Attached files
file | filename |
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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)
(Address of principal executive offices)
Registrants telephone number (248) 223-9160
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates was $34,595,213 based on the
closing sale price of the Companys common stock as reported on the OTC:BB stock market on June 25,
2010.
The number of shares outstanding of the registrants common stock as of March 25, 2011: 18,876,000
shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants definitive Proxy Statement for the 2011 Annual Meeting of Stockholders
are incorporated by reference in Part III 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.
1
Table of Contents
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1) Financial Statements. The following financial statements and report of independent
registered public accounting firms of Diversified Restaurant Holdings and its subsidiaries are
filed as part of this report:
| Report of Independent Registered Public Accounting Firm dated March 28, 2011 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) |
2
Table of Contents
EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
10.4 | Transfer Agreement dated March 20, 2007, by MCA Enterprises
Brandon, Inc. (formerly MCA Enterprises, Inc.), T. Michael Ansley,
Mark C. Ansley, Thomas D. Ansley, Steven Menker, Jason Curtis and
AMC Wings, Inc. and Buffalo Wild Wings International, Inc.
(incorporated by reference to exhibit 10.4 of our Form 10-Q filed
November 12, 2010) |
|||
10.5 | Amendment to Buffalo Wild Wings Area Development Agreement dated
March 20, 2007 (incorporated by reference to exhibit 10.5 of our
Form 10-Q filed November 12, 2010) |
|||
10.6 | Amendment to Buffalo Wild Wings Area Development Agreement dated
November 5, 2007 (incorporated by reference to exhibit 10.5 of our
Form 10-Q filed November 12, 2010) |
|||
10.7 | Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by
and between Buffalo Wild Wings International, Inc. and AMC
Traverse City, Inc., a wholly-owned subsidiary of the Company
(incorporated by reference to exhibit 10.1 to our Form 8-K filed
September 10, 2010) |
|||
10.8 | Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by
and between Buffalo Wild Wings International, Inc. and AMC
Lakeland, Inc., a wholly-owned subsidiary of the Company
(incorporated by reference to exhibit 10.2 to our Form 8-K filed
September 10, 2010) |
|||
10.9 | Form of Stock Option Agreement (incorporated by reference to
exhibit 10.1 to our Form 8-K filed August 5, 2010) |
|||
10.10 | Amendment to Buffalo Wild Wings Area Development Agreement dated
December 27, 2003 (incorporated by reference to exhibit 10.12 of
our Form 10-Q filed November 12, 2010) |
|||
10.11 | Real Estate Loan Agreement dated June 23, 2010 between our
subsidiary, MCA Enterprises Brandon, Inc., and Bank of America
N.A. (incorporated by reference to exhibit 10.1 to our Form 10-Q
filed August 10, 2010) |
|||
10.12 | Bridge Loan Agreement dated June 23, 2010 between our subsidiary,
MCA Enterprises Brandon, Inc., and Bank of America N.A.
(incorporated by reference to exhibit 10.2 to our Form 10-Q filed
August 10, 2010). |
|||
10.13 | Buffalo Wild Wings Franchise Agreement dated June 3, 2010 between
our subsidiary, AMC Ft. Myers, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10.4 to
our Form 10-Q filed August 10, 2010). |
|||
10.14 | RBS Credit Agreement dated May 5, 2010 between DRH and RBS (filed
with the Securities and Exchange Commission as an exhibit to the
Companys Form 8-K on May 10, 2010) |
|||
10.15 | Buffalo Wild Wings Retail Center Lease dated December 7, 2009
between our subsidiary, AMC Marquette, Inc., and Centrup
Hospitality, LLC (incorporated by reference to exhibit 10 of our
Form 8-K filed December 11, 2009) |
|||
10.16 | Buffalo Wild Wings Retail Center Lease dated December 2, 2009
between our subsidiary, AMC Chesterfield, Inc., and Chesterfield
Development Company, LLC (incorporated by reference to exhibit 10
for our Form 8-K filed December 7, 2009) |
|||
10.17 | Buffalo Wild Wings Franchise Agreement dated October 20, 2009
between our subsidiary, AMC Marquette, Inc., and Buffalo Wild
Wings International, Inc. (incorporated by reference to exhibit
10.1 of our Form 8-K filed October 26, 2009) |
|||
10.18 | Buffalo Wild Wings Franchise Agreement dated October 20, 2009
between our subsidiary, AMC Chesterfield, Inc., and Buffalo Wild
Wings International, Inc. (incorporated by reference to exhibit
10.2 of our Form 8-K filed October 26, 2009) |
|||
10.19 | Master Lease Agreement dated September 9, 2009 between our
subsidiary, Troy Burgers, Inc., and Novi Town Center Investors,
LLC (incorporated by reference to exhibit 10 of our Form 8-K filed
September 10, 2009) |
3
Table of Contents
EXHIBIT NO. | EXHIBIT DESCRIPTION | |||
10.20 | Master Lease Agreement dated February 12, 2009 between our
subsidiary, AMC Flint, Inc., and CoActiv Capital Partners, Inc.
