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EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc.c15394exv31w1.htm
EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc.c15394exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc.c15394exv31w2.htm
EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc.c15394exv32w1.htm
Table of Contents

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     .
Commission File No. 000-53577
DIVERSIFIED RESTAURANT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Nevada   03-0606420
(State or other jurisdiction of incorporation
or organization)
  (I.R.S. Employer Identification Number)
27680 Franklin Rd., Southfield, MI 48034
(Address of principal executive offices)
Registrant’s telephone number (248) 223-9160
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates was $34,595,213 based on the closing sale price of the Company’s common stock as reported on the OTC:BB stock market on June 25, 2010.
The number of shares outstanding of the registrant’s common stock as of March 25, 2011: 18,876,000 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference in Part III of the Original Filing (as defined below). The registrant intends to file such Proxy Statement with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report on Form 10-K.
 
 

 

 


TABLE OF CONTENTS

PART II
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


Table of Contents

EXPLANATORY NOTE
Diversified Restaurant Holdings, Inc. (“DRH” or the “Company”) is filing this Amendment No. 1 on Form 10-K/A (“the Amendment”) to our Annual Report on Form 10-K for the fiscal year ended December 26, 2010, which was filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2011 (the “Original Filing”). We are filing this Amendment to correct a typographical error in the report involving diluted earnings per share, as outlined below.
                 
    December 26, 2010     December 27, 2009  
Diluted earnings per share, as reported
  $ 0.19     $ 0.40  
Diluted earnings per share, as restated
  $ 0.02     $ 0.04  
This Amendment amends and restates “Item 8. Consolidated Financial Statements and Supplementary Data” of Part II and “Item 15. Exhibits and Financial Statement Schedules” of Part IV of the Original Filing solely as a result of, and to reflect, the restatement. Pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain the currently-dated certifications from our principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our principal executive officer and our principal financial officer are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except for the foregoing amended information, this Amendment continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that have occurred subsequent to that date. Other events occurring after the date of the Original Filing or other information necessary to reflect subsequent events have been disclosed in reports filed with the SEC subsequent to the Original Filing.
PART II.
ITEM 8.  
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and the Report of Independent Registered Accounting Firm are included at pages F-1 through F-20 of this Annual Report and are incorporated herein by reference.

 

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PART IV
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following financial statements and report of independent registered public accounting firms of Diversified Restaurant Holdings and its subsidiaries are filed as part of this report:
    Report of Independent Registered Public Accounting Firm dated March 28, 2011 and April 11, 2011 — Silberstein Ungar, PLLC
    Consolidated Balance Sheets — December 26, 2010 and December 27, 2009
    Consolidated Statements of Operations
    Consolidated Statement of Stockholders’ Equity
    Consolidated Statements of Cash Flows
    Notes to Consolidated Financial Statements
The consolidated financial statements, the notes to the consolidated financial statements, and the reports of independent registered public accounting firm listed above are incorporated by reference in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Index to Exhibits required by Item 601 of Regulation S-K:
         
EXHIBIT NO.   EXHIBIT DESCRIPTION
       
 
  2.1    
Affiliates Acquisition Purchase Agreement dated February 1, 2010 (incorporated by reference to exhibit 2.1 of our Form 8-K filed February 5, 2010)
  2.2    
Brandon Property Purchase and Sale Agreement dated March 25, 2010 between our subsidiary, MCA Enterprises, Brandon, Inc. and Florida Wings Group, LLC (incorporated by reference to exhibit 10 of our Form 8-K filed June 30, 2010).
  3.1    
Articles of Incorporation (incorporated by reference to our registration statement on Form SB-2 (SEC File Number 333-145316), as filed with the Securities and Exchange Commission on August 10, 2007)
  3.2    
Amended and Restated Certificate of Incorporation (incorporated by reference to our registration statement on Form SB-2 (SEC File Number 333-145316), as filed with the Securities and Exchange Commission on August 10, 2007)
  3.3    
By-laws (incorporated by reference to our registration statement on Form SB-2 (SEC File Number 333-145316), as filed with the Securities and Exchange Commission on August 10, 2007)
  4.0    
Specimen Stock Certificate (incorporated by reference to our registration statement on Form SB-2 (SEC File Number 333-145316), as filed with the Securities and Exchange Commission on August 10, 2007)
  10.1    
Buffalo Wild Wings Franchise Agreement dated July 29, 2010 by and between Buffalo Wild Wings International, Inc. and Anker, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to exhibit 10.1 of our Form 10-Q filed November 12, 2010)
  10.2    
Renewal Addendum to Buffalo Wild Wings Franchise Agreement dated July 29, 2010, by and between Buffalo Wild Wings International, Inc. and Anker, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to exhibit 10.2 of our Form 10-Q filed November 12, 2010)
  10.3    
Buffalo Wild Wings Area Development Agreement dated July 18, 2003, by and between Buffalo Wild Wings International, Inc. and MCA Enterprises, Inc. (subsequently assigned to AMC Wings, Inc., a wholly-owned subsidiary of the Company) (incorporated by reference to exhibit 10.3 of our Form 10-Q filed November 12, 2010)

 

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EXHIBIT NO.   EXHIBIT DESCRIPTION
       
 
  10.4    
Transfer Agreement dated March 20, 2007, by MCA Enterprises Brandon, Inc. (formerly MCA Enterprises, Inc.), T. Michael Ansley, Mark C. Ansley, Thomas D. Ansley, Steven Menker, Jason Curtis and AMC Wings, Inc. and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10.4 of our Form 10-Q filed November 12, 2010)
  10.5    
Amendment to Buffalo Wild Wings Area Development Agreement dated March 20, 2007 (incorporated by reference to exhibit 10.5 of our Form 10-Q filed November 12, 2010)
  10.6    
Amendment to Buffalo Wild Wings Area Development Agreement dated November 5, 2007 (incorporated by reference to exhibit 10.5 of our Form 10-Q filed November 12, 2010)
  10.7    
Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo Wild Wings International, Inc. and AMC Traverse City, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to exhibit 10.1 to our Form 8-K filed September 10, 2010)
  10.8    
Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo Wild Wings International, Inc. and AMC Lakeland, Inc., a wholly-owned subsidiary of the Company (incorporated by reference to exhibit 10.2 to our Form 8-K filed September 10, 2010)
  10.9    
Form of Stock Option Agreement (incorporated by reference to exhibit 10.1 to our Form 8-K filed August 5, 2010)
  10.10    
Amendment to Buffalo Wild Wings Area Development Agreement dated December 27, 2003 (incorporated by reference to exhibit 10.12 of our Form 10-Q filed November 12, 2010)
  10.11    
Real Estate Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon, Inc., and Bank of America N.A. (incorporated by reference to exhibit 10.1 to our Form 10-Q filed August 10, 2010)
  10.12    
Bridge Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon, Inc., and Bank of America N.A. (incorporated by reference to exhibit 10.2 to our Form 10-Q filed August 10, 2010).
  10.13    
Buffalo Wild Wings Franchise Agreement dated June 3, 2010 between our subsidiary, AMC Ft. Myers, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10.4 to our Form 10-Q filed August 10, 2010).
  10.14    
RBS Credit Agreement dated May 5, 2010 between DRH and RBS (filed with the Securities and Exchange Commission as an exhibit to the Company’s Form 8-K on May 10, 2010)
  10.15    
Buffalo Wild Wings Retail Center Lease dated December 7, 2009 between our subsidiary, AMC Marquette, Inc., and Centrup Hospitality, LLC (incorporated by reference to exhibit 10 of our Form 8-K filed December 11, 2009)
  10.16    
Buffalo Wild Wings Retail Center Lease dated December 2, 2009 between our subsidiary, AMC Chesterfield, Inc., and Chesterfield Development Company, LLC (incorporated by reference to exhibit 10 for our Form 8-K filed December 7, 2009)
  10.17    
Buffalo Wild Wings Franchise Agreement dated October 20, 2009 between our subsidiary, AMC Marquette, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10.1 of our Form 8-K filed October 26, 2009)
  10.18    
Buffalo Wild Wings Franchise Agreement dated October 20, 2009 between our subsidiary, AMC Chesterfield, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10.2 of our Form 8-K filed October 26, 2009)
  10.19    
Master Lease Agreement dated September 9, 2009 between our subsidiary, Troy Burgers, Inc., and Novi Town Center Investors, LLC (incorporated by reference to exhibit 10 of our Form 8-K filed September 10, 2009)

