Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc. | c09562exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc. | c09562exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc. | c09562exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc. | c09562exv31w1.htm |
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 27, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission File No. 000-53577
DIVERSIFIED RESTAURANT HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 03-0606420 | |
(State or other jurisdiction of incorporation or formation) |
(I.R.S. employer identification number) |
27680 Franklin Road
Southfield, Michigan 48034
(Address of principal executive offices)
Southfield, Michigan 48034
(Address of principal executive offices)
Issuers telephone number: (248) 223-9160
Issuers facsimile number: (248) 223-9165
Issuers facsimile number: (248) 223-9165
No change
(Former name, former address and former
fiscal year, if changed since last report)
(Former name, former address and former
fiscal year, if changed since last report)
Copies to:
Michael T. Raymond, Esq.
Dickinson Wright, PLLC
301 East Liberty, Suite 500
Ann Arbor, Michigan 48104-2266
(734) 623-1663
www.dickinson-wright.com
Michael T. Raymond, Esq.
Dickinson Wright, PLLC
301 East Liberty, Suite 500
Ann Arbor, Michigan 48104-2266
(734) 623-1663
www.dickinson-wright.com
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o No
þ
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 18,876,000 shares of $.0001 par value common stock outstanding as of
December 10, 2010.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Table of Contents
EXPLANATORY NOTE
Diversified Restaurant Holdings, Inc. (DRH or the Company) is filing this Amendment No. 1 on
Form 10-Q/A (Amendment No. 1) to correct certain misstatements made in the Companys financial
statements included in Part I, Item 1 of the Companys quarterly report on Form 10-Q for the
quarter ended June 27, 2010 (Original Quarterly Financial Statements), which were filed with the
Securities and Exchange Commission (SEC) on August 10, 2010 (the Original Filing). The
misstatements and corrections thereto are described in Note 15 to the unaudited consolidated
financial statements. The Company has also amended its Managements Discussion and Analysis
contained in Part I, Item 2 to reflect the changes to the Companys Financial Statements that have
been amended by this Amendment No 1. The Company has also amended its Part I, Item 4 disclosures
regarding controls and procedures and included updated certifications of its Chief Executive
Officer and Chief Financial Officer as Exhibits 31 and 32 to this Amendment No. 1, as required by
Rule 12b-15 promulgated pursuant to the Securities and Exchange Act of 1934, as amended.
Other than as described above, none of the other disclosures in the Original Filing have been
amended or updated. However, for the convenience of the reader, this Amendment No. 1 includes those
unaltered items from the Original Filing in their entirety. This Amendment No. 1 speaks as of the
filing date of the Original Filing, does not reflect events that may have occurred subsequent to
the original filing date, and does not modify or update in any way disclosures made in the Original
Filing other than as described above. Accordingly, this Amendment No. 1 should be read in
conjunction with the Companys filings with the SEC subsequent to the Original Filing.
INDEX
1 | ||||||||
1 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
30 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
38 | ||||||||
39 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
i
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
June 27 | December 27 | |||||||
2010 | 2009 (a) | |||||||
(Restated) | (Restated) | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 668,962 | $ | 1,594,362 | ||||
Accounts receivable related party |
| 376,675 | ||||||
Inventory |
305,517 | 307,301 | ||||||
Prepaid assets |
161,475 | 152,702 | ||||||
Other current assets |
59,227 | 42,382 | ||||||
Total current assets |
1,195,181 | 2,473,422 | ||||||
Property and equipment, net (Note 3) |
15,258,823 | 11,655,513 | ||||||
Intangible assets, net (Note 4) |
956,570 | 751,779 | ||||||
Other long-term assets |
56,144 | 49,280 | ||||||
Deferred income taxes (Note 8) |
567,449 | 246,754 | ||||||
Total assets |
$ | 18,034,167 | $ | 15,176,748 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt (Note 6) |
$ | 2,233,716 | $ | 2,193,057 | ||||
Accounts payable |
759,410 | 527,151 | ||||||
Accrued liabilities |
885,769 | 674,768 | ||||||
Deferred rent |
119,486 | 104,940 | ||||||
Total current liabilities |
3,998,381 | 3,499,916 | ||||||
Accrued rent |
741,369 | 846,014 | ||||||
Deferred rent |
834,272 | 638,024 | ||||||
Related party payable |
| 430,351 | ||||||
Other liabilities interest rate swap |
404,921 | 213,604 | ||||||
Long-term debt, less current portion (Note 6) |
13,054,104 | 6,767,041 | ||||||
Total liabilities |
19,033,047 | 12,394,950 | ||||||
Commitments and contingencies (Notes 5, 6, 9, 10,
and 11) |
||||||||
Stockholders equity (deficit) (Note 7) |
||||||||
Common stock $0.0001 par value;
100,000,000 shares authorized, 18,876,000
and 18,626,000 shares,
respectfully, issued and
outstanding |
1,888 | 1,863 | ||||||
Additional paid-in capital |
2,622,286 | 2,356,155 | ||||||
Retained Earnings (accumulated deficit) |
(3,218,133 | ) | 423,780 | |||||
Comprehensive income (loss) |
(404,921 | ) | | |||||
Total stockholders equity (deficit) |
(998,880 | ) | 2,781,798 | |||||
Total liabilities and stockholders equity (deficit) |
$ | 18,034,167 | $ | 15,176,748 | ||||
(a) | Amounts are derived from audited financial statements as of December 27, 2009. |
The accompanying notes are an integral part of these interim consolidated financial statements.
1
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 27 | June 30 | June 27 | June 30 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 10,683,821 | $ | 10,403,079 | $ | 21,399,699 | $ | 20,833,034 | ||||||||
Total revenue |
10,683,821 | 10,403,079 | 21,399,699 | 20,833,034 | ||||||||||||
Operating expenses |
||||||||||||||||
Compensation costs |
3,397,029 | 2,966,668 | 6,434,026 | 5,765,227 | ||||||||||||
Food and beverage costs |
3,137,948 | 3,295,191 | 6,475,210 | 6,560,295 | ||||||||||||
General and administrative |
2,642,782 | 2,276,075 | 5,083,677 | 4,827,556 | ||||||||||||
Pre-opening |
111,921 | 131,277 | 217,179 | 133,078 | ||||||||||||
Occupancy |
573,619 | 722,175 | 1,333,839 | 1,445,719 | ||||||||||||
Depreciation and amortization |
640,715 | 538,701 | 1,245,604 | 1,027,199 | ||||||||||||
Total operating expenses |
10,504,014 | 9,930,087 | 20,789,535 | 19,759,074 | ||||||||||||
Operating profit |
179,807 | 472,992 | 610,164 | 1,073,960 | ||||||||||||
Interest expense |
(518,143 | ) | (171,156 | ) | (687,876 | ) | (351,203 | ) | ||||||||
Other income (expense), net |
(15,658 | ) | 97,245 | 1,563 | 124,187 | |||||||||||
Income (loss) before income taxes |
(353,994 | ) | 399,081 | (76,149 | ) | 846,944 | ||||||||||
Income tax benefit (provision) |
244,463 | (113,122 | ) | 121,887 | (215,006 | ) | ||||||||||
Net income (loss) |
$ | (109,531 | ) | $ | 285,959 | $ | 45,738 | $ | 631,938 | |||||||
Basic earnings (loss) per share as reported |
$ | (0.006 | ) | $ | 0.016 | $ | 0.002 | $ | 0.035 | |||||||
Fully diluted earnings (loss) per share as reported |
$ | (0.004 | ) | $ | 0.010 | $ | 0.002 | $ | 0.022 | |||||||
Weighted average number of common shares
outstanding (Notes 1 and 7) |
||||||||||||||||
Basic |
18,876,000 | 18,070,000 | 18,873,253 | 18,070,000 | ||||||||||||
Diluted |
29,020,000 | 29,020,000 | 29,020,000 | 29,020,000 | ||||||||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
2
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 27 | June 30 | June 27 | June 30 | |||||||||||||
2010 (Restated) |
2009 (Restated) |
2010 (Restated) |
2009 (Restated) |
|||||||||||||
Net income (loss) |
$ | (109,531 | ) | $ | 285,959 | $ | 45,738 | $ | 631,938 | |||||||
Comprehensive income (loss) |
||||||||||||||||
Unrealized changes in fair value of cash flow hedges |
(404,921 | ) | | (404,921 | ) | | ||||||||||
Comprehensive income (loss) |
$ | (514,452 | ) | $ | 285,959 | $ | (359,183 | ) | $ | 631,938 | ||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
3
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT) (UNAUDITED) (RESTATED)
Retained | ||||||||||||||||||||||||
Additional | Earnings | Total | ||||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (Loss) | Equity (Deficit) | |||||||||||||||||||
Balances December 27, 2009 (a) |
18,626,000 | $ | 1,863 | $ | 2,356,155 | $ | 423,780 | $ | | $ | 2,781,798 | |||||||||||||
Shares issued for warrants exercised at $1.00
per share (Note 7) |
250,000 | 25 | 249,975 | | | 250,000 | ||||||||||||||||||
Share-based compensation (Note 7) |
| | 16,156 | | | 16,156 | ||||||||||||||||||
Acquisition of BWW restaurants (Note 2) |
| | | (3,134,790 | ) | | (3,134,790 | ) | ||||||||||||||||
Distributions |
| | | (552,861 | ) | | (552,861 | ) | ||||||||||||||||
Unrealized changes in fair value of cash
flow hedges |
| | | | (404,921 | ) | (404,921 | ) | ||||||||||||||||
Net income |
| | | 45,738 | | 45,738 | ||||||||||||||||||
Balances June 27, 2010 |
18,876,000 | $ | 1,888 | $ | 2,622,286 | $ | (3,218,133 | ) | $ | (404,921 | ) | $ | (998,880 | ) | ||||||||||
(a) | Amounts are derived from audited financial statements as of December 27, 2009. |
The accompanying notes are an integral part of these interim consolidated financial statements.
4
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended | ||||||||
June 27 | June 30 | |||||||
2010 | 2009 | |||||||
(Restated) | (Restated) | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 45,738 | 631,938 | |||||
Adjustments to reconcile net income to
net cash provided by (used in) operating activities |
||||||||
Depreciation and amortization |
1,245,604 | 1,027,199 | ||||||
Loss on disposal of property and equipment |
217,868 | | ||||||
Share-based compensation |
16,156 | 16,156 | ||||||
Deferred income tax (provision) benefit |
(320,695 | ) | 186,996 | |||||
Changes in operating assets and liabilities that
provided (used) cash |
||||||||
Accounts receivable related party |
376,675 | (93,090 | ) | |||||
Inventory |
1,784 | 22,226 | ||||||
Prepaid assets |
(8,773 | ) | (2,687 | ) | ||||
Other current assets |
(16,845 | ) | 168,370 | |||||
Intangible assets |
(88,329 | ) | (1,210 | ) | ||||
Other assets |
(6,864 | ) | (89,802 | ) | ||||
Accounts payable |
(198,092 | ) | (40,030 | ) | ||||
Accrued liabilities |
211,001 | 226,461 | ||||||
Accrued rent |
(104,645 | ) | 89,620 | |||||
Deferred rent |
210,794 | (56,400 | ) | |||||
Net cash provided by operating activities |
1,581,377 | 2,085,747 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(2,500,490 | ) | (1,459,141 | ) | ||||
Net cash used for investing activities |
(2,500,490 | ) | (1,459,141 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt |
963,065 | 867,529 | ||||||
Repayments of long-term debt |
(666,491 | ) | (757,052 | ) | ||||
Proceeds from issuance of common stock |
250,000 | | ||||||
Distributions |
(552,861 | ) | (797,750 | ) | ||||
Net cash used for financing activities |
(6,287 | ) | (687,273 | ) | ||||
Net increase in cash and cash equivalents |
(925,400 | ) | (60,667 | ) | ||||
Cash and cash equivalents, beginning of period |
1,594,362 | 1,029,459 | ||||||
Cash and cash equivalents, end of period |
$ | 668,962 | $ | 968,792 | ||||
The accompanying notes are an integral part of these interim consolidated financial statements.
