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EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc. | c14678exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc. | c14678exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc. | c14678exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc. | c14678exv31w2.htm |
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 26, 2010
or
o | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to .
Commission File No. 000-53577
DIVERSIFIED RESTAURANT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 03-0606420 | |
(State of other jurisdiction of Incorporation | (I.R.S. Employer Identification No.) | |
or organization) |
27680 Franklin Rd., Southfield, MI 48034
(Address of principal executive offices)
(Address of principal executive offices)
Registrants telephone number (248) 223-9160
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates was $34,595,213 based on the
closing sale price of the Companys common stock as reported on the OTC:BB stock market on June 25,
2010.
The number of shares outstanding of the registrants common stock as of March 25, 2011: 18,876,000
shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants definitive Proxy Statement for the 2011 Annual Meeting of Stockholders
are incorporated by reference in Part III herein. The registrant intends to file such Proxy
Statement with the Securities and Exchange Commission no later than 120 days after the end of the
fiscal year covered by this report on Form 10-K.
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I
The registrant, Diversified Restaurant Holdings, Inc., and its subsidiaries, are referred to
in this Annual Report on Form 10-K (Annual Report) as Diversified, DRH, Company, or in the
nominative we or us or the possessive our.
Cautionary Statement Regarding Forward Looking Information
Certain statements contained in this Annual Report are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended, and the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks, uncertainties and assumptions and are identified
by words such as expects, estimates, projects, anticipates, believes, could, and other
similar words. Forward-looking statements are based upon the current beliefs and expectations of
management. All statements contained herein, in press releases, written statements or other
documents filed with the Securities and Exchange Commission, or in DRHs communications and
discussions with investors and analysts in the normal course of business through meetings,
webcasts, phone calls and conference calls, regarding expectations with respect to sales, earnings,
cash flows, operating efficiencies, store openings, acquisitions, franchise sales, commodity
pricing, labor costs, or developments with respect to litigation or litigation costs that are not
clearly historical in nature and are addressing operating performance, events, or developments that
DRH expects or anticipates will occur in the future, including but not limited to franchise sales,
restaurant openings, financial performance, and adverse developments with respect to litigation or
increased litigation costs, the operation or performance of the Companys business units, or the
market price of its common stock are forward-looking statements and are subject to known and
unknown risks, uncertainties, and contingencies. Many of these risks, uncertainties, and
contingencies are beyond our control, and may cause actual results, performance or achievements to
differ materially from anticipated results, performance or achievements. Factors include the
risk factors listed and more fully described in Item 1A below, Risk Factors, as well as
risk factors that we have discussed in previous public reports and other documents filed with the
Securities and Exchange Commission.
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ITEM 1. | BUSINESS |
Introduction
Diversified Restaurant Holdings, Inc. (DRH) was formed on
September 25, 2006. In 2008, the Company was taken public through a self-underwritten initial public offering and became a publicly-held
company. DRH and its wholly-owned subsidiaries, including AMC Group, Inc, (AMC), AMC Wings, Inc.
(WINGS), and AMC Burgers, Inc. (BURGERS), develop, own, and operate Bagger Daves and BWW
restaurants located throughout Michigan and Florida, as detailed below.
The Company is a leading Buffalo Wild Wings® (BWW) franchisee and, as of March 25, 2011,
operates 21 BWW restaurants (14 in Michigan and seven in Florida). The recipient of many franchise
awards, including awards for the Highest Annual Restaurant Sales in 2004, 2005, and 2006, DRH
remains on track to fulfill its Area Development Agreement with Buffalo Wild Wings, Inc. (BWWI),
which requires a total of 32 BWW restaurants by 2017.
DRH is the owner, operator, and franchisor of the unique,
full-service, ultra-casual restaurant and bar Bagger Daves Legendary Burger TavernTM
(Bagger Daves), which was launched in January 2008. As of March 25, 2011, there are four locations in
the state of Michigan. DRH is approved to franchise Bagger Daves in the states of Michigan,
Indiana, Ohio, and Illinois. For more information, please visit www.baggerdaves.com.
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.
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AMC was formed on March 28, 2007 and serves as the operational and administrative center for the
Company. AMC renders management, operational support, and advertising services to WINGS and its subsidiaries and BURGERS
and its subsidiaries. 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. 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
the duration of 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 believes it is in compliance with the terms of these agreements at March 25,
2011.
BURGERS was formed on March 12, 2007 and serves as a holding company for its Bagger Daves
restaurants. Bagger Daves Franchising Corporation, a subsidiary of BURGERS, was formed to act as
the franchisor for the Bagger Daves concept and has rights to franchise in the states of Michigan,
Ohio, Indiana, and Illinois.
The
Companys Headquarters are located at 27680 Franklin Road, Southfield, Michigan, 48034. Our telephone number is (248)
223-9160. We can also be found on the internet at www.diversifiedrestaurantholdings.com
and www.baggerdaves.com.
At the end of 2009, we converted to a 52/53 week fiscal year ending the last Sunday in December.
Our 2010 and 2009 fiscal years ended on December 26, 2010 and December 27, 2009, respectively, and
had 364 and 361 operating days, respectively.
Background
We were founded by T. Michael Ansley, our President and CEO, in late 2004 as an operating center
for seven BWW locations that Mr. Ansley owned and operated as a franchisee. Mr. Ansley opened his
first affiliated BWW in December 1999 and, since then, has received numerous awards from BWWI,
including awards for highest annual restaurant sales and operator of
the year to name a few.
In September 2007, Mr. Ansley was awarded Franchisee of the Year by the International Franchise
Association (IFA). The IFAs membership consists of over 10,000 franchisees and 1,300 franchisor
companies and its mission is to protect, enhance, and promote franchising.
DRH was formed in 2006 to provide the framework and financial flexibility to grow both as a
franchisee of BWW and to develop and grow our unique Bagger Daves Legendary Burger
Tavern® restaurant concept.
We originated the Bagger Daves® concept with our first store opening in January 2008 in Berkley,
Michigan, followed later that year with our second store in Ann Arbor, Michigan. We opened our
third store in February 2010 which is located in Novi, Michigan.
Our fourth restaurant opened in
February 2011 in Brighton, Michigan.
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Restaurant Concepts
Buffalo Wild Wings
We are a franchisee for Buffalo Wild Wings, Inc. (NASDAQ: BWLD) which, as of December 26, 2010,
reported 732 Buffalo Wild Wing Grill & Bar® restaurants in 44 states that were either directly
owned or franchised. The restaurants feature a variety of boldly-flavored, craveable menu items in
a welcoming neighborhood atmosphere with an extensive multi-media social environment, a full bar,
and an open layout that creates a distinctive dining experience for sports fans and families alike.
The restaurants are differentiated by the social environment we create and the connection we make
with our team members, guests, and the local community. The inviting and energetic environment of
the restaurants is complemented by furnishings that can easily be rearranged to accommodate parties
of various sizes. Guests have the option of watching various sporting events on projection screens
or approximately 50 additional televisions, competing in Buzztime Trivia, or playing video games.
BWW restaurants have widespread appeal and have won dozens of Best Wings and Best Sports Bar
awards across the country. The BWW menu is competitively priced between the quick casual and
casual dining segments, featuring traditional chicken wings, boneless wings, and other items
including chicken tenders, Wild Flatbreads, popcorn shrimp, specialty hamburgers and sandwiches,
wraps, Buffalito® soft tacos, appetizers, and salads. The made-to-order menu items are
enhanced by the bold flavor profile of BWWs 14 signature sauces and four signature seasonings,
which range in flavor from Sweet BBQ to Blazin®. The restaurants offer approximately
20 domestic and imported beers on tap, including several local or regional micro-brews and a wide
selection of bottled beers, wines, and liquor. The award-winning food and memorable experience
drives guest visits and loyalty. Our typical BWW restaurant derives approximately 77% of its
revenues from food and 23% of its revenue from alcohol sales, primarily draft beer.
Bagger Daves Legendary Burger TavernTM
Bagger Daves is our first initiative to diversify our operations by developing our own unique,
full-service, ultra-casual restaurant and bar concept, which was launched in January 2008. We have
created a warm, inviting, and entertaining atmosphere through friendly and memorable guest service.
We believe our guests will be craving our beef and turkey burgers after their first bite.
The concept focuses on local flair with the interior showcasing historic photos of the city in
which it resides. It also features an electric train that runs above the dining room and bar
areas. Bagger Daves offers a full-service, family-friendly restaurant and bar with a casual,
comfortable atmosphere. The menu features freshly-made burgers (never frozen), accompanied by more
than 30 toppings from which to choose, fresh-cut fries, hand-dipped milkshakes, and a selection of
craft beer and wine. Signature items include Sloppy Daves BBQ®, Train Wreck
Burger®, and Bagger Daves Amazingly Delicious Turkey Black Bean Chili®.
The
guiding principle of the Bagger Daves brand is genuine simplicity. The burgers are made from
a USDA fresh premium ground beef blend with no trimmings or Michigan fresh ground turkey. The
burgers come in the Regular (two patties) or Small (one patty) versions on fresh buns.
Customers can choose from burger Legends including the Train Wreck Burger®, the Blues
Burger® and Sloppy Daves BBQ® or guests have the freedom to Create Your Own
Legend which allows you to totally customize your burger choosing from a variety of buns and more
than 30 toppings, including custom house-made sauces presenting bold and exciting new flavors. In
addition, burger toppings include various cheeses, bacon, egg, guacamole and a variety of
complimentary toppings sautéed mushrooms and onions, barbecue sauce, steak sauce and other
standard condiments.
Beyond legendary burgers, Bagger Daves offers our Amazingly Delicious Turkey Black Bean
Chili®, a Veggie Black Bean burger, a grilled cheese sandwich, a BLT sandwich, salads,
and fresh-cut fries. The fries are cut in-house from Idaho potatoes and cooked in canola oil using
a seven-step Belgian-style process producing a fry reminiscent of those served at community fairs.
We also offer Daves Sweet Potato Chips®, a Bagger Daves specialty using fresh cut
premium sweet potatoes from North Carolina. Customers can choose from our own signature dipping
sauces of honey/cinnamon/sea salt mix (especially good on the sweet potato chips) or honey mustard.
Bagger Daves also offers hand-dipped ice cream and milkshakes with a variety of free mix-ins.
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To reinforce the Bagger Daves name and brand, our burgers, sandwiches and fries/chips are served
in natural (brown) bags with our logo stamped prominently thereon and set in a cake tin.
We believe our tagline captures it all: Bagger Daves®. Legendary Tastes.
Unforgettable Experience. As of March 25, 2011, there are four locations in the state of
Michigan. DRH is approved to franchise Bagger Daves in the states of Michigan, Indiana, Ohio, and
Illinois. For more information, please visit www.baggerdaves.com. More information on
Bagger Daves® can be found on our website: www.baggerdaves.com.
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 managed (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 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 805-50, Business Combinations: Transactions Between Entities Under Common Control, the
Company accounted for the Affiliates Acquisition as 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.
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 and March 9, 2011, the Company converted $1,424,000 and
$2,900,000, respectively, into a term loan through a fixed-rate swap arrangement. The termination
date is May 5, 2017 for both conversions and interest is fixed at a rate of 5.91% for the September
24, 2010 conversion and 6.35% for the March 9, 2011 conversion.
Principal and interest payments are amortized over the life of the loan, with monthly payments of
approximately $21,000 for the September 24, 2010 conversion and approximately $48,000 for the March
9, 2011 conversion.
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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.
The remainder of the purchase price for the Brandon Property was financed using the Companys
working capital.
Growth Strategy
We firmly believe that a happy employee translates into a happy guest. A happy guest drives repeat
sales and word-of-mouth marketing two key factors that are fundamental to our sales growth
strategy. We believe that our core areas of expertise include site selection, development, management,
quality guest service, and operations. We plan to grow by increasing the number of restaurants in
each of the two concepts we currently offer and by developing or acquiring additional concepts that
can be expanded profitably.
As of December 26, 2010, we are an experienced operator of 19 franchised BWW restaurants; 13
restaurants in Michigan and six in Florida. We have a development agreement with BWWI to operate
32 BWW restaurants by 2017. We plan to open a total of three Buffalo Wild Wings restaurants in
2011, including our Traverse City, Michigan, and Lakeland, Florida BWW restaurants that opened in
the first quarter of 2011 and one additional
restaurant planned for the fourth quarter of 2011. We expect to open additional stores if optimal
locations are found and appropriate financing can be secured.
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In 2008, we established a new restaurant concept, Bagger Daves Legendary Burger Tavern®. We had
two restaurants that began operations in 2008 and one that began operation in February 2010. As
our Bagger Daves concept has proven to be successful thus far, we plan to grow and franchise
throughout the upper Midwest and, ultimately, nationally. We believe that with the three stores
currently operating and the fourth just opened in February of 2011, we can demonstrate proof of the concept and
begin franchising the Bagger Daves concept. We plan to open a total of three Bagger Daves
restaurants in 2011; our Brighton, Michigan restaurant opened in February 2011, and we plan to open
one additional Bagger Daves restaurant in each of the third and fourth quarters of 2011. We
expect to open additional stores if optimal locations are found and appropriate financing can be
secured.
We currently have Franchise Disclosure Documents filed and approved in Michigan, Indiana, Ohio, and
Illinois. Our plan is to continue to develop and grow this concept as we concurrently expand our
BWW franchises in Michigan and Florida.
We plan to fund the startup of these BWW and Bagger Daves restaurants through our existing DLOC or
other suitable funding sources. These loans will be recorded as liabilities on our balance sheet
and the furniture, equipment and leasehold improvements will be recorded as capital assets on the
balance sheet of each separate affiliated legal entity that owns the restaurant. The financial
statements of these wholly-owned subsidiaries will be combined with our balance sheet on a
consolidated basis for reporting purposes.