(incorporated by reference to exhibit 10 of our Form 8-K filed
February 17, 2009) |
|||
10.21 | Buffalo Wild Wings Amendment to Area Development Agreement dated
December 10, 2008 between our subsidiary, AMC Wings, Inc., and
Buffalo Wild Wings International, Inc. (incorporated by reference
to exhibit 10.1 of our Form 8-K filed December 15, 2008) |
|||
10.22 | Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between
our subsidiary, AMC Port Huron, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10 of
our form 8-K filed July 8, 2008) |
|||
10.23 | Buffalo Wild Wings Franchise Agreement dated July 1, 2008 between
our subsidiary, AMC Flint, Inc., and Buffalo Wild Wings
International, Inc. (incorporated by reference to exhibit 10 of
our form 8-K filed July 8, 2008) |
|||
10.24 | Retail Center Lease dated June 30, 2008 between our subsidiary,
AMC Port Huron, Inc., and Port Builders, Inc., Walter Sparling and
Mary L. Sparling (incorporated by reference to exhibit 10 of our
form 8-K filed July 7, 2008) |
|||
10.25 | Retail Center Lease dated June 30, 2008 between our subsidiary,
AMC Flint, Inc., and Ramco-Gershenson Properties, L.P.
(incorporated by reference to exhibit 10 of our form 8-K filed
July 7, 2008) |
|||
10.26 | Form of Stock Option Agreement, dated July 30, 2007, entered into
by and between the Company and Directors Gregory Stevens, T.
Michael Ansley, Jay Alan Dusenberry, Jason T. Curtis and David
Ligotti (incorporated by reference to exhibit 10.24 of our Form 10-K filed March 26, 2010) |
|||
14 | Code of Ethics (incorporated by reference to our Form 10-K for the
fiscal year ended December 31, 2008, as filed with the Securities
and Exchange Commission on March 31, 2009) |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906
of Sarbanes Oxley Act of 2002 |
4
Table of Contents
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 |
5
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC.
Index to Consolidated Financial Statements
F-1 | ||||
F-2 | ||||
CONSOLIDATED FINANCIAL STATEMENTS: |
||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
6
Table of Contents
Silberstein Ungar, PLLC
CPAs and Business Advisors
phone (248) 203-0080
fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025
fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025
www.sucpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Diversified Restaurant Holdings, Inc.
Southfield, MI
Diversified Restaurant Holdings, Inc.
Southfield, MI
We have audited the accompanying
consolidated balance sheets of Diversified Restaurant Holdings, Inc. and
Subsidiaries as of December 26, 2010 and December 27, 2009, and the
related consolidated statements of 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
Bingham Farms, Michigan
March 28, 2011, except for the restated fully diluted earnings per share as to which the date is April 11, 2011
F-1
Table of Contents
March
28, 2011 and April 11, 2011
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control
over financial reporting that is designed to produce reliable financial statements presented in
conformity with generally accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control. Accordingly, even an effective system of internal
control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Companys system of internal control over financial reporting that is
designed to produce reliable financial statements presented in conformity with generally accepted
accounting principles as of December 26, 2010. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 26, 2010, Diversified Restaurant Holdings,
Inc. maintained an effective system of internal control over financial reporting that is designed
to produce reliable financial statements presented in conformity with generally accepted accounting
principles based on those criteria.
Managements report is not subject to attestation by the companys registered public accounting
firm pursuant to Section 404(c) of the Sarbanes-Oxley Act. Accordingly, this Annual Report does
not include an attestation report of the companys registered public accounting firm regarding
internal control over financial reporting.
Diversified Restaurant Holdings, Inc. |
||
/s/ T. Michael Ansley |
||
Chairman of the Board, President, Chief Executive Officer, |
||
and Principal Executive Officer |
||
/s/ David G. Burke |
||
Chief Financial Officer, Treasurer, Principal Financial Officer, |
||
and Principal Accounting Officer |
F-2
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 1,305,031 | $ | 1,594,362 | ||||
Accounts receivable related party |
| 376,675 | ||||||
Inventory |
339,059 | 307,301 | ||||||
Prepaid assets |
209,708 | 152,702 | ||||||
Other current assets |
43,348 | 42,382 | ||||||
Total current assets |
1,897,146 | 2,473,422 | ||||||
Property and equipment, net (Note 3) |
17,252,599 | 11,655,513 | ||||||
Intangible assets, net (Note 4) |
975,461 | 789,279 | ||||||
Other long-term assets |
63,539 | 11,780 | ||||||
Deferred income taxes (Note 8) |
607,744 | 246,754 | ||||||
Total assets |
$ | 20,796,489 | $ | 15,176,748 | ||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt (Note 6) |
$ | 1,858,262 | $ | 2,443,057 | ||||
Accounts payable |
1,388,397 | 527,151 | ||||||
Accrued liabilities |
1,089,112 | 674,768 | ||||||
Deferred rent |
127,075 | 104,940 | ||||||
Total current liabilities |
4,462,846 | 3,749,916 | ||||||
Accrued rent |
793,774 | 846,014 | ||||||
Deferred rent |
928,757 | 638,024 | ||||||
Related party payable |
| 430,351 | ||||||
Other liabilities interest rate swap |
367,181 | 213,604 | ||||||
Long-term debt, less current portion (Note 6) |
14,706,756 | 6,517,041 | ||||||
Total liabilities |
21,259,314 | 12,394,950 | ||||||
Commitments and contingencies (Notes 5, 6, 9, 10, and 11) |
||||||||
Stockholders (deficit) equity (Note 7) |