5
Table of Contents
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (DRH or the Company) was formed on September 25, 2006.
DRH and its three wholly-owned subsidiaries, AMC Group, Inc, (AMC), AMC Wings, Inc. (WINGS),
and AMC Burgers, Inc. (BURGERS), develop, own, and operate, as well as render management and
advertising services for, Buffalo Wild Wings (BWW) restaurants located throughout Michigan and
Florida and the Companys own restaurant concept, Bagger Daves Legendary Burgers and Fries
(Bagger Daves), as detailed below.
The following organizational chart outlines the corporate structure of the Company and its
subsidiaries, all of which are wholly-owned by the Company. A brief textual description of the
entities follows the organizational chart. DRH is incorporated in the State of Nevada. All other
entities are incorporated or organized in the State of Michigan.
AMC was formed on March 28, 2007 and serves as the operational and administrative center for the
Company. AMC renders management and advertising services to WINGS and its subsidiaries and to
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.
6
Table of Contents
WINGS was formed on March 12, 2007 and serves as a holding company for its BWW restaurants. WINGS,
through its subsidiaries, holds 17 BWW restaurants that are currently in operation. The Company
also executed franchise agreements with Buffalo Wild Wings International, Inc. (BWWI) to open two
more restaurants, one in Chesterfield Township, Michigan and the other in Ft. Myers, Florida. The
Company is currently negotiating another franchise agreement for a BWW restaurant in Traverse City,
Michigan, as was recently announced in a July 27, 2010 press release. The Company anticipates
having this franchise agreement executed by the end of August 2010. These restaurants will be held
by AMC Chesterfield, Inc., AMC Ft. Myers, Inc., and AMC Traverse City, Inc., respectively.
The Company is economically dependent on retaining its franchise rights with BWWI. Each of the
franchise agreements has a specific initial term expiration date ranging from October 10, 2010
through June 3, 2030, depending on the date that 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. Each of the franchise agreements has a
specific expiration date, when factoring in any applicable renewals, ranging from January 29, 2019
through June 3, 2045. The Company is in compliance with the terms of these agreements at June 27,
2010. The Company is under contract with BWWI to facilitate another 19 franchise agreements by
2017. 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. The Company is expanding its
Bagger Daves concept to Brighton, Michigan, as was recently announced in an August 10, 2010 press
release. BURGERS also has a wholly-owned subsidiary named Bagger Daves Franchising Corporation
that was
formed to act as the franchisor for the Bagger Daves concept. We have filed for rights to
franchise in Michigan, Ohio, and Indiana, but have not yet franchised any Bagger Daves
restaurants.
We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB
sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, and cash flows. References to GAAP issued
by the FASB in these footnotes are to the FASB Accounting Standards Codification (Codification or
ASC). The FASB finalized the Codification effective for periods ending on or after September 15,
2009. Prior FASB standards, like FASB Statement No. 13, Accounting for Leases, are no longer being
issued by the FASB. For further discussion of the ASC, refer to the Recent Accounting
Pronouncements section of this note.
Basis of Presentation
The consolidated financial statements as of June 27, 2010 and December 27, 2009, and for the
three-month and six-month periods ended June 27, 2010 and June 30, 2009, have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange Commission. The
financial information as of June 27, 2010 and December 27, 2009 and for the three-month and
six-month periods ended June 27, 2010 and June 30, 2009 is unaudited, but, in the opinion of
management, reflects all adjustments and accruals necessary for a fair presentation of the
financial position, results of operations, and cash flows for the interim periods.
The financial information as of December 27, 2009 is derived from our audited consolidated
financial statements and notes thereto for the fiscal year ended December 27, 2009, which is
included in Item 8 in the Fiscal 2009 Annual Report on Form 10-K and should be read in conjunction
with such financial statements.
7
Table of Contents
The results of operations for the three-month and six-month periods ended June 27, 2010 are not
necessarily indicative of the results of operations that may be achieved for the entire year ending
December 26, 2010.
Principles of Consolidation
The interim consolidated financial statements include the accounts of DRH and its subsidiaries,
AMC, WINGS and its subsidiaries, and BURGERS and its subsidiaries. The interim consolidated
financial statements also include the account balances of the nine recently acquired, affiliated
restaurants resulting from the February 1, 2010 acquisition, as they are now subsidiaries of WINGS
(refer to Note 2 for details).
All significant intercompany accounts and transactions have been eliminated upon consolidation.
Fiscal Year
During 2009, the Company changed its fiscal year to utilize an accounting period that ends on the
last Sunday in December. Consequently, fiscal year 2009 ended on December 27, 2009, comprising 51
weeks and three days. Prior to 2009, the Company reported on a calendar-year basis and,
accordingly, fiscal year 2008 ended on December 31, 2008, comprising 52 weeks and one day. This
quarterly report on Form 10-Q is for the six-month period ended June 27, 2010, comprising 26 weeks.
Segment Reporting
Reportable segments are strategic business units that offer different products and services, are
managed separately because each business requires different executional strategies, cater to
different clients needs, and are subject to regular review by our chief operating decision-maker.
While DRH may be viewed as having two reporting segments, one as a restaurant operator and the
other as a franchisor, the Company has determined it does not meet the quantitative or materiality
thresholds to be considered separately reportable. As such, there are no separately reportable
business segments at June 27, 2010 and December 27, 2009.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company
considers all highly-liquid investments purchased with original maturities of three months or less
to be cash equivalents. The Company, at times throughout the year, may, in the ordinary course of
business, maintain cash balances in excess of federally-insured limits. Management does not
believe the Company is exposed to any unusual risks on such deposits.
Revenue Recognition
Revenues from food and beverage sales are recognized and generally collected at the point of sale.
As a result of the February 1, 2010 acquisition, management and advertising fees are no longer
recognized (refer to Note 2 for details).
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding
balances. Balances that are outstanding after management has used reasonable collection efforts
are written off with a corresponding charge to bad debt expense. The balances at June 27, 2010 and
December 27, 2009, respectively, relate principally to management and advertising fees charged to
and intercompany transactions with the related BWW restaurants that were managed by AMC and arose
in the ordinary course of business (refer to Note 5 for details) prior to the February 1, 2010
acquisition. Refer to Note 2 for details on the recent acquisition, which essentially eliminated
management and advertising fees revenue. Management does not believe any allowances for doubtful
accounts are necessary at June 27, 2010 or December 27, 2009.
8
Table of Contents
Accounting for Gift Cards
The Company records the net increase or decrease in BWW gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. The gift card processor deducts
gift card sales dollars from each restaurants bank account weekly and deposits gift card
redemption dollars weekly. Under this centralized system, any breakage would be recorded by Blazin
Wings, Inc., a subsidiary of BWWI, and be subject to the breakage laws in the state of Minnesota,
where Blazin Wings, Inc. is located.
The Company records the net increase or decrease in Bagger Daves gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. Michigan law states that gift
cards cannot expire and any post-sale fees cannot be assessed until five years after the date of
gift card purchase by the consumer. There is no breakage attributable to Bagger Daves restaurants
for the Company to record for the six months ended June 27, 2010 and for the six months ended June
30, 2009, respectively.
The liability is included in accrued liabilities in the interim consolidated balance sheets. As of
June 27, 2010, the Companys gift card liability was approximately $3,062, compared to
approximately $30,067 at December 27, 2009.
Lease Accounting
Certain operating leases provide for minimum annual payments that increase over the life of the
lease. The aggregate minimum annual payments are expensed on a straight-line basis beginning when
we take possession of the property and extending over the term of the related lease. The amount by
which straight-line rent exceeds actual lease payment requirements in the early years of the lease
is accrued as deferred rent liability and reduced in later years when the actual cash payment
requirements exceed the straight-line expense. The Company also accounts, in its straight-line
computation, for the effect of any rental holidays or tenant incentives.
Inventory
Inventory, which consists mainly of food and beverage products, is accounted for at the lower of
cost or market using the first in, first out method of inventory valuation.
Prepaid, Intangible, and Other Assets
Prepaid assets consist principally of prepaid insurance and are recognized ratably, as operating
expense, over the period covered by the unexpired premium. Amortizable intangible assets consist
principally of franchise fees, trademarks, and loan fees and are deferred and amortized to
operating expense on a straight-line basis over the term of the related underlying agreements based
on the following:
Franchise fees | 10 to 20 years | |
Trademarks | 15 years | |
Loan fees | 2 to 7 years (loan term) |
Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and,
accordingly, are not amortized. Management annually reviews these assets to determine whether
carrying values have been impaired. During the period ended June 27, 2010, no impairments relating
to intangible assets with finite or infinite lives were recognized.
Property and Equipment
Property and equipment are stated at cost. Major improvements and renewals are capitalized, while
ordinary maintenance and repairs are expensed. Management annually reviews these assets to
determine whether carrying values have been impaired.
The Company capitalizes, as restaurant construction in progress, costs incurred in connection with
the design, build out, and furnishing of its 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.
9
Table of Contents
Depreciation and Amortization
Depreciation on equipment and furniture and fixtures is computed using the straight-line method
over the estimated useful lives of the related assets, which range from five to seven years.
Restaurant leasehold improvements are amortized over the shorter of the lease term or the useful
life of the related improvement, whichever is shorter. Restaurant construction in progress is not
amortized or depreciated until the related assets are placed into service.
Advertising
Advertising expenses are recognized in the period in which they are incurred. Advertising expense
was $560,737 for the three months ended June 27, 2010 and $389,193 for the three months ended June
30, 2009. Advertising expense was $1,046,475 for the six months ended June 27, 2010 and $847,566
for the six months ended June 30, 2009.
Pre-opening Costs
Pre-opening costs are those costs associated with opening new restaurants and will vary based on
the number of new locations opening and under construction. These costs are expensed as incurred.
Pre-opening costs for the three months ended June 27, 2010 were $111,921 and $131,277 for the three
months ended June 30, 2009. For the six months ended June 27, 2010, pre-opening costs were
$217,179 and $133,078 for the six months ended June 30, 2009.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in the future, based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets and liabilities.
Earnings per Share
Earnings per share are calculated under the provisions of FASB ASC 260, Earnings per Share. ASC 260
requires a dual presentation of basic and diluted earnings per share on the face of the income
statement. Diluted reflects the potential dilution of all common stock equivalents except in
cases where the effect would be anti-dilutive.
Concentration Risks
Approximately 80% and 79% of food and beverage sales came from restaurants located in Michigan
during the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.
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
disclosures 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 Instruments
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.
10
Table of Contents
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a $15
million credit facility (the Credit Facility) with RBS Citizens, N.A., a national banking
association (RBS), as further described in Notes 2 and 6. The Credit Facility consists of a $6
million loan in the form of a development line of credit and a $9 million senior secured term loan
with a fixed-rate swap arrangement. In conjunction with the Credit Facility, the existing swap
agreements were terminated, resulting in a notional principal amount reduction of $214,074 and a
termination fee of $19,176. The termination fee was recorded as interest expense for the three-
and six-month period ended June 27, 2010.