Site Selection
We conduct extensive analysis to determine the location of each new restaurant. Proximity to
businesses (office buildings, movie theaters, manufacturing plants, hospitals, etc.) and leveraging
high-traffic venues are a key success criteria for our business.
For our restaurants, we prefer a strong end-cap position in a well-anchored shopping center or
lifestyle entertainment center. Movie theaters are also a major traffic driver for BWW. Three of
our locations are directly beside or in front of a movie theater. However, we do not rule out
freestanding locations if the opportunity meets certain economic criteria. As of December 26,
2010, we operate five stand-alone building locations. In February 2011, we opened our sixth
stand-alone restaurant in Lakeland, Florida.
Restaurant Operations
We believe that retaining high quality restaurant managers, valuing our employees, and providing
fast, friendly service to our guests will be key to our continued success.
Management and Staffing
The core values that define our corporate culture are cleanliness, service, and organization. Our
restaurants are generally staffed with one general manager and up to four assistant managers
depending on sales volume of the restaurant. The general manager is responsible for day-to-day
operations and for maintaining the standards of quality and performance that define our corporate
culture. We utilize area managers to oversee our general managers and supervise the operation of
our restaurants, including the continuing development of each restaurants management team.
Through regular visits to the restaurants and constant communication with the management team, the
area managers ensure adherence to all aspects of our concept, strategy, and standards of quality.
We also have secret shoppers that visit our restaurants on a monthly basis and provide customer
satisfaction scores for the criteria we define.
Training, Development, and Recruiting
Successful restaurant operations, customer satisfaction, quality, and cleanliness begin with the
employee a key component of our strategy. We pride ourselves on facilitating a well-organized,
thorough, hands-on training
program. Our employees undergo classroom training followed by job shadowing in order to prepare
them for their new role.
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We offer a very competitive incentive program which we believe is unparalleled in the restaurant
industry. Aside from very competitive base salaries and benefits, management is incentivized with
a strong performance-based bonus program. We also provide group health, dental, and vision
insurance, a tuition reimbursement program, a referral bonus program, and opportunities for career
advancement. Effective May 1, 2011, we will also offer a
company-sponsored 401(k) plan, in which the Company has established a
matching contribution feature.
We emphasize growth from within the organization as much as possible, giving our employees the
opportunity to develop and advance. We believe this philosophy helps build a strong, loyal
management team with above-industry-standard employee retention rates, giving us a competitive
advantage versus our competitors. We strive for a balance of internal promotion and external
hiring.
Restaurants
Our BWW restaurants range in size from 5,300 square feet to 7,500 square feet, with a historical
square foot average of 6,473. We anticipate that future restaurants will range in size from 5,500
to 6,500 square feet with an average cash investment per restaurant of approximately $1,200,000,
excluding preopening expenses of approximately $160,000. From time to time, we expect that our
restaurants will be smaller or larger or cost more or less than our targeted range, depending on
the particular circumstances of the selected site. Also, from time to time, we expect to purchase
the building or the land and building for certain restaurants, in which case the cash investment
would be significantly higher. We have a continuous capital improvement plan for our restaurants
and plan major renovations every five years. 12 of our 19 BWW restaurants are current with
Generation 4.1 design criteria and one is scheduled for an upgrade in the summer of 2011. The
improvement includes high definition flat screen televisions and projectors. We also attempt to
increase seating capacity whenever possible. For a more detailed discussion of our capital
improvement plans, please refer to the Liquidity and Capital Resources section of the Managements
Discussion and Analysis below.
Our Bagger Daves restaurants will have a typical footprint of approximately 4,000 square feet and
an outside seating area where feasible. We anticipate an average cash investment per restaurant of
approximately $700,000 $800,000, excluding preopening expenses of approximately $50,000. From
time to time, we expect that our restaurants will be smaller or larger or cost more or less than
our targeted range, depending on the particular circumstances of the selected site. Also, from
time to time, we expect to purchase the building or the land and building for certain restaurants,
in which case the cash investment would be significantly higher. We plan to establish this concept
in the Detroit Metropolitan market and then expand it throughout the Midwest, with an ultimate goal
of franchising the concept nationally.
Metrics
We use several metrics to evaluate and improve each restaurants performance that include: sales
growth, ticket times, table turns, guest satisfaction, secret shopper scores, Guest Experience
Management (GEM) scores obtained through guest feedback via the internet, hourly labor cost, and
cost of sales (COS).
Quality Control and Purchasing
We strive to maintain high quality standards, protecting our food supply at all times.
Our purchasing operations for BWW restaurants are primarily through channels established by BWWI
corporate operations. We do, however, negotiate directly with most of these channels as to price
and delivery terms. Where we purchase directly, we seek to obtain the highest quality ingredients,
products, and supplies from reliable sources at competitive prices. For Bagger Daves, we have
been able to leverage our BWW purchasing power and develop supply sources at a more reasonable cost
than would be expected for a smaller restaurant concept.
To maximize our purchasing efficiencies,
our centralized purchasing staff negotiates, when available, fixed-price contracts
(usually for a one-year period) or, where appropriate, commodity-price contracts.
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Marketing and Advertising
In 2010, we spent approximately 2% of all restaurant sales on marketing efforts. Charitable
donations and local community sponsorships help us develop local public relations and is a major
component of our marketing efforts. We support programs that build traffic at the grass roots
level. During 2010, we participated in numerous local store marketing events for both BWW and
Bagger Daves throughout the communities we service.
BWW
We pay a marketing fee to BWWI equal to 3% of revenue, which is supported by national advertising
designed to build brand awareness. Some examples include television commercials on ESPN and CBS
during key periods, such as football season and the March Madness NCAA basketball tournaments. In
addition, we spent another 2% of revenue on our own marketing initiatives, of which 0.5% of it was
allocated to a regional cooperative of BWW franchisees in the metropolitan Detroit area (for those
BWW restaurants in the metro Detroit area). We established the BWW restaurants in the Michigan and
Florida markets through coordinated local store marketing efforts and operating strengths that
focus on the guest experience.
Our BWW stores participated in more than 100 local events in 2010, including Oak Apple Run (Royal
Oak, Michigan), Woodward Dream Cruise (Ferndale, Michigan), Boys and Girls Club Walk (Royal Oak,
Michigan), Sterling Fest (Sterling Heights, Michigan), Childrens Leukemia Walk (Milford,
Michigan), Affirmations Big Bash (Ferndale, Michigan), Holiday Ice Festival (Ferndale, Michigan),
SudsFest (Tampa, Florida), Taste of Brandon (Brandon, Florida), Marquette Marathon (Marquette,
Michigan), and the Sarasota Pumpkin Festival (Sarasota, Florida). In addition, we sponsored more
than 150 sports teams and hosted more than 130 fundraising events, raising more than $38,000 for
local non-profit organizations.
Bagger Daves
The advertising and marketing plan for developing the Bagger Daves brand relies on local media
(for which we allocate 2% of revenue), specials, promotions, and community events. We are also
building our marketing reach with our current guests through enhancing our social media avenue. We
attribute a large part of our Bagger Daves growth through word-of-mouth.
Bagger Daves participated in more than 30 events in 2010, including Oak Apple Run (Royal Oak,
Michigan), Woodward Dream Cruise (Ferndale, Michigan), Boys and Girls Club Walk (Royal Oak,
Michigan), and Childrens Leukemia Walk (in Milford, Michigan). Bagger Daves also sponsored more
than 40 local sports teams and held more than 10 fundraising nights at its locations.
Information Technology
We believe that technology can help to provide a competitive advantage and enable our strategy for
growth through efficient restaurant operations, information analysis, and ease and speed of guest
service. We have a standard point-of-sale system in all of our restaurants that is integrated to
our corporate office. The systems are designed to improve operating efficiencies, enable rapid
analysis of marketing and financial information, and reduce administrative time. Further, we are
working to equip our Bagger Daves restaurants with the ability for guests to order online and pick
up their order at their convenience.
Competition
Competition in the restaurant industry is intense. We believe we compete primarily with local and
regional sports bars and national casual dining and quick casual establishments. Competition is
expected to remain intense with respect to price, service, location, concept, and the type and
quality of food. There is also competition for real estate sites, qualified management personnel,
and hourly restaurant staff. Many of our competitors have been in existence longer than we have
and they may be better established in markets where we are currently
or may, in the future, be located. Accordingly, we intend to
continually evolve our restaurants, maintain high quality
standards, and
treat our guests in a manner that encourages them to return. Our pricing communicates value to
the guest in a comfortable, welcoming atmosphere providing full-service, unlike many competitors in
the fast-casual segment.
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Employees
As of December 26, 2010, we had 1,143 total employees, of which 440 were full-time employees. We
strive to promote from within and provide highly competitive wages and benefits. We value our
employees and their input and believe this philosophy contributes to a low turnover ratio, even at
the hourly-wage level, relative to industry standards.
Trademarks, Service Marks, and Trade Secrets
The Buffalo Wild Wings® registered service mark is owned by BWWI.
Our domestically-registered trademarks and service marks include Bagger Daves Legendary Burger
TavernTM, Bagger Daves Legendary Burgers & Fries®, Bagger
Daves®, Make a Fresh Start Here®, Daves Sloppy BBQ®, Sloppy
Daves BBQ®, Railhouse Burger Sauce®, The Blues Burger®, Train
Wreck Burger®, Daves Sweet Potato Chips®, Meaningless Free
Toppings®, Sloppy Daves Fries®, and Amazingly Delicious Turkey Black Bean
Chili®. We place considerable value on our trademarks, service marks, trade secrets,
and other proprietary rights and believe they are important to our brand-building efforts and the
marketing of our Bagger Daves® restaurant concept. We intend to actively enforce and defend our
intellectual property, however, we cannot predict whether the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of these rights or the use by
others of restaurant features based upon or similar to our concepts. Although we believe we have
sufficient protections concerning our trademarks and service marks, we may face claims of
infringement that could interfere with our ability to market our restaurants and promote our brand.
Government Regulations
The restaurant industry is subject to numerous federal, state, and local governmental regulations,
including those relating to the preparation and sale of food and alcoholic beverages, sanitation,
public health, fire codes, zoning, and building requirements and to periodic review by state and
municipal authorities for areas in which the restaurants are located. Each restaurant requires
appropriate licenses from regulatory authorities allowing it to sell liquor, beer, and wine, and
each restaurant requires food service licenses from local health authorities. Our licenses to sell
alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause,
including violation by us or our employees of any law or regulation pertaining to alcoholic
beverage control, such as those regulating the minimum age of employees or patrons who may serve or
be served alcoholic beverages, the serving of alcoholic beverages to visibly intoxicated patrons,
advertising, wholesale purchasing, and inventory control. In order to reduce this risk, restaurant
employees are trained in standardized operating procedures designed to assure compliance with all
applicable codes and regulations. We have not encountered any material problems relating to
alcoholic beverage licenses or permits to date.
We are also subject to laws governing our relationship with employees. Our failure to comply with
federal, state, and local employment laws and regulations may subject us to losses and harm our
brands. The laws and regulations govern such matters as wage and hour requirements; workers
compensation insurance; unemployment and other taxes; working and safety conditions; overtime; and
citizenship and immigration status. Significant additional government-imposed regulations under the
Fair Labor Standards Act and similar laws related to minimum wages, overtime, rest breaks, paid
leaves of absence, and mandated health benefits may also impact the performance of our operations.
In addition, employee claims based on, among other things, discrimination, harassment, wrongful
termination, wage, and hour requirements, and payments to employees who receive gratuities, may
divert financial and management resources and adversely affect operations. The losses that may be
incurred as a result of any violation of such governmental regulations by the company are difficult
to quantify. To our knowledge, we are in compliance in all material respects with all applicable
federal, state, and local laws affecting our business.
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Compliance with these laws and regulations may lead to increased costs and operational complexity
and may increase our exposure to governmental investigations or litigation. We may also be
subject, in certain states, to dram-shop statutes, which generally allow a person injured by an
intoxicated person to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor
liability coverage as part of our existing comprehensive general liability insurance which we
believe is consistent with coverage carried by other companies in the restaurant industry of
similar size and scope of operations. Even though we carry liquor liability insurance, a judgment
against us under a dram shop statute in excess of our liability coverage could have a material
adverse effect on our operations.
Available Information
We are subject to the informational reporting requirements of the Securities Exchange Act of 1934
and, therefore, we file periodic reports, proxy statements, and other information with the
Securities and Exchange Commission (the SEC).
We maintain an Internet website address at www.diversifiedrestaurantholdings.com. We make
available, free of charge through our website, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as they are
reasonably available after these materials are electronically filed with or furnished to the SEC.
These materials are also accessible on the SECs web site at www.sec.gov.
Our website also features a hyperlink to a portion of the SECs website where all of the reports we
have filed with or furnished to the SEC may be accessed free of charge. None of the other
information found on our website is incorporated into this Annual Report or any other report we
file with, or furnish to, the SEC. We assume no obligation to update or revise forward looking
statements in this Form 10-K, whether as a result of new information, future events or otherwise,
unless we are required to do so by law.
ITEM 1A. | RISK FACTORS |
The following risk factors and the discussion as set forth in Item 7 of this Form 10-K or
incorporated by reference, and our subsequent periodic filings with the SEC, contain various
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The risks and
uncertainties described below are not the only ones we face, as it is not possible to foresee all
of the factors that may cause actual results to differ from our forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and uncertainties and
speak only as of the date on which they are made. Additional risks and uncertainties that are not
presently know to us or that we currently deem immaterial or that are not specific to us, such as
general economic conditions, may also adversely affect our business and operations. We believe
that all material risk factors have been discussed below.