 

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EXHIBIT NO.   EXHIBIT DESCRIPTION
       
 
  10.20    
Master Lease Agreement dated February 12, 2009 between our subsidiary, AMC Flint, Inc., and CoActiv Capital Partners, Inc. (incorporated by reference to exhibit 10 of our Form 8-K filed February 17, 2009)
  10.21    
Buffalo Wild Wings Amendment to Area Development Agreement dated December 10, 2008 between our subsidiary, AMC Wings, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10.1 of our Form 8-K filed December 15, 2008)
  10.22    
Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between our subsidiary, AMC Port Huron, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10 of our form 8-K filed July 8, 2008)
  10.23    
Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between our subsidiary, AMC Flint, Inc., and Buffalo Wild Wings International, Inc. (incorporated by reference to exhibit 10 of our form 8-K filed July 8, 2008)
  10.24    
Retail Center Lease dated June 30, 2008 between our subsidiary, AMC Port Huron, Inc., and Port Builders, Inc., Walter Sparling and Mary L. Sparling (incorporated by reference to exhibit 10 of our form 8-K filed July 7, 2008)
  10.25    
Retail Center Lease dated June 30, 2008 between our subsidiary, AMC Flint, Inc., and Ramco-Gershenson Properties, L.P. (incorporated by reference to exhibit 10 of our form 8-K filed July 7, 2008)
  10.26    
Form of Stock Option Agreement, dated July 30, 2007, entered into by and between the Company and Directors Gregory Stevens, T. Michael Ansley, Jay Alan Dusenberry, Jason T. Curtis and David Ligotti (incorporated by reference to exhibit 10.24 of our Form 10-K filed March 26, 2010)
  14    
Code of Ethics (incorporated by reference to our Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 31, 2009)
  31.1    
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
  31.2    
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
  32.1    
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002
  32.2    
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 11, 2011
         
  DIVERSIFIED RESTAURANT HOLDINGS, INC.
 
 
  By:   /s/ T. Michael Ansley    
    T. Michael Ansley   
    President, Chief Executive Officer, Director,
Chairman of the Board, and
Principal Executive Officer 
 
     
  By:   /s/ David G. Burke    
    David G. Burke   
    Treasurer, Chief Financial Officer, Director,
Principal Financial Officer, and
Principal Accounting Officer 
 

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
Index to Consolidated Financial Statements
         
    F-1  
 
       
    F-2  
 
       
CONSOLIDATED FINANCIAL STATEMENTS:
       
 
       
    F-3  
 
       
    F-4  
 
       
    F-5  
 
       
    F-6  
 
       
    F-7  
 
       
    F-8  

 

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Silberstein Ungar, PLLC
CPAs and Business Advisors
phone (248) 203-0080
fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025
www.sucpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Diversified Restaurant Holdings, Inc.
Southfield, MI
We have audited the accompanying consolidated balance sheets of Diversified Restaurant Holdings, Inc. and Subsidiaries as of December 26, 2010 and December 27, 2009, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversified Restaurant Holdings, Inc. and Subsidiaries as of December 26, 2010 and December 27, 2009 and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
     
/s/ Silberstein Ungar, PLLC
 
   
Silberstein Ungar, PLLC
Bingham Farms, Michigan
March 28, 2011, except for the restated fully diluted earnings per share as to which the date is April 11, 2011
(MSI LOGO)

 

F-1


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March 28, 2011 and April 11, 2011
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.’S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company’s system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles as of December 26, 2010. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 26, 2010, Diversified Restaurant Holdings, Inc. maintained an effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles based on those criteria.
Management’s report is not subject to attestation by the company’s registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act. Accordingly, this Annual Report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.
     
Diversified Restaurant Holdings, Inc.
   
 
   
/s/ T. Michael Ansley
   
 
T. Michael Ansley
   
Chairman of the Board, President, Chief Executive Officer,
   
and Principal Executive Officer
   
 
   
/s/ David G. Burke
   
 
David G. Burke
   
Chief Financial Officer, Treasurer, Principal Financial Officer,
   
and Principal Accounting Officer
   

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    December 26     December 27  
    2010     2009  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 1,305,031     $ 1,594,362  
Accounts receivable — related party
          376,675  
Inventory
    339,059       307,301  
Prepaid assets
    209,708       152,702  
Other current assets
    43,348       42,382  
 
           
Total current assets
    1,897,146       2,473,422  
 
               
Property and equipment, net (Note 3)
    17,252,599       11,655,513  
Intangible assets, net (Note 4)
    975,461       789,279  
Other long-term assets
    63,539       11,780  
Deferred income taxes (Note 8)
    607,744       246,754  
 
           
Total assets
  $ 20,796,489     $ 15,176,748  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
               
 
               
Current liabilities
               
Current portion of long-term debt (Note 6)
  $ 1,858,262     $ 2,443,057  
Accounts payable
    1,388,397       527,151  
Accrued liabilities
    1,089,112       674,768  
Deferred rent
    127,075       104,940  
 
           
Total current liabilities
    4,462,846       3,749,916  
 
               
Accrued rent
    793,774       846,014  
Deferred rent
    928,757       638,024  
Related party payable
          430,351  
Other liabilities — interest rate swap
    367,181       213,604  
Long-term debt, less current portion (Note 6)
    14,706,756       6,517,041  
 
           
Total liabilities
    21,259,314       12,394,950  
 
           
 
               
Commitments and contingencies (Notes 5, 6, 9, 10, and 11)
               
 
               
Stockholders’ (deficit) equity (Note 7)
               
Common stock — $0.0001 par value; 100,000,000 shares authorized, 18,876,000 and 18,626,000 shares, respectively, issued and outstanding
    1,888       1,863  
Additional paid-in capital
    2,631,304       2,356,155  
Retained earnings (accumulated deficit)
    (2,728,836 )     423,780  
Comprehensive (loss) income
    (367,181 )      
 
           
Total stockholders’ (deficit) equity
    (462,825 )     2,781,798  
 
           
 
               
Total liabilities and stockholders’ (deficit) equity
  $ 20,796,489     $ 15,176,748  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
                 