The Companys interest rate swap liabilities at December 27, 2009 were treated as a fair value
hedge. By contrast, the Company has elected to account for the new interest rate swap using cash
flow hedge accounting. 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 comprehensive
income.
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 June 27, 2010 and December 27, 2009 was $8,914,220 and $3,013,271,
respectively. The expiration dates of these agreements are consistent with debt instruments as
described in Note 6.
Recent Accounting Pronouncements
In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) Number 165 (SFAS
No. 165 or ASC 855-10), Subsequent Events. Companies are now required to disclose the date
through which subsequent events have been evaluated by management. Public entities (as defined)
must conduct the evaluation as of the date the financial statements are issued and provide
disclosure that such date was used for this evaluation. SFAS No. 165 provides that financial
statements are considered issued when they are widely distributed for general use and reliance in
a form and format that complies with GAAP. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009 and
must be applied prospectively. The adoption of ASC 855-10 during the quarter ended September 30,
2009 did not have a significant effect on the Companys financial statements as of that date or for
the quarter or year-to-date period then ended.
In June 2009, the FASB issued SFAS Number 168 (SFAS No. 168 or ASC 105-10), The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162. SFAS No. 168 establishes the Codification as the sole source
of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental
entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 was
prospectively effective for financial statements issued for fiscal years ending on or after
September 15, 2009 and interim periods within those fiscal years. The adoption of ASC 105-10 on
July 1, 2009 did not impact the Companys results of operations or financial condition. The
Codification did not change GAAP, however, it did change the way GAAP is organized and presented.
As a result, these changes impact how companies reference GAAP in its financial statements and in
its significant accounting policies. The Company implemented the Codification in these interim
consolidated financial statements by providing references to the Codification topics alongside
references to the corresponding standards.
In January 2010, the FASB issued Accounting Standards Update (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.
11
Table of Contents
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 managed (Affiliates Acquisition). Under the terms of the agreements,
the purchase price for each of the affiliated restaurants was determined by multiplying each
restaurants average annual earnings before interest, taxes, depreciation, and amortization
(EBITDA) for the previous three (3) fiscal years (2007, 2008, and 2009) by two, and subtracting
the long-term debt of the respective restaurant. Two of the affiliated restaurants did not have a
positive purchase price under the above formula. As a result, the purchase price for those
restaurants was set at $1.00 per membership interest percentage. The total purchase price for
these nine restaurants was $3,134,790. The Affiliates Acquisition was approved by resolution of
the disinterested directors of the Company, who determined that the Affiliates Acquisition terms
were at least as favorable as those that could be obtained through arms-length negotiations with an
unrelated party. The Company paid the purchase price for each of the affiliated restaurants to
each selling shareholder by issuing an unsecured promissory note for the pro-rata value of the
equity interest in the affiliated restaurants. The promissory notes bear interest at 6% per
year, mature on February 1, 2016, and are payable in quarterly installments, with principal and
interest fully amortized over six years.
In accordance with FASB ASC 805-50, Business Combinations: Transactions Between Entities Under
Common Control, the Company accounted for the Affiliates Acquisition, a transaction between
entities under common control, as if the transaction had occurred at the beginning of the period
(i.e., December 27, 2009). Further, prior years amounts also have been retrospectively adjusted to
furnish comparative information while the entities were under common control.
Execution of $15 Million Comprehensive Credit Facility
As introduced above, on May 5, 2010, the Company, together with its wholly-owned subsidiaries,
entered into a $15 million Credit Facility with RBS. 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 seven years 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.
12
Table of Contents
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 DRH, 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. Specifically, the Company caused MCA
Brandon Enterprises, Inc. to enter into a Real Estate Loan Agreement (the Real Estate Loan
Agreement) and a Bridge Loan Agreement (the Bridge Loan Agreement) with Bank of America, N.A.
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 Bridge Loan Agreement provides for a short-term bridge loan in the total principal amount of
$920,000, matures on April 23, 2011 and requires interest-only payments until maturity. The
outstanding amounts borrowed under the Bridge Loan Agreement bear interest at a floating rate,
adjusted daily, equal to the Banks Prime Rate plus 3%. The Bridge Loan Agreement is secured by a
junior mortgage on the Brandon Property; the corporate guaranties of the Company, WINGS, and AMC
Group; and the personal guaranty of T. Michael Ansley.
The Company obtained a Section 504 Authorization for Debenture Guaranty issued by the U.S. Small
Business Administration (SBA) on April 1, 2010. The parties anticipate that the Bridge Loan
Agreement will be replaced by a Section 504 loan from the SBA as soon as the necessary paperwork
has been completed. This process is expected to take approximately 90 120 days. The Section 504
loan will bear a fixed interest rate of 4.93% for its 20-year duration.
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.
13
Table of Contents
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following assets:
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Land |
$ | 385,959 | $ | | ||||
Building |
2,243,861 | | ||||||
Equipment |
7,312,657 | 6,710,092 | ||||||
Furniture and fixtures |
1,974,209 | 1,833,347 | ||||||
Leasehold improvements |
12,590,925 | 11,585,978 | ||||||
Restaurant construction in progress |
365,392 | 126,804 | ||||||
Total |
24,873,003 | 20,256,221 | ||||||
Less accumulated depreciation |
(9,614,180 | ) | (8,600,708 | ) | ||||
Property and equipment, net |
$ | 15,258,823 | $ | 11,655,513 | ||||
On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of the Company,
completed the purchase the Brandon Property; refer to Note 2 for details.
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Amortized intangible assets: |
||||||||
Franchise fees |
$ | 358,750 | $ | 358,750 | ||||
Trademark |
2,500 | 2,500 | ||||||
Loan fees |
149,825 | 66,565 | ||||||
Total |
511,075 | 427,815 | ||||||
Less accumulated amortization |
(96,723 | ) | (122,064 | ) | ||||
Amortized intangible assets, net |
414,352 | 305,751 | ||||||
Unamortized intangible assets: |
||||||||
Liquor licenses |
542,218 | 446,028 | ||||||
Total intangible assets, net |
$ | 956,570 | $ | 751,779 | ||||
Amortization expense for the six months ended June 27, 2010 and June 30, 2009 was $17,263 and
$32,091, respectively. Based on the current intangible assets and their estimated useful lives,
amortization expense for fiscal years 2010, 2011, 2012, 2013, and 2014 is projected to total
approximately $45,500 per year.
5. RELATED PARTY TRANSACTIONS
The Affiliates Acquisition (refer to Note 2 for details) was accomplished through the issuance of
unsecured promissory notes to each selling shareholder. The 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.
Fees for monthly accounting and financial statement compilation services are paid to an entity
owned by a director and stockholder of the Company. Fees paid during the three months ended June
27, 2010 and the three months ended June 30, 2009 were $49,160 and $41,969, respectively. Fees
paid during the six months ended June 27, 2010 and the six months ended June 30, 2009 were $109,594
and $91,796, respectively.
14
Table of Contents
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, which 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 June 27, 2010 and December 27, 2009, the carrying amount of the underlying
debt obligation of the related entity was $1,932,993 and 2,938,000, respectively. The Companys
guarantees extend for the full term of the debt agreements, which expire in 2019. 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 entity for which it has provided the
guarantees operate under common ownership and management control and, in accordance with FASB ASC
460 (ASC 460), Guarantees, the initial recognition and measurement provisions of ASC 460 do not
apply. At June 27, 2010, payments on the debt obligations were current.
Long-term debt (refer to Note 6 for details) contains two promissory notes in the amount of
$100,000 each, along with accrued interest, due to two of DRHs stockholders. The notes commenced
in January
2009, bear interest at a rate of 3.2% per annum, and are being repaid in monthly installments of
approximately $4,444 each over a two-year period.
Current debt (refer to Note 6 for details) 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.
Refer to Note 9 for related party operating lease transactions.
6. LONG-TERM DEBT
Long-term debt consists of the following obligations:
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Senior Secured Term Loan 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%. |
$ | 8,914,220 | | |||||
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). |
1,150,000 | |
15
Table of Contents
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Note payable to a bank secured by a
junior mortgage on the Brandon Property,
corporate guaranties, and a personal
guaranty. The agreement provides for a
short-term bridge loan (which will be
transferred to a long-term SBA loan
within 90 120 days), matures in April
2011, and requires interest-only payments
until maturity. Interest is charged at a
floating rate, adjusted daily, equal to
the Banks Prime Rate plus 3%. The rate
at June 27, 2010 was approximately 6.25%. |
920,000 | | ||||||
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
June 27, 2010 was approximately 4.35%).
In November 2011, if the Company has not
already elected to do so (which is its
intent), 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. |
657,136 | | ||||||
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. |
245,754 | | ||||||
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 June 27, 2010 was approximately
4.05%. The note matures in September
2014. |
48,059 | 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. |
14,592 | 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
Credit Facility. |
| 7,821,912 | ||||||
Obligations under capital leases (Note 10) |
| 693,196 | ||||||
Notes payable related parties (Note 5) |
3,338,059 | 354,848 | ||||||
Total long-term debt |
$ | 15,287,820 | $ | 8,960,098 | ||||
Less current portion |
(2,233,716 | ) | (2,193,057 | ) | ||||
Long-term debt, net of current portion |
$ | 13,054,104 | $ | 6,767,041 | ||||
16
Table of Contents
Scheduled principal maturities of long-term debt for each of the five years succeeding December 27,
2009, and thereafter, are summarized as follows:
Year | Amount | |||
2010 |
$ | 2,233,716 | ||
2011 |
1,575,584 | |||
2012 |
1,777,900 | |||
2013 |
2,099,989 | |||
2014 |
2,004,175 | |||
Thereafter |
5,596,456 | |||
Total |
$ | 15,287,820 | ||
Interest expense was $518,143 and $171,155 (including related party interest expense of $52,581 for
the three months ended June 27, 2010 and $13,971 for the three months ended June 30, 2009; refer to
Note 5 for further details) for the three months ended June 27, 2010 and the three months ended
June 30, 2009, respectively. Interest expense was $687,876 and $351,203 (including related party
interest expense of $61,220 for the six months ended June 27, 2010 and $24,497 for the six months
ended June 30, 2009; refer to Note 5 for further details) for the six months ended June 27, 2010
and the six months ended June 30, 2009, respectively.
The above agreements contain various customary financial covenants generally based on the
performance of the specific borrowing entity and other related entities. The more significant
covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage
ratio, both of which we are in compliance with as of June 27, 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. Once vested, the options can be exercised at a price of $2.50 per share. Stock
option expense of $8,078 and $8,077, as determined using the Black-Scholes model, was recognized
during the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively,
as compensation cost in the consolidated statements of operations and as additional paid-in capital
on the consolidated statement of stockholders equity to reflect the fair value of shares vested as
of June 27, 2010. The fair value of unvested shares, as determined using the Black-Scholes model,
is $2,743 as of June 27, 2010. The fair value of the unvested shares will be amortized ratably
over the remaining vesting term. The valuation methodology used an assumed term based upon the
stated term of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate
and volatility factor of 0 based on the concept of minimum value as defined in FASB ASC 718,
CompensationStock 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.
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 June 27, 2010, 144,000 shares of authorized common stock are
reserved for issuance to provide for the exercise of the Companys stock options.
