||||||||||||||||
Depreciation and
amortization |
696,161 | 567,099 | 129,062 | 22.8 | 6.1 | 5.4 | ||||||||||||||||||
Total operating expenses |
$ | 10,854,618 | $ | 9,90,6610 | $ | 948,008 | 9.6 | % | 95.0 | % | 94.6 | % | ||||||||||||
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When comparing the three months ended September 26, 2010 to
the three months ended September 30, 2009, total operating
expenses increased by $948 thousand as a direct result of the additional
locations opened during 2010. Further explanations for fluctuations in the percentage of total
revenue are detailed below.
Compensation costs increased 15.8% primarily due to the addition of staff needed for the additional
restaurants that opened in 2010. As a percentage of revenue, compensation costs increased from
27.6% to 29.3% for the three months ended September 26, 2010 and September 30, 2009, respectively.
This increase as a percentage of revenue is attributed to labor inefficiencies associated with new store openings.
Food and beverage costs increased 1.7% for the three months ended September 26, 2010 when compared
with the three months ended September 30, 2009. As a percentage of revenue, food and beverage
costs decreased from 31.1% for the three months ended September 30, 2009 to 29.0% for the
three months ended September 26, 2010. The decrease in our food
and beverage cost as a percentage of revenue is primarily a result of the decrease in
fresh, bone-in chicken wing prices.
General
and administrative costs increased by 15.0% for the three months ended September 26, 2010
when compared with the three months ended September 30, 2009. As a percentage of revenue, general
and administrative costs increased from 22.2% for the three months ended September 30, 2009 to
23.4% for the three months ended September 26, 2010, primarily due to an increase in overall
advertising, higher repair and maintenance charges (as a result of the acquisition of more mature
restaurants that came with original restaurant equipment that was of an older age), and loan termination fees (a result of the new Credit Facility). These increases were
offset by economies of scale recognized for professional services and restaurant-specific supplies.
In addition, as a result of a tax cost segregation study, we were able to ultimately decrease
personal property taxes due to the allocation of certain capital assets into lower tax brackets.
Pre-opening costs decreased by 49.6% for the three months ended September 26, 2010 when compared
with the three months ended September 30, 2009 due to fewer restaurants undergoing a construction
phase during the current three-month period. As a percentage of revenue, pre-opening costs
decreased from 1.3% for the three months ended September 30, 2009 to 0.6% for the three months
ended September 26, 2010 for the same reason.
Occupancy costs increased 3.2% for the three months ended September 26, 2010 when compared with the
three months ended September 30, 2009 primarily due to the additional rents assumed with the new
restaurant locations. As a percentage of revenue, occupancy costs for the three months ended
September 30, 2009 were 7.1% compared with occupancy costs of 6.7% for the three months ended
September 26, 2010, primarily due to negotiated rent reductions in locations where such opportunities existed.
Depreciation and amortization costs increased by more than 22% for the three months ended September
26, 2010 when compared with the three months ended September 30, 2009. As a percentage of revenue,
depreciation and amortization costs increased from 5.4% to 6.1% for the three months ended
September 30, 2009 and September 26, 2010, respectively. This was a result of depreciable
equipment being put into service for a total of three new restaurants in 2010.
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Nine Months Ended | Change | % Total Revenue | ||||||||||||||||||||||
September 26, 2010 | September 30, 2009 | $ | % | 2010 | 2009 | |||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
$ | 9,780,263 | $ | 8,655,533 | $ | 1,124,730 | 13.0 | % | 29.8 | % | 27.6 | % | ||||||||||||
Food and beverage costs |
9,785,584 | 9,813,943 | (28,359 | ) | (0.3 | ) | 29.8 | 31.3 | ||||||||||||||||
General and administrative |
7,707,679 | 7,281,370 | 426,309 | 5.9 | 23.5 | 23.3 | ||||||||||||||||||
Pre-opening |
283,308 | 133,078 | 150,230 | 112.9 | 0.9 | 0.4 | ||||||||||||||||||
Occupancy |
2,165,555 | 2,187,465 | (21,910 | ) | (1.0 | ) | 6.6 | 7.0 | ||||||||||||||||
Depreciation and amortization |
1,941,765 | 1,594,297 | 347,468 | 21.8 | 5.9 | 5.1 | ||||||||||||||||||
Total operating expenses |
$ | 31,664,154 | $ | 29,665,686 | $ | 1,998,468 | 6.7 | % | 96.5 | % | 94.7 | % | ||||||||||||
When comparing the nine months ended September 26, 2010 to the nine months ended September 30,
2009, total operating expenses increased by almost $2.0 million as a direct result of the additional
locations opened during 2010. Further explanations for fluctuations in the percentage of total
revenue are detailed below.