||||||||
Common stock $0.0001 par value; 100,000,000 shares authorized, 18,876,000
and 18,626,000 shares, respectively, issued and outstanding |
1,888 | 1,863 | ||||||
Additional paid-in capital |
2,631,304 | 2,356,155 | ||||||
Retained earnings (accumulated deficit) |
(2,728,836 | ) | 423,780 | |||||
Comprehensive (loss) income |
(367,181 | ) | | |||||
Total
stockholders (deficit) equity |
(462,825 | ) | 2,781,798 | |||||
Total
liabilities and stockholders (deficit) equity |
$ | 20,796,489 | $ | 15,176,748 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Revenue |
||||||||
Food and beverage sales |
$ | 45,248,018 | $ | 41,754,515 | ||||
Total revenue |
45,248,018 | 41,754,515 | ||||||
Operating expenses |
||||||||
Compensation costs |
13,293,945 | 11,470,244 | ||||||
Food and beverage costs |
13,340,619 | 13,029,103 | ||||||
General and administrative |
10,738,464 | 9,728,455 | ||||||
Pre-opening |
654,764 | 164,114 | ||||||
Occupancy |
2,957,902 | 2,935,363 | ||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | ||||||
Total operating expenses |
43,664,827 | 39,691,027 | ||||||
Operating profit |
1,583,191 | 2,063,488 | ||||||
Interest expense |
(1,202,299 | ) | (778,612 | ) | ||||
Other income, net |
28,317 | 259,413 | ||||||
Income before income taxes |
409,209 | 1,544,289 | ||||||
Income tax
benefit (provision) |
125,826 | (350,051 | ) | |||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Basic earnings per share as reported |
$ | 0.03 | $ | 0.07 | ||||
Fully diluted earnings per share as 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.
F-4
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Comprehensive income |
||||||||
Unrealized
changes in fair
value of cash
flow hedges |
(367,181 | ) | | |||||
Comprehensive income |
$ | 167,854 | $ | 1,194,238 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS (DEFICIT) EQUITY
Retained | ||||||||||||||||||||||||
Additional | Earnings | Total | ||||||||||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | (Loss) Income | (Deficit) Equity | |||||||||||||||||||
Balances December 31, 2008 |
18,070,000 | $ | 1,807 | $ | 1,758,899 | $ | 525,332 | $ | | $ | 2,286,038 | |||||||||||||
Share-based compensation (Note 7) |
32,312 | $ | 32,312 | |||||||||||||||||||||
Exercise of employee stockoptions (Note 7) |
6,000 | 1 | 14,999 | $ | 15,000 | |||||||||||||||||||
Shares issued for warrants exercised at $1.00
per share (Note 7) |
550,000 | 55 | 549,945 | $ | 550,000 | |||||||||||||||||||
Dividends
paid prior to acquisition |
(1,295,790 | ) | $ | (1,295,790 | ) | |||||||||||||||||||
Net income |
1,194,238 | $ | 1,194,238 | |||||||||||||||||||||
Balances December 27, 2009 |
18,626,000 | 1,863 | 2,356,155 | 423,780 | 0 | 2,781,798 | ||||||||||||||||||
Shares issued for warrants exercised at $1.00
per share (Note 7) |
250,000 | 25 | 249,975 | | | 250,000 | ||||||||||||||||||
Share-based compensation (Note 7) |
| | 25,174 | | | 25,174 | ||||||||||||||||||
Acquisition of BWW restaurants (Note 2) |
| | | (3,134,790 | ) | | (3,134,790 | ) | ||||||||||||||||
Dividends
paid prior to acquisition |
| | | (552,861 | ) | (552,861 | ) | |||||||||||||||||
Unrealized changes in fair value of cash flow hedges |
| | | | (367,181 | ) | (367,181 | ) | ||||||||||||||||
Net income |
| | | 535,035 | | 535,035 | ||||||||||||||||||
Balances December 26, 2010 |
18,876,000 | $ | 1,888 | $ | 2,631,304 | $ | (2,728,836 | ) | $ | (367,181 | ) | $ | (462,825 | ) | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 535,035 | $ | 1,194,238 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
2,679,133 | 2,363,748 | ||||||
Loss on disposal of property and equipment |
20,966 | 310 | ||||||
Share-based compensation |
25,174 | 32,312 | ||||||
Deferred income taxes |
(360,990 | ) | 353,203 | |||||
Decrease
(increase) in operating assets: |
||||||||
Accounts receivable related party |
376,675 | 165,134 | ||||||
Inventory |
(31,758 | ) | 35,508 | |||||
Prepaid assets |
(57,006 | ) | (41,718 | ) | ||||
Other current assets |
(966 | ) | 4,115 | |||||
Intangible assets |
(82,666 | ) | (48,710 | ) | ||||
Other long-term assets |
(51,759 | ) | (11,780 | ) | ||||
Increase
(decrease) in operating liabilities: |
||||||||
Accounts payable |
861,246 | (272,129 | ) | |||||
Accrued liabilities |
414,344 | 75,498 | ||||||
Accrued rent |
(52,240 | ) | 200,357 | |||||
Deferred rent |
312,868 | (112,470 | ) | |||||
Net cash provided by (used in) operating activities |
4,588,056 | 3,939,406 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(5,827,947 | ) | (718,070 | ) | ||||
Net cash provided by (used in) investing activities |
(5,827,947 | ) | (718,070 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of long-term debt and notes payable |
3,450,746 | 694,986 | ||||||
Repayments of long-term debt and notes payable |
(2,197,325 | ) | (2,620,629 | ) | ||||
Proceeds from issuance of common stock |
250,000 | 565,000 | ||||||
Dividends
paid prior to acquisition |
(552,861 | ) | (1,295,790 | ) | ||||
Net cash provided by (used in) financing activities |
950,560 | (2,656,433 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(289,331 | ) | 564,903 | |||||
Cash and cash equivalents, beginning of period |
1,594,362 | 1,029,459 | ||||||
Cash and cash equivalents, end of period |
$ | 1,305,031 | $ | 1,594,362 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (DRH)
was formed on September 25, 2006. DRH and its
wholly-owned subsidiaries (collectively referred to as the
Company), including AMC Group, Inc, (AMC), AMC Wings, Inc. (WINGS), and AMC Burgers,
Inc. (BURGERS), develop, own, and operate Buffalo
Wild Wings (BWW) restaurants located throughout Michigan and Florida and the Companys own
restaurant concept, Bagger Daves Legendary Burger TavernTM (Bagger Daves), as
detailed below.