    December 26     December 27  
    2010     2009  
Revenue
               
Food and beverage sales
  $ 45,248,018     $ 41,754,515  
 
           
Total revenue
    45,248,018       41,754,515  
 
               
Operating expenses
               
Compensation costs
    13,293,945       11,470,244  
Food and beverage costs
    13,340,619       13,029,103  
General and administrative
    10,738,464       9,728,455  
Pre-opening
    654,764       164,114  
Occupancy
    2,957,902       2,935,363  
Depreciation and amortization
    2,679,133       2,363,748  
 
           
Total operating expenses
    43,664,827       39,691,027  
 
           
 
               
Operating profit
    1,583,191       2,063,488  
 
               
Interest expense
    (1,202,299 )     (778,612 )
Other income, net
    28,317       259,413  
 
           
 
               
Income before income taxes
    409,209       1,544,289  
 
               
Income tax benefit (provision)
    125,826       (350,051 )
 
           
 
               
Net income
  $ 535,035     $ 1,194,238  
 
           
 
               
Basic earnings per share — as reported
  $ 0.03     $ 0.07  
 
           
Fully diluted earnings per share — as restated
  $ 0.02     $ 0.04  
 
           
 
               
Weighted average number of common shares outstanding (Notes 1 and 7)
               
Basic
    18,871,879       18,070,000  
Diluted
    29,125,000       29,020,000  
The accompanying notes are an integral part of these consolidated financial statements.

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                 
    December 26     December 27  
    2010     2009  
 
Net income
  $ 535,035     $ 1,194,238  
 
               
Comprehensive income
               
Unrealized changes in fair value of cash flow hedges
    (367,181 )      
 
           
 
               
Comprehensive income
  $ 167,854     $ 1,194,238  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
                                                 
                            Retained                
                    Additional     Earnings             Total  
    Common Stock     Paid-in     (Accumulated     Comprehensive     Stockholders’  
    Shares     Amount     Capital     Deficit)     (Loss) Income     (Deficit) Equity  
 
                                               
Balances — December 31, 2008
    18,070,000     $ 1,807     $ 1,758,899     $ 525,332     $     $ 2,286,038  
 
                                               
Share-based compensation (Note 7)
                    32,312                     $ 32,312  
 
                                               
Exercise of employee stockoptions (Note 7)
    6,000       1       14,999                     $ 15,000  
 
                                               
Shares issued for warrants exercised at $1.00 per share (Note 7)
    550,000       55       549,945                     $ 550,000  
 
                                               
Dividends paid prior to acquisition
                            (1,295,790 )           $ (1,295,790 )
 
                                               
Net income
                            1,194,238             $ 1,194,238  
 
                                   
 
                                               
Balances — December 27, 2009
    18,626,000       1,863       2,356,155       423,780       0       2,781,798  
 
                                               
Shares issued for warrants exercised at $1.00 per share (Note 7)
    250,000       25       249,975                   250,000  
 
                                               
Share-based compensation (Note 7)
                25,174                   25,174  
 
                                               
Acquisition of BWW restaurants (Note 2)
                      (3,134,790 )           (3,134,790 )
 
                                               
Dividends paid prior to acquisition
                      (552,861 )             (552,861 )
 
                                               
Unrealized changes in fair value of cash flow hedges
                            (367,181 )     (367,181 )
 
                                               
Net income
                      535,035             535,035  
 
                                   
 
                                               
Balances — December 26, 2010
    18,876,000     $ 1,888     $ 2,631,304     $ (2,728,836 )   $ (367,181 )   $ (462,825 )
 
                                   
The accompanying notes are an integral part of these consolidated financial statements.

 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    December 26     December 27  
    2010     2009  
Cash flows from operating activities
               
Net income
  $ 535,035     $ 1,194,238  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    2,679,133       2,363,748  
Loss on disposal of property and equipment
    20,966       310  
Share-based compensation
    25,174       32,312  
Deferred income taxes
    (360,990 )     353,203  
Decrease (increase) in operating assets:
               
Accounts receivable — related party
    376,675       165,134  
Inventory
    (31,758 )     35,508  
Prepaid assets
    (57,006 )     (41,718 )
Other current assets
    (966 )     4,115  
Intangible assets
    (82,666 )     (48,710 )
Other long-term assets
    (51,759 )     (11,780 )
Increase (decrease) in operating liabilities:
               
Accounts payable
    861,246       (272,129 )
Accrued liabilities
    414,344       75,498  
Accrued rent
    (52,240 )     200,357  
Deferred rent
    312,868       (112,470 )
 
           
Net cash provided by (used in) operating activities
    4,588,056       3,939,406  
 
           
 
               
Cash flows from investing activities
               
Purchases of property and equipment
    (5,827,947 )     (718,070 )
 
           
Net cash provided by (used in) investing activities
    (5,827,947 )     (718,070 )
 
           
 
               
Cash flows from financing activities
               
Proceeds from issuance of long-term debt and notes payable
    3,450,746       694,986  
Repayments of long-term debt and notes payable
    (2,197,325 )     (2,620,629 )
Proceeds from issuance of common stock
    250,000       565,000  
Dividends paid prior to acquisition
    (552,861 )     (1,295,790 )
 
           
Net cash provided by (used in) financing activities
    950,560       (2,656,433 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (289,331 )     564,903  
 
               
Cash and cash equivalents, beginning of period
    1,594,362       1,029,459  
 
           
 
               
Cash and cash equivalents, end of period
  $ 1,305,031     $ 1,594,362  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (“DRH”) was formed on September 25, 2006. DRH and its wholly-owned subsidiaries (collectively referred to as the “Company”), including AMC Group, Inc, (“AMC”), AMC Wings, Inc. (“WINGS”), and AMC Burgers, Inc. (“BURGERS”), develop, own, and operate Buffalo Wild Wings (“BWW”) restaurants located throughout Michigan and Florida and the Company’s own restaurant concept, Bagger Dave’s Legendary Burger TavernTM (“Bagger Dave’s”), as detailed below.
The following organizational chart outlines the corporate structure of DRH and its subsidiaries, all of which are wholly-owned by the Company. A brief textual description of the entities follows the organizational chart. DRH is incorporated in the State of Nevada. All other entities are incorporated or organized in the State of Michigan.
(FLOW CHART)
AMC was formed on March 28, 2007 and serves as the operational and administrative center for the Company. AMC renders management and advertising services to WINGS and its subsidiaries and BURGERS and its subsidiaries. Prior to the February 1, 2010 acquisition (see Note 2 for details), AMC also rendered management and advertising services to nine BWW restaurants affiliated with the Company through common ownership and management control. Services rendered by AMC include marketing, restaurant operations, restaurant management consultation, hiring and training of management and staff, and other management services reasonably required in the ordinary course of restaurant operations.
WINGS was formed on March 12, 2007 and serves as a holding company for its BWW restaurants. WINGS, through its subsidiaries, holds 19 BWW restaurants that were in operation as of December 26, 2010. The Company also executed franchise agreements with Buffalo Wild Wings, Inc. (“BWWI”) to open two more restaurants, one in Lakeland, Florida, and one in Traverse City, Michigan. WINGS operates 21 BWW restaurants as of March 25, 2011.