Fluctuations in the Cost of Food Products Could Impact Operating Results
Our primary food products are fresh chicken wings and ground beef. We work to counteract the effect
of the volatility of chicken wing prices, which can adversely affect operating results. Our cost of
sales could be significantly affected by increases in the cost of fresh chicken wings and ground
beef, which can result from a number of factors, including but not limited to, seasonality, cost of
grain, animal disease, increase in demand domestically and internationally, and other factors that
may affect availability. We also depend on our franchisor, BWWI, as it relates to chicken wings, to
negotiate prices and deliver product to us at a reasonable cost. Chicken wing prices averaged $1.58
per pound in 2010, $.12 per pound lower than the average of $1.70 in 2009. Our franchisor, BWWI,
currently purchases, and secures for its franchisors, chicken wings at market price.
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We May Suffer Negative Consequences if New Restaurants Dont Open in Timely Manner
If we are unable to successfully open new restaurants in a timely manner, our revenue growth rate
and profits may be adversely affected. We must open restaurants in a timely and profitable manner
to successfully expand our business. In the past we have experienced delays in restaurant openings
and we may face similar delays in the future. These delays may trigger financial penalties by the
franchisor as provided in our Area Development Agreement. These delays may not meet market
expectations, which may negatively affect our stock price. Further, future
restaurants may not meet operating results similar to those of existing locations. Our ability to
expand successfully will depend on a number of factors, many of which are beyond our control. A
few of the factors are listed below:
| Locating and securing quality locations in new and existing markets; |
| Negotiating acceptable leases or purchase agreements; |
| Securing acceptable financing for new locations; |
| Cost effective and timely planning, design, and build-out of restaurants; |
| Attracting, recruiting, training, and retaining qualified team members; |
| Hiring reputable and satisfactory construction contractors; |
| Competition in new and existing markets; |
| Obtaining and maintaining required local, state, and federal government approvals and permits related to construction of the sites and the sale of food and alcoholic beverages; |
| Creating brand awareness in new markets; and |
| General economic conditions. |
We May Experience Higher-Than-Anticipated
Costs Associated With the Remodeling of Existing Restaurants
Our revenues and expenses can be
impacted significantly by the location, number, and timing of remodeling of existing restaurants.
We incur substantial expenses when we remodel existing restaurants. The expenses of
remodeling any of our restaurants may be higher than anticipated. An increase in such
expenses could have an adverse effect on our results of operations.
Our Inability to Renew Existing Leases on Favorable Terms May Adversely Affect Our Results of
Operations
As of December 26, 2010, 21 of our 22 restaurants are located on leased premises and are subject to
varying lease-specific arrangements. For example, some of the leases require base rent that is
subject to certain market factors, and other leases include base rent with specified periodic
increases. Some leases are subject to renewals which could involve substantial increases.
Additionally, a few leases require contingent rent based on a percentage of gross sales. We
currently have one restaurant lease that will expire during the next 12 months, and we are
currently evaluating the desirability of renewing this lease. While we currently expect to pursue
the renewal, no guarantee can be given that such lease will be renewed or, if renewed, that rents
will not increase substantially.
The success of our restaurants depends in large part on their leased locations. As demographic and
economic patterns change, current leased locations may or may not continue to be attractive or
profitable. Possible declines in trade areas where our restaurants are located or adverse economic
conditions in surrounding areas could result in reduced revenues in those locations. In addition,
desirable leased locations for new restaurant openings or for the relocation of existing
restaurants may not be available at an acceptable cost when we identify a particular opportunity
for a new restaurant or relocation.
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We May Not Be Able To Manage Our Growth
Our Companys expansion strategy will depend upon our ability to open and operate additional
restaurants profitably. The opening of new restaurants will depend on a number of factors, many of
which are beyond our control. These factors include, among others, the availability of management,
restaurant staff, and other personnel,
the cost and availability of suitable restaurant locations, cost effective and timely planning,
design and build-out of restaurants, acceptable leasing or financial terms, acceptable financing,
and securing required governmental permits. Although we have formulated our business plans and
expansion strategies based on certain assumptions, we anticipate that, as with most business
ventures, we will be subject to changing conditions. Our assessments regarding timing and the
opening of new restaurants, as well as a variety of other factors, may not prove to be correct
and/or such new restaurants may not be profitable.
Our Restaurants May Not Achieve Market Acceptance
When expanding our BWW and Bagger Daves concepts, we will enter new markets in which we may have
limited operating experience. There can be no assurance that we will be able to achieve success
and/or profitability in our new markets or in our new stores. The success of these new restaurants
will be affected by the different competitive conditions, consumer tastes, and discretionary
spending patterns of the new markets as well as our ability to generate market awareness of the BWW
and Bagger Daves brands. New restaurants typically require several months of operation before
achieving normal profitability. When we enter highly competitive new markets or territories in
which we have not yet established a market presence, the volatile effects on revenue and profit
margins may be greater and more prolonged than anticipated.
Competition in the Restaurant Industry May Affect Our Ability to Compete Effectively
The restaurant industry is intensely competitive. We believe we compete primarily with regional and
local sports bars, burger establishments, casual dining concepts, and quick-casual establishments.
Many of our direct and indirect competitors are well-established national, regional, or local
chains with a greater market presence than us. Further, some competitors have substantially greater
financial, marketing, and other resources than us. In addition, independent owners of local or
regional establishments may enter the wing-based or burger-based restaurant businesses without
significant barriers to entry and such establishments may provide price competition for our
restaurants. Competition in the casual dining, quick casual, and quick service segments of the
restaurant industry is expected to remain intense with respect to price, service, location,
concept, and the type and quality of food. We also face intense competition for real estate sites,
qualified management personnel, and hourly restaurant staff.
New Restaurants Added to Our Existing Markets May Take Sales from Existing Restaurants
New restaurants added to our existing markets, whether by us, other franchisees, or the franchisor,
may take sales away from our restaurants. Because we intend to open restaurants in our existing
markets, this may impact revenues earned by our existing restaurants.
Acquisitions May Have Unanticipated Consequences That Could Harm Our Business and Our Financial
Condition
We may seek to selectively acquire existing restaurants. To do so, we would need to identify
suitable acquisition candidates, negotiate acceptable acquisition terms, and obtain appropriate
financing. Any acquisition that we pursue, whether or not successfully completed, may involve
risks, including:
| material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired restaurants are integrated into our operations; |
| risks associated with entering into markets or conducting operations where we have no or limited prior experience; and |
| diversion of managements attention from other business concerns. |
Future acquisitions of existing restaurants, which may be accomplished through a cash purchase
transaction, the issuance of our equity securities, or a combination of both, could result in
potentially dilutive issuances of our equity securities, the incurrence of debt and contingent
liabilities, and impairment charges related to intangible assets, any of which could harm our
business and financial condition.
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A Decline in Visitors to Any of the Business Districts Near the Locations of Our Restaurants Could
Negatively Affect Our Restaurant Sales
Some of our restaurants are located near high-activity areas such as retail centers, big box
shopping centers, and entertainment centers. We depend on high visitor rates at these businesses to
attract guests to our restaurants. If visitors to these centers decline due to economic conditions,
closure of big-box retailers, road construction, changes in consumer preferences or shopping
patterns, changes in discretionary consumer spending or otherwise, our restaurant sales could
decline significantly and adversely affect our results of operations.
Shortages or Interruptions in the Availability and Delivery of Food and Other Supplies May Increase
Costs or Reduce Revenues
Possible shortages or interruptions in the supply of food items and other supplies to our
restaurants caused by inclement weather, terrorist attacks, natural disasters such as floods,
drought and hurricanes, pandemics, the inability of our vendors to obtain credit in a tightened
credit market, food safety warnings or advisories or the prospect of such pronouncements, or other
conditions beyond our control could adversely affect the availability, quality, and cost of items
we buy and the operations of our restaurants. Our inability to effectively manage supply chain risk
could increase our costs and limit the availability of products critical to our restaurant
operations.
Unfavorable Publicity Could Harm Our Business
Multi-unit restaurant businesses such as ours can be adversely affected by publicity resulting from
complaints or litigation or general publicity regarding poor food quality, food-borne illness,
personal injury, food tampering, adverse health effects of consumption of various food products or
high-calorie foods (including obesity), or other concerns. Negative publicity from traditional
media or on-line social network postings may also result from actual or alleged incidents or events
taking place in our restaurants. Regardless of whether the allegations or complaints are valid,
unfavorable publicity relating to a number of our restaurants, or only to a single restaurant,
could adversely affect public perception of the entire brand. Adverse publicity and its effect on
overall consumer perceptions of food safety, or our failure to respond effectively to adverse
publicity, could have a material adverse effect on our business.
Failure
to Establish, Maintain, and Control Our Internal Controls Over Financial Reporting Could Harm
Our Business and Financial Results
Our management is responsible for establishing and maintaining effective internal control over
financial reporting. Internal control over financial reporting is a process to provide reasonable
assurance regarding the reliability of financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute assurance that we
would prevent or detect a misstatement of our financial statements or fraud. Any failure to
maintain an effective system of internal control over financial reporting could limit our ability
to report our financial results accurately and timely or to detect and prevent fraud. A significant
financial reporting failure or material weakness in internal control over financial reporting could
cause a loss of investor confidence and decline in the market price of our stock.
Economic Conditions Could Have a Material Adverse Impact on Our Landlords or Other Tenants in
Retail Centers in Which We Are Located
Our landlords may be unable to obtain financing or remain in good standing under their existing
financing arrangements, resulting in failures to pay required construction contributions or satisfy
other lease covenants to us. In addition other tenants at retail centers in which we or our future
franchisees are located or have executed leases may fail to open or may cease operations. If our
landlords fail to satisfy required co-tenancies, such failures may result in us terminating leases
or delaying openings in these locations. Also, decreases in total tenant occupancy in retail
centers in which we are located may affect guest traffic at our restaurants. All of these factors
could have a material adverse impact on our operations.
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Our Success Depends Substantially on the Value of Our Brands and Our Reputation for Offering Guests
an Unparalleled Guest Experience
We believe we have built a strong reputation for the quality and breadth of our menu items as part
of the total experience that guests enjoy in our restaurants. We believe we must protect and grow
the value of our brands to continue to be successful in the future. Any incident that erodes
consumer trust in or affinity for our brands could significantly reduce its value. If consumers
perceive or experience a reduction in food quality, service, ambiance, or in any way believes we
failed to deliver a consistently positive experience, the value of our brands could suffer.
Our Marketing and Branding Strategies May Not Be Successful
Over the past few years, we have been focusing our marketing towards our new Bagger Daves branding
strategy. As part of this initiative, we developed and introduced new logos, a new advertising
approach, new restaurant design and other branding elements. We also plan to introduce a unique
loyalty program in the coming years and are planning a number of media-related events to further
promote our Bagger Daves brand. We do not have any assurance that our latest marketing strategies
will be successful. If new advertising, modified branding, and other marketing programs do not
drive increased restaurant sales, the expense associated with these programs will adversely impact
our financial results, and we may not generate the levels of comparable restaurant sales we expect.
We May Not Be Able To Attract and Retain Qualified Team Members to Operate and Manage Our
Restaurants
The success of our restaurants depends on our ability to attract, motivate, and develop, and retain
a sufficient number of qualified restaurant employees, including managers and hourly team members.
The inability to recruit, develop, and retain these individuals may delay the planned openings of
new restaurants or result in high employee turnover in existing restaurants, thus increasing the
cost to efficiently operate our restaurants. This could inhibit our expansion strategy and
business performance and negatively impact our operating results.
The Loss of Key Executives or Difficulties Recruiting and Retaining Qualified Team Members Could
Affect Our Performance
Our success depends substantially on the contributions and abilities of key executives and other
employees and on our ability to recruit and retain high quality employees. We must continue to
recruit, retain, and motivate management and other employees sufficient to maintain our current
business and support our projected growth. The loss of any of our executive officers could
jeopardize our ability to meet our financial targets. In particular, we are presently dependent
upon the services of T. Michael Ansley, David G. Burke, and Jason T. Curtis. We do not have
employment agreements with any of our employees. Our inability to retain the full-time services of
any of these people or attract other qualified individuals could have an adverse effect on us, and
there would likely be a difficult transition period in finding replacements for any of them.
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Legal Actions Could Have an Adverse Affect on Us
We could
face legal action from our franchisor, government agencies,
employees, customers, or other parties. Many
state and federal laws govern our industry and if we fail to comply with these laws, we could be
liable for damages or penalties. Further, we may face litigation from customers alleging that we
were responsible for some illness or injury they suffered at or after a visit to our restaurants,
or that we have problems with food quality or operations. We may also face litigation resulting
from employer-employee relations, including age discrimination, sexual harassment, gender
discrimination, or local, state and federal labor law violations, as an example. Expensive
litigation may adversely affect both our revenue and profits.
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We May Not Be Able to Obtain and Maintain Licenses and Permits Necessary to Operate Our
Restaurants
The restaurant industry is subject to various federal, state, and local government regulations,
including those relating to the sale of food and alcoholic beverages. The failure to obtain and
maintain these licenses, permits and approvals, including food and liquor licenses, could adversely
affect our operating results. Difficulties or failure to obtain the required licenses and approvals
could delay or result in our decision to cancel the opening of new restaurants. Local authorities
may revoke, suspend, or deny renewal of our food and liquor licenses if they determine that our
conduct violates applicable regulations.