Compensation costs increased 13.0% due to the addition of staff needed for the additional
restaurants that opened in 2010. As a percentage of revenue, compensation costs increased from
27.6% to 29.8% for the nine months ended September 26, 2010 and September 30, 2009, respectively.
This increase as a percentage of revenue is attributed to labor inefficiencies associated with new store openings.
Food and beverage costs decreased 0.3% for the nine months ended September 26, 2010 when compared
with the nine months ended September 30, 2009. As a percentage of revenue, food and beverage costs
for the nine months ended September 26, 2010 decreased to 29.8% compared with 31.3% for the nine
months ended September 30, 2009, primarily due to a decrease in fresh, bone-in chicken wing prices.
General
and administrative costs increased by 5.9% for the nine months ended September 26, 2010
when compared with the nine months ended September 30, 2009. As a percentage of revenue, general
and administrative costs remained relatively stable, increasing from 23.3% for the nine months
ended September 30, 2009 to 23.5% for the nine months ended
September 26, 2010. This is despite an increase in overall advertising, higher repair and maintenance
charges (as a result of the acquisition of more mature restaurants that came with original
restaurant equipment that was of an older age), and loan termination fees (a
result of the new Credit Facility). These increases were offset by economies of scale recognized
for professional services and restaurant-specific supplies. In addition, as a result of a tax cost
segregation study, we were able to ultimately decrease personal property taxes due to the
allocation of certain capital assets into lower tax brackets.
Pre-opening costs increased by 112.9% for the nine months ended September 26, 2010 when compared
with the nine months ended September 30, 2009 due to three restaurants undergoing a construction
phase during the current nine-month period versus one restaurant undergoing a construction phase
during the same period of the prior 2009 year. As a percentage of revenue, pre-opening costs
increased from 0.4% to 0.9% when comparing the nine months ended September 30, 2009 to September
26, 2010 as a result of two new restaurants opening for business during the third quarter of
the 2010 year (as opposed to one new restaurant opening during the second quarter of
the 2009 year).
Occupancy costs decreased 1.0% for the nine months ended September 26, 2010 when compared with the
nine months ended September 30, 2009. As a percentage of revenue, occupancy costs for the nine
months ended September 26, 2010 were 6.6% compared with occupancy costs of 7.0% for the nine months
ended September 30, 2009. The decrease is primarily attributed to the reversal of accrued rent
which primarily resulted from the Brandon, Florida real estate
transaction and negotiated rent reductions in locations where such
opportunities existed.
Depreciation and amortization costs increased by 21.8% for the nine months ended September 26, 2010
when compared with the nine months ended September 30, 2009. As a percentage of revenue,
depreciation and amortization costs increased to 5.9% from 5.1% for the nine months ended September
26, 2010 and September 30, 2009, respectively. This was a result of depreciable equipment being
put into service at a total of three new restaurants in 2010.
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INTEREST AND TAXES
Cash
paid for interest was $243,854 and $198,699 during the three months ended September 26, 2010
and the three months ended September 30, 2009, respectively.
Cash paid for interest was $931,730 and $578,654 during the nine months ended September 26, 2010 and the nine months ended September
30, 2009, respectively. For the current-year period, the increase was primarily due to the one-time
charge of $301,430 in the second quarter of 2010 related to pre-payment penalties on refinanced
debt (see Note 2 for further details)
For the three months and nine months ended September 26, 2010, we booked an income tax provision of
$131,119 and $9,232, respectively, compared to the three months and nine months ended September 30,
2009, when income tax provisions of $204,796 and $419,803, respectively, were recorded. The 2010
quarterly tax provisions resulted principally as a result of the Affiliates Acquisition; refer to
Note 2 for further details.
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
Our primary liquidity and capital requirements are for new restaurant construction, remodeling of
existing restaurants, and other general business needs. We intend to fund up to 70% of future BWW
restaurants and up to 50% of future Bagger Daves restaurants with our $6.0 million development
line of credit. All remaining capital requirements will be from operational cash flow. The $9.0
million refinance of existing debt in May of 2010 will free up approximately $1.0 million in cash
flow for the first 12 months of this Credit Facility due to a lower fixed interest rate and the
re-amortization of principal and interest (see Note 2 and our 8-K filing of May 10, 2010 for
further details on our Credit Facility).