On November 30, 2006, pursuant to a private placement, DRH issued warrants to purchase 800,000
common shares at a purchase price of $1 per share. These warrants vested over a three-year period
from the issuance date and expired on November 30, 2009. The fair value of these warrants, which
totaled approximately $145,000 as determined using the Black-Scholes model, was recognized as an
offering cost in 2006. The valuation methodology used an assumed term based upon the stated term
of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate and
volatility factor of 0 based on the concept of minimum value as defined in FASB ASC 505-50, Equity
Based Payments to Non-Employees. A dividend yield of 0% was used because the Company has never
paid a dividend and does not anticipate paying dividends in the reasonably foreseeable future. An
extension of time to exercise warrants until December 31, 2009 was approved by resolution of the
disinterested directors of the Company. As of June 27, 2010, all 800,000 warrants were exercised
at the option price of $1 per share.
17
Table of Contents
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 June 27, 2010. Any preferences, rights, voting
powers, restrictions, dividend limitations, qualifications, and terms and conditions of redemption
shall be set forth and adopted by a board of directors resolution prior to issuance of any series
of preferred stock.
8. INCOME TAXES
The benefit (provision) for income taxes consists of the following components for the three and six
months ended June 27, 2010 and the three and six months ended June 30, 2009:
Three Months Ended | Six Months Ended | |||||||||||||||
June 27 | June 30 | June 27 | June 30 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Federal |
||||||||||||||||
Current |
$ | | $ | | $ | | $ | | ||||||||
Deferred |
295,744 | (71,476 | ) | 190,607 | (105,127 | ) | ||||||||||
State |
||||||||||||||||
Current |
(36,502 | ) | | (86,603 | ) | | ||||||||||
Deferred |
(14,779 | ) | 44,808 | 17,883 | 36,698 | |||||||||||
Income tax benefit
(provision) |
$ | 244,463 | $ | (26,668 | ) | $ | 121,887 | $ | (68,429 | ) | ||||||
The benefit (provision) for income taxes is different from that which would be obtained by applying
the statutory federal income tax rate to loss before income taxes. The items causing this
difference are as follows:
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Income tax benefit (provision) at federal statutory rate |
$ | 25,891 | $ | (207,455 | ) | |||
State income tax benefit (provision) |
(68,720 | ) | (57,585 | ) | ||||
Permanent differences |
22,554 | (32,111 | ) | |||||
Tax credits |
70,000 | 93,500 | ||||||
Other |
72,162 | (48,413 | ) | |||||
Income tax benefit (provision) |
$ | 121,887 | $ | (252,064 | ) | |||
18
Table of Contents
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:
June 27 | December 27 | |||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carry forwards |
$ | 757,922 | $ | 954,370 | ||||
Deferred rent expense |
347,500 | 78,998 | ||||||
Start-up costs |
236,851 | 104,327 | ||||||
Tax credit carry forwards |
262,544 | 164,366 | ||||||
Swap loss recognized for book |
| 56,970 | ||||||
Other including state deferred tax assets |
425,757 | 193,781 | ||||||
Total deferred assets |
2,030,574 | 1,552,812 | ||||||
Deferred tax liabilities: |
||||||||
Other including state deferred tax liabilities |
240,113 | 146,325 | ||||||
Tax depreciation in excess of book |
1,223,012 | 1,159,733 | ||||||
Total deferred tax liabilities: |
1,463,125 | 1,306,058 | ||||||
Net deferred income tax assets |
$ | 567,449 | $ | 246,754 | ||||
If deemed necessary by management, the Company establishes valuation allowances in accordance with
the provisions of FASB ASC 740, Income Taxes. Management continually reviews realizability of
deferred tax assets and the Company recognizes these benefits only as reassessment indicates that
it is more likely than not that such tax benefits will be realized.
The Company expects to use net operating loss and general business tax credit carry-forwards before
its 20-year expiration. A significant amount of net operating loss carry forwards were used when
the Company purchased nine affiliated restaurants, which were previously managed by DRH. Net operating
loss carry forwards of $273,141 and $1,956,042 will expire in 2029 and 2028, respectively. General
business tax credits of $70,000, $86,678, $59,722 and $46,144 will expire in 2030, 2029, 2028 and
2027, respectively.
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 June 27, 2010.
In July 2007, the State of Michigan signed into law the Michigan Business Tax Act (MBTA),
replacing the Michigan Single Business Tax, with a business income tax and a modified gross
receipts tax. This new tax took effect January 1, 2008 and, because the MBTA is based on or
derived from income-based measures, the provisions of ASC 740 apply as of the enactment date. The
law, as amended, established a deduction to the business income tax base if temporary differences
associated with certain assets results in a net deferred tax liability as of December 31, 2007 (the
year of enactment of this new tax). This deduction has a carry-forward period to at least tax year
2029. This benefit amounts to $33,762.
The Company is a member of a unitary group with other parties related by common ownership according
to the provisions of the MBTA. This group will file a single tax return for all members. An
allocation of the current and deferred Michigan business tax incurred by the unitary group has been
made based on an estimate of Michigan business tax attributable to the Company and has been
reflected as state income tax expense in the accompanying interim consolidated financial statements
consistent with the provisions of ASC 740.
The Company files income tax returns in the United States federal jurisdiction and various state
jurisdictions.
19
Table of Contents
9. OPERATING LEASES (INCLUDING RELATED PARTY)
Lease terms are generally 10 to 15 years (with the exception of our office lease, which is a
four-year term), with renewal options, and generally require us to pay a proportionate share of
real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant
leases provide for contingent rental payments based on sales thresholds.
The Company previously leased its office facilities under a lease that required monthly payments of
$3,835; this lease expired on April 30, 2010. The Company relocated its general offices, effective
March 1, 2010, signed a new four-year lease for 5,340 sq. ft. of office space that commenced in
March 2010, requires monthly payments of $4,450, expires in May 2014, and contains two two-year
options to extend.
The Company renegotiated its lease for AMC Northport, Inc. Effective March 1, 2009, the base rent
is approximately $6,129, reduced from approximately $12,267, through February 2011. For
consideration of the above rent modification, DRH agreed to guarantee the rent for a period of five
years beginning March 1, 2009. The lease contains two five-year options to extend.
The Company renegotiated its lease for AMC Riverview, Inc. Effective April 2009, the base rent was
reduced from approximately $12,800 to approximately $9,600 through March 2010. An extension to
this rent reduction was later granted through May 2010. Beginning in June 2010, the rent reverted
back to its original $12,800 amount. The lease contains two five-year options to extend.
Flyer Enterprises, Inc. signed a 10-year lease that commenced in December 1999, requires monthly
payments of $11,116 (with 3% annual increases), and expired in December 2009. An option was
exercised on the lease, extending the expiration date to December 2014.
TMA Enterprises of Novi, Inc. signed a 12-year lease that commenced in June 2002, requires monthly
payments of approximately $14,493 (with an approximate 9% rent increase in June 2012), expires in
2014, and contains one five-year renewal option.
Bearcat Enterprises, Inc. signed a 15-year lease, from an entity related through common ownership,
which commenced in February 2004, requires monthly payments of approximately $20,197, expires in
2019, and contains three five-year options to extend.
TMA Enterprises of Ferndale, LLC signed a 10-year lease that commenced in March 2005, requires
monthly payments of approximately $8,864, expires in 2015, and contains two five-year options to
extend.
Buckeye Group II, LLC signed a 10-year lease that commenced in April 2006, requires monthly
payments of approximately $15,102, expires in 2016, and contains two five-year options to extend.
AMC Warren, LLC signed a 10-year lease that commenced in July 2006, requires monthly payments of
approximately $15,755, expires in 2016, and contains two five-year options to extend.
Berkley Burgers, Inc. signed a 15-year lease, from an entity related through common ownership,
which commenced in February 2008, requires monthly payments of approximately $6,300, expires in
February 2023, and contains three five-year options to extend.
AMC Grand Blanc, Inc. signed a 10-year lease that commenced in March 2008, requires monthly
payments of approximately $10,300, expires in 2018, and contains two five-year options to extend.
AMC Troy, Inc. and Ann Arbor Burgers, Inc. both signed 10-year leases that commenced in August
2008, require monthly payments of approximately $13,750 and $6,890, respectfully, expire in 2018,
and contain two five-year options to extend.
20
Table of Contents
AMC Petoskey, Inc. signed a 10-year lease that commenced in August 2008, requires monthly payments
of approximately $9,000, expires in 2018, and contains two five-year options to extend.
AMC Flint, Inc.s signed a 10-year lease that commenced in December 2008, requires monthly payments
of approximately $4,800, expires in 2018, and contains three five-year options to extend.
The Company renegotiated its lease for Buckeye Group, LLC. Effective April 2009, the base rent was
reduced from approximately $13,333 to approximately $9,333. The term of the lease was also
extended through 2017 and contains two five-year options to extend.
AMC Port Huron, Inc. signed a 10-year lease that commenced in June 2009, requires monthly payments
of approximately $6,500, expires in 2019, and contains three five-year options to extend.
Troy Burgers, Inc. signed a 10-year lease that commenced in February 2010, requires monthly
payments of approximately $7,000 (rent is based on a percentage of revenues, not to exceed
approximately $7,000 per month), expires in 2020, and contains two five-year options to extend.
The Company renegotiated its lease for Anker, Inc. Effective March 2010, the base rent was reduced
from approximately $9,354 to approximately $6,800 through April 2021. The term of the lease was
also extended through April 2021 and contains two five-year options to extend.
AMC Marquette, Inc. signed a 15-year lease that commenced in June 2010, requires monthly payments
of approximately $8,700, expires in 2025, and contains three five-year options to extend.
Total rent expense was $573,619 and $712,880 for the three months ended June 27, 2010 and June 30,
2009, respectively (of which $82,538 and $81,463 for the three months ended June 27, 2010 and June
30, 2009, respectively, were paid to a related party). Rent expense was $1,333,839 and $1,444,331
for the six months ended June 27, 2010 and June 30, 2009, respectively (of which $165,341 and
$162,927 for the six months ended June 27, 2010 and June 30, 2009, respectively, were paid to a
related party).
Scheduled future minimum lease payments for each of the five years and thereafter for
non-cancelable operating leases with initial or remaining lease terms in excess of one year at June
27, 2010 are summarized as follows:
Year | Amount | |||
2010 |
$ | 2,633,067 | ||
2011 |
2,476,780 | |||
2012 |
2,558,860 | |||
2013 |
2,624,804 | |||
2014 |
2,496,364 | |||
Thereafter |
6,155,604 | |||
Total |
$ | 18,945,479 | ||
10. CAPITAL LEASES
Starting January 2009 through February 2010, the Company entered into agreements to sell and
immediately lease back various equipment and furniture at its Flint BWW, Port Huron BWW, and Novi
Bagger Daves locations, respectively. These leases required between 36 and 48 monthly payments of
approximately $29,787 combined, including applicable taxes, with options to purchase the assets
under lease for a range of $1 to $100 at the conclusion of the lease. These transactions, prior to
the Credit Facility, were reflected in the interim consolidated financial statements as capital
leases with a combined asset values recorded at their combined purchase price of $1,108,780 and
depreciated as purchased furniture and equipment, and the lease obligations included in long-term
debt at its present value. As a result of the Senior Secured Term Loan of the Credit Facility
(refer to Note 2 for details), these lease obligations were paid in full, along with applicable
prepayment penalties.
21
Table of Contents
11. COMMITMENTS AND CONTINGENCIES
Prior to 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 by the subsidiary 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
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 their 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 June 27,
2010, of the 38 restaurants required to be opened, 17 of these restaurants, including six that were
in operation prior to the initial Area Development Agreement, had been opened for business.