 

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The Company is economically dependent on retaining its franchise rights with BWWI. As of March 25, 2011, the franchise agreements have specific initial term expiration dates ranging from November 23, 2011 through September 7, 2030, depending on the date each was executed and its initial term. The franchise agreements are renewable at the option of the franchisor and are generally renewable if the franchisee has complied with the franchise agreement. When factoring in any applicable renewals, as of March 25, 2011, the franchise agreements have specific expiration dates ranging from January 29, 2019 through September 7, 2045. The Company is in compliance with the terms of these agreements at March 25, 2011. The Company is under contract with BWWI to enter into a total of 38 franchise agreements by 2017 (see Note 11 for details). The Company held an option to purchase the nine affiliated restaurants that were managed by AMC, which it exercised on February 1, 2010 (see Note 2 for details).
BURGERS was formed on March 12, 2007 to own the Company’s Bagger Dave’s restaurants, a full-service, ultra-casual dining concept developed by the Company. BURGERS’ subsidiaries, Berkley Burgers, Inc., Ann Arbor Burgers, Inc., and Troy Burgers, Inc., own restaurants currently in operation in Berkley, Ann Arbor, and Novi, Michigan, respectively. Another Brighton, Michigan restaurant location, Brighton Burgers, Inc. opened to the public on February 27, 2011. BURGERS also has a wholly-owned subsidiary named Bagger Dave’s Franchising Corporation that was formed to act as the franchisor for the Bagger Dave’s concept. We have filed for rights to franchise in Michigan, Ohio, Illinois, and Indiana, but have not yet franchised any Bagger Dave’s restaurants.
We follow accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“Codification” or “ASC”). The FASB finalized the Codification effective for periods ending on or after September 15, 2009. Prior FASB standards, like FASB Statement No. 13, Accounting for Leases, are no longer being issued by the FASB. For further discussion of the ASC, refer to the “Recent Accounting Pronouncements” section of this note.
Principles of Consolidation
The consolidated financial statements include the accounts of DRH and its subsidiaries, AMC, WINGS and its subsidiaries, and BURGERS and its subsidiaries. The consolidated financial statements also include the account balances of the nine acquired, affiliated restaurants resulting from the February 1, 2010 acquisition, as they are now subsidiaries of WINGS (refer to Note 2 for details).
All significant intercompany accounts and transactions have been eliminated upon consolidation.
Fiscal Year
During 2009, the Company changed its fiscal year to utilize a 52- or 53-week accounting period that ends on the last Sunday in December. Consequently, fiscal year 2010 ended on December 26, 2010, comprising 52 weeks. Fiscal year 2009 ended on December 27, 2009, comprising 51 weeks and three days.
Segment Reporting
Reportable segments are strategic business units that offer different products and services, are managed separately because each business requires different executional strategies, cater to different clients’ needs, and are subject to regular review by our chief operating decision maker. There are no separately reportable business segments at December 26, 2010 and December 27, 2009.

 

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Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company, at times throughout the year, may, in the ordinary course of business, maintain cash balances in excess of federally-insured limits. Management does not believe the Company is exposed to any unusual risks on such deposits.
Revenue Recognition
Revenues from food and beverage sales are recognized and generally collected at the point of sale. All sales are presented on a net basis and all sales taxes are excluded from revenue.
Accounts Receivable — Related Party
Accounts receivable — related party were stated at the amount management expects to collect from outstanding balances. Balances that are outstanding after management has used reasonable collection efforts are written off with a corresponding charge to bad debt expense. The balance at December 27, 2009 related principally to amounts advanced to an affiliate that owns the real estate at one BWW restaurant. This receivable was paid in full during 2010. Management does not believe any allowances for doubtful accounts were necessary at December 27, 2009. There are no accounts receivable — related party at December 26, 2010.
Accounting for Gift Cards
The Company records the net increase or decrease in BWW gift card sales versus gift card redemptions to the gift card liability account on a monthly basis. The gift card processor deducts gift card sales dollars from each restaurant’s 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 Dave’s 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 Dave’s restaurants for the Company to record as of December 26, 2010 and December 27, 2009.
The Company’s gift card liability was $109,422 and $30,067 at December 26, 2010 and December 27, 2009, respectively.
Lease Accounting
Certain operating leases provide for minimum annual payments that increase over the life of the lease. Typically, leases have an initial lease term of between 10 and 15 years and contain renewal options under which we may extend the terms for periods of three to five years. The aggregate minimum annual payments are expensed on a straight-line basis commencing at the start of our construction period and extending over the term of the related lease, with consideration of renewal options unless management does not intend on renewing the lease. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the lease is accrued as deferred rent liability and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts, in its straight-line computation, for the effect of any “rental holidays”, “free rent periods”, or “tenant incentives”.

 

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Inventory
Inventory, which consists mainly of food and beverage products, is accounted for at the lower of cost or market using the first in, first out method of inventory valuation.
Prepaid Expenses and Other Assets
Prepaid assets consist principally of prepaid insurance and are recognized ratably as operating expense over the period covered by the unexpired premium. Other assets consist primarily of intangible assets. Amortizable intangible assets consist principally of franchise fees, trademarks, and loan fees and are deferred and amortized to operating expense on a straight-line basis over the term of the related underlying agreements based on the following:
     
Franchise fees
  10 to 20 years
Trademarks
  15 years
Loan fees
  2 to 7 years (loan term)
Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management annually reviews these assets to determine whether carrying values have been impaired. During the periods ended December 26, 2010 and December 27, 2009, respectively, no impairments relating to intangible assets with finite or indefinite lives were recognized.
Property and Equipment
Property and equipment are recorded at cost. Major improvements and renewals are capitalized. Land is not depreciated. Buildings are depreciated using the straight-line method over the estimated useful life, which is typically 39 years. Equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser of the term of the lease, with consideration of renewal options, or the estimated useful lives of the assets, which is typically 10 years. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings.
Restaurant construction in progress is not amortized or depreciated until the related assets are placed into service. The Company capitalizes, as restaurant construction in progress, costs incurred in connection with the design, build out, and furnishing of its owned restaurants. Such costs consist principally of leasehold improvements, directly related costs such as architectural and design fees, construction period interest (when applicable), and equipment, furniture and fixtures not yet placed in service.
During the periods ended December 26, 2010 and December 27, 2009, respectively, no impairments relating to property and equipment with finite or indefinite lives were recognized.
Advertising
Advertising expenses associated with contributions to the national BWW advertising fund are expensed as contributed and all other advertising expenses are expensed as incurred. Advertising expenses were $2,094,383 and $1,771,284 for the years ended December 26, 2010 and December 27, 2009, respectively.
Pre-opening Costs
Pre-opening costs are those costs associated with opening new restaurants and will vary based on the number of new locations opening and under construction. These costs are expensed as incurred. Pre-opening costs were $654,764 and $164,114 for the years ended December 26, 2010 for and December 27, 2009, respectively.