The Sale of Alcoholic Beverages at Our Restaurants Subjects Us to Additional Regulations and
Potential Liability
Because our restaurants sell alcoholic beverages, we are required to comply with the alcohol
licensing requirements of the federal government, states, and municipalities where our restaurants
are located. Alcoholic beverage control regulations require applications to state authorities and,
in certain locations, county and municipal authorities for a license and permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on Sundays. Typically, the
licenses are renewed annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the daily operations of the restaurants,
including minimum age of guests and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we
fail to comply with federal, state, or local regulations, our licenses may be revoked and we may be
forced to terminate the sale of alcoholic beverages at one or more of our restaurants.
In certain states we are subject to dram shop statutes, which generally allow a person injured by
an intoxicated person the right to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. Some dram shop litigation against restaurant
companies has resulted in significant judgments, including punitive damages.
Our Inability to Successfully and Sufficiently Raise Menu Prices Could Result in a Decline in
Profitability
We utilize menu price increases to help offset cost increases, including increased cost for
commodities, minimum wages, employee benefits, insurance arrangements, construction, utilities, and
other key operating costs. If our selection and amount of menu price increases are not accepted by
consumers and reduce guest traffic, or are insufficient to counter increased costs, our financial
results could be harmed.
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Our Operating Results May Fluctuate Due to the Timing of Special Events and Other
Factors
Our operating results depend, in part, on special events, such as the Super
Bowl® and other sporting events viewed by our guests in our restaurants such as
those sponsored by the National Football League, Major League Baseball, National Basketball
Association, National Hockey League, and National Collegiate Athletic Association. Interruptions
in the viewing of these professional sporting league events due to strikes, lockouts, or labor
disputes may impact our results. Additionally, our results are subject to fluctuations based on
the dates of sporting events and their availability for viewing through broadcast, satellite, and
cable networks. Historically, sales in most of our restaurants have been higher during fall and
winter months based on the relative popularity and extent of national, regional, and local sporting
and other events.
We May Not Be Able to Protect Our Trademarks, Service Marks and Trade Secrets
We place considerable value on our trademarks, service marks, and trade secrets. We intend to
actively enforce and defend our intellectual property, although we may not always be successful. We
attempt to protect our recipes as trade secrets by, among other things, requiring confidentiality
agreements with our suppliers and executive officers. However, we cannot be sure that we will be
able to successfully enforce our rights under our marks or prevent competitors from
misappropriating our recipes. We can also not be sure that our marks are valuable; using our marks
does not, or will not, violate others marks; the registrations of our marks would be upheld if
challenged; or we would not be prevented from using our marks in areas of the country where others
might have already established rights to them. Any of these uncertainties could have an adverse
effect on us and our expansion strategy.
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There Can Be No Assurance That An Active Trading Market for Shares of Our Common Stock Will Develop
There is
a minimal, relatively inactive public market for our common stock. We
cannot be certain that a more active public
market for our common stock will develop, or if developed, the extent to which investor interest in
our company will sustain an active trading or how liquid such a market might be in the future. Our
Common Stock will likely be thinly traded compared to larger more widely known companies. It is
possible that an active trading market, if established, will not continue and there can be no
assurance as to the price at which our common stock will trade. We are not subject of any research
analyst coverage. The absence of research analyst coverage can adversely affect the market value
and liquidity of an equity security.
Our Current Principal Stockholder Owns a Large Percentage of Our Voting Stock, Which Allows Him to
Control Substantially All Matters Requiring Stockholder Approval
T. Michael Ansley, our President, Chief Executive Officer, and Chairman of the Board of Directors,
owns approximately 59% of our outstanding common stock. As a result, he may have significant
influence over a decision to enter into any corporate transaction and has the ability to prevent
any transaction that requires the approval of stockholders, regardless of whether or not our other
stockholders believe that such transaction is in their own best interests. Such concentration of
voting power could have the effect of delaying, deterring, or preventing a change of control or
other business combination, which could in turn have an adverse effect on the market price of our
common stock or prevent our stockholders from realizing a premium over the then-prevailing market
price for their shares of common stock.
The Large Number of Shares Eligible for Public Sale and Registered for Resale Could Depress the
Market Price of Our Common Stock
The market price for our common stock could decline as a result of sales of a large number of
shares of our common stock in the market and the perception that
these sales might occur may
depress the market price. As of December 26, 2010, we had outstanding 18,876,000 shares of common
stock, most of which are either freely tradable or otherwise eligible
for resale under Rule 144 under
the Securities Act of 1933. In addition, effective January 27,
2011, we have reserved approximately
1,000,000 shares for issuance under our stock incentive plan and our employee stock
discount purchase plan. We plan to file a registration statement under the securities laws to
register the common stock to be issued under these plans following
our 2011 annual stockholders meeting. Once registered, shares issued under these
plans will be freely tradable without restriction unless acquired by affiliates of our company, who
will be subject to the volume and other limitations of Rule 144.
Since We Do Not Expect to Pay Any Dividends for the Foreseeable Future, Holders of Our Common Stock
May Be Forced to Sell Their Stock in Order to Obtain a Return on Their Investment
We do not anticipate that we will pay any dividends to holders of our common stock in the
foreseeable future. Instead, we plan to reinvest any earnings to finance our restaurant operations
and growth plans. Accordingly, stockholders must rely on sales of their common stock after price
appreciation, which may never occur, as the only way to realize any return on their investment. As
a result, investors seeking cash dividends should not purchase our common stock.
Adverse Effect of Undesignated Stock
Our authorized capital includes 10,000,000 shares of blank check preferred stock. Our Board of
Directors has the authority to issue any or all of the shares of preferred stock, including the
authority to establish one or more series, and to fix the powers, preferences, rights and
limitations of such class or series, without seeking stockholder approval.
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No Assurance of Profitability
We may experience operating losses as we develop and implement our business plan. As a result, we
may not be able to maintain profitability.
Possible Issuance of Additional Shares without Stockholder Approval Could Dilute Stockholders
As of December 26, 2010, we have an aggregate of 18,876,000 shares of common stock outstanding. In
addition, our directors have a total of 354,000 options to purchase shares of common stock at $2.50
per share. Of these options, 144,000 are fully vested, 70,000 will vest in July 2011, 70,000 will
vest in July 2012, and 70,000 will vest in July 2013. Additionally, the Company anticipates
awarding 50,000 shares of restricted stock to employees under the Companys Stock Incentive Plan
during 2011. Although there are currently no other material plans, agreements, commitments, or
undertakings with respect to the issuance of additional shares of common stock or securities
convertible into any such shares, if any shares are issued in the future, they would further dilute
the percentage ownership of our common stock held by our stockholders.
Penny Stock Regulations Could Inhibit the Trading Of Our Stock in the Secondary Market
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in
penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on the NASDAQ system,
provided that current price and volume information with respect to transactions in such securities
is furnished by the exchange or system). Prior to a transaction in a penny stock, a broker-dealer
is required to:
| deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market; |
| provide the customer with current bid and offer quotations for the penny stock; |
| explain the compensation of the broker-dealer and its salesperson in the transaction; |
| provide monthly account statements showing the market value of each penny stock held in the customers account; and |
| make a special written acknowledgment that the penny stock is a suitable investment for the purchaser and receive the purchasers written agreement to the transaction. |
These requirements may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If our share price drops below
$5.00, our shares could be subject to the penny stock rules. As such, investors might find it more
difficult to sell their shares.
Actions by the Franchisor Could Negatively Affect Our Business and Operating Results
Our BWW restaurant operations depend, in part, on decisions made by our franchisor. Business
decisions made by our franchisor could adversely impact our operating
performance and profitability. If our image and
reputation is compromised, we may suffer materially which, in turn, may negatively affect our
operating performance.
Compliance with the Sarbanes-Oxley Act May Be Costly
As the market value of our non-affiliate voting stock increases, we may be required to change our
registration status, which could require us to continue to implement
certain additional accounting procedures to
comply with the Sarbanes-Oxley Act of 2002. These procedures may
require us to incur greater
audit and internal control-related expenses in the future.
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Changes in Consumer Preferences or Discretionary Consumer Spending Could Harm our Performance
Our success depends, in part, upon the continued popularity of our chicken and boneless wings,
hamburgers and turkey burgers, other food and beverage items, and appeal of our restaurant
concepts. We also depend on trends toward consumers eating away from home. Shifts in these consumer
preferences could negatively affect our future profitability. Such shifts could be based on health
concerns related to the cholesterol, carbohydrate, fat, calorie, or salt content of certain food
items, including items featured on our menu. Negative publicity over the health aspects of such
food items may adversely affect consumer demand for our menu items and could result in a decrease
in guest traffic to our restaurants, which could materially harm our business.
In addition, our success depends to a significant extent on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable consumer income, and
consumer confidence. A decline in consumer spending or in economic conditions could reduce guest
traffic or impose practical limits on pricing, either of which could harm our business, financial
condition, operating results or cash flow.
We Are Susceptible To Adverse Trends and Economic Conditions in Michigan and Florida
The
Michigan economy is largely tied to the automotive industry. This
geographic area is susceptible to
strikes, industry lay-offs, and general economic contraction, which could negatively affect
customer counts and consumer discretionary spending which, in turn, would adversely impact our
revenue and profits.
The
Florida economy is heavily tied to tourism and the real estate
market. A continued decline in both may have a negative impact on our individual customer base, whether through loss of
value or lack of new jobs, and may result in decreased sales at our Florida locations.
Our Ability to Raise Capital In The Future May Be Limited, Which Could Adversely Impact Our
Business
Changes in our restaurant operations, lower than anticipated restaurant sales, increased food or
labor costs, increased property expenses, acceleration of our expansion plans, or other events,
including those described in this report, may cause us to seek additional debt or equity financing
on an accelerated basis. Financing may not be available to us on acceptable terms, and our failure
to raise capital when needed could negatively impact our restaurant growth plans as well as our
financial condition and results of operations. Additional equity financing, if available, may be
dilutive to the holders of our common stock. Debt financing may involve significant cash payment
obligations, covenants, and financial ratios that may restrict our ability to operate and grow our
business.
Risks of Continuing Losses and Financial Covenant Violations
There can be no assurances that in the future the Company will be in compliance with all covenants
of its current or future debt agreements or that its lenders would waive any violations of such
covenants. Non-compliance with debt covenants by the Company could have a material adverse effect
on the Companys business, results of operations, and financial condition.
Our Current Insurance May Not Provide Adequate Levels of Coverage against Claims
We currently maintain insurance that is customary and required in our franchise agreements and
leases. However, there are types of losses we may incur that cannot be insured against or that we
believe are not economically reasonable to insure against, such as losses due to natural disasters.
Such damages could have a material adverse effect on our business and results of operations.
An Impairment in the Carrying Value of Our Fixed Assets and / or Intangible Assets Could Adversely
Affect Our Financial Condition and Consolidated Results of Operations
We evaluate the useful lives of our fixed assets and intangible assets to determine if they are
definite- or indefinite-lived. Reaching a determination on useful life requires significant
judgments and assumptions regarding the future effects of obsolescence, demand, competition, other
economic factors (such as the stability of the industry, legislative action that results in an
uncertain or changing regulatory environment, and expected changes in distribution channels), the
level of required maintenance expenditures, and the expected lives of other related groups of
assets. We cannot accurately predict the amount and timing of any impairment of assets. Should the
value of intangible assets become impaired, there could be an adverse effect on our financial
condition and consolidated results of operations.
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If We Are Unable To Maintain Our Rights to Use Key Technologies of Third Parties, Our Business May
Be Harmed
We rely on certain technology licensed from third parties, and may be required to license
additional technology in the future, for use in managing our Internet sites and providing related
services to users. These third-party technology licenses may not continue to be available to us on
acceptable commercial terms or at all. The inability to enter into and maintain any of these
technology licenses could significantly harm our business, financial condition, and operating
results.
We May Incur Costs Resulting From Security Risks We Face in Connection With Our Electronic
Processing and Transmission of Confidential Customer Information
We accept electronic payment cards from our guests for payment in our restaurants. During 2010,
approximately 61% of our sales were attributable to credit/debit card transactions, and
credit/debit card usage could continue to increase. A number of restaurant operators and retailers
have experienced actual or potential security breaches in which credit and debit card information
may have been stolen. While we have taken reasonable steps to prevent the occurrence of security
breaches in this respect, we may, in the future, become subject to claims for purportedly
fraudulent transactions arising out of the actual or alleged theft of credit or debit card
information, and we may also be subject to lawsuits or other proceedings in the future relating to
these types of incidents. Proceedings related to theft of credit/debit card information may be
brought by payment card providers, banks, and credit unions that issue cards, cardholders (either
individually or as part of a class action lawsuit), and federal and state regulators. Any such
proceedings could distract our management from running our business and cause us to incur
significant unplanned losses and expenses.
We also receive and maintain certain personal information about our guests and team members. The
use of this information by us is regulated at the federal and state levels. If our security and
information systems are compromised or our team members fail to comply with these laws and
regulations and this information is obtained by unauthorized persons or used inappropriately, it
could adversely affect our reputation, as well as results of operations, and could result in
litigation against us or the imposition of penalties. In addition, our ability to accept credit
cards as payment in our restaurants and on-line store depends on us remaining in compliance with
standards set by the PCI Security Standards Council. These standards, set by a consortium of the
major credit card companies, require certain levels of system security and procedures to protect
our customers credit card and other personal information. Privacy and information security laws
and regulations change over time, and compliance with those changes may result in cost increases
due to necessary systems and process changes.
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Changes in Public Health Concerns May Impact Our Performance
Changes in public health concerns may affect consumer preferences for our products. For example, if
incidents of the avian flu occur in the United States, consumer preferences for poultry or beef
products may be negatively impacted, resulting in a decline in demand for our products. Similarly,
public health concerns regarding food ingredients, fat, and calories have resulted in governmental
regulations that may adversely affect our operations to the extent that such regulations are
imposed in specific locations, rather than nationally or state wide, or that exceptions to the
regulations are given to bars or other restaurant establishments, giving patrons the ability to
choose nearby locations that are not subject to the same regulations. Further, growing movements
to change laws relating to alcohol may result in a decline in alcohol consumption at our
restaurants or increase the number of dram shop claims made against us, either of which may
negatively impact operations or result in the loss of liquor licenses. We are carefully monitoring
new laws regulating the preparation and sale of food items and alcohol.