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
$491,898 and $496,369 in royalty expense for the three months ended June 27, 2010 and the three
months ended June 30, 2009, respectively. The Company incurred $994,728 and $994,976 in royalty
expense for the six months ended June 27, 2010 and the six months ended June 30, 2009,
respectively. Advertising fund contribution expenses were $296,556 and $293,674 for the three
months ended June 27, 2010 and the three months ended June 30, 2009, respectively. Advertising
fund contribution expenses were $612,620 and $619,313 for the three months ended June 27, 2010 and
the three months ended June 30, 2009, respectively.
The Company is required by its various BWWI franchise agreements to modernize the restaurants
during the term of the agreements. The individual agreements generally require improvements
between the fifth year and the tenth year to meet the most current design model that BWWI has
approved. The modernization costs can range from approximately $50,000 to approximately $500,000
depending on the individual restaurants needs.
The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and
threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of
any litigation is uncertain. While unfavorable outcomes could have adverse effects on the
Companys business, results of operations, and financial condition, management believes that the
Company is adequately insured and does not believe that any pending or threatened proceedings would
adversely impact the Companys results of operations, cash flows, or financial condition.
12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was $518,143 and $171,155 during the three months ended June 27, 2010 and
the three months ended June 30, 2009, respectively. Cash paid for interest was $687,876 and
$351,203 during the six months ended June 27, 2010 and the six months ended June 30, 2009,
respectively.
Cash paid for income taxes was $15,457 and $0 during the three months ended June 27, 2010 and the
three months ended June 30, 2009, respectively. Cash paid for income taxes was $110,436 and $0
during the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.
22
Table of Contents
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Capital expenditures of $250,000 were funded by capital lease borrowing during the six months ended
June 27, 2010.
The Company issued promissory notes totaling $3,134,790 to the sellers to fund the February 1, 2010
Affiliates Acquisition.
The $9 million Senior Secured Term Loan of the new Credit Facility paid off $8,577,071 of existing
debt.
Approximately $2.3 million of long-term assets and debt were assumed in the Brandon Property
purchase.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 27, 2010 and December 27, 2009, our financial instruments consisted of cash equivalents,
accounts receivable, accounts payable and debt. The fair value of cash equivalents, accounts
receivable, accounts payable and short-term debt approximates its carrying value, due to its
short-term nature. Also, the fair value of notes payable related party approximates carrying
value due to its short-term maturities. As of June 27, 2010, our total debt, less related party
debt, was approximately $11.9 million and had a fair value of approximately $8.9 million. As of
December 27, 2009, our total debt was approximately $8.5 million and had a fair value of
approximately $8.7 million. The Company estimates the fair value of its fixed-rate debt using
discounted cash flow analysis based on the Companys incremental borrowing rate.
There was no impact for adoption of FASB ASC 820, Fair Value Measurements and Disclosures (ASC
820), to the consolidated financial statements as of September 30, 2009. ASC 820 requires fair
value measurement to be classified and disclosed in one of the following three categories:
| Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. |
| Level 2: Quoted prices in markets that are not active or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no market
activity). |
Interest rate swaps held by the Company for risk management purposes are not actively traded. The
Company measures the fair value using broker quotes which are generally based on market observable
inputs including yield curves and the value associated with counterparty credit risk. The interest
rate swaps discussed in Notes 1 and 6 fall into the Level 2 category under the guidance of ASC 820.
The fair market value of the interest rate swaps as of June 27, 2010 was a liability of $404,921,
which is recorded in other liabilities on the consolidated balance sheet. The fair value of the
interest rate swaps at December 27, 2009 was a liability of $213,604. Unrealized loss associated
with interest rate swap positions in existence at June 27, 2010, which are reflected in the
statement of stockholders (deficit) equity, totaled $404,921 for the six months ended June 27,
2010 and are included in comprehensive (loss) income.
23
Table of Contents
14. SUBSEQUENT EVENTS
On July 31, 2010, the Company entered into a stock option agreement (Stock Option Agreement) with
each of its directors as compensation for their services as directors, including T. Michael Ansley,
who serves as the Companys President and Chief Executive Officer, and David G. Burke, who serves
as the Companys Chief Financial Officer and Treasurer; refer to our 8-K filing of August 5, 2010
for further details. The Stock Option Agreements granted each of the directors, including Mr.
Ansley and Mr. Burke, the option to purchase 30,000 shares of common stock exercisable at $2.50 per share. The options
expire on July 31, 2016. The options and the underlying shares of common stock are restricted
securities. The options vest for each of the directors according the schedule set forth below,
subject to continued service as a director:
Director | Option Vesting Dates | |
T. Michael Ansley
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
David G. Burke
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Jay A. Dusenberry
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
David Ligotti
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Gregory J. Stevens
|
10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013 |
|
Bill McClintock
|
10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013 |
|
Joseph M. Nowicki
|
10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013 |
Effective July 29, 2010, the Company exercised an option, with BWWI, to renew its Anker, Inc.
franchise agreement. |
On August 10, 2010, the Company announced the expansion of its Bagger Daves concept to the
Brighton, Michigan area. The new Bagger Daves restaurant is anticipated to open by the end of the
year.
The Company evaluated subsequent events for potential recognition and/or disclosure through August
10, 2010, the date the interim consolidated financial statements were issued.
15. RESTATEMENTS
The restated financial statements included in Part I, Item 1 of this Form 10-Q/A Amendment No. 1
(Restated Financial Statements) restate the financial statements included in Part I, Item 1 of
the Companys quarterly report on Form 10-Q for the quarter ended June 27, 2010 (Original
Quarterly Financial Statements), which were filed with the SEC on August 10, 2010 (the Original
Filing).
On February 1, 2010, the Company completed the Affiliates Acquisition. The Original Quarterly
Financial Statements included the activity from the Affiliates Acquisition commencing as of
February 1, 2010. However, upon re-evaluation of the Original Quarterly Financial Statements in
light of FASB ASC 805-50, Business Combinations: Transactions Between Entities Under Common
Control, the Company has determined that the Affiliates Acquisition, as a transaction between
entities under common control, should have been accounted for as if the transaction had occurred at
the beginning of the period (i.e., December 28, 2009). Further, financial statements and financial information presented in
the Original Quarterly Financial Statements for prior years should also have been retrospectively
adjusted to furnish comparative information while the entities were under common control. The Companys Restated Financial Statements include the
activity of the acquired affiliates for the full 2009 and 2010 years.
In addition, the Company incorrectly incorporated the acquired entities landlord allowance balance
(recorded as deferred revenue per accounting standards) as a temporary difference for book versus
tax rent in the Original Quarterly Financial Statements. In accordance with FASB 740-10-25, Income
Taxes, only the amortization of the landlord allowance is a temporary difference. The Companys
Restated Financial Statements includes only the amortization of the landlord allowance as a
temporary difference.
Lastly, the Company miscalculated the basic and diluted weighted average number of common shares outstanding for the three- and six-month period ended June 27, 2010. No other financial statement line items were affected by this miscalculation. The Company’s Restated Financial Statements reflect this correction.
24
Table of Contents
A summary comparison of the Original Quarterly Financial Statements to the Restated Financial
Statements showing the material net effect of the Restatement follows:
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 27, 2010 | December 27, 2009 | |||||||||||||||||||||||
As Previously | As | As Previously | As | |||||||||||||||||||||
Reported | Adjustments | Restated | Reported | Adjustments | Restated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Total current assets |
1,195,181 | | 1,195,181 | 1,144,061 | 1,329,361 | 2,473,422 | ||||||||||||||||||
Deferred income taxes |
786,942 | (219,493 | ) | 567,449 | 246,754 | | 246,754 | |||||||||||||||||
Total other long-term assets |
16,271,537 | | 16,271,537 | 8,327,412 | 4,129,160 | 12,456,572 | ||||||||||||||||||
Total assets |
$ | 18,253,660 | $ | (219,493 | ) | $ | 18,034,167 | $ | 9,718,227 | $ | 5,458,521 | $ | 15,176,748 | |||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||||||
Total current liabilities |
3,998,381 | | 3,998,381 | 2,080,354 | 1,419,562 | 3,499,916 | ||||||||||||||||||
Total long-term liabilities |
15,034,666 | | 15,034,666 | 5,445,161 | 3,449,873 | 8,895,034 | ||||||||||||||||||
Total liabilities |
19,033,047 | | 19,033,047 | 7,525,515 | 4,869,435 | 12,394,950 | ||||||||||||||||||
Stockholders equity (deficit) |
||||||||||||||||||||||||
Common stock |
1,888 | | 1,888 | 1,863 | | 1,863 | ||||||||||||||||||
Additional paid-in capital |
2,622,286 | | 2,622,286 | 2,356,155 | | 2,356,155 | ||||||||||||||||||
Retained earnings (accumulated deficit) |
(2,998,640 | ) | (219,493 | ) | (3,218,133 | ) | (165,306 | ) | 589,086 | 423,780 | ||||||||||||||
Comprehensive (loss) income |
(404,921 | ) | | (404,921 | ) | | | | ||||||||||||||||
Total stockholders equity (deficit) |
(779,387 | ) | (219,493 | ) | (998,880 | ) | 2,192,712 | 589,086 | 2,781,798 | |||||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 18,253,660 | $ | (219,493 | ) | $ | 18,034,167 | $ | 9,718,227 | $ | 5,458,521 | $ | 15,176,748 | |||||||||||
25
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 27, 2010 | Three Months Ended June 30, 2009 | |||||||||||||||||||||||
As Previously | As | As Previously | As | |||||||||||||||||||||
Reported | Adjustments | Restated | Reported | Adjustments | Restated | |||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Food and beverage sales |
$ | 10,683,821 | $ | | $ | 10,683,821 | $ | 4,305,776 | $ | 6,097,303 | $ | 10,403,079 | ||||||||||||
Management and advertising fees |