The following organizational chart outlines the corporate
structure of DRH and its
subsidiaries, all of which are wholly-owned by the Company. A brief textual description of the
entities follows the organizational chart. DRH is incorporated in the State of Nevada. All other
entities are incorporated or organized in the State of Michigan.
AMC was formed on March 28, 2007 and serves as the operational and administrative center for the
Company. AMC renders management and advertising services to WINGS and its subsidiaries and BURGERS
and its subsidiaries. Prior to the February 1, 2010 acquisition (see Note 2 for details), AMC also
rendered management and advertising services to nine BWW restaurants affiliated with the Company
through common ownership and management control. Services rendered by AMC include marketing,
restaurant operations, restaurant management consultation, hiring and training of management and
staff, and other management services reasonably required in the ordinary course of restaurant
operations.
WINGS was formed on March 12, 2007 and serves as a holding company for its BWW restaurants. WINGS,
through its subsidiaries, holds 19 BWW restaurants that were in operation as of December 26, 2010.
The Company also executed franchise agreements with Buffalo Wild Wings, Inc. (BWWI) to open two
more restaurants, one in Lakeland, Florida, and one in Traverse City,
Michigan. WINGS
operates 21 BWW restaurants as of March 25, 2011.
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Table of Contents
The Company is economically dependent on retaining its franchise rights with BWWI. As of March 25,
2011, the franchise agreements have specific initial term expiration dates ranging from November
23, 2011 through September 7, 2030, depending on the date each was executed and its initial term.
The franchise agreements are renewable at the option of the franchisor and are generally renewable
if the franchisee has complied with the franchise agreement. When factoring in any applicable
renewals, as of March 25, 2011, the franchise agreements have specific expiration dates ranging
from January 29, 2019 through September 7, 2045. The Company is in compliance with the terms of
these agreements at March 25, 2011. The Company is under contract with BWWI to enter into a total
of 38 franchise agreements by 2017 (see Note 11 for details). The Company held an option to
purchase the nine affiliated restaurants that were managed by AMC, which it exercised on February
1, 2010 (see Note 2 for details).
BURGERS was formed on March 12, 2007 to own the Companys Bagger Daves restaurants, a
full-service, ultra-casual dining concept developed by the Company. BURGERS subsidiaries, Berkley
Burgers, Inc., Ann Arbor Burgers, Inc., and Troy Burgers, Inc., own restaurants currently in
operation in Berkley, Ann Arbor, and Novi, Michigan, respectively. Another Brighton, Michigan
restaurant location, Brighton Burgers, Inc. opened to the public on February 27, 2011. BURGERS also
has a wholly-owned subsidiary named Bagger Daves Franchising Corporation that was formed to act as
the franchisor for the Bagger Daves concept. We have filed for rights to franchise in Michigan,
Ohio, Illinois, and Indiana, but have not yet franchised any Bagger Daves restaurants.
We follow accounting standards set by the Financial Accounting Standards Board (FASB). The FASB
sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, and cash flows. References to GAAP issued by
the FASB in these footnotes are to the FASB Accounting Standards Codification (Codification or
ASC). The FASB finalized the Codification effective for periods ending on or after September 15,
2009. Prior FASB standards, like FASB Statement No. 13, Accounting for Leases, are no longer being
issued by the FASB. For further discussion of the ASC, refer to the Recent Accounting
Pronouncements section of this note.
Principles of Consolidation
The consolidated financial statements include the accounts of DRH and its subsidiaries, AMC, WINGS
and its subsidiaries, and BURGERS and its subsidiaries. The consolidated financial statements also
include the account balances of the nine acquired, affiliated restaurants resulting from the
February 1, 2010 acquisition, as they are now subsidiaries of WINGS (refer to Note 2 for details).
All significant intercompany accounts and transactions have been eliminated upon consolidation.
Fiscal Year
During 2009, the Company changed its fiscal year to utilize a 52- or 53-week accounting period that
ends on the last Sunday in December. Consequently, fiscal year 2010 ended on December 26, 2010,
comprising 52 weeks. Fiscal year 2009 ended on December 27, 2009, comprising 51 weeks
and three days.