Cash
flow from operations for the nine months ended September 26,
2010 is $2,905,741 compared with
$2,875,124 for the nine months ended September 30, 2009.
Total capital expenditures for the year are expected to be approximately $7.5 million, of which
approximately $4.5 million is for new restaurant construction, $2.5 million is for real estate (see
Note 2 for further details), and $0.5 million is for existing store renovations, which includes
upgrades to audio/visual equipment.
Opening new restaurants is the Companys primary use of capital and is critical to its growth. New
construction for 2010 includes:
| Novi, Michigan Bagger Daves opened February 22, 2010 |
| Marquette, Michigan BWW opened June 6, 2010 |
| Chesterfield, Michigan BWW opened August 22, 2010 |
| Ft. Myers, Florida BWW opened November 7, 2010 |
| Brighton, Michigan Bagger Daves construction began in early November 2010 with an
anticipated opening date in February 2011 |
| Lakeland, Florida BWW construction began in early November 2010 with an
anticipated opening date in February 2011 |
| Traverse City, Michigan BWW construction is scheduled to begin in November 2010
with an anticipated opening date in February 2011 |
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Although investments in new stores are an integral part of our strategic and capital expenditures
plan, we also believe that reinvesting in existing stores is an important factor and necessary to
maintain the overall positive dining experience for our guests. Depending on the age of the
existing stores, upgrades range from $50 thousand on the interior to $500 thousand for a full
remodel of the restaurant. Stores are typically upgraded after approximately five years of
operation and fully remodeled after approximately 10 years of operation.
Mandatory Upgrades:
| Per a Franchise Agreement dated July 29, 2010 by and between BWWI and Anker, Inc., a
wholly-owned subsidiary of the Company, were obligated to complete a full remodel of our
Fenton, Michigan location by August 31, 2011. Estimated cost of this remodel will be
between $350 thousand and $450 thousand dollars, which we plan to commence in July 2011. This
remodel will be funded by cash from operations. |
Discretionary Upgrades:
Although not obligated to do so, the Company has invested capital to upgrade two locations in 2010.
We do not anticipate any other significant capital improvement outlays for the remainder of the
year.
| Sterling Heights, Michigan BWW in June 2010, we completed a remodel of this
location funded by cash from operations in the amount of $97 thousand dollars. This
remodel was discretionary and consisted primarily of audio/video equipment upgrades and a
freshening up of the interior to enhance the guest experience. |
| Ferndale, Michigan BWW in September 2010, we completed a remodel of this location
funded by cash from operations in the amount of $250 thousand dollars. This remodel was
discretionary but strategic due to increased market competition and higher expectations of
our guests. It included audio/video equipment upgrades and significant interior
architectural changes. |
In 2011, the Company anticipates investing additional capital to upgrade up to five existing
locations, all of which will be funded by cash from operations. Timing and amounts will vary but
we expect these upgrades to each range from $65-100 thousand dollars. These improvements will primarily
consist of audio/video equipment upgrades and outdoor patio upgrades.
Our new Credit Facility has debt covenants that have to be met on a quarterly basis. As of
September 26, 2010, we are in compliance with all of them.
OFF BALANCE SHEET ARRANGEMENTS
The Company assumed, from a related entity, an Area Development Agreement with BWWI to open 23 BWW
restaurants by October 1, 2016 within the designated development territory, as defined by the
agreement. Failure to develop restaurants in accordance with the schedule detailed in the agreement
could lead to potential penalties of $50,000 for each undeveloped restaurant and loss of rights to
the development territory. On December 10, 2008, DRH, through its wholly-owned subsidiary, AMC
Wings, Inc., entered into an amendment to the Area Development Agreement (the Amended Agreement)
with BWWI. The Amended Agreement expanded our exclusive franchise territory in Michigan and
extended, by one year, the time frame for completion of our obligations under the initial terms of
the Area Development Agreement.
The Amended Agreement includes the right to develop an additional nine BWW Restaurants, which
increases the total number of BWW Restaurants we have a right to develop to 32. We have until
November 1, 2017 to complete our development obligations under the Amended Agreement. As of
September 26, 2010, 12 of these restaurants had been opened for business under the Amended
Agreement and 20 remain. Another six restaurants were opened prior to the Area Development
Agreement which, assuming that we are successful at fulfilling our Amended Agreement, will bring
DRHs total BWW restaurant count to 38 by November 1, 2017.