| | | 441,276 | (441,276 | ) | | |||||||||||||||||
Total revenue |
10,683,821 | | 10,683,821 | 4,747,052 | 5,656,027 | 10,403,079 | ||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
3,397,029 | | 3,397,029 | 1,491,686 | 1,474,982 | 2,966,668 | ||||||||||||||||||
Food and beverage costs |
3,137,948 | | 3,137,948 | 1,348,406 | 1,946,785 | 3,295,191 | ||||||||||||||||||
General and administrative |
2,642,782 | | 2,642,782 | 1,019,158 | 1,256,917 | 2,276,075 | ||||||||||||||||||
Pre-opening |
111,921 | | 111,921 | 131,277 | | 131,277 | ||||||||||||||||||
Occupancy |
573,619 | | 573,619 | 275,805 | 446,370 | 722,175 | ||||||||||||||||||
Depreciation and amortization |
640,715 | | 640,715 | 358,439 | 180,262 | 538,701 | ||||||||||||||||||
Total operating expenses |
10,504,014 | | 10,504,014 | 4,624,771 | 5,305,316 | 9,930,087 | ||||||||||||||||||
Operating profit |
179,807 | | 179,807 | 122,281 | 350,711 | 472,992 | ||||||||||||||||||
Interest expense |
(518,143 | ) | | (518,143 | ) | (104,585 | ) | (66,571 | ) | (171,156 | ) | |||||||||||||
Other income (expense), net |
(15,658 | ) | | (15,658 | ) | 79,295 | 17,950 | 97,245 | ||||||||||||||||
Income (loss) before income taxes |
(353,994 | ) | | (353,994 | ) | 96,991 | 302,090 | 399,081 | ||||||||||||||||
Income tax benefit (provision) |
244,463 | | 244,463 | (26,668 | ) | (86,454 | ) | (113,122 | ) | |||||||||||||||
Net income (loss) |
$ | (109,531 | ) | $ | | $ | (109,531 | ) | $ | 70,323 | $ | 215,636 | $ | 285,959 | ||||||||||
Basic earnings (loss) per share as reported |
$ | (0.006 | ) | 0.00 | $ | (0.006 | ) | $ | 0.004 | $ | 0.012 | $ | 0.016 | |||||||||||
Fully diluted earnings (loss) per share as
reported |
$ | (0.004 | ) | (0.00 | ) | $ | (0.004 | ) | $ | 0.002 | $ | 0.007 | $ | 0.010 | ||||||||||
Weighted average number of common shares
outstanding |
||||||||||||||||||||||||
Basic |
18,870,505 | 5,495 | 18,876,000 | 18,070,000 | | 18,070,000 | ||||||||||||||||||
Diluted |
29,160,000 | (140,000 | ) | 29,020,000 | 29,020,000 | | 29,020,000 |
26
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended June 27, 2010 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||
As Previously | As | As Previously | As | |||||||||||||||||||||
Reported | Adjustments | Restated | Reported | Adjustments | Restated | |||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Food and beverage sales |
$ | 19,325,822 | $ | 2,073,877 | $ | 21,399,699 | $ | 8,440,786 | $ | 12,392,248 | $ | 20,833,034 | ||||||||||||
Management and advertising fees |
165,886 | (165,886 | ) | | 897,805 | (897,805 | ) | | ||||||||||||||||
Total revenue |
19,491,708 | 1,907,991 | 21,399,699 | 9,338,591 | 11,494,443 | 20,833,034 | ||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
5,983,841 | 450,185 | 6,434,026 | 2,850,893 | 2,914,334 | 5,765,227 | ||||||||||||||||||
Food and beverage costs |
5,810,496 | 664,714 | 6,475,210 | 2,630,402 | 3,929,893 | 6,560,295 | ||||||||||||||||||
General and administrative |
4,675,377 | 408,300 | 5,083,677 | 2,125,829 | 2,701,727 | 4,827,556 | ||||||||||||||||||
Pre-opening |
217,179 | | 217,179 | 133,078 | | 133,078 | ||||||||||||||||||
Occupancy |
1,183,785 | 150,054 | 1,333,839 | 550,202 | 895,517 | 1,445,719 | ||||||||||||||||||
Depreciation and amortization |
1,163,275 | 82,329 | 1,245,604 | 704,844 | 322,355 | 1,027,199 | ||||||||||||||||||
Total operating expenses |
19,033,953 | 1,755,582 | 20,789,535 | 8,995,248 | 10,763,826 | 19,759,074 | ||||||||||||||||||
Operating profit |
457,755 | 152,409 | 610,164 | 343,343 | 730,617 | 1,073,960 | ||||||||||||||||||
Interest expense |
(668,426 | ) | (19,450 | ) | (687,876 | ) | (215,892 | ) | (135,311 | ) | (351,203 | ) | ||||||||||||
Other income (expense), net |
(2,567 | ) | 4,130 | 1,563 | 90,514 | 33,673 | 124,187 | |||||||||||||||||
Income (loss) before income taxes |
(213,238 | ) | 137,089 | (76,149 | ) | 217,965 | 628,979 | 846,944 | ||||||||||||||||
Income tax benefit (provision) |
354,979 | (233,092 | ) | 121,887 | (68,429 | ) | (146,577 | ) | (215,006 | ) | ||||||||||||||
Net income (loss) |
$ | 141,741 | $ | (96,003 | ) | $ | 45,738 | $ | 149,536 | $ | 482,402 | $ | 631,938 | |||||||||||
Basic earnings per share as reported |
$ | 0.008 | $ | (0.005 | ) | $ | 0.002 | $ | 0.008 | $ | 0.027 | $ | 0.035 | |||||||||||
Fully diluted earnings per share as
reported |
$ | 0.005 | $ | (0.003 | ) | $ | 0.002 | $ | 0.005 | $ | 0.017 | $ | 0.022 | |||||||||||
Weighted average number of common
shares
outstanding |
||||||||||||||||||||||||
Basic |
18,870,505 | 2,748 | 18,873,253 | 18,070,000 | | 18,070,000 | ||||||||||||||||||
Diluted |
29,090,000 | (70,000 | ) | 29,020,000 | 29,020,000 | | 29,020,000 |
27
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) (UNAUDITED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) (UNAUDITED)
Retained Earnings | Accumulated Other | |||||||||||||||||||||||
Common Stock | Additional | (Accumulated | Comprehensive | Total Stockholders | ||||||||||||||||||||
BALANCES AS PREVIOUSLY REPORTED: | Shares | Amount | Paid-In Capital | Deficit) | Income (Loss) | Equity (Deficit) | ||||||||||||||||||
Balances December 27, 2009 |
18,626,000 | $ | 1,863 | $ | 2,356,155 | $ | (165,306 | ) | $ | | $ | 2,192,712 | ||||||||||||
Shares issued for warrants |
250,000 | 25 | 249,975 | | | 250,000 | ||||||||||||||||||
Share-based compensation |
| | 16,156 | | | 16,156 | ||||||||||||||||||
Aquisition of BWW restaurants |
| | | (2,975,075 | ) | | (2,975,075 | ) | ||||||||||||||||
Distributions |
| | | | | | ||||||||||||||||||
Unrealized changes in fair
value of cash flow hedges |
| | | | (404,921 | ) | (404,921 | ) | ||||||||||||||||
Net income |
| | | 141,741 | | 141,741 | ||||||||||||||||||
Balances June 27, 2010 |
18,876,000 | $ | 1,888 | $ | 2,622,286 | $ | (2,998,640 | ) | $ | (404,921 | ) | $ | (779,387 | ) | ||||||||||
Retained Earnings | Accumulated Other | |||||||||||||||||||||||
Common Stock | Additional | (Accumulated | Comprehensive | Total Stockholders | ||||||||||||||||||||
ADJUSTMENTS: | Shares | Amount | Paid-In Capital | Deficit) | Income (Loss) | Equity (Deficit) | ||||||||||||||||||
Balances December 27, 2009 |
| | | 589,086 | | 589,086 | ||||||||||||||||||
Shares issued for warrants |
| | | | | | ||||||||||||||||||
Share-based compensation |
| | | | | | ||||||||||||||||||
Aquisition of BWW restaurants |
| | | (159,715 | ) | | (159,715 | ) | ||||||||||||||||
Distributions |
| | | (552,861 | ) | | (552,861 | ) | ||||||||||||||||
Unrealized changes in fair
value of cash flow hedges |
| | | | | | ||||||||||||||||||
Net income |
| | | (96,003 | ) | | (96,003 | ) | ||||||||||||||||
Balances June 27, 2010 |
| | | (219,493 | ) | | (219,493 | ) | ||||||||||||||||
Retained Earnings | Accumulated Other | |||||||||||||||||||||||
Common Stock | Additional | (Accumulated | Comprehensive | Total Stockholders | ||||||||||||||||||||
BALANCES AS RESTATED: | Shares | Amount | Paid-In Capital | Deficit) | Income (Loss) | Equity (Deficit) | ||||||||||||||||||
Balances December 27, 2009 |
18,626,000 | $ | 1,863 | $ | 2,356,155 | $ | 423,780 | $ | | $ | 2,781,798 | |||||||||||||
Shares issued for warrants |
250,000 | 25 | 249,975 | | | 250,000 | ||||||||||||||||||
Share-based compensation |
| | 16,156 | | | 16,156 | ||||||||||||||||||
Aquisition of BWW restaurants |
| | | (3,134,790 | ) | | (3,134,790 | ) | ||||||||||||||||
Distributions |
| | | (552,861 | ) | | (552,861 | ) | ||||||||||||||||
Unrealized changes in fair
value of cash flow hedges |
| | | | (404,921 | ) | (404,921 | ) | ||||||||||||||||
Net income |
| | | 45,738 | | 45,738 | ||||||||||||||||||
Balances June 27, 2010 |
18,876,000 | 1,888 | 2,622,286 | (3,218,133 | ) | (404,921 | ) | (998,880 | ) | |||||||||||||||
28
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 27, 2010 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||
As Previously | As | As Previously | As | |||||||||||||||||||||
Reported | Adjustments | Restated | Reported | Adjustments | Restated | |||||||||||||||||||
Net cash provided by operating activities |
1,674,856 | (93,479 | ) | 1,581,377 | 1,116,224 | 969,523 | 2,085,747 | |||||||||||||||||
Net cash used in investing activities |
(2,501,501 | ) | 1,011 | (2,500,490 | ) | (1,127,110 | ) | (332,031 | ) | (1,459,141 | ) | |||||||||||||
Net cash provided by financing activities |
846,089 | (852,376 | ) | (6,287 | ) | 301,133 | (988,406 | ) | (687,273 | ) | ||||||||||||||
Net increase in cash and cash equivalents |
19,444 | (944,844 | ) | (925,400 | ) | 290,247 | (350,914 | ) | (60,667 | ) | ||||||||||||||
Cash and cash equivalents, beginning of
period |
649,518 | 944,844 | 1,594,362 | 133,865 | 895,594 | 1,029,459 | ||||||||||||||||||
Cash and cash equivalents, end of period |
$ | 668,962 | $ | | $ | 668,962 | $ | 424,112 | $ | 544,680 | $ | 968,792 | ||||||||||||
29
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated interim financial statements and related notes
included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial
statements and related notes and Managements Discussion and Analysis of Financial Condition and
Results from Operations contained in our Form 10-K for the fiscal year ended December 27, 2009.)
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q may contain information that includes
or is based upon certain forward-looking statements relating to our business. These
forward-looking statements represent managements current judgment and assumptions, and can be
identified by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements are frequently accompanied by the use of such words as anticipates,
plans, believes, expects, projects, intends, and similar expressions. Such
forward-looking statements involve known and unknown risks, uncertainties, and other factors,
including, while it is not possible to predict or identify all such risks, uncertainties, and other
factors, those relating to our ability to secure the additional financing adequate to execute our
business plan; our ability to locate and start up new restaurants; acceptance of our restaurant
concepts in new market places; the cost of food and other raw materials. Any one of these or other
risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be
materially different from those described herein or elsewhere by us. We caution readers not to
place undue reliance on any such forward-looking statements, which speak only as of the date they
were made. Certain of these risks, uncertainties, and other factors may be described in greater
detail in our filings from time to time with the Securities and Exchange Commission, which we
strongly urge you to read and consider. Subsequent written and oral forward-looking statements
attributable to us or to persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements set forth above and elsewhere in our reports filed with the Securities
and Exchange Commission. We expressly disclaim any intent or obligation to update any
forward-looking statements.
OVERVIEW
DRH is a leading Buffalo Wild Wings® (BWW) franchisee that is rapidly expanding
through organic growth and acquisitions. It operates 17 BWW restaurants; 12 in Michigan and five
in Florida. DRH also created its own unique, full-service restaurant concept: Bagger Daves
Legendary Burgers and Fries® (Bagger Daves), which falls within the full-service,
ultra-casual dining segment and was launched in January 2008. As of June 27, 2010, we owned and
operated three Bagger Daves® restaurants in Southeast Michigan with the most recent store opening
in February 2010. We also have Franchise Disclosure Documents approved and filed in Michigan,
Indiana, and Ohio for our Bagger Daves concept.