Segment Reporting
Reportable segments are strategic business units that offer different products and services, are
managed separately because each business requires different executional strategies, cater to
different clients needs, and are subject to regular review by our chief operating decision maker.
There are no separately
reportable business segments at December 26, 2010 and December 27, 2009.
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Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company
considers all highly-liquid investments purchased with original maturities of three months or less
to be cash equivalents. The Company, at times throughout the year, may, in the ordinary course of
business, maintain cash balances in excess of federally-insured limits. Management does not believe
the Company is exposed to any unusual risks on such deposits.
Revenue Recognition
Revenues from food and beverage sales are recognized and generally collected at the point of sale.
All
sales are presented on a net basis and all sales taxes are excluded from revenue.
Accounts Receivable Related Party
Accounts receivable related party were stated at the amount management expects to collect from
outstanding balances. Balances that are outstanding after management has used reasonable collection
efforts are written off with a corresponding charge to bad debt expense. The balance at December
27, 2009 related principally to amounts advanced to an affiliate that owns the real estate at one
BWW restaurant. This receivable was paid in full during 2010. Management does not believe any
allowances for doubtful accounts were necessary at December 27, 2009. There are no accounts
receivable related party at December 26, 2010.
Accounting for Gift Cards
The Company records the net increase or decrease in BWW gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. The gift card processor deducts
gift card sales dollars from each restaurants bank account weekly and deposits gift card
redemption dollars weekly. Under this centralized system, any breakage would be recorded by Blazin
Wings, Inc., a subsidiary of BWWI, and be subject to the breakage laws in the state of Minnesota,
where Blazin Wings, Inc. is located.
The Company records the net increase or decrease in Bagger Daves gift card sales versus gift card
redemptions to the gift card liability account on a monthly basis. Michigan law states that gift
cards cannot expire and any post-sale fees cannot be assessed until five years after the date of
gift card purchase by the consumer. There is no breakage attributable to Bagger Daves restaurants
for the Company to record as of December 26, 2010 and December 27, 2009.
The Companys gift card liability was $109,422 and $30,067 at December 26, 2010 and December 27,
2009, respectively.
Lease Accounting
Certain operating leases provide for minimum annual payments that increase over the life of the
lease. Typically, leases have an initial lease term of between 10 and 15 years and contain renewal
options under which we may extend the terms for periods of three to five years. The aggregate
minimum annual payments are expensed on a straight-line basis commencing at the start of our
construction period and extending over the term of the related lease, with consideration of renewal
options unless management does not intend on renewing the lease. The amount by which straight-line
rent exceeds actual lease payment requirements in the early years of the lease is accrued as
deferred rent liability and reduced in later years when the actual cash payment requirements exceed
the straight-line expense. The Company also accounts, in its straight-line computation, for the
effect of any rental holidays, free rent periods, or tenant incentives.
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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 Companys revenues for the years ended December 26, 2010 and
December 27, 2009, respectively, were generated from food and beverage sales from restaurants
located in Michigan.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Financial Instrument
The Company utilizes interest rate swap agreements with a bank to fix interest rates on a portion
of the Companys portfolio of variable rate debt, which reduces exposure to interest rate
fluctuations. The Company does not use any other types of derivative financial instruments to hedge
such exposures, nor does it use derivatives for speculative purposes.
On May 5, 2010, the Company entered into a $15 million dollar debt facility with RBS Citizens Bank,
N.A. (RBS), as further described in Notes 2 and 6, in which $6 million is in the form of a
development line of credit (of which $1.4 million was subsequently termed out and affixed to a
fixed-rate swap arrangement) and $9 million is a senior secured term loan with a fixed-rate swap
arrangement. In conjunction with the new debt facility, the existing swap agreements were
terminated, resulting in a notional principal amount reduction of $214,074 and a termination fee of
$19,176 that was appropriately recorded as interest expense.
The new interest rate swap agreements qualify for hedge accounting. As such, the Company
is accounting for the hedged instrument as cash flow hedges. Under the cash flow hedge method,
the effective portion of the derivative is marked to fair value, based on third-party valuation
models, as a component of accumulated other comprehensive income (loss). The interest rate swap
liabilities at December 27, 2009 were not treated as cash flow hedges and,
accordingly, fair value hedge accounting was used.
The Company records the fair value of its interest rate swaps on the balance sheet in other assets
or other liabilities depending on the fair value of the swaps. The notional value of interest rate
swap agreements in place at December 26, 2010 and December 27, 2009 was approximately $9,778,700
and $3,013,000, respectively.
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Table of Contents
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 (ASU 2010-06),
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU
2010-06 amends ASC 820, Fair Value Measurements and Disclosures, to require new disclosures related
to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure
requirements related to Level 3 measurements. The guidance also clarifies existing fair value
measurement disclosures about the level of disaggregation and about inputs and valuation techniques
used to measure fair value. The additional disclosure requirements are effective for the first
reporting period beginning after December 15, 2009, except for the additional disclosure
requirements related to Level 3 measurements which are effective for fiscal years beginning after
December 15, 2010. The additional disclosure requirements did not have any financial impact on our
consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure
Requirements to eliminate the requirement for public companies to disclose the date through which
subsequent events have been evaluated. We will continue to evaluate subsequent events through the
date of the issuance of the financial statements; however, consistent with this guidance, the date
will no longer be disclosed.