Unpredictable Catastrophic Events Could Have a Material Adverse Effect
The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic
disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms, and
blizzards), fires, and other catastrophes could adversely affect the Companys financial condition
or results of operations. Unpredictable natural and other disasters could have an adverse effect on
the Company in that such events could materially disrupt its operations or the ability or
willingness of its customers to visit the Companys restaurants. The incidence and severity of
catastrophes are inherently unpredictable. Although the Company carries insurance to mitigate its
exposure to certain catastrophic events, catastrophic events could nevertheless reduce the
Companys earnings and cause volatility in its financial results for any quarter or year and have a
material adverse effect on the Companys financial condition or results of operations. Future
property insurance deductibles and premiums may also negatively impact our financial performance.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 2. | PROPERTIES |
Our main office is located at 27680 Franklin Road, Southfield, Michigan 48034 and our telephone
number is (248) 223-9160. Our main office has approximately 5,340 square feet of office space. We
occupy this facility under a lease that terminates on May 31, 2014, with two options to extend the
lease for a period of two years each.
As of December 26, 2010, we operated 22 restaurants, 21 of which are leased properties. The
majority of our leases are for 10- and 15-year terms, generally including options to extend the
terms. Most of our leases include exclusive use provisions prohibiting our landlords from
leasing space to other restaurants that fall within certain specified criteria and incorporate
incremental increases based on time passage and payment of certain occupancy-related expenses. In
February 2011, we opened an additional three restaurants, all on leased properties.
We own the underlying land for our Brandon, Florida BWW property. Our Berkley, Michigan Bagger
Daves and our Clinton Township, Michigan BWW restaurants are rented from a related party (please
see Footnote 5 in the Notes to Consolidated Financial Statements section). We own all of the
equipment, furnishings, and fixtures in our restaurants. The Company
also owns a significant amount of leasehold improvements in the
leased facilities.
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The table below sets forth the locations of our restaurants in operation as of March 25, 2011:
Open | Description of | Square | ||||||||
Tenant | Date | Rented Space | Patio? | Feet | ||||||
Company
Headquarters 27680 Franklin Road Southfield, MI 48034 |
N/A | N/A | N/A | 5,340 | ||||||
Flyer Enterprises, Inc. 44671 Mound Road Sterling Heights, MI 48314 |
December 1999 | in-line | no | 6,542 | ||||||
Anker, Inc. 3190 Silver Lake Rd. Fenton, MI 48430 |
April 2001 | end cap | yes | 6,105 | ||||||
TMA Enterprises of Novi, Inc. 44375 Twelve Mile Rd. Novi, MI 48377 |
June 2002 | in-line | no | 6,815 | ||||||
Bearcat Enterprises, Inc. 15745 15 Mile Rd. Clinton Twp., MI 48035 |
December 2003 | free standing | yes | 6,600 | ||||||
MCA Enterprises Brandon, Inc. 2055 Badlands Drive Brandon, FL 33511 |
June 2004 | free standing | yes | 6,600 | ||||||
TMA Enterprises of Ferndale, LLC 280 W. Nine Mile Rd. Ferndale, MI 48220 |
March 2005 | in-line | yes | 7,400 | ||||||
Buckeye Group, LLC 13416 Boyette Rd. Riverview, FL 33569 |
September 2005 | end cap | yes | 6,400 | ||||||
Buckeye Group II 4067 Clark Rd. Sarasota, FL 34233 |
March 2006 | end cap | yes | 6,500 | ||||||
AMC Warren, LLC 29287 Mound Rd. Warren, MI 48092 |
July 2006 | end cap | yes | 6,800 | ||||||
AMC North Port, Inc. 4301 Aiden Lane North Port, FL 34287 |
August 2007 | end cap | yes | 6,395 | ||||||
AMC Riverview, Inc. 10607 Big Bend Road Riverview, FL 33579 |
August 2007 | end cap | yes | 6,400 | ||||||
AMC Grand Blanc, Inc. 8251 Trillium Circle Ave.; Ste. 102 Grand Blanc, MI 48439 |
March 2008 | free standing | yes | 6,000 | ||||||
AMC Troy, Inc. 1873 E. Big Beaver Road Troy, MI 48083 |
July 2008 | end cap | yes | 7,500 | ||||||
AMC Petoskey, Inc. 2180 Anderson Rd., Ste. 150 Petoskey, MI 49770 |
August 2008 | end cap | yes | 6,200 | ||||||
AMC Flint, Inc. G-3192 South Linden Road Flint, MI 48507 |
December 2008 | end cap | yes | 6,400 | ||||||
AMC Port Huron, Inc. 4355 24th Avenue, Suite 1 Port Huron, MI 48059 |
July 2009 | end cap | yes | 6,500 | ||||||
AMC Marquette, Inc. 2500 U.S. Highway 41 West Marquette, MI 49855 |
June 2010 | free standing | yes | 5,606 | ||||||
AMC Chesterfield, Inc. 51346 Gratiot Avenue Chesterfield, MI 48051 |
August 2010 | in-line | yes | 6,250 | ||||||
AMC Ft. Myers, Inc. 9390 Dynasty Drive; Suite 101 Ft. Myers, Florida 33905 |
November 2010 | end cap | yes | 5,303 | ||||||
AMC Traverse City, Inc. 3480 S. Airport Road Traverse City, MI 49684 |
February 2011 | end cap | yes | 6,183 | ||||||
AMC Lakeland, Inc. 3750 US Highway 98 Lakeland, FL 33810 |
February 2011 | free standing | yes | 7,437 | ||||||
Berkley Burgers, Inc. 2972 Coolidge Road Berkley, MI 48072 |
January 2008 | free standing | no | 3,472 | ||||||
Ann Arbor Burgers, Inc. 859 W. Eisenhower Parkway Ann Arbor, MI 48103 |
August 2008 | in-line | no | 3,800 | ||||||
Troy Burgers, Inc. 26054 Novi Road Novi, MI 48375 |
February 2010 | end cap | yes | 4,200 | ||||||
Brighton Burgers, Inc. 110 East Grand River Brighton, MI 48116 |
February 2011 | in-line | yes | 4,643 |
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ITEM 3. | LEGAL PROCEEDINGS |
Occasionally, we are a defendant in litigation arising in the ordinary course of our business,
including claims arising from personal injuries, contract claims, dram shop claims, employment
related claims, and claims from guests or employees alleging injury, illness, or other food
quality, health, or operational concerns. To date, none of these types of litigation, most of which
are typically covered by insurance, has had a material effect on us. We have insured, and continue
to insure, against most of these types of claims.
ITEM 4. | (REMOVED AND RESERVED) |
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The
Companys common stock is traded on the Over The Counter
(OTC) Bulletin Board under the symbol DFRH.
Our stock was granted a trading symbol on October 6, 2008.
The following table sets forth the high and low bid quotations for our common stock for the fiscal
years ended December 26, 2010 and December 27, 2009 as reported by the OTC Bulletin Board:
2010 | 2009 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 5.40 | 1.01 | $ | 5.25 | 0.05 | ||||||||||
Second Quarter |
5.40 | 0.25 | 5.75 | 2.65 | ||||||||||||
Third Quarter |
5.40 | 5.25 | 5.25 | 5.25 | ||||||||||||
Fourth Quarter |
5.25 | 5.25 | 5.40 | 4.00 |
Trading during the above periods was very limited and sporadic. These bid prices reflect
inter-dealer prices, without retail mark ups or mark downs or commissions and may not represent
actual transactions.
Holders
As of December 26, 2010, there were approximately 119 record holders of 18,876,000 shares of the
Companys common stock, excluding shareholders whose stock is held either in nominee name and/or
street name brokerage accounts. Based on the information we obtained from our transfer agent,
Fidelity Transfer Company, 8915 S. 700 E, Suite 102, Sandy, Utah 84070, there were approximately 58
holders of our common stock whose stock is held either in nominee name and/or street name brokerage
accounts as of December 26, 2010.
Dividends
We have not declared or paid any cash dividends on our common stock. It is our policy to preserve
cash for development and other working capital needs and, therefore, do not currently have plans to
pay any cash dividends.
Our future dividend policy will be determined by our Board of Directors and will depend on various
factors, including our results of operations, financial condition, anticipated cash needs, and
plans for expansion.
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Securities Authorized for Issuance Under Equity Compensation Plans
As of December 26, 2010, we had not authorized the issuance of any of our securities in connection
with any form of equity compensation plan. However, on January 27, 2011, the Board adopted the
Diversified Restaurant Holdings, Inc. Stock Incentive Plan of 2011 (the Incentive Plan) and the
Employee Stock Discount Purchase Plan of 2011 (the Purchase Plan) (collectively, the Plans).
On February 14, 2011, the Company filed a Schedule 14C Information Statement indicating that it had
received a written consent from the majority holder of its voting securities approving the Plans.
However, the Company, with agreement of the majority stockholder, has subsequently elected to
disregard the written consent and, in lieu thereof, submit the Plans to the Companys stockholders
for approval at the Companys 2011 Annual Meeting. The Company does not anticipate making any
awards under the Inventive Plan or permitting sales under the Purchase Plan until the Plans have
been approved by the stockholders and a registration statement has been filed. Complete
information concerning the Plans will be contained in the Companys 2011 Proxy Statement.
ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
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.
As of December 26, 2010 it operated 19 BWW restaurants; 13 in Michigan and six in Florida. By the
time of this filing, two additional BWW stores were opened; one in Traverse City, Michigan and one in
Lakeland, Florida. 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
December 26, 2010, the Company owned and operated three Bagger Daves® restaurants in
Southeast Michigan. By the time of this filing, an additional Bagger Daves was opened in
Brighton, Michigan. We also have
Franchise Disclosure Documents approved and filed in Michigan, Indiana, Illinois, and Ohio for our
Bagger Daves concept.
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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
financial statements is reflected in the consolidated balance sheets, statements of
operations, statements of comprehensive (loss) income, statements of stockholders (deficit)
equity, statements of cash flows, and notes to the consolidated financial statements. Refer
to Note 2 in the notes to 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 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
consolidated financial statements for further details.
Restaurant Openings
The following table outlines the restaurant unit information for the years indicated. Total owned
restaurants reflects the number of restaurants owned and operated by DRH for each year. Since the
Companys inception, it managed nine existing BWW restaurants and on February 1, 2010, these
restaurants were acquired by the Company. Total managed restaurants reflects the total number of
restaurants managed and/or owned by the Company. 2009 comparative results are a consolidation of
owned and managed restaurants based on the accounting of an acquisition of entities under common
control (refer to Note 2 in the notes to consolidated financial statements for further
details).
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Beginning of year |
22 | 9 | 8 | 2 | 0 | |||||||||||||||
Acquisitions |
0 | 9 | 0 | 0 | 0 | |||||||||||||||
Openings |
3 | 4 | 1 | 6 | 2 | |||||||||||||||
Planned Openings |
3 | |||||||||||||||||||
Closures |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total owned restaurants |
28 | 22 | 9 | 8 | 2 | |||||||||||||||
Affiliate restaurants under common control |
0 | 0 | 9 | 9 | 9 | |||||||||||||||
Total managed restaurants |
28 | 22 | 18 | 17 | 11 | |||||||||||||||
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Results of Operations
Operating results for fiscal years 2010 and 2009 are expressed in dollars and as a percentage of
revenue in the following table.
December 26 | December 27 | December 26 | December 27 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 45,248,018 | $ | 41,754,515 | 100.0 | % | 100.0 | % | ||||||||
Total revenue |
45,248,018 | 41,754,515 | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses |
||||||||||||||||
Compensation costs |
13,293,945 | 11,470,244 | 29.4 | % | 27.5 | % | ||||||||||
Food and beverage costs |
13,340,619 | 13,029,103 | 29.5 | % | 31.2 | % | ||||||||||
General and administrative |
10,738,464 | 9,728,455 | 23.7 | % | 23.3 | % | ||||||||||
Pre-opening |
654,764 | 164,114 | 1.4 | % | 0.4 | % | ||||||||||
Occupancy |
2,957,902 | 2,935,363 | 6.5 | % | 7.0 | % | ||||||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | 5.9 | % | 5.7 | % | ||||||||||
Total operating expenses |
43,664,827 | 39,691,027 | 96.5 | % | 95.1 | % | ||||||||||
Operating profit |
1,583,191 | 2,063,488 | 3.5 | % | 4.9 | % | ||||||||||
Interest expense |
(1,202,299 | ) | (778,612 | ) | -2.7 | % | -1.9 | % | ||||||||
Other income, net |
28,317 | 259,413 | 0.1 | % | 0.6 | % | ||||||||||
Income before income taxes |
409,209 | 1,544,289 | 0.9 | % | 3.7 | % | ||||||||||
Income tax provision |
125,826 | (350,051 | ) | 0.3 | % | -0.8 | % | |||||||||
Net income |
$ | 535,035 | $ | 1,194,238 | 1.2 | % | 2.9 | % | ||||||||
FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009
Revenue
Total revenue increased $3.50 million or 8.4%. Revenue from four new restaurants, defined as
locations that began operating in fiscal year 2010, was approximately $4.56 million.