 

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Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Earnings Per Common Share
Earnings per share are calculated under the provisions of ASC 260, Earnings per Share. ASC 260 requires a dual presentation of “basic” and “diluted” earnings per share on the face of the income statement. Basic earnings per common share excludes dilution and is computed by dividing the net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include dilutive common stock equivalents consisting of stock options determined by the treasury stock method. Restricted stock units are contingently issuable shares subject to vesting based on performance criteria.
Concentration Risks
Approximately 80% and 79% of the Company’s revenues for the years ended December 26, 2010 and December 27, 2009, respectively, were generated from food and beverage sales from restaurants located in Michigan.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instrument
The Company utilizes interest rate swap agreements with a bank to fix interest rates on a portion of the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations. The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes.
On May 5, 2010, the Company entered into a $15 million dollar debt facility with RBS Citizens Bank, N.A. (“RBS”), as further described in Notes 2 and 6, in which $6 million is in the form of a development line of credit (of which $1.4 million was subsequently termed out and affixed to a fixed-rate swap arrangement) and $9 million is a senior secured term loan with a fixed-rate swap arrangement. In conjunction with the new debt facility, the existing swap agreements were terminated, resulting in a notional principal amount reduction of $214,074 and a termination fee of $19,176 that was appropriately recorded as interest expense.
The new interest rate swap agreements qualify for hedge accounting. As such, the Company is accounting for the hedged instrument as cash flow hedges. Under the cash flow hedge method, the effective portion of the derivative is marked to fair value, based on third-party valuation models, as a component of accumulated other comprehensive income (loss). The interest rate swap liabilities at December 27, 2009 were not treated as cash flow hedges and, accordingly, fair value hedge accounting was used.
The Company records the fair value of its interest rate swaps on the balance sheet in other assets or other liabilities depending on the fair value of the swaps. The notional value of interest rate swap agreements in place at December 26, 2010 and December 27, 2009 was approximately $9,778,700 and $3,013,000, respectively.

 

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Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820, Fair Value Measurements and Disclosures, to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements which are effective for fiscal years beginning after December 15, 2010. The additional disclosure requirements did not have any financial impact on our consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements to eliminate the requirement for public companies to disclose the date through which subsequent events have been evaluated. We will continue to evaluate subsequent events through the date of the issuance of the financial statements; however, consistent with this guidance, the date will no longer be disclosed.
With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations, or cash flows.
Reclassifications
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year’s presentation.
2. SIGNIFICANT BUSINESS TRANSACTIONS
Acquisition of Nine Affiliated BWW Restaurants
On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW restaurants it previously used to manage (“Affiliates Acquisition”). Under the terms of the agreements (“Purchase Agreements”), the purchase price for each of the affiliated restaurants was determined by multiplying each restaurant’s average annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the previous three fiscal years (2007, 2008, and 2009) by two, and subtracting the long-term debt of the respective restaurant. Two of the affiliated restaurants did not have a positive purchase price under the above formula. As a result, the purchase price for those restaurants was set at $1.00 per membership interest percentage. The total purchase price for these nine restaurants was $3,134,790. The Affiliates Acquisition was approved by resolution of the disinterested directors of the Company, who determined that the acquisition terms were at least as favorable as those that could be obtained through arms-length negotiations with an unrelated party. The Company paid the purchase price for each of the affiliated restaurants to each selling shareholder by issuing an unsecured promissory note for the pro-rata value of the equity interest in the affiliated restaurants. The promissory notes bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments, with principal and interest fully amortized over six years.
In accordance with ASC 805-50, Business Combinations: Transactions Between Entities Under Common Control, the Company accounted for the Affiliates Acquisition as a transaction between entities under common control, as if the transaction had occurred at the beginning of the period (i.e., December 28, 2009). Further, prior years amounts also have been retrospectively adjusted to furnish comparative information while the entities were under common control. Because the Affiliates Acquisition was amongst related parties, goodwill could not be recognized. Alternatively, the perceived goodwill associated with the Affiliates Acquisition was recognized as a decrease in stockholders’ equity.
Execution of $15 Million Comprehensive Debt Facility
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a credit facility (the “Credit Facility”) with RBS Citizens, N.A. (“RBS”), a national banking association. The Credit Facility consists of a $6 million development line of credit (“DLOC”) and a $9 million senior secured term loan (“Senior Secured Term Loan”). The Credit Facility is secured by a senior lien on all Company assets.

 

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The Company plans to use the DLOC to increase its number of BWW franchise restaurant locations in the states of Michigan and Florida and to develop additional Bagger Dave’s restaurant locations. The DLOC is for a term of 18 months (the “Draw Period”) and amounts borrowed bear interest at 4% over LIBOR as adjusted monthly. During the Draw Period, the Company may make interest-only payments on the amounts borrowed. The Company may convert amounts borrowed during the Draw Period into one or more term loans bearing interest at 4% over LIBOR as adjusted monthly, with principal and interest amortized over the life of the loan and with a maturity date of May 5, 2017. Any amounts borrowed by the Company during the Draw Period that are not converted into a term loan by November 5, 2011, will automatically be converted to a term loan on the same terms as outlined above. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts, payable quarterly. On September 24, 2010 and March 9, 2011, the Company converted $1,424,000 and $2,900,000, respectively, into a term loan through a fixed-rate swap arrangement. The termination date is May 5, 2017 for both conversions and interest is fixed at a rate of 5.91% for the September 24, 2010 conversion and 6.35% for the March 9, 2011 conversion. Principal and interest payments are amortized over the life of the loan, with monthly payments of approximately $21,000 for the September 24, 2010 conversion and approximately $48,000 for the March 9, 2011 conversion.
The Company used approximately $8.7 million of the Senior Secured Term Loan to repay substantially all of its outstanding senior debt and early repayment fees owed to unrelated parties and the remaining $0.3 million was used for working capital. The Senior Secured Term Loan is for a term of seven years and, through a fixed-rate swap arrangement, bears interest at a fixed rate of 7.10%. Principal and interest payments are amortized over seven years, with monthly payments of approximately $120,000.
Purchase of Building in Brandon, Florida
On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of WINGS, completed the purchase of its previously-leased BWW location at 2055 Badlands Drive, Brandon, FL 33511 (the “Brandon Property”) pursuant to the terms of a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) dated March 25, 2010, between MCA Brandon Enterprises, Inc. and Florida Wings Group, LLC. The Brandon Property includes 2.01 useable acres of land, and is improved by a free-standing, 6,600 square foot BWW restaurant built in 2004. On April 28, 2010, the land and building appraised at $2.6 million. The Company has operated a BWW restaurant at the Brandon Property since June 2004. The total purchase price of the Brandon Property was $2,573,062, exclusive of additional fees, taxes, due diligence, and closing costs. The purchase price was paid through a combination of commercial financing, seller financing, and working capital. MCA Brandon Enterprises, Inc. entered into a Real Estate Loan Agreement (the “Real Estate Loan Agreement”) with Bank of America, a 504 Loan Agreement (the “504 Loan Agreement”) with the U.S. Small Business Administration, and a Promissory Note (“Promissory Note”) with Florida Wings Group, LLC.
The Real Estate Loan Agreement provides for a loan in the total principal amount of $1,150,000, matures on June 23, 2030, and requires equal monthly payments of interest and principal amortized over 25 years. The outstanding amounts borrowed under the Real Estate Loan Agreement bear interest at an initial rate of 6.72% per year. The interest rate will adjust to the U.S. Treasury Securities Rate plus 4% on June 23, 2017, and on the same date every seven years thereafter. After each adjustment date, the interest rate remains fixed until the next adjustment date. The Real Estate Loan Agreement is secured by a senior mortgage on the Brandon Property; the corporate guaranties of the Company, WINGS, and AMC; and the personal guaranty of T. Michael Ansley, President, CEO, Chairman of the Board of Directors, and a principal shareholder of the Company.
The 504 Loan Agreement provides for a loan in the total principal amount of $927,000, has a 20-year maturity, and requires interest-only payments until maturity. The outstanding amounts borrowed under the 504 Loan Agreement bear interest at a rate of 3.58%. The 504 Loan Agreement is secured by a junior mortgage on the Brandon Property.
The Promissory Note is in the principal amount of $245,754, matures on August 1, 2013, is amortized over 15 years, and requires monthly principal and interest installments of $2,209 with the balance due at maturity. The outstanding amounts borrowed under the Promissory Note bear interest at 7% per annum. The Promissory Note is unsecured.