30
Table of Contents
ACQUISITION OF NINE AFFILIATED BWW RESTAURANTS
On February 1, 2010, the Company acquired nine affiliated BWW restaurants (the Affiliates
Acquisition) in Michigan and Florida. The Affiliates Acquisition was valued at $3.1 million. The
Company financed the Affiliates Acquisition through the issuance of subordinated promissory notes
to the sellers totaling $3,134,790. The notes are amortized over six years and bear interest at 6%
per year (refer to Note 2 in the notes to interim consolidated financial statements for further
details).
The Affiliates Acquisition consisted of BWW Michigan stores in Sterling Heights, Fenton, Novi,
Clinton Township, Ferndale, and Warren and Florida stores in Brandon, Fish Hawk Ranch, and
Sarasota. The stores range in age from four to 10 years. The Affiliates Acquisition allows us to
fully capture the potential economic benefits associated with these nine BWW stores in 2010 and
beyond.
EXECUTION OF $15 MILLION COMPREHENSIVE CREDIT FACILITY
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a $15
million Credit Facility with RBS Citizens, N.A., a national banking association. The Credit
Facility consists of a $6 million development line of credit and a $9 million senior secured term
loan. Refer to Note 2 in the notes to interim consolidated financial statements for further
details.
PURCHASE OF BUILDING IN BRANDON, FLORIDA
On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of AMC Wings, Inc.,
completed the purchase of its previously-leased BWW location at 2055 Badlands Drive, Brandon, FL
33511 pursuant to the terms of a Purchase and Sale Agreement dated March 25, 2010, between MCA
Brandon Enterprises, Inc. and Florida Wings Group, LLC. Refer to Note 2 in the notes to interim
consolidated financial statements for further details.
RESULTS OF OPERATIONS
For the three months ended June 27, 2010 and for the six months ended June 27, 2010, revenue was
generated from the operations of 17 BWW restaurants and three Bagger Daves Legendary Burgers and
Fries (Bagger Daves) restaurants (with the newest location in Novi, MI recently opened in
February 2010). For the three months ended June 30, 2009 and the six months ended June 30, 2009,
revenue was generated from the operations of 15 BWW restaurants and two Bagger Daves restaurants.
Three Months Ended | ||||||||||||||||
June 27 2010 (Restated) |
June 30 2009 (Restated) |
$ Change | % Change | |||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 10,683,821 | $ | 10,403,079 | $ | 280,742 | 2.7 | % | ||||||||
Total revenue |
$ | 10,683,821 | $ | 10,403,079 | $ | 280,742 | 2.7 | % | ||||||||
Revenue increased 2.7% to $10.7 million a result of the new store openings.
Six Months Ended | ||||||||||||||||
June 27 | June 30 | |||||||||||||||
2010 (Restated) |
2009 (Restated) |
$ Change |
% Change |
|||||||||||||
Revenue |
||||||||||||||||
Food and beverage sales |
$ | 21,399,699 | 20,833,034 | 566,665 | 2.7 | % | ||||||||||
Total revenue |
$ | 21,399,699 | $ | 20,833,034 | $ | 566,665 | 2.7 | % | ||||||||
Revenue increased 2.7% to $21.4 million a result of the new store openings.
31
Table of Contents
OPERATING EXPENSES
Three Months Ended | ||||||||||||||||||||||||
June 27 2010 |
June 30 2009 |
$ | % | % Revenue | % Revenue | |||||||||||||||||||
(Restated) | (Restated) | Change | Change | 2010 | 2009 | |||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
$ | 3,397,029 | $ | 2,966,668 | $ | 430,361 | 14.5 | % | 31.8 | % | 28.5 | % | ||||||||||||
Food and beverage costs |
3,137,948 | 3,295,191 | (157,243 | ) | (4.8 | )% | 29.4 | % | 31.7 | % | ||||||||||||||
General and
administrative |
2,642,782 | 2,276,075 | 366,707 | 16.1 | % | 24.7 | % | 21.9 | % | |||||||||||||||
Pre-opening |
111,921 | 131,277 | (19,356 | ) | (14.7 | )% | 1.0 | % | 1.3 | % | ||||||||||||||
Occupancy |
573,619 | 722,175 | (148,556 | ) | (20.6 | )% | 5.4 | % | 6.9 | % | ||||||||||||||
Depreciation and
amortization |
640,715 | 538,701 | 102,014 | 18.9 | % | 6.0 | % | 5.2 | % | |||||||||||||||
Total operating
expenses |
$ | 10,504,014 | $ | 9,930,087 | $ | 573,927 | 5.8 | % | 98.3 | % | 95.5 | % | ||||||||||||
Compensation costs increased 14.5%, or $430,361, for the three months ended June 27, 2010 when
compared with the three months ended June 30, 2009. As a percentage of revenue, compensation costs
increased from 28.5% for the three months ended June 30, 2009 to 31.8% for the three months ended
June 27, 2010. This increase as a percentage of revenue is attributed to labor inefficiencies
associated with new store openings.
Food and beverage costs decreased by $157,243, or 4.8%, for the three months ended June 27, 2010
when compared with the three months ended June 30, 2009. As a percentage of revenue, food and
beverage costs decreased from 31.7% for the three months ended June 30, 2009 to 29.4% for the three
months ended June 30, 2010. The decrease in food 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 16.1%, or $366,707, for the three months ended June
27, 2010 when compared with the three months ended June 30, 2009. As a percentage of revenue, the
general and administrative costs increased from 21.9% for the three months ended June 30, 2009 to
24.7% for the three months ended June 27, 2010 primarily due to an increase in overall advertising,
higher repair and maintenance charges and loan termination fees. These increases were partially
offset by economies of scale recognized for professional services and restaurant-specific supplies.
In addition, as a result of a tax cost segregation study, we were able to ultimately decrease
personal property taxes due to the allocation of certain capital assets into lower tax brackets.
Pre-opening costs decreased by 14.7% for the three months ended June 27, 2010 when compared with
the three months ended June 30, 2009 due to fewer restaurants undergoing a construction phase
during the current three-month period. As a percentage of revenue, pre-opening costs decreased
from 1.3% for the three months ended June 30, 2009 to 1.0% for the three months ended June 27, 2010
for the same reason.
Occupancy costs decreased by 20.6% for the three months ended June 27, 2010 when compared with the
three months ended June 30, 2009. As a percentage of revenue, occupancy costs for the three months
ended June 27, 2010 were 5.4% compared with occupancy costs of 6.9% for the three months ended June
30, 2009. This is primarily due the Brandon Property transaction, which provided a one-time
reversal of accrued rent in the amount of $213,466 (refer to Note 2 for further details on the real
estate transaction and Note 1, under Lease Accounting, for further details on accrued rent).
32
Table of Contents
Depreciation and amortization costs increased by 18.9% for the three months ended June 27, 2010
when compared with the three months ended June 30, 2009. As a percentage of revenue, depreciation
and amortization costs increased to 6.0% for the three months ended June 30, 2010 from 5.2% for the
three months ended June 30, 2009, respectively. This is primarily due to the depreciation and
amortization that is recorded for the new restaurant locations.
Six Months Ended | ||||||||||||||||||||||||
June 27 2010 |
June 30 2009 |
$ | % | % Revenue | % Revenue | |||||||||||||||||||
(Restated) | (Restated) | Change | Change | 2010 | 2009 | |||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Compensation costs |
$ | 6,434,026 | $ | 5,765,227 | $ | 668,799 | 11.6 | % | 30.1 | % | 27.7 | % | ||||||||||||
Food and beverage
costs |
6,475,210 | 6,560,295 | (85,085 | ) | (1.3 | )% | 30.3 | % | 31.5 | % | ||||||||||||||
General and
administrative |
5,083,677 | 4,827,556 | 256,121 | 5.3 | % | 23.8 | % | 23.2 | % | |||||||||||||||
Pre-opening |
217,179 | 133,078 | 84,1001 | 63.2 | % | 1.0 | % | 0.6 | % | |||||||||||||||
Occupancy |
1,333,839 | 1,445,719 | (111,880 | ) | (7.7 | )% | 6.2 | % | 6.9 | % | ||||||||||||||
Depreciation and
amortization |
1,245,604 | 1,027,199 | 218,405 | 21.3 | % | 5.8 | % | 4.9 | % | |||||||||||||||
Total operating
expenses |
$ | 20,789,535 | $ | 19,759,074 | $ | 1,030,461 | 5.2 | % | 97.1 | % | 94.8 | % | ||||||||||||
Compensation costs increased 11.6% for the six months ended June 27, 2010 when compared with the
six months ended June 30, 2009. As a percentage of revenue, compensation costs increased from 27.7%
to 30.1% for the six months ended June 30, 2009 and June 27, 2010, respectively. This increase as a
percentage of revenue is attributed to labor inefficiencies associated with new store openings.
Food and beverage costs decreased by 1.3% for the six months ended June 27, 2010 when compared with
the six months ended June 30, 2009. As a percentage of revenue, food and beverage costs decreased
from 31.5% for the six months ended June 30, 2009 to 30.3% for the six months ended June 27, 2010.
The decrease in food 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 5.3% for the six months ended June 27, 2010 when
compared with the six months ended June 30, 2009. As a percentage of revenue, general and
administrative costs increased from 23.2% for the six months ended June 30, 2009 to 23.8% for the
six months ended June 27, 2010 primarily due to an increase in overall advertising, higher repair
and maintenance charges and loan termination fees. These increases were mostly 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 63.2% for the six months ended June 27, 2010 when compared with the
six months ended June 30, 2009. As a percentage of total revenue, pre-opening costs increased from
0.6% to 1.0% when comparing the six months ended June 30, 2009 to the six months ended June 27,
2010 as a result of two restaurants undergoing a construction phase during the current six-month
period versus one restaurant undergoing a construction phase during the first half of 2009.
Occupancy costs decreased by 7.7% for the six months ended June 27, 2010 when compared with the six
months ended June 30, 2009. As a percentage of revenue, occupancy costs for the six months ended
June 27, 2010 were 6.2% compared with occupancy costs of 6.9% for the six months ended June 30,
2009. This is primarily due the Brandon Property transaction, which provided a one-time reversal
of accrued rent in the amount of $213,466 (refer to Note 2 for further details on the real estate
transaction and Note 1, under Lease Accounting, for further details on accrued rent). This decrease
was partially offset by the addition of rent for two newly-opened restaurants.
33
Table of Contents
Depreciation and amortization costs increased by 21.3% for the six months ended June 27, 2010 when
compared with the six months ended June 30, 2009. As a percentage of revenue, depreciation and
amortization costs increased to from 4.9% to 5.8% for the six months ended June 30, 2009 and six
months ended June 27, 2010, respectively. This is primarily due to the depreciation and
amortization that is recorded for the new restaurant locations.
INTEREST AND TAXES
For the three months and six months ended June 27, 2010, interest expense was $518,413 and
$687,876, respectively, compared to the three months and six months ended June 30, 2009, when
interest expense of $171,155 and $351,203, respectively. For both of the current-year periods, the increase was primarily due to the one-time charge of $301,430 in the second quarter of 2010 related
to pre-payment penalties on refinanced debt (see Note 2 for further details).