In addition, due to the Companys recent fiscal year change, 2010 had
four additional days when compared to 2009. This was offset by a net decrease in revenue of approximately $1.06 million from restaurants that
were operating prior to fiscal year 2010. This includes two restaurants that were not operating
for at least fifteen months by the beginning of fiscal year 2010, a length of time we use to
account for a new locations honeymoon period when doing year-over-year comparisons.
There are a variety of reasons for the increase or decrease in our existing stores. We believe
that the overall economic conditions in Michigan and Florida, particularly high unemployment rates,
contributed to the decline in some of our stores. In addition, we had two remodels that require
temporary partial shutdowns which negatively impacted the short-term performance of these stores.
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The location of specific restaurants also contributes to its year over year sales performance.
Negative performance due to the location of some stores resulted from layoffs at large businesses
in proximity of our stores, road construction of major arteries that drive traffic to our stores
and new competition in some markets. We believe that these impacts are temporary and do not reflect
the long-term outlook for these locations.
Positive performance of existing stores resulted from increased brand awareness, additional
investment in local area marketing, menu price increases and, in some cases, resilience to overall
economic downturn.
Operating Expenses
% of Total Revenue | Change | |||||||||||||||||||
Dec. 26, 2010 | Dec. 27, 2009 | 2010 | 2009 | % | ||||||||||||||||
Operating expenses |
||||||||||||||||||||
Compensation costs |
$ | 13,293,945 | 11,470,244 | 29.4 | % | 27.5 | % | 15.9 | % | |||||||||||
Food and beverage costs |
13,340,619 | 13,029,103 | 29.5 | % | 31.2 | % | 2.4 | % | ||||||||||||
General and administrative |
10,738,464 | 9,728,455 | 23.7 | % | 23.3 | % | 10.4 | % | ||||||||||||
Pre-opening |
654,764 | 164,114 | 1.4 | % | 0.4 | % | 299 | % | ||||||||||||
Occupancy |
2,957,902 | 2,935,363 | 6.5 | % | 7.0 | % | 0.8 | % | ||||||||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | 5.9 | % | 5.7 | % | 13.3 | % | ||||||||||||
Total operating expenses |
$ | 43,664,827 | 39,691,027 | 96.5 | % | 95.1 | % | 10.0 | % | |||||||||||
When comparing the year ended December 26, 2010 to the year ended December 26, 2009, total
operating expenses increased 10.0% as a direct result of the additional locations opened during
2010. Further explanations for fluctuations in the percentage of total revenue are detailed below
as comparisons of the year ended December 26, 2010 to the year ended December 26, 2009.
Compensation costs increased 15.9% primarily due to the addition of staff needed for four new
restaurants that opened in 2010. As a percentage of revenue, compensation costs increased from
27.5% to 29.4%. This increase as a percentage of revenue is primarily attributed to labor
inefficiencies and training associated with new store openings.
Food and beverage costs increased 2.4%. As a percentage of revenue, food and beverage costs
decreased from 31.2% to 29.5%. 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 11.8%. As a percentage of revenue, general and
administrative costs increased from 23.4% to 24.1%, primarily due to an increase in overall
advertising, higher repair and maintenance charges, 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 264.2% due to more restaurants undergoing a construction phase in
2010. As a percentage of revenue, pre-opening costs increased from 0.3% to 1.1% for the same
reason.
Occupancy costs increased 0.8% primarily due to the additional rents assumed with the new
restaurant locations. As a percentage of revenue, occupancy costs decreased from 7.0% to 6.5%
primarily due to negotiated rent reductions in locations where such opportunities existed.
Depreciation and amortization costs increased by 13.3%. As a percentage of revenue, depreciation
and amortization costs increased from 5.7% to 5.9%. This was a result of depreciable equipment
being put into service for a total of four new restaurants in 2010.
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Interest and Taxes
Cash paid for interest was $1,333,190 and $781,913 during the year ended December 26, 2010 and
December 27, 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). In 2010, we booked an income tax benefit of
$125,826 compared to a 2009 income tax provision of $350,051,
respectively, due to the Company being able to use a significant
amount of net operating loss carry forwards associated with the
acquisition.
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 freed 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).
The need for working capital required to operate our business is not significant due to the nature
of the restaurant industry. Restaurant operations are primarily conducted on a cash basis since
customers pay immediately using cash or credit/debit cards, thus limiting our receivables.
Inventory turnover is approximately 2.5 times per week and, with the ability to pay for the
purchase of goods and supplies some time after the receipt of those items (up to 30 days), we
alleviate the need for incremental working capital to support growth.
Cash flow
from operations for the year ended December 26, 2010 is
$4,588,056 compared with
$3,939,406 for the year ended December 27, 2009.
Total capital expenditures for the year were approximately $8.3 million, of which approximately
$5.5 million was for new restaurant construction, $2.3 million is for real estate (see Note 2 for
further details), and $0.5 million 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 and 2011 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 |
| Traverse City, Michigan BWW opened February 7, 2011 |
| Lakeland, Florida BWW opened February 13, 2011 |
| Brighton, Michigan Bagger Daves opened February 27, 2011 |
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 $50,000 on the interior to $500,000 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.
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Mandatory Upgrades
Per a Franchise Agreement dated July 29, 2010 by and between BWWI and Anker, Inc., a wholly-owned
subsidiary of the Company, we are obligated to complete a full remodel of our Fenton, Michigan
location by August 31, 2011. Estimated cost of this remodel will be between $350,000 and $450,000,
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
and will allocate funds to upgrade up to five more locations in 2011.
| Sterling Heights, Michigan BWW in June 2010, we completed a remodel of this location funded by cash from operations in the amount of $97,000. 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 $250,000 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 six 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 $65,000 250,000. These improvements will primarily consist of audio/video equipment upgrades and outdoor patio upgrades. One upgrade may consist of a building expansion to increase the seating capacity. |
Our new Credit Facility has debt covenants that have to be met on a quarterly basis. As of December
26, 2010, we are in compliance with all of them.
In 2010, our liquidity was additionally impacted by the commencement of the following significant
transactions (refer to Note 2 in the consolidated financial statements for more details):
| On February 1, 2010, the Company completed the Affiliates Acquisition, issuing promissory notes totaling $3,134,790 in favor of the sellers. We anticipate expending approximately $626,000 in principal and interest on an annual basis until February 2016 in payment of these notes. |
| 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. During 2010, we expended approximately $1 million in principal and interest in repayment of this facility. We anticipate the annual amount expended for principal and interest payments to be approximately $2,700,000 until the loan matures in May 2017. |
| 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. We anticipate the annual amount expended for principal and interest payments related to this purchase to be $189,000 until the loan matures in June 2030. |
33
Table of Contents
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, per the Amended Agreement, to 32. We have until November 1, 2017 to complete our
development obligations under the Amended Agreement. As of December 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.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and the Report
of Independent Registered Accounting Firm are included at pages F-1 through F-20 of this Annual
Report and are incorporated herein by reference.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of December 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 December 26, 2010.
Evaluation of Internal Control and Procedures
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). There are inherent
limitations in the effectiveness of any system of internal control. Accordingly, even an effective
system of internal control can provide only reasonable assurance with respect to financial
statement preparation.
Under the supervision and with the participation of our management, including our principal
executive and principal financial officers, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 26, 2010. This evaluation was based on
criteria for effective internal control over financial reporting described in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of December 26, 2010. Refer to page [F-12] for managements report.
34
Table of Contents
This Annual Report does not include an attestation report of the companys registered public
accounting firm regarding internal control over financial reporting. Managements report is not
subject to attestation by the companys registered public accounting firm pursuant to Section
404(c) of the Sarbanes-Oxley Act.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the quarter
ended December 26, 2010 that have materially affected, or are reasonably likely to materially
affect the Companys internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
Not applicable.
PART III
Certain information required by this Part III is omitted from this report and is incorporated
by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held in 2011 (the Proxy
Statement).
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated by reference to the Proxy Statement.
35
Table of Contents
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1) Financial Statements. The following financial statements and report of independent
registered public accounting firms of Diversified Restaurant Holdings and its subsidiaries are
filed as part of this report:
| Report of Independent Registered Public Accounting Firm dated March 28, 2011 Silberstein Ungar, PLLC |
| Consolidated Balance Sheets December 26, 2010 and December 27, 2009 |
| Consolidated Statements of Operations |
| Consolidated Statement of Stockholders Equity |
| Consolidated Statements of Cash Flows |
| Notes to Consolidated Financial Statements |
The consolidated financial statements, the notes to the consolidated financial statements, and the
reports of independent registered public accounting firm listed above are incorporated by reference
in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Index to Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
2.1 | Affiliates Acquisition Purchase Agreement dated February 1, 2010
(incorporated by reference to exhibit 2.1 of our Form 8-K filed
February 5, 2010) |
|||
2.2 | Brandon Property Purchase and Sale Agreement dated March 25, 2010
between our subsidiary, MCA Enterprises, Brandon, Inc. and Florida
Wings Group, LLC (incorporated by reference to exhibit 10 of our
Form 8-K filed June 30, 2010). |
|||
3.1 | Articles of Incorporation (incorporated by reference to our
registration statement on Form SB-2 (SEC File Number 333-145316),
as filed with the Securities and Exchange Commission on August 10,
2007) |
|||
3.2 | Amended and Restated Certificate of Incorporation (incorporated by
reference to our registration statement on Form SB-2 (SEC File
Number 333-145316), as filed with the Securities and Exchange
Commission on August 10, 2007) |
|||
3.3 | By-laws (incorporated by reference to our registration statement
on Form SB-2 (SEC File Number 333-145316), as filed with the
Securities and Exchange Commission on August 10, 2007) |
|||
4.0 | Specimen Stock Certificate (incorporated by reference to our
registration statement on Form SB-2 (SEC File Number 333-145316),
as filed with the Securities and Exchange Commission on August 10,
2007) |
|||
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 (incorporated by reference
to exhibit 10.1 of our Form 10-Q filed November 12, 2010) |
|||
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
(incorporated by reference to exhibit 10.2 of our Form 10-Q filed
November 12, 2010) |
|||
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) (incorporated by reference
to exhibit 10.3 of our Form 10-Q filed November 12, 2010) |
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Table of Contents
EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
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.
(incorporated by reference to exhibit 10.4 of our Form 10-Q filed
November 12, 2010) |
|||
10.5 | Amendment to Buffalo Wild Wings Area Development Agreement dated
March 20, 2007 (incorporated by reference to exhibit 10.5 of our
Form 10-Q filed November 12, 2010) |
|||
10.6 | Amendment to Buffalo Wild Wings Area Development Agreement dated
November 5, 2007 (incorporated by reference to exhibit 10.5 of our
Form 10-Q filed November 12, 2010) |
|||
10.7 | 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
(incorporated by reference to exhibit 10.1 to our Form 8-K filed
September 10, 2010) |
|||
10.8 | 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
(incorporated by reference to exhibit 10.2 to our Form 8-K filed
September 10, 2010) |
|||
10.9 | Form of Stock Option Agreement (incorporated by reference to
exhibit 10.1 to our Form 8-K filed August 5, 2010) |
|||
10.10 | Amendment to Buffalo Wild Wings Area Development Agreement dated
December 27, 2003 (incorporated by reference to exhibit 10.12 of
our Form 10-Q filed November 12, 2010) |
|||
10.11 | Real Estate Loan Agreement dated June 23, 2010 between our
subsidiary, MCA Enterprises Brandon, Inc., and Bank of America
N.A. (incorporated by reference to exhibit 10.1 to our Form 10-Q
filed August 10, 2010) |
|||
10.12 | Bridge Loan Agreement dated June 23, 2010 between our subsidiary,
MCA Enterprises Brandon, Inc., and Bank of America N.A.
(incorporated by reference to exhibit 10.2 to our Form 10-Q filed
August 10, 2010). |
|||
10.13 | Buffalo Wild Wings Franchise Agreement dated June 3, 2010 between
our subsidiary, AMC Ft. Myers, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10.4 to
our Form 10-Q filed August 10, 2010). |
|||
10.14 | RBS Credit Agreement dated May 5, 2010 between DRH and RBS (filed
with the Securities and Exchange Commission as an exhibit to the
Companys Form 8-K on May 10, 2010) |
|||
10.15 | Buffalo Wild Wings Retail Center Lease dated December 7, 2009
between our subsidiary, AMC Marquette, Inc., and Centrup
Hospitality, LLC (incorporated by reference to exhibit 10 of our
Form 8-K filed December 11, 2009) |
|||
10.16 | Buffalo Wild Wings Retail Center Lease dated December 2, 2009
between our subsidiary, AMC Chesterfield, Inc., and Chesterfield
Development Company, LLC (incorporated by reference to exhibit 10
for our Form 8-K filed December 7, 2009) |
|||
10.17 | Buffalo Wild Wings Franchise Agreement dated October 20, 2009
between our subsidiary, AMC Marquette, Inc., and Buffalo Wild
Wings International, Inc. (incorporated by reference to exhibit
10.1 of our Form 8-K filed October 26, 2009) |
|||
10.18 | Buffalo Wild Wings Franchise Agreement dated October 20, 2009
between our subsidiary, AMC Chesterfield, Inc., and Buffalo Wild
Wings International, Inc. (incorporated by reference to exhibit
10.2 of our Form 8-K filed October 26, 2009) |
|||
10.19 | Master Lease Agreement dated September 9, 2009 between our
subsidiary, Troy Burgers, Inc., and Novi Town Center Investors,
LLC (incorporated by reference to exhibit 10 of our Form 8-K filed
September 10, 2009) |
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Table of Contents
EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
10.20 | Master Lease Agreement dated February 12, 2009 between our
subsidiary, AMC Flint, Inc., and CoActiv Capital Partners, Inc.