 

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The remainder of the purchase price for the Brandon Property was financed using the Company’s working capital.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
                 
    December 26     December 27  
    2010     2009  
Land
  $ 385,959     $  
Building
    2,255,246        
Equipment
    8,140,417       6,710,092  
Furniture and fixtures
    2,216,347       1,833,347  
Leasehold improvements
    13,925,216       11,585,978  
Restaurant construction-in-progress
    1,247,265       126,804  
 
           
Total
    28,170,450       20,256,221  
Less accumulated depreciation
    (10,917,851 )     (8,600,708 )
 
           
Property and equipment, net
  $ 17,252,599     $ 11,655,513  
 
           
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
                 
    December 26     December 27  
    2010     2009  
Amortized intangibles
               
Franchise fees
  $ 373,750     $ 358,750  
Trademark
    7,475       2,500  
Loan fees
    155,100       66,565  
 
           
Total
    536,325       427,815  
Less accumulated amortization
    (115,246 )     (122,064 )
 
           
Amortized intangibles, net
    421,079       305,751  
 
           
Unamortized intangibles
               
Liquor licenses
    554,382       483,528  
 
           
 
               
Total intangibles
  $ 975,461     $ 789,279  
 
           
Amortization expense for the years ended December 26, 2010 and December 27, 2009 was $37,470 and $23,791, respectively. Based on the current intangible assets and their estimated useful lives, amortization expense for fiscal years 2011, 2012, 2013, 2014, and 2015 is projected to total approximately $47,500 per year.
5. RELATED PARTY TRANSACTIONS
The Affiliates Acquisition (see Note 2) was accomplished by issuing unsecured promissory notes to each selling shareholder that bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments, with principal and interest fully amortized over six years.
Fees for monthly accounting and financial statement compilation services are paid to an entity owned by a director and stockholder of the Company. Fees paid during the years ended December 26, 2010 and December 27, 2009, respectively, were $211,631 and $173,291, respectively.

 

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The Company is a guarantor of debt of two entities that are affiliated through common ownership and management control. Under the terms of the guarantees, the Company’s maximum liability is equal to the unpaid principal and any unpaid interest. There are currently no separate agreements that provide recourse for the Company to recover any amounts from third parties should the Company be required to pay any amounts or otherwise perform under the guarantees and there are no assets held either as collateral or by third parties that, under the guarantees, the Company could liquidate to recover all or a portion of any amounts required to be paid under the guarantees. The event or circumstance that would require the Company to perform under the guarantees is an “event of default”. An “event of default” is defined in the related note agreements principally as a) default of any liability, obligation, or covenant with a bank, including failure to pay, b) failure to maintain adequate collateral security value, or c) default of any material liability or obligation to another party. As of December 26, 2010 and December 27, 2009, the carrying amount of the underlying debt obligation of the related entity was $1,985,467 and $2,938,000, respectively.
The Company’s guarantees extend for the full term of the debt agreements, which expire in 2017. This amount is also the maximum potential amount of future payments the Company could be required to make under the guarantees. As noted above, the Company, and the related entities for which it has provided the guarantees, operates under common ownership and management control and, in accordance with ASC 460 (“ASC 460”), Guarantees, the initial recognition and measurement provisions of ASC 460 do not apply. At December 26, 2010, payments on the debt obligation were current.
Long-term debt (Note 6) included two promissory notes in the original amount of $100,000 each, along with accrued interest, due to two of the Company’s stockholders. The notes commenced in January 2009, bear interest at a rate of 3.2% per annum, and were repaid through monthly installments of approximately $4,444 each over a two-year period which ended in December 2010.
Current debt (Note 6) also includes a promissory note to a DRH stockholder in the amount of $250,000. The note is a demand note that does not require principal or interest payments. Interest is accrued at 8% per annum and is compounded quarterly. The Company has 180 days from the date of demand to pay the principal and accrued interest.
See Note 9 for related party operating lease transactions.
6. LONG-TERM DEBT
Long-term debt consists of the following obligations:
                 
    December 26     December 27  
    2010     2009  
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $120,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 7.10%.
  $ 8,399,538        
 
               
Note payable to a bank secured by a senior mortgage on the Brandon Property, corporate guaranties, and a personal guaranty. Scheduled monthly principal and interest payments are approximately $8,000 for the period beginning July 2010 through maturity in June 2030, at which point a balloon payment of $413,550 is due. Interest is charged based on a fixed rate of 6.72%, per annum, through June 2017, at which point the rate will adjust to the U.S. Treasury Securities Rate plus 4% (and every seven years thereafter).
    1,141,188        
 
               
Note payable to a bank secured by a junior mortgage on the Brandon Property. Matures in 2030 and requires monthly principal and interest installments of approximately $6,100 until maturity. Interest is charged at a rate of 3.58% per annum.
    915,446        
 
               
DLOC to a bank, secured by a senior lien on all company assets. Scheduled interest payments are charged at a rate of 4% over the 30-day LIBOR (the rate at December 26, 2010 was approximately 4.26%). In November 2011, the DLOC will convert into a term loan bearing interest at 4% over the 30-day LIBOR and will mature in May 2017. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts.
    1,424,679        

 

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    December 26     December 27  
    2010     2009  
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $22,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 5.91%.
    1,379,098          
 
               
Unsecured note payable that matures in August 2013 and requires monthly principal and interest installments of approximately $2,200, with the balance due at maturity. Interest is 7% per annum.
    241,832        
 
               
Note payable to a bank secured by the property and equipment of Bearcat Enterprises, Inc. as well as personal guarantees of certain stockholders and various related parties. Scheduled monthly principal and interest payments are approximately $4,600 including annual interest charged at a variable rate of 3.70% above the 30-day LIBOR rate. The rate at December 26, 2010 was approximately 3.96%. The note was repaid during 2010.
          72,975  
 
               
Note payable to Ford Credit secured by a vehicle purchased by Flyer Enterprises, Inc. to be used in the operation of the business. This is an interest-free loan under a promotional 0% rate. Scheduled monthly principal payments are approximately $430. The note matures in April 2013.
    12,016       17,167  
 
               
Various notes payable to a bank or leasing company secured by property and equipment as well as corporate and personal guarantees of DRH; the Company’s subsidiaries; certain stockholders; and/or various related parties. The various agreements called for either monthly interest only, principal, and/or interest payments in the aggregate amount of $117,169. Interest charges ranged from LIBOR plus 2% to a fixed rate of 9.15% per annum. The various notes were scheduled to mature between February 2011 and December 2015. These various notes were paid off upon the execution of the May 5, 2010 Credit Facility.
          7,821,912  
 