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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
In the ordinary course of business, we have made a number of estimates and assumptions in the
preparation of our financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ significantly from those estimates under
different assumptions and conditions. We frequently reevaluate these significant factors and make
adjustments where facts and circumstances dictate.
The Company believes the following accounting policies represent critical accounting policies.
Critical accounting policies are those that are both most important to the portrayal of a companys
financial condition and results and require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. We discuss our significant accounting
policies in Note 1 to the Companys consolidated interim financial statements, including those
policies that do not require management to make difficult, subjective, or complex judgments or
estimates.
FASB Codification Discussion
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets generally accepted accounting principles (GAAP) that we follow to
ensure we consistently report our financial condition, results of operations, and cash flows. Over
the years, the FASB and other designated GAAP-setting bodies have issued standards in the form of
FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of
Position, etc. One standard that applies to our business is FASB Statement No. 13, Accounting for
Leases. That standard, originally issued in 1976, has been interpreted and amended many times over
the years.
The FASB recognized the complexity of its standard-setting process and embarked on a revised
process in 2004 that culminated in the release, on July 1, 2009, of the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. To the Company, this means instead
of following the leasing rules in Statement No. 13, we will follow the guidance in Topic 840,
Leases. The Codification does not change how the Company accounts for its transactions or the
nature of related disclosures made. However, when referring to guidance issued by the FASB, the
Company refers to topics in the ASC rather than Statement No. 13, etc. The above change was made
effective by the FASB for periods ending on or after September 15, 2009. We have updated references
to GAAP in this quarterly report on Form 10-Q to reflect the guidance in the Codification.
Property and Equipment
We record all property and equipment at cost less accumulated depreciation and we select useful
lives that reflect the actual economic lives of the underlying assets. We amortize leasehold
improvements over the shorter of the useful life of the asset or the related lease term. We
calculate depreciation using the straight-line method for consolidated financial statement
purposes. We capitalize improvements and expense repairs and maintenance costs as incurred. We are
often required to exercise judgment in our decision whether to capitalize an asset or expense an
expenditure that is for maintenance and repairs. Our judgments may produce materially different
amounts of repair and maintenance or depreciation expense if different assumptions were used.
We perform an asset impairment analysis, on an annual basis, of property and equipment related to
our restaurant locations. We also perform these tests when we experience a triggering event such
as a major change in a locations operating environment or other event that might impact our
ability to recover our asset investment. This process requires the use of estimates and
assumptions, which are subject to a high degree of judgment. Our analysis indicated that we did not
need to record any impairment charges during the three months ended September 26, 2010 and the nine
months ended September 26, 2010. As such, none were recorded. If these assumptions or
circumstances change in the future, we may be required to record impairment charges for these
assets.
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Deferred Tax Assets
The Company records deferred tax assets for the value of benefits expected to be realized from the
utilization of state and federal net operating loss carry forwards. We periodically review these
assets for realizability based upon expected taxable income in the applicable taxing jurisdictions.
To the extent we believe some portion of the benefit may not be realizable, an estimate of the
unrealized portion is made and an allowance is recorded. At September 26, 2010, we had no valuation
allowance, as we believe we will generate sufficient taxable income in the future to realize the
benefits of our deferred tax assets. This belief is principally based upon the Companys option to
purchase the nine affiliated restaurants it previously managed, which happened on February 1, 2010.
Realization of these deferred tax assets is dependent upon generating sufficient taxable income
prior to expiration of any net operating loss carry forwards. Although realization is not assured,
management believes it is more likely than not that the remaining recorded deferred tax assets will
be realized. If the ultimate realization of these deferred tax assets is significantly different
from our expectations, the value of its deferred tax assets could be materially overstated.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Not Applicable.
Item 4. Controls and Procedures
As of September 26, 2010, an evaluation was performed under the supervision of and with the
participation of our management, including our principal executive and principal financial
officers, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including our principal executive and
principal financial officers, concluded that our disclosure controls and procedures were effective
as of September 26, 2010.
There were no changes in the Companys internal control over financial reporting during the quarter
ended September 26, 2010 that have materially affected, or are reasonably likely to materially
affect the Companys internal control over financial reporting.