With the exception of the pronouncements noted above, no other accounting standards or
interpretations issued or recently adopted are expected to have a material impact on the Companys
financial position, operations, or cash flows.
Reclassifications
Certain reclassifications have been made to the prior year consolidated financial statements to
conform to the current years presentation.
2. SIGNIFICANT BUSINESS TRANSACTIONS
Acquisition of Nine Affiliated BWW Restaurants
On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW
restaurants it previously used to manage (Affiliates Acquisition). Under the terms of the
agreements (Purchase Agreements), the purchase price for each of the affiliated restaurants was
determined by multiplying each restaurants average annual earnings before interest, taxes,
depreciation and amortization (EBITDA) for the previous three fiscal years (2007, 2008, and 2009)
by two, and subtracting the long-term debt of the respective restaurant. Two of the affiliated
restaurants did not have a positive purchase price under the above formula. As a result, the
purchase price for those restaurants was set at $1.00 per membership interest percentage. The total
purchase price for these nine restaurants was $3,134,790. The Affiliates Acquisition was approved
by resolution of the disinterested directors of the Company, who determined that the acquisition
terms were at least as favorable as those that could be obtained through arms-length negotiations
with an unrelated party. The Company paid the purchase price for each of the affiliated restaurants
to each selling shareholder by issuing an unsecured promissory note for the pro-rata value of the
equity interest in the affiliated restaurants. The promissory notes bear interest at 6% per year,
mature on February 1, 2016, and are payable in quarterly installments, with principal and interest
fully amortized over six years.
In accordance with ASC 805-50, Business Combinations: Transactions Between Entities Under Common
Control, the Company accounted for the Affiliates Acquisition as a transaction between entities
under common control, as if the transaction had occurred at the beginning of the period (i.e.,
December 28, 2009). Further, prior years amounts also have been retrospectively adjusted to furnish
comparative information while the entities were under common control. Because the Affiliates
Acquisition was amongst related parties, goodwill could not be
recognized. Alternatively, the perceived
goodwill associated with the Affiliates Acquisition was recognized as a decrease in stockholders
equity.
Execution of $15 Million Comprehensive Debt Facility
On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a credit
facility (the Credit Facility) with RBS Citizens, N.A. (RBS), a national banking association.
The Credit Facility consists of a
$6 million development line of credit (DLOC) and a $9 million senior secured term loan (Senior
Secured Term Loan). The Credit Facility is secured by a senior lien on all Company assets.
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The Company plans to use the DLOC to increase its number of BWW franchise restaurant locations in
the states of Michigan and Florida and to develop additional Bagger Daves restaurant locations.
The DLOC is for a term of 18 months (the Draw Period) and amounts borrowed bear interest at 4%
over LIBOR as adjusted monthly. During the Draw Period, the Company may make interest-only payments
on the amounts borrowed. The Company may convert amounts borrowed during the Draw Period into one
or more term loans bearing interest at 4% over LIBOR as adjusted monthly, with principal and
interest amortized over the life of the loan and with a maturity date of May 5, 2017. Any amounts
borrowed by the Company during the Draw Period that are not converted into a term loan by November
5, 2011, will automatically be converted to a term loan on the same terms as outlined above. The
DLOC includes a carrying cost of .25% per year of any available but undrawn amounts, payable
quarterly. On September 24, 2010 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 Companys
working capital.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Land |
$ | 385,959 | $ | | ||||
Building |
2,255,246 | | ||||||
Equipment |
8,140,417 | 6,710,092 | ||||||
Furniture and fixtures |
2,216,347 | 1,833,347 | ||||||
Leasehold improvements |
13,925,216 | 11,585,978 | ||||||
Restaurant construction-in-progress |
1,247,265 | 126,804 | ||||||
Total |
28,170,450 | 20,256,221 | ||||||
Less accumulated depreciation |
(10,917,851 | ) | (8,600,708 | ) | ||||
Property and equipment, net |
$ | 17,252,599 | $ | 11,655,513 | ||||
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Amortized intangibles |
||||||||
Franchise fees |
$ | 373,750 | $ | 358,750 | ||||
Trademark |
7,475 | 2,500 | ||||||
Loan fees |
155,100 | 66,565 | ||||||
Total |
536,325 | 427,815 | ||||||
Less accumulated amortization |
(115,246 | ) | (122,064 | ) | ||||
Amortized intangibles, net |
421,079 | 305,751 | ||||||
Unamortized intangibles |
||||||||
Liquor licenses |
554,382 | 483,528 | ||||||
Total intangibles |
$ | 975,461 | $ | 789,279 | ||||
Amortization expense for the years ended December 26, 2010 and December 27, 2009 was $37,470 and
$23,791, respectively. Based on the current intangible assets and their estimated useful lives,
amortization expense for fiscal years 2011, 2012, 2013, 2014, and 2015 is projected to total
approximately $47,500 per year.
5. RELATED PARTY TRANSACTIONS
The Affiliates Acquisition (see Note 2) was accomplished by issuing unsecured promissory notes to
each selling shareholder that bear interest at 6% per year, mature on February 1, 2016, and are
payable in quarterly installments, with principal and interest fully amortized over six years.
Fees for monthly accounting and financial statement compilation services are paid to an entity
owned by a director and stockholder of the Company. Fees paid during the years ended December 26,
2010 and December 27, 2009, respectively, were $211,631 and $173,291, respectively.