(incorporated by reference to exhibit 10 of our Form 8-K filed
February 17, 2009) |
|||
10.21 | Buffalo Wild Wings Amendment to Area Development Agreement dated
December 10, 2008 between our subsidiary, AMC Wings, Inc., and
Buffalo Wild Wings International, Inc. (incorporated by reference
to exhibit 10.1 of our Form 8-K filed December 15, 2008) |
|||
10.22 | Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between
our subsidiary, AMC Port Huron, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10 of
our form 8-K filed July 8, 2008) |
|||
10.23 | Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between
our subsidiary, AMC Flint, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10 of
our form 8-K filed July 8, 2008) |
|||
10.24 | Retail Center Lease dated June 30, 2008 between our subsidiary,
AMC Port Huron, Inc., and Port Builders, Inc., Walter Sparling and
Mary L. Sparling (incorporated by reference to exhibit 10 of our
form 8-K filed July 7, 2008) |
|||
10.25 | Retail Center Lease dated June 30, 2008 between our subsidiary,
AMC Flint, Inc., and Ramco-Gershenson Properties, L.P.
(incorporated by reference to exhibit 10 of our form 8-K filed
July 7, 2008) |
|||
10.26 | Form of Stock Option Agreement, dated July 30, 2007, entered into
by and between the Company and Directors Gregory Stevens, T.
Michael Ansley, Jay Alan Dusenberry, Jason T. Curtis and David
Ligotti (incorporated by reference to exhibit 10.24 of our Form 10-K filed March 26, 2010) |
|||
14 | Code of Ethics (incorporated by reference to our Form 10-K for the
fiscal year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 31, 2009) |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906
of Sarbanes Oxley Act of 2002 |
38
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated:
March 28, 2011
DIVERSIFIED RESTAURANT HOLDINGS, INC. |
||||
By: | /s/ T. Michael Ansley | |||
T. Michael Ansley | ||||
President, Chief Executive Officer, Director, Chairman of the Board, and Principal Executive Officer |
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures | ||
/s/ T. Michael Ansley
President, Chief Executive Officer, Director, Chairman of the Board, and Principal Executive Officer |
Dated: March 28, 2011 | |
/s/ David G. Burke
Treasurer, Chief Financial Officer, Director, Principal Financial Officer, and Principal Accounting Officer |
Dated: March 28, 2011 | |
/s/ Jason T. Curtis
Chief Operating Officer |
Dated: March 28, 2011 | |
/s/ Jay Alan Dusenberry
Secretary, Director |
Dated: March 28, 2011 | |
/s/ David Ligotti
Director |
Dated: March 28, 2011 | |
/s/ Gregory J. Stevens
Director |
Dated: March 28, 2011 | |
/s/ Joseph M. Nowicki
Director |
Dated: March 28, 2011 | |
/s/ Philip Friedman
Director |
Dated: March 28, 2011 |
39
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC.
Index to Consolidated Financial Statements
F-1 | ||||
F-2 | ||||
CONSOLIDATED FINANCIAL STATEMENTS: |
||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
40
Table of Contents
Silberstein Ungar, PLLC
CPAs and Business Advisors
phone (248) 203-0080
fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025
fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025
www.sucpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Diversified Restaurant Holdings, Inc.
Southfield, MI
Diversified Restaurant Holdings, Inc.
Southfield, MI
We have audited the accompanying consolidated balance sheets of Diversified Restaurant Holdings,
Inc. and Subsidiaries as of December 26, 2010 and December 27, 2009, and the related consolidated
statements of operations, comprehensive income, changes in stockholders equity (deficit), and cash
flows for the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Diversified Restaurant Holdings, Inc. and Subsidiaries
as of December 26, 2010 and December 27, 2009 and the results of its operations and cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Silberstein Ungar, PLLC
|
Silberstein Ungar, PLLC
Bingham Farms, Michigan
March 28, 2011
Bingham Farms, Michigan
March 28, 2011
F-1
Table of Contents
March
28, 2011
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control
over financial reporting that is designed to produce reliable financial statements presented in
conformity with generally accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control. Accordingly, even an effective system of internal
control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Companys system of internal control over financial reporting that is
designed to produce reliable financial statements presented in conformity with generally accepted
accounting principles as of December 26, 2010. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 26, 2010, Diversified Restaurant Holdings,
Inc. maintained an effective system of internal control over financial reporting that is designed
to produce reliable financial statements presented in conformity with generally accepted accounting
principles based on those criteria.
Managements report is not subject to attestation by the companys registered public accounting
firm pursuant to Section 404(c) of the Sarbanes-Oxley Act. Accordingly, this Annual Report does
not include an attestation report of the companys registered public accounting firm regarding
internal control over financial reporting.
Diversified Restaurant Holdings, Inc. |
||
/s/ T. Michael Ansley |
||
Chairman of the Board, President, Chief Executive Officer, |
||
and Principal Executive Officer |
||
/s/ David G. Burke |
||
Chief Financial Officer, Treasurer, Principal Financial Officer, |
||
and Principal Accounting Officer |
F-2
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 1,305,031 | $ | 1,594,362 | ||||
Accounts receivable related party |
| 376,675 | ||||||
Inventory |
339,059 | 307,301 | ||||||
Prepaid assets |
209,708 | 152,702 | ||||||
Other current assets |
43,348 | 42,382 | ||||||
Total current assets |
1,897,146 | 2,473,422 | ||||||
Property and equipment, net (Note 3) |
17,252,599 | 11,655,513 | ||||||
Intangible assets, net (Note 4) |
975,461 | 789,279 | ||||||
Other long-term assets |
63,539 | 11,780 | ||||||
Deferred income taxes (Note 8) |
607,744 | 246,754 | ||||||
Total assets |
$ | 20,796,489 | $ | 15,176,748 | ||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt (Note 6) |
$ | 1,858,262 | $ | 2,443,057 | ||||
Accounts payable |
1,388,397 | 527,151 | ||||||
Accrued liabilities |
1,089,112 | 674,768 | ||||||
Deferred rent |
127,075 | 104,940 | ||||||
Total current liabilities |
4,462,846 | 3,749,916 | ||||||
Accrued rent |
793,774 | 846,014 | ||||||
Deferred rent |
928,757 | 638,024 | ||||||
Related party payable |
| 430,351 | ||||||
Other liabilities interest rate swap |
367,181 | 213,604 | ||||||
Long-term debt, less current portion (Note 6) |
14,706,756 | 6,517,041 | ||||||
Total liabilities |
21,259,314 | 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 |
2,631,304 | 2,356,155 | ||||||
Retained earnings (accumulated deficit) |
(2,728,836 | ) | 423,780 | |||||
Comprehensive (loss) income |
(367,181 | ) | | |||||
Total
stockholders (deficit) equity |
(462,825 | ) | 2,781,798 | |||||
Total
liabilities and stockholders (deficit) equity |
$ | 20,796,489 | $ | 15,176,748 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Revenue |
||||||||
Food and beverage sales |
$ | 45,248,018 | $ | 41,754,515 | ||||
Total revenue |
45,248,018 | 41,754,515 | ||||||
Operating expenses |
||||||||
Compensation costs |
13,293,945 | 11,470,244 | ||||||
Food and beverage costs |
13,340,619 | 13,029,103 | ||||||
General and administrative |
10,738,464 | 9,728,455 | ||||||
Pre-opening |
654,764 | 164,114 | ||||||
Occupancy |
2,957,902 | 2,935,363 | ||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | ||||||
Total operating expenses |
43,664,827 | 39,691,027 | ||||||
Operating profit |
1,583,191 | 2,063,488 | ||||||
Interest expense |
(1,202,299 | ) | (778,612 | ) | ||||
Other income, net |
28,317 | 259,413 | ||||||
Income before income taxes |
409,209 | 1,544,289 | ||||||
Income tax
benefit (provision) |
125,826 | (350,051 | ) | |||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Basic earnings per share as reported |
$ | 0.03 | $ | 0.07 | ||||
Fully diluted earnings per share as reported |
$ | 0.19 | $ | 0.40 | ||||
Weighted average number of common shares outstanding (Notes 1 and 7) |
||||||||
Basic |
18,871,879 | 18,070,000 | ||||||
Diluted |
29,125,000 | 29,020,000 |
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Comprehensive income |
||||||||
Unrealized
changes in fair
value of cash
flow hedges |
(367,181 | ) | | |||||
Comprehensive income |
$ | 167,854 | $ | 1,194,238 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS (DEFICIT) EQUITY
Retained | ||||||||||||||||||||||||
Additional | Earnings | Total | ||||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | (Loss) Income | (Deficit) Equity | |||||||||||||||||||
Balances December 31, 2008 |
18,070,000 | $ | 1,807 | $ | 1,758,899 | $ | 525,332 | $ | | $ | 2,286,038 | |||||||||||||
Share-based compensation (Note 7) |
32,312 | $ | 32,312 | |||||||||||||||||||||
Exercise of employee stockoptions (Note 7) |
6,000 | 1 | 14,999 | $ | 15,000 | |||||||||||||||||||
Shares issued for warrants exercised at $1.00
per share (Note 7) |
550,000 | 55 | 549,945 | $ | 550,000 | |||||||||||||||||||
Dividends
paid prior to acquisition |
(1,295,790 | ) | $ | (1,295,790 | ) | |||||||||||||||||||
Net income |
1,194,238 | $ | 1,194,238 | |||||||||||||||||||||
Balances December 27, 2009 |
18,626,000 | 1,863 | 2,356,155 | 423,780 | 0 | 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) |
| | 25,174 | | | 25,174 | ||||||||||||||||||
Acquisition of BWW restaurants (Note 2) |
| | | (3,134,790 | ) | | (3,134,790 | ) | ||||||||||||||||
Dividends
paid prior to acquisition |
| | | (552,861 | ) | (552,861 | ) | |||||||||||||||||
Unrealized changes in fair value of cash flow hedges |
| | | | (367,181 | ) | (367,181 | ) | ||||||||||||||||
Net income |
| | | 535,035 | | 535,035 | ||||||||||||||||||
Balances December 26, 2010 |
18,876,000 | $ | 1,888 | $ | 2,631,304 | $ | (2,728,836 | ) | $ | (367,181 | ) | $ | (462,825 | ) | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | ||||||
Loss on disposal of property and equipment |
20,966 | 310 | ||||||
Share-based compensation |
25,174 | 32,312 | ||||||
Deferred income taxes |
(360,990 | ) | 353,203 | |||||
Decrease
(increase) in operating assets: |
||||||||
Accounts receivable related party |
376,675 | 165,134 | ||||||
Inventory |
(31,758 | ) | 35,508 | |||||
Prepaid assets |
(57,006 | ) | (41,718 | ) | ||||
Other current assets |
(966 | ) | 4,115 | |||||
Intangible assets |
(82,666 | ) | (48,710 | ) | ||||
Other long-term assets |
(51,759 | ) | (11,780 | ) | ||||
Increase
(decrease) in operating liabilities: |
||||||||
Accounts payable |
861,246 | (272,129 | ) | |||||
Accrued liabilities |
414,344 | 75,498 | ||||||
Accrued rent |
(52,240 | ) | 200,357 | |||||
Deferred rent |
312,868 | (112,470 | ) | |||||
Net cash provided by (used in) operating activities |
4,588,056 | 3,939,406 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(5,827,947 | ) | (718,070 | ) | ||||
Net cash provided by (used in) investing activities |
(5,827,947 | ) | (718,070 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt and notes payable |
3,450,746 | 694,986 | ||||||
Repayments of long-term debt and notes payable |
(2,197,325 | ) | (2,620,629 | ) | ||||
Proceeds from issuance of common stock |
250,000 | 565,000 | ||||||
Dividends
paid prior to acquisition |
(552,861 | ) | (1,295,790 | ) | ||||
Net cash provided by (used in) financing activities |
950,560 | (2,656,433 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(289,331 | ) | 564,903 | |||||
Cash and cash equivalents, beginning of period |
1,594,362 | 1,029,459 | ||||||
Cash and cash equivalents, end of period |
$ | 1,305,031 | $ | 1,594,362 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
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
wholly-owned subsidiaries (collectively referred to as the
Company), including AMC Group, Inc, (AMC), AMC Wings, Inc. (WINGS), and AMC Burgers,
Inc. (BURGERS), develop, own, and operate Buffalo
Wild Wings (BWW) restaurants located throughout Michigan and Florida and the Companys own
restaurant concept, Bagger Daves Legendary Burger TavernTM (Bagger Daves), as
detailed below.
The following organizational chart outlines the corporate
structure of DRH 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 19 BWW restaurants that were in operation as of December 26, 2010.
The Company also executed franchise agreements with Buffalo Wild Wings, Inc. (BWWI) to open two
more restaurants, one in Lakeland, Florida, and one in Traverse City,
Michigan. WINGS
operates 21 BWW restaurants as of March 25, 2011.
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Table of Contents
The Company is economically dependent on retaining its franchise rights with BWWI. As of March 25,
2011, 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, as of March 25, 2011, 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 March 25, 2011. The Company is under contract with BWWI to enter into a total
of 38 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 Brighton, Michigan
restaurant location, Brighton Burgers, Inc. opened to the public on February 27, 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, Illinois, 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.
Principles of Consolidation
The consolidated financial statements include the accounts of DRH and its subsidiaries, AMC, WINGS
and its subsidiaries, and BURGERS and its subsidiaries. The consolidated financial statements also
include the account balances of the nine 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 2010 ended on December 26, 2010,
comprising 52 weeks. Fiscal year 2009 ended on December 27, 2009, comprising 51 weeks
and three days.
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.
There are no separately
reportable business segments at December 26, 2010 and December 27, 2009.
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Table of Contents
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.
All
sales are presented on a net basis and all sales taxes are excluded from revenue.