               
Obligations under capital leases (Note 10)
          693,196  
 
               
Notes payable — related parties (Note 5)
    3,051,221       354,848  
 
           
 
               
Total long-term debt
    16,565,018       8,960,098  
 
               
Less current portion
    (1,858,262 )     (2,443,057 )
 
           
 
               
Long-term debt, net of current portion
  $ 14,706,756     $ 6,517,041  
 
           

 

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Scheduled principal maturities of long-term debt for each of the five years succeeding December 26, 2010, and thereafter, are summarized as follows:
         
Year   Amount  
2011
  $ 1,858,262  
2012
    1,812,624  
2013
    2,134,724  
2014
    2,040,548  
2015
    2,175,219  
Thereafter
    6,543,641  
 
     
Total
  $ 16,565,018  
 
     
Interest expense was $1,202,299 and $778,612 (including related party interest expense of $154,040 and $22,624 for the fiscal years ended December 26, 2010 and December 27, 2009) for the fiscal years ended December 26, 2010 and December 27, 2009, respectively.
The above agreements contain various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of December 26, 2010.
7. CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)
On July 30, 2007, DRH granted options for the purchase of 150,000 shares of common stock to the directors of the Company. These options vest ratably over a three-year period and expire six years from issuance. At December 26, 2010, these options are fully vested and can be exercised at a price of $2.50 per share.
On July 31, 2010, DRH granted options for the purchase of 210,000 shares of common stock to the directors of the Company. These options vest ratably over a three-year period and expire six years from issuance. Once vested, the options can be exercised at a price of $2.50 per share.
Stock option expense of $25,174 and $32,312, as determined using the Black-Scholes model, was recognized during the fiscal years ended December 26, 2010 and December 27, 2009, respectively, as compensation cost in the consolidated statements of operations and as additional paid-in capital on the consolidated statement of stockholders’ equity to reflect the fair value of shares vested as of December 26, 2010. The fair value of unvested shares, as determined using the Black-Scholes model, is $53,244 as of December 26, 2010. The fair value of the unvested shares will be amortized ratably over the remaining vesting term. The valuation methodology used an assumed term based upon the stated term of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate and volatility factor of 0 based on the concept of minimum value as defined in ASC 718, Compensation-Stock Compensation. A dividend yield of 0% was used because the Company has never paid a dividend and does not anticipate paying dividends in the reasonably foreseeable future.

 

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In October 2009, one member of the Board of Directors exercised 6,000 vested options at a price of $2.50 per share. Consequently, at December 26, 2010, 354,000 shares of authorized common stock are reserved for issuance to provide for the exercise of the Company’s stock options.
On November 30, 2006, pursuant to a private placement, DRH issued warrants to purchase 800,000 common shares at a purchase price of $1 per share. These warrants vested over a three-year period from the issuance date and expired on November 30, 2009. The fair value of these warrants, which totaled approximately $145,000 as determined using the Black-Scholes model, was recognized as an offering cost in 2006. The valuation methodology used an assumed term based upon the stated term of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate and volatility factor of 0 based on the concept of minimum value as defined in ASC 505-50, Equity Based Payments to Non-Employees. A dividend yield of 0% was used because the Company has never paid a dividend and does not anticipate paying dividends in the reasonably foreseeable future. An extension of time to exercise warrants until December 31, 2009 was approved by resolution of the disinterested directors of the Company. As of December 26, 2010, all 800,000 warrants were exercised at the option price of $1 per share.
The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001. No preferred shares are issued or outstanding as of September 26, 2010. Any preferences, rights, voting powers, restrictions, dividend limitations, qualifications, and terms and conditions of redemption shall be set forth and adopted by a board of directors’ resolution prior to issuance of any series of preferred stock.
8. INCOME TAXES
The (provision) benefit for income taxes consists of the following components for the fiscal year ended December 26, 2010 and December 27, 2009:
                 
    December 26     December 27  
    2010     2009  
Federal
               
Current
  $     $  
Deferred
    259,350     (194,480 )
 
               
State
               
Current
    (36,502 )     (17,427 )
Deferred
    (97,022 )     (40,157 )
 
           
 
               
Income Tax (Provision) Benefit
  $ 125,826   $ (252,064 )
 
           
The (provision) benefit for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to loss before income taxes. The items causing this difference are as follows:
                 
    December 26     December 27  
    2010     2009  
Income tax (provision) benefit at federal statutory rate
  $ (87,855 )   $ (207,455 )
State income tax (provision) benefit
    (133,524 )     (57,585 )
Permanent differences
    (81,799 )     (32,111 )
Tax credits
    347,989       93,500  
Other
    81,015     (48,413 )
 
           
 
               
Income tax (provision) benefit
  $ 125,826   $ (252,064 )
 
           

 

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company expects the deferred tax assets to be fully realizable within the next several years. Significant components of the Company’s deferred income tax assets and liabilities are summarized as follows:
                 
    December 26     December 27  
    2010     2009  
Deferred tax assets:
               
Net operating loss carry forwards
  $ 1,252,609     $ 954,370  
Deferred rent expense
    68,509       78,998  
Start-up costs
    190,076       104,327  
Tax credit carry-forwards
    540,533       164,366  
Swap loss recognized for book
          56,970  
Other — including state deferred tax assets
    487,139       193,781  
 
           
Total deferred assets
    2,538,866       1,552,812  
Deferred tax liabilities:
               
Other — including state deferred tax assets
    547,522       146,325  
Tax depreciation in excess of book
    1,505,800       1,159,733  
 
           
Total deferred tax liabilities:
    1,931,122       1,306,058  
 
           
Net deferred income tax assets
  $ 607,744     $ 246,754  
 
           
If deemed necessary by management, the Company establishes valuation allowances in accordance with the provisions of FASB ASC 740, Income Taxes (“ASC 740”). Management continually reviews realizability of deferred tax assets and the Company recognizes these benefits only as reassessment indicates that it is more likely than not that such tax benefits will be realized.
The Company expects to use net operating loss and general business tax credit carry-forwards before its 20-year expiration. A significant amount of net operating loss carry forwards were used when the Company purchased nine affiliated restaurants, which were previously managed by DRH. Net operating loss carry forwards of $1,241,025 and $2,443,119 will expire in 2030 and 2028, respectively. General business tax credits of $347,989, $86,678, $59,722 and $46,144 will expire in 2030, 2029, 2028 and 2027, respectively.
On January 1, 2007, the Company adopted the provisions ASC 740 regarding the accounting for uncertainty in income taxes. There was no impact on the Company’s consolidated financial statements upon adoption.
The Company classifies all interest and penalties as income tax expense. There are no accrued interest amounts or penalties related to uncertain tax positions as of December 26, 2010.
In July 2007, the State of Michigan signed into law the Michigan Business Tax Act (“MBTA”), replacing the Michigan Single Business Tax, with a business income tax and a modified gross receipts tax. This new tax took effect January 1, 2008, and, because the MBTA is based on or derived from income-based measures, the provisions of ASC 740 apply as of the enactment date. The law, as amended, established a deduction to the business income tax base if temporary differences associated with certain assets results in a net deferred tax liability as of December 31, 2007 (the year of enactment of this new tax). This deduction has a carry-forward period to at least tax year 2029. This benefit amounts to $33,762.
The Company is a member of a unitary group with other parties related by common ownership according to the provisions of the MBTA. This group will file a single tax return for all members. An allocation of the current and deferred Michigan business tax incurred by the unitary group has been made based on an estimate of Michigan business tax attributable to the Company and has been reflected as state income tax expense in the accompanying consolidated financial statements consistent with the provisions of ASC 740.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions.