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The Company is a guarantor of debt of two entities that are affiliated through common ownership and
management control. Under the terms of the guarantees, the Companys maximum liability is equal to
the unpaid principal and any unpaid interest. There are currently no separate agreements that
provide recourse for the Company to recover
any amounts from third parties should the Company be required to pay any amounts or otherwise
perform under the guarantees and there are no assets held either as collateral or by third parties
that, under the guarantees, the Company could liquidate to recover all or a portion of any amounts
required to be paid under the guarantees. The event or circumstance that would require the Company
to perform under the guarantees is an event of default. An event of default is defined in the
related note agreements principally as a) default of any liability, obligation, or covenant with a
bank, including failure to pay, b) failure to maintain adequate collateral security value, or c)
default of any material liability or obligation to another party. As of December 26, 2010 and
December 27, 2009, the carrying amount of the underlying debt obligation of the related entity was
$1,985,467 and $2,938,000, respectively.
The Companys guarantees extend for the full term of the debt agreements, which expire in 2017.
This amount is also the maximum potential amount of future payments the Company could be required
to make under the guarantees. As noted above, the Company, and the related entities for which it
has provided the guarantees, operates under common ownership and management control and, in
accordance with ASC 460 (ASC 460), Guarantees, the initial recognition and measurement provisions
of ASC 460 do not apply. At December 26, 2010, payments on the debt obligation were current.
Long-term debt (Note 6) included two promissory notes in the original amount of $100,000 each,
along with accrued interest, due to two of the Companys stockholders. The notes commenced in
January 2009, bear interest at a rate of 3.2% per annum, and were repaid through monthly
installments of approximately $4,444 each over a two-year period which ended in December 2010.
Current debt (Note 6) also includes a promissory note to a DRH stockholder in the amount of
$250,000. The note is a demand note that does not require principal or interest payments. Interest
is accrued at 8% per annum and is compounded quarterly. The Company has 180 days from the date of
demand to pay the principal and accrued interest.
See Note 9 for related party operating lease transactions.
6. LONG-TERM DEBT
Long-term debt consists of the following obligations:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Note payable to a bank secured by a
senior lien on all company assets.
Scheduled monthly principal and interest
payments are approximately $120,000
through maturity in May 2017. Interest is
charged based on a swap arrangement
designed to yield a fixed annual rate of
7.10%. |
$ | 8,399,538 | | |||||
Note payable to a bank secured by a
senior mortgage on the Brandon Property,
corporate guaranties, and a personal
guaranty. Scheduled monthly principal and
interest payments are approximately
$8,000 for the period beginning July 2010
through maturity in June 2030, at which
point a balloon payment of $413,550 is
due. Interest is charged based on a fixed
rate of 6.72%, per annum, through June
2017, at which point the rate will adjust
to the U.S. Treasury Securities Rate plus
4% (and every seven years thereafter). |
1,141,188 | | ||||||
Note payable to a bank secured by a
junior mortgage on the Brandon Property.
Matures in 2030 and requires monthly
principal and interest installments of
approximately $6,100 until maturity.
Interest is charged at a rate of 3.58%
per annum. |
915,446 | | ||||||
DLOC to a bank, secured by a senior lien
on all company assets. Scheduled interest
payments are charged at a rate of 4% over
the 30-day LIBOR (the rate at December
26, 2010 was approximately 4.26%). In
November 2011, the DLOC will convert into
a term loan bearing interest at 4% over
the 30-day LIBOR and will mature in May
2017. The DLOC includes a carrying cost
of .25% per year of any available but
undrawn amounts. |
1,424,679 | |
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December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Note payable to a bank secured by a
senior lien on all company assets.
Scheduled monthly principal and interest
payments are approximately $22,000
through maturity in May 2017. Interest is
charged based on a swap arrangement
designed to yield a fixed annual rate of
5.91%. |
1,379,098 | |||||||
Unsecured note payable that matures in
August 2013 and requires monthly
principal and interest installments of
approximately $2,200, with the balance
due at maturity. Interest is 7% per
annum. |
241,832 | | ||||||
Note payable to a bank secured by the
property and equipment of Bearcat
Enterprises, Inc. as well as personal
guarantees of certain stockholders and
various related parties. Scheduled
monthly principal and interest payments
are approximately $4,600 including annual
interest charged at a variable rate of
3.70% above the 30-day LIBOR rate. The
rate at December 26, 2010 was
approximately 3.96%. The note was repaid
during 2010. |
| 72,975 | ||||||
Note payable to Ford Credit secured by a
vehicle purchased by Flyer Enterprises,
Inc. to be used in the operation of the
business. This is an interest-free loan
under a promotional 0% rate. Scheduled
monthly principal payments are
approximately $430. The note matures in
April 2013. |
12,016 | 17,167 | ||||||
Various notes payable to a bank or
leasing company secured by property and
equipment as well as corporate and
personal guarantees of DRH; the Companys
subsidiaries; certain stockholders;
and/or various related parties. The
various agreements called for either
monthly interest only, principal, and/or
interest payments in the aggregate amount
of $117,169. Interest charges ranged from
LIBOR plus 2% to a fixed rate of 9.15%
per annum. The various notes were
scheduled to mature between February 2011
and December 2015. These various notes
were paid off upon the execution of the
May 5, 2010 Credit Facility. |
| 7,821,912 | ||||||
Obligations under capital leases (Note 10) |
| 693,196 | ||||||
Notes payable related parties (Note 5) |
3,051,221 | 354,848 | ||||||
Total long-term debt |
16,565,018 | 8,960,098 | ||||||
Less current portion |
(1,858,262 | ) | (2,443,057 | ) | ||||
Long-term debt, net of current portion |
$ | 14,706,756 | $ | 6,517,041 | ||||
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Scheduled principal maturities of long-term debt for each of the five years succeeding
December 26, 2010, and thereafter, are summarized as follows:
Year | Amount | |||
2011 |
$ | 1,858,262 | ||
2012 |
1,812,624 | |||
2013 |
2,134,724 | |||
2014 |
2,040,548 | |||
2015 |
2,175,219 | |||
Thereafter |
6,543,641 | |||
Total |
$ | 16,565,018 | ||
Interest expense was $1,202,299 and $778,612 (including related party interest expense of
$154,040 and $22,624 for the fiscal years ended December 26, 2010 and December 27, 2009) for the
fiscal years ended December 26, 2010 and December 27, 2009, respectively.