Accounts Receivable Related Party
Accounts receivable related party were 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 balance at December
27, 2009 related principally to amounts advanced to an affiliate that owns the real estate at one
BWW restaurant. This receivable was paid in full during 2010. Management does not believe any
allowances for doubtful accounts were necessary at December 27, 2009. There are no accounts
receivable related party at December 26, 2010.
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 as of December 26, 2010 and December 27, 2009.
The Companys gift card liability was $109,422 and $30,067 at December 26, 2010 and December 27,
2009, respectively.
Lease Accounting
Certain operating leases provide for minimum annual payments that increase over the life of the
lease. Typically, leases have an initial lease term of between 10 and 15 years and contain renewal
options under which we may extend the terms for periods of three to five years. The aggregate
minimum annual payments are expensed on a straight-line basis commencing at the start of our
construction period and extending over the term of the related lease, with consideration of renewal
options unless management does not intend on renewing the 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, free rent periods, or tenant incentives.
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Table of Contents
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 Expenses 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. Other assets consist primarily of
intangible assets. 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 periods ended December 26, 2010 and December 27,
2009, respectively, no impairments relating to intangible assets with
finite or indefinite lives were
recognized.
Property and Equipment
Property and equipment are recorded at cost. Major improvements and renewals are capitalized. Land
is not depreciated. Buildings are depreciated using the straight-line method over the estimated
useful life, which is typically 39 years. Equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful lives of the assets, which range from
three to seven years. Leasehold improvements, which include the cost of improvements funded by
landlord incentives or allowances, are amortized using the straight-line method over the lesser of
the term of the lease, with consideration of renewal options, or the estimated useful lives of the
assets, which is typically 10 years. Maintenance and repairs are expensed as incurred. Upon
retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the
respective accounts and the related gains or losses are credited or charged to earnings.
Restaurant construction in progress is not amortized or depreciated until the related assets are
placed into service. 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.
During the periods ended December 26, 2010 and December 27, 2009, respectively, no impairments
relating to property and equipment with finite or indefinite lives were recognized.
Advertising
Advertising expenses associated with contributions to the national BWW advertising fund are
expensed as contributed and all other advertising expenses are expensed as incurred. Advertising
expenses were $2,094,383 and $1,771,284 for the years ended December 26, 2010 and December 27,
2009, respectively.
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 were $654,764 and $164,114 for the years ended December 26, 2010 for and December
27, 2009, respectively.
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Table of Contents
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 Common Share
Earnings per share are calculated under the provisions of 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. Basic earnings per common share excludes dilution and is computed by dividing the net
earnings available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share include dilutive common stock
equivalents consisting of stock options determined by the treasury stock method. Restricted stock
units are contingently issuable shares subject to vesting based on performance criteria.
Concentration Risks
Approximately 80% and 79% of the Companys revenues for the years ended December 26, 2010 and
December 27, 2009, respectively, were 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.
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 that was appropriately recorded as interest expense.
The new interest rate swap agreements qualify for hedge accounting. As such, the Company
is accounting 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 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 December 26, 2010 and December 27, 2009 was approximately $9,778,700
and $3,013,000, respectively.
F-12
Table of Contents
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.
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 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 ASC 805-50, Business Combinations: Transactions Between Entities Under Common
Control, the Company accounted for the Affiliates Acquisition as 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 perceived
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.
F-13
Table of Contents
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 and March 9, 2011, the Company converted $1,424,000 and
$2,900,000, respectively, into a term loan through a fixed-rate swap arrangement. The termination
date is May 5, 2017 for both conversions and interest is fixed at a rate of 5.91% for the September
24, 2010 conversion and 6.35% for the March 9, 2011 conversion. Principal and interest payments
are amortized over the life of the loan, with monthly payments of approximately $21,000 for the
September 24, 2010 conversion and approximately $48,000 for the March 9, 2011 conversion.
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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Table of Contents
The remainder of the purchase price for the Brandon Property was financed using the Companys
working capital.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Land |
$ | 385,959 | $ | | ||||
Building |
2,255,246 | | ||||||
Equipment |
8,140,417 | 6,710,092 | ||||||
Furniture and fixtures |
2,216,347 | 1,833,347 | ||||||
Leasehold improvements |
13,925,216 | 11,585,978 | ||||||
Restaurant construction-in-progress |
1,247,265 | 126,804 | ||||||
Total |
28,170,450 | 20,256,221 | ||||||
Less accumulated depreciation |
(10,917,851 | ) | (8,600,708 | ) | ||||
Property and equipment, net |
$ | 17,252,599 | $ | 11,655,513 | ||||
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
December 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 |
(115,246 | ) | (122,064 | ) | ||||
Amortized intangibles, net |
421,079 | 305,751 | ||||||
Unamortized intangibles |
||||||||
Liquor licenses |
554,382 | 483,528 | ||||||
Total intangibles |
$ | 975,461 | $ | 789,279 | ||||
Amortization expense for the years ended December 26, 2010 and December 27, 2009 was $37,470 and
$23,791, respectively. Based on the current intangible assets and their estimated useful lives,
amortization expense for fiscal years 2011, 2012, 2013, 2014, and 2015 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 years ended December 26,
2010 and December 27, 2009, respectively, were $211,631 and $173,291, 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 December 26, 2010 and
December 27, 2009, the carrying amount of the underlying debt obligation of the related entity was
$1,985,467 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 ASC 460 (ASC 460), Guarantees, the initial recognition and measurement provisions
of ASC 460 do not apply. At December 26, 2010, payments on the debt obligation were current.
Long-term debt (Note 6) included two promissory notes in the original 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 were repaid through monthly
installments of approximately $4,444 each over a two-year period which ended in December 2010.
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:
December 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%. |
$ | 8,399,538 | | |||||
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). |
1,141,188 | | ||||||
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. |
915,446 | | ||||||
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 December
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. |
1,424,679 | |
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Table of Contents
December 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 $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%. |
1,379,098 | |||||||
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. |
241,832 | | ||||||
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 December 26, 2010 was
approximately 3.96%. The note was repaid
during 2010. |
| 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. |
12,016 | 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) |
3,051,221 | 354,848 | ||||||
Total long-term debt |
16,565,018 | 8,960,098 | ||||||
Less current portion |
(1,858,262 | ) | (2,443,057 | ) | ||||
Long-term debt, net of current portion |
$ | 14,706,756 | $ | 6,517,041 | ||||
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Scheduled principal maturities of long-term debt for each of the five years succeeding
December 26, 2010, and thereafter, are summarized as follows:
Year | Amount | |||
2011 |
$ | 1,858,262 | ||
2012 |
1,812,624 | |||
2013 |
2,134,724 | |||
2014 |
2,040,548 | |||
2015 |
2,175,219 | |||
Thereafter |
6,543,641 | |||
Total |
$ | 16,565,018 | ||
Interest expense was $1,202,299 and $778,612 (including related party interest expense of
$154,040 and $22,624 for the fiscal years ended December 26, 2010 and December 27, 2009) for the
fiscal years ended December 26, 2010 and December 27, 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 December 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 December 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 $25,174 and $32,312, as determined using the Black-Scholes model, was
recognized during the fiscal years ended December 26, 2010 and December 27, 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
December 26, 2010. The fair value of unvested shares, as determined using the Black-Scholes model,
is $53,244 as of December 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 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 December 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 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 December 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 (provision) benefit for income taxes consists of the following components for the fiscal year
ended December 26, 2010 and December 27, 2009:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Federal |
||||||||
Current |
$ | | $ | | ||||
Deferred |
259,350 | (194,480 | ) | |||||
State |
||||||||
Current |
(36,502 | ) | (17,427 | ) | ||||
Deferred |
(97,022 | ) | (40,157 | ) | ||||
Income Tax (Provision) Benefit |
$ | 125,826 | $ | (252,064 | ) | |||
The (provision) benefit 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:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Income tax (provision) benefit at federal statutory rate |
$ | (87,855 | ) | $ | (207,455 | ) | ||
State income tax (provision) benefit |
(133,524 | ) | (57,585 | ) | ||||
Permanent differences |
(81,799 | ) | (32,111 | ) | ||||
Tax credits |
347,989 | 93,500 | ||||||
Other |
81,015 | (48,413 | ) | |||||
Income tax (provision) benefit |
$ | 125,826 | $ | (252,064 | ) | |||
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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:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carry forwards |
$ | 1,252,609 | $ | 954,370 | ||||
Deferred rent expense |
68,509 | 78,998 | ||||||
Start-up costs |
190,076 | 104,327 | ||||||
Tax credit carry-forwards |
540,533 | 164,366 | ||||||
Swap loss recognized for book |
| 56,970 | ||||||
Other including state deferred tax assets |
487,139 | 193,781 | ||||||
Total deferred assets |
2,538,866 | 1,552,812 | ||||||
Deferred tax liabilities: |
||||||||
Other including state deferred tax assets |
547,522 | 146,325 | ||||||
Tax depreciation in excess of book |
1,505,800 | 1,159,733 | ||||||
Total deferred tax liabilities: |
1,931,122 | 1,306,058 | ||||||
Net deferred income tax assets |
$ | 607,744 | $ | 246,754 | ||||
If deemed necessary by management, the Company establishes valuation allowances in accordance with
the provisions of FASB ASC 740, Income Taxes (ASC 740). 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 $1,241,025 and $2,443,119 will
expire in 2030 and 2028, respectively. General business tax credits of
$347,989, $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 ASC 740 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 December 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 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.
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Table of Contents
9. OPERATING LEASES (INCLUDING RELATED PARTY)
Lease terms range from four to 20 years, with renewal options, and
generally require us to pay a proportionate share of real estate taxes, insurance, common area
maintenance, and other operating costs. Some restaurant leases provide for contingent rental
payments based on sales thresholds.
Total
rent expense was $2,293,195 and $2,443,941 for the fiscal years ended December 26, 2010
and December 27, 2009, respectively (of which $329,721 and
$329,008 for the fiscal years ended
December 26, 2010 and December 27, 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
December 26, 2010 are summarized as follows:
Year | Amount | |||
2011 |
$ | 2,647,419 | ||
2012 |
2,735,598 | |||
2013 |
2,803,344 | |||
2014 |
2,676,717 | |||
2015 |
2,372,943 |
F-21
Table of Contents
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 consolidated financial statements as capital
leases with 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 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 December
26, 2010, of the 32 restaurants required to be opened under the Area Development Agreement, 13 of
these restaurants had been opened for business, leaving a balance of 19 restaurants to be opened by
March 2017. In February 2011, we opened two additional BWW restaurants one in Traverse City,
Michigan and the other in Lakeland, Florida. As of March 25, 2010, we are ahead of schedule and
have 17 more restaurant locations to open.
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
$2,108,061 and $1,996,901 in royalty expense for the fiscal years ended December 26, 2010 and
December 27, 2009, respectively. Advertising fund contribution expenses were $1,290,205 and
$1,215,493 for the fiscal years ended December 26, 2010 and December 27, 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. Please refer to the Liquidity and Capital Resources section of the
Managements Discussion and Analysis above for further details.
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.
F-22
Table of Contents
12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was $1,333,190 and $781,913 during the years ended December 26, 2010 and
December 27, 2009, respectively.
Cash paid for income taxes was $183,441 and $0 during the years ended December 26, 2010 and
December 27, 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 year ended
December 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.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC 820 Fair Value Measurements and
Disclosures, establishes the authoritative definition of fair value, sets out a framework for
measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair
value is the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. We use a three-tier fair value
hierarchy based upon observable and non-observable inputs as follows:
| Level 1 Quoted market prices in active markets for identical assets and liabilities; |
| Level 2 Inputs, other than level 1 inputs, either directly or indirectly observable; and |
| Level 3 Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use. |
As of December 26, 2010 and December 27, 2009, our financial instruments consisted of cash
equivalents, accounts payable, and debt. The fair value of cash equivalents, 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.
The fair value of our interest rate swaps is determined based on third-party valuation models,
which utilize quoted interest rate curves to calculate the forward value and then discount the
forward values to the present period. 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. Our interest rate swaps are classified as a Level 2 measurement as
these securities are not actively traded in the market, but are observable based on transactions
associated with bank loans with similar terms and maturities.
There were no transfers between levels of the fair value hierarchy during the fiscal years ended
December 26, 2010 and December 27, 2009. Unrealized loss associated with interest rate swap
positions in existence at December 26, 2010, which are reflected in the statement of stockholders
(deficit) equity, totaled $367,181 for the fiscal year ended December 26, 2010 and are included in
comprehensive (loss) income.
F-23
Table of Contents
The following table presents the fair values for those assets and liabilities measured on a
recurring basis as of December 26, 2010:
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||
Asset/(Liability) | ||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Total | |||||||||||||||
Interest Rate Swaps |
$ | | (367,181 | ) | | (367,181 | ) | (367,181 | ) |
The following table presents the fair values for those assets and liabilities measured on a
recurring basis as of December 27, 2009:
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||
Asset/(Liability) | ||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Total | |||||||||||||||
Interest Rate Swaps |
$ | | (213,604 | ) | | (213,604 | ) | (213,604 | ) |
As of December 26, 2010, our total debt, less related party debt, was approximately $13.5 million
and had a fair value of approximately $8.7 million. As of December 27, 2009, our total debt, less
related party debt, was approximately $8.6 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.
14. SUBSEQUENT EVENTS
Subsequent
to December 26, 2010, the Company opened its 20th and 21st BWW
restaurants Traverse City, Michigan, opened on February 7, 2011 and Lakeland,
Florida, opened on February 13, 2011.
In
addition, the Company opened its fourth Bagger Daves location in Brighton,
Michigan on February 27, 2011.
The Company evaluated subsequent events for
potential recognition and/or disclosure through the date of the
issuance of these consolidated financial statements.
F-24