For the three months and six months ended June 27, 2010, we booked an income tax benefit of
$244,463 and $121,887, respectively, compared to the three months and six months ended June 30,
2009, when income tax provisions of $26,668 and $68,429, respectively, were recorded. The 2010
quarterly tax benefits primarily resulted from amounts we were able to recognize for net operating
loss carry forwards, deferred rent expense, start-up costs, and tax credit carry forwards.
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
Our current consolidated interim cash flow from operations for the six months ended June 27, 2010
was $1,581,377 compared with $2,085,747 for the six months ended June 30, 2009. On May 5, 2010,
DRH entered into a new credit facility with Charter One, a division of RBS Citizens, N.A. This
debt facility refinanced all existing senior debt originally used to finance the building of our
existing stores over the years as well as made available a $6 million development line of credit
for future borrowings. We intend to fund up to 70% of future restaurants with our $6.0 million
development line of credit and all remaining capital requirements from operational cash flow. The
$9.0 million refinance of existing debt will free up approximately $1.0 million in cash flow for
the first 12 months due to a lower fixed interest rate and the re-amortization of debt (see Note 2
and our 8-K filing of May 10, 2010 for further details on our Credit Facility).
In 2010, we anticipate drawing on the new development line of credit for the following new
restaurants:
| Chesterfield, Michigan BWW construction began in the second
quarter of 2010 with an anticipated opening date of Sunday, August 22,
2010. The estimated cost of construction is approximately $950,000.
We anticipate borrowing up to 70% of the necessary funds and paying
the remaining balance through cash from operations. |
||
| Ft. Myers, FL BWW construction is scheduled to begin in August
2010 with an anticipated opening date in the fourth quarter of 2010. |
||
| Brighton, MI Bagger Daves construction is scheduled to begin in
September with an anticipated opening dated in the fourth quarter of
2010. |
Our primary liquidity and capital requirements are for new restaurant construction, remodeling of
existing restaurants, and other general business needs. Total capital expenditures for the year are
expected to be approximately $7.5 million, of which approximately $4.5 million is for new
restaurant construction, $2.5 million is for real estate (see Note 2 for further details), and $0.5
million is for existing store renovations, which includes upgrades to audio/visual.
34
Table of Contents
We believe that reinvesting in existing stores is an important factor to maintaining the overall
experience for our guests. Depending on the age of the existing stores, upgrades range from $50
thousand on the interior to $500 thousand for a full remodel of the restaurant. Stores are
typically upgraded after approximately five years of operation and fully remodeled after
approximately 10 years of operation.
Despite the new development line of credit, there are no assurances that we will be successful in
our efforts to draw on this facility for new store openings due to covenant restrictions.
Management believes that emphasis on prime locations is now more critical than ever to create
stronger store openings and earlier positive cash flows to decrease our dependency on third-party
financing.
Our new Credit Facility has debt covenants that have to be met on a quarterly basis. As of June
27, 2010, we are in compliance with all of them.
OFF BALANCE SHEET ARRANGEMENTS
The Company assumed, from a related entity, an Area Development Agreement with BWW 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 BWW. 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 nine additional BWW restaurants, which
increases the total number of BWW restaurants we have a right to develop to 32. Under the Amended
Agreement, we paid Buffalo Wild Wings, Inc., as Franchisor, a development fee of $31,250. Franchise
fees for the nine additional restaurants will be $12,500 each. We have until November 1, 2017 to
complete our development obligations under the Amended Agreement. As of June 27, 2010, 11 of these
restaurants had been opened for business under the Amended Agreement and 31 remain. Another six
restaurants were opened prior to the Area Development Agreement which, assuming that we are
successful at fulfilling our Area Development Agreement, will bring DRHs total BWW restaurant
count to 38 by November 1, 2017.
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, which 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 June 27, 2010 and December 27, 2009, the carrying amount of the underlying
debt obligation of the related entity was $1,932,993 and 2,938,000, respectively. The Companys
guarantees extend for the full term of the debt agreements, which expire in 2019. 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 entity for which it has provided the
guarantees operate under common ownership and management control and, in accordance with FASB ASC
460 (ASC 460), Guarantees, the initial recognition and measurement provisions of ASC 460 do not
apply. At June 27, 2010, payments on the debt obligations were current.
The Company is required by its various BWWI franchise agreements to modernize the restaurants
during the term of the agreement. 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.
35
Table of Contents
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
In the ordinary course of business, we have made a number of estimates and assumptions in the
preparation of our financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ significantly from those estimates
under different assumptions and conditions. We frequently reevaluate these significant factors and make adjustments
where facts and circumstances dictate.
The Company believes the following accounting policies represent critical accounting policies.
Critical accounting policies are those that are both most important to the portrayal of a companys
financial condition and results and require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. We discuss our significant accounting
policies in Note 1 to the Companys consolidated interim financial statements, including those
policies that do not require management to make difficult, subjective, or complex judgments or
estimates.
FASB Codification Discussion
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred
to as the FASB. The FASB sets generally accepted accounting principles that we follow to ensure
we consistently report our financial condition, results of operations, and cash flows. Over the
years, the FASB and other designated GAAP-setting bodies have issued standards in the form of FASB
Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position,
etc. One standard that applies to our business is FASB Statement No. 13, Accounting for Leases.
That standard, originally issued in 1976, has been interpreted and amended many times over the
years.
The FASB recognized the complexity of its standard-setting process and embarked on a revised
process in 2004 that culminated in the release, on July 1, 2009, of the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. To the Company, this means instead
of following the leasing rules in Statement No. 13, we will follow the guidance in Topic 840,
Leases. The Codification does not change how the Company accounts for its transactions or the
nature of related disclosures made. However, when referring to guidance issued by the FASB, the
Company refers to topics in the ASC rather than Statement No. 13, etc. The above change was made
effective by the FASB for periods ending on or after September 15, 2009. We have updated references
to GAAP in this quarterly report on Form 10-Q to reflect the guidance in the Codification.
Property and Equipment
We record all property and equipment at cost less accumulated depreciation and we select useful
lives that reflect the actual economic lives of the underlying assets. We amortize leasehold
improvements over the shorter of the useful life of the asset or the related lease term. We
calculate depreciation using the straight-line method for consolidated financial statement
purposes. We capitalize improvements and expense repairs and maintenance costs as incurred. We are
often required to exercise judgment in our decision whether to capitalize an asset or expense an
expenditure that is for maintenance and repairs. Our judgments may produce materially different
amounts of repair and maintenance or depreciation expense if different assumptions were used.
We perform an asset impairment analysis, on an annual basis, of property and equipment related to
our restaurant locations. We also perform these tests when we experience a triggering event such
as a major change in a locations operating environment, or other event that might impact our
ability to recover our asset investment. This process requires the use of estimates and
assumptions, which are subject to a high degree of judgment. Our analysis indicated that we did not
need to record any impairment charges during the three months ended June 27, 2010 and the six
months ended June 27, 2010. As such, none were recorded. If these assumptions or circumstances
change in the future, we may be required to record impairment charges for these assets.
36
Table of Contents
Deferred Tax Assets
The Company records deferred tax assets for the value of benefits expected to be realized from the
utilization of state and federal net operating loss carry forwards. We periodically review these
assets for realizability based upon expected taxable income in the applicable taxing jurisdictions. To the
extent we believe some portion of the benefit may not be realizable, an estimate of the unrealized
portion is made and an allowance is recorded. At June 27, 2010, we had no valuation allowance, as
we believe we will generate sufficient taxable income in the future to realize the benefits of our
deferred tax assets. This belief is principally based upon the Companys exercise option to
purchase the nine affiliated restaurants it previously managed, which happened on February 1, 2010.
Realization of these deferred tax assets is dependent upon generating sufficient taxable income
prior to expiration of any net operating loss carry forwards. Although realization is not assured,
management believes it is more likely than not that the remaining recorded deferred tax assets will
be realized. If the ultimate realization of these deferred tax assets is significantly different
from our expectations, the value of its deferred tax assets could be materially overstated.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Not Applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Management of the Company carried out an evaluation, under the
supervision and with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, due to the
existence of a material weakness in internal control over financial reporting in the area of
accounting for the acquisition of affiliated restaurants under common control and income taxes
associated therewith, the Companys disclosure controls and procedures were not effective as of
June 27, 2010.
For certain additional information regarding the restatements of certain of the Companys
historical financial results and the material weakness identified by management, see Note 15 of the
accompanying Notes to the interim consolidated financial statements included herewith.
Changes in Internal Control. On April 22, 2010, the Company retained a controller with public
accounting expertise to strengthen its internal accounting team. In addition, the Board of
Directors elected the controller to serve in the capacity of Chief Compliance Officer. The Company
believes that adding a controller with public accounting expertise will improve the Companys
internal control over financial reporting.
Additionally, as a result of the identification of the issues that led to the restatements, and the
related reassessment of our disclosure controls and procedures, including our internal control over
financial reporting, as of September 26, 2010, there have been subsequent changes in our controls
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting. Specifically, the following have been implemented:
| During the 3rd Quarter of 2010, the Company adopted an internal policy requiring written
documentation of the accounting methods applied to significant accounting transactions and
the rationale for selecting such methods. |
| During the 3rd Quarter of 2010, the Company adopted an internal policy requiring the
review, by a third-party subject matter expert, of material and complex transactions, such
as the Affiliates Acquisition that we completed on February 1, 2010. |
37
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Occasionally, we are a defendant in litigation arising in the ordinary course of our business,
including claims arising from personal injuries, contract claims, dram shop claims,
employment-related claims, and claims from guests or employees alleging injury, illness, or other
food quality, health, or operational concerns. To date, none of these types of litigation, most of
which are typically covered by insurance, has had a material effect on our financial condition or
results of operations. We have insured and continue to insure against most of these types of
claims. A judgment on any claim not covered by or in excess of our insurance coverage could
materially adversely affect our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those previously disclosed in our
annual report on Form 10-K for the year ended December 27, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
38
Table of Contents
Item 6. Exhibits
(a) Exhibits:
**2.1 | Brandon Property Purchase and Sale Agreement dated March 25, 2010 between our subsidiary, MCA
Enterprises, Brandon, Inc. and Florida Wings Group, LLC. |
|||
*3.1 | Certificate of Incorporation. |
|||
*3.2 | By-Laws. |
|||
10.1 | Real Estate Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises
Brandon, Inc., and Bank of America N.A. (filed with Original Filing and not refiled herewith). |
|||
10.2 | Bridge Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon,
Inc., and Bank of America N.A. (filed with Original Filing and not refiled herewith). |
|||
10.3 | Promissory Note dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon, Inc.,
and Florida Wings Group, LLC (filed with Original Filing and not refiled herewith). |
|||
10.4 | Buffalo Wild Wings Franchise Agreement dated June 3, 2010 between our subsidiary, AMC Ft.
Myers, Inc., and Buffalo Wild Wings International, Inc. (filed with Original Filing and not
refiled herewith). |
|||
***10.5 | RBS Development Line of Credit Agreement dated May 5, 2010 between DRH and RBS. |
|||
***10.6 | RBS Credit Agreement dated May 5, 2010 between DRH and RBS. |
|||
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. |
* | Filed as an exhibit to the Companys Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference. |
|
** | Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 8-K on June
30, 2010. |
|
*** | Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 8-K on May
10, 2010. |
39
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
Dated: December 10, 2010 | DIVERSIFIED RESTAURANT HOLDINGS, INC. |
|||
By: | /s/ T. Michael Ansley | |||
T. Michael Ansley | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
By: | /s/ David G. Burke | |||
David G. Burke | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
40