The above agreements contain various customary financial covenants generally based on the
performance of the specific borrowing entity and other related entities. The more significant
covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage
ratio, both of which we are in compliance with as of December 26, 2010.
7. CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)
On July 30, 2007, DRH granted options for the purchase of 150,000 shares of common stock to the
directors of the Company. These options vest ratably over a three-year period and expire six years
from issuance. At December 26, 2010, these options are fully vested and can be exercised at a price
of $2.50 per share.
On July 31, 2010, DRH granted options for the purchase of 210,000 shares of common stock to the
directors of the Company. These options vest ratably over a three-year period and expire six years
from issuance. Once vested, the options can be exercised at a price of $2.50 per share.
Stock option expense of $25,174 and $32,312, as determined using the Black-Scholes model, was
recognized during the fiscal years ended December 26, 2010 and December 27, 2009, respectively, as
compensation cost in the consolidated statements of operations and as additional paid-in capital on
the consolidated statement of stockholders equity to reflect the fair value of shares vested as of
December 26, 2010. The fair value of unvested shares, as determined using the Black-Scholes model,
is $53,244 as of December 26, 2010. The fair value of the unvested shares will be amortized ratably
over the remaining vesting term. The valuation methodology used an assumed term based upon the
stated term of three years, a risk-free rate of return represented by the U.S. Treasury Bond rate
and volatility factor of 0 based on the concept of minimum value as defined in ASC 718,
Compensation-Stock Compensation. A dividend yield of 0% was used because the Company has never paid
a dividend and does not anticipate paying dividends in the reasonably foreseeable future.
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Table of Contents
In October 2009, one member of the Board of Directors exercised 6,000 vested options at a price of
$2.50 per share. Consequently, at December 26, 2010, 354,000 shares of authorized common stock are
reserved for issuance to provide for the exercise of the Companys stock options.
On November 30, 2006, pursuant to a private placement, DRH issued warrants to purchase 800,000
common shares at a purchase price of $1 per share. These warrants vested over a three-year period
from the issuance date and expired on November 30, 2009. The fair value of these warrants, which
totaled approximately $145,000 as determined using the Black-Scholes model, was recognized as an
offering cost in 2006. The valuation methodology used an assumed term based upon the stated term of
three years, a risk-free rate of return represented by the U.S. Treasury Bond rate and volatility
factor of 0 based on the concept of minimum value as defined in ASC 505-50, Equity Based Payments
to Non-Employees. A dividend yield of 0% was used because the Company has never paid a dividend and
does not anticipate paying dividends in the reasonably foreseeable future. An extension of time to
exercise warrants until December 31, 2009 was approved by resolution of the disinterested directors
of the Company. As of December 26, 2010, all 800,000 warrants were exercised at the option price of
$1 per share.
The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001. No
preferred shares are issued or outstanding as of September 26, 2010. Any preferences, rights,
voting powers, restrictions, dividend limitations, qualifications, and terms and conditions of
redemption shall be set forth and adopted by a board of directors resolution prior to issuance of
any series of preferred stock.
8. INCOME TAXES
The (provision) benefit for income taxes consists of the following components for the fiscal year
ended December 26, 2010 and December 27, 2009:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Federal |
||||||||
Current |
$ | | $ | | ||||
Deferred |
259,350 | (194,480 | ) | |||||
State |
||||||||
Current |
(36,502 | ) | (17,427 | ) | ||||
Deferred |
(97,022 | ) | (40,157 | ) | ||||
Income Tax (Provision) Benefit |
$ | 125,826 | $ | (252,064 | ) | |||
The (provision) benefit for income taxes is different from that which would be obtained by applying
the statutory federal income tax rate to loss before income taxes. The items causing this
difference are as follows:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Income tax (provision) benefit at federal statutory rate |
$ | (87,855 | ) | $ | (207,455 | ) | ||
State income tax (provision) benefit |
(133,524 | ) | (57,585 | ) | ||||
Permanent differences |
(81,799 | ) | (32,111 | ) | ||||
Tax credits |
347,989 | 93,500 | ||||||
Other |
81,015 | (48,413 | ) | |||||
Income tax (provision) benefit |
$ | 125,826 | $ | (252,064 | ) | |