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, 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 our financial condition or
results of operations. We have insured and continue to insure against most of these types of
claims. A judgment on any claim not covered by or in excess of our insurance coverage could
materially adversely affect our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those previously disclosed in our
annual report on Form 10-K for the year ended December 27, 2009.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 31, 2010, the Company entered into a stock option agreement (Stock Option Agreement) with
each of its directors as compensation for their services as directors, including T. Michael Ansley,
who serves as the Companys President and Chief Executive Officer, and David G. Burke, who serves
as the Companys Chief Financial Officer and Treasurer. The Stock Option Agreements granted each of
the directors, including Mr. Ansley and Mr. Burke, the option to purchase 30,000 shares of common
stock exercisable at $2.50 per share. The options expire on July 31, 2016. The options and the
underlying shares of common stock are restricted securities. The options vest for each of the
directors according to the schedule set forth below, subject to continued service as a director:
Director | Option Vesting Dates | |
T. Michael Ansley
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
David G. Burke
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Jay A. Dusenberry
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
David Ligotti
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Gregory J. Stevens
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Bill McClintock
|
10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013 |
|
Joseph M. Nowicki
|
10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013 |
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
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Item 6. Exhibits
(a) Exhibits:
3.1 | Certificate of Incorporation (filed as an exhibit to the Companys Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and
incorporated herein by this reference). |
|||
3.2 | By-Laws (filed as an exhibit to the Companys Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by
this reference). |
|||
10.1 | Buffalo Wild Wings Franchise Agreement dated July 29, 2010 by and between Buffalo Wild Wings
International, Inc. and Anker, Inc., a wholly-owned subsidiary of the Company. |
|||
10.2 | Renewal Addendum to Buffalo Wild Wings Franchise Agreement dated July 29, 2010, by and
between Buffalo Wild Wings International, Inc. and Anker, Inc., a wholly-owned subsidiary of
the Company. |
|||
10.3 | Buffalo Wild Wings Area Development Agreement dated July 18, 2003, by and between Buffalo
Wild Wings International, Inc. and MCA Enterprises, Inc. (subsequently assigned to AMC Wings,
Inc., a wholly-owned subsidiary of the Company). |
|||
10.4 | Transfer
Agreement dated March 20, 2007, by MCA Enterprises Brandon, Inc.
(formerly MCA
Enterprises, Inc.), T. Michael Ansley, Mark C. Ansley, Thomas D. Ansley, Steven Menker, Jason
Curtis and AMC Wings, Inc. and Buffalo Wild Wings International, Inc. |
|||
10.5 | Amendment to Buffalo Wild Wings Area Development Agreement dated March 20, 2007. |
|||
10.6 | Amendment to Buffalo Wild Wings Area Development Agreement dated November 5, 2007. |
|||
10.7 | Commercial Security Agreement dated June 30, 2008, between Ann Arbor Burgers, Inc., a
wholly-owned subsidiary of the Company, and Home City Federal Savings Bank of Springfield.
(Note: This exhibit is filed to replace Exhibit 10.1 to our Form 8-K filed July 7, 2008, which
contained technical errors that rendered certain portions of the exhibit illegible.) |
|||
10.8 | Promissory Note dated June 30, 2008 between Ann Arbor Burgers, Inc., a wholly-owned
subsidiary of the Company, and Home City Federal Savings Bank of Springfield. (Note: This
exhibit is filed to replace Exhibit 10.2 to our Form 8-K filed July 7, 2008, which contained
technical errors that rendered certain portions of the exhibit illegible.) |
|||
10.9 | Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo Wild
Wings International, Inc. and AMC Traverse City, Inc., a wholly-owned subsidiary of the
Company (filed as an exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 2010, and incorporated herein by this
reference). |
|||
10.10 | Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo
Wild Wings International, Inc. and AMC Lakeland, Inc., a wholly-owned subsidiary of the
Company (filed as an exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 2010, and incorporated herein by this
reference). |
|||
10.11 | Form of Stock Option Agreement (filed as a exhibit to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on August 5, 2010, and incorporated
herein by this reference). |
|||
10.12 |
Amendment to Buffalo Wild Wings Area Development Agreement dated
December 27, 2003.
|
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|||
31.2 | Certification Chief Financial Officer pursuant to Rule 13a-14(a). |
|||
32.1 | Certification Chief Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002. |
|||
32.2 | Certification Chief Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
Dated: November 10, 2010 | DIVERSIFIED RESTAURANT HOLDINGS, INC. |
|||
By: | /s/ David G. Burke | |||
David G. Burke | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
35