 

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9. OPERATING LEASES (INCLUDING RELATED PARTY)
Lease terms range from four to 20 years, with renewal options, and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.
Total rent expense was $2,293,195 and $2,443,941 for the fiscal years ended December 26, 2010 and December 27, 2009, respectively (of which $329,721 and $329,008 for the fiscal years ended December 26, 2010 and December 27, 2009, respectively, were paid to a related party).
Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at December 26, 2010 are summarized as follows:
         
Year   Amount  
2011
  $ 2,647,419  
2012
    2,735,598  
2013
    2,803,344  
2014
    2,676,717  
2015
    2,372,943  

 

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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 Dave’s locations, respectively. These leases required between 36 and 48 monthly payments of approximately $29,787 combined, including applicable taxes, with options to purchase the assets under lease for a range of $1 to $100 at the conclusion of the lease. These transactions, prior to the Credit Facility, were reflected in the consolidated financial statements as capital leases with combined asset values recorded at their combined purchase price of $1,108,780 and depreciated as purchased furniture and equipment, and the lease obligations included in long-term debt at its present value. As a result of the Senior Secured Term Loan of the Credit Facility, these lease obligations were paid in full, along with applicable prepayment penalties, and are properly reflected in the consolidated financial statements as a component of the Senior Secured Term Loan of the Credit Facility.
11. COMMITMENTS AND CONTINGENCIES
Prior to the Affiliates Acquisition on February 1, 2010, the Company had management service agreements in place with nine BWW restaurants located in Michigan and Florida. These management service agreements contained options that allowed WINGS to purchase each restaurant for a price equal to a factor of twice the average EBITDA of the restaurant for the previous three fiscal years (2007, 2008, and 2009) less long-term debt. These options were exercised on February 1, 2010, six months prior to the expiration of the options and in line with the Company’s strategic plan. Refer to Note 2 for further details.
The Company assumed, from a related entity, an “Area Development Agreement” with BWWI in which the Company undertakes to open 23 BWW restaurants within its designated “development territory”, as defined by the agreement, by October 1, 2016. On December 12, 2008, this agreement was amended adding nine additional restaurants and extending the date of fulfillment to March 1, 2017. Failure to develop restaurants in accordance with the schedule detailed in the agreement could lead to potential penalties of $50,000 for each undeveloped restaurant, payment of the initial franchise fees for each undeveloped restaurant, and loss of rights to development territory. As of December 26, 2010, of the 32 restaurants required to be opened under the Area Development Agreement, 13 of these restaurants had been opened for business, leaving a balance of 19 restaurants to be opened by March 2017. In February 2011, we opened two additional BWW restaurants — one in Traverse City, Michigan and the other in Lakeland, Florida. As of March 25, 2010, we are ahead of schedule and have 17 more restaurant locations to open.
The Company is required to pay BWWI royalties (5% of net sales) and advertising fund contributions (3% of net sales) for the term of the individual franchise agreements. The Company incurred $2,108,061 and $1,996,901 in royalty expense for the fiscal years ended December 26, 2010 and December 27, 2009, respectively. Advertising fund contribution expenses were $1,290,205 and $1,215,493 for the fiscal years ended December 26, 2010 and December 27, 2009, respectively.
The Company is required by its various BWWI franchise agreements to modernize the restaurants during the term of the agreements. The individual agreements generally require improvements between the fifth year and the tenth year to meet the most current design model that BWWI has approved. The modernization costs can range from approximately $50,000 to approximately $500,000 depending on the individual restaurants’ needs. Please refer to the Liquidity and Capital Resources section of the Management’s Discussion and Analysis above for further details.
The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of any litigation is uncertain. While unfavorable outcomes could have adverse effects on the Company’s 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 Company’s results of operations, cash flows, or financial condition.

 

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12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was $1,333,190 and $781,913 during the years ended December 26, 2010 and December 27, 2009, respectively.
Cash paid for income taxes was $183,441 and $0 during the years ended December 26, 2010 and December 27, 2009, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Capital expenditures of $250,000 were funded by capital lease borrowing during the year ended December 26, 2010.
Promissory notes of $3,134,790 were issued to fund the February 1, 2010 Affiliates Acquisition.
The Brandon Property transaction resulted in $2,322,800 of notes payable.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC 820 Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
    Level 1 — Quoted market prices in active markets for identical assets and liabilities;
    Level 2 — Inputs, other than level 1 inputs, either directly or indirectly observable; and
    Level 3 — Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use.
As of December 26, 2010 and December 27, 2009, our financial instruments consisted of cash equivalents, accounts payable, and debt. The fair value of cash equivalents, accounts payable and short-term debt approximate its carrying value, due to its short-term nature. Also, the fair value of notes payable — related party approximates the carrying value due to its short-term maturities.
The fair value of our interest rate swaps is determined based on third-party valuation models, which utilize quoted interest rate curves to calculate the forward value and then discount the forward values to the present period. The Company measures the fair value using broker quotes which are generally based on market observable inputs including yield curves and the value associated with counterparty credit risk. Our interest rate swaps are classified as a Level 2 measurement as these securities are not actively traded in the market, but are observable based on transactions associated with bank loans with similar terms and maturities.
There were no transfers between levels of the fair value hierarchy during the fiscal years ended December 26, 2010 and December 27, 2009. Unrealized loss associated with interest rate swap positions in existence at December 26, 2010, which are reflected in the statement of stockholders’ (deficit) equity, totaled $367,181 for the fiscal year ended December 26, 2010 and are included in comprehensive (loss) income.

 

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The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 26, 2010:
                                         
FAIR VALUE MEASUREMENTS  
                                    Asset/(Liability)  
Description   Level 1     Level 2     Level 3     Total     Total  
Interest Rate Swaps
  $       (367,181 )           (367,181 )     (367,181 )
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 27, 2009:
                                         
FAIR VALUE MEASUREMENTS  
                                    Asset/(Liability)  
Description   Level 1     Level 2     Level 3     Total     Total  
Interest Rate Swaps
  $       (213,604 )           (213,604 )     (213,604 )
As of December 26, 2010, our total debt, less related party debt, was approximately $13.5 million and had a fair value of approximately $8.7 million. As of December 27, 2009, our total debt, less related party debt, was approximately $8.6 million and had a fair value of approximately $5.7 million. The Company estimates the fair value of its fixed-rate debt using discounted cash flow analysis based on the Company’s incremental borrowing rate.
14. SUBSEQUENT EVENTS
Subsequent to December 26, 2010, the Company opened its 20th and 21st BWW restaurants — Traverse City, Michigan, opened on February 7, 2011 and Lakeland, Florida, opened on February 13, 2011. In addition, the Company opened its fourth Bagger Dave’s location in Brighton, Michigan on February 27, 2011.
The Company evaluated subsequent events for potential recognition and/or disclosure through the date of the issuance of these consolidated financial statements.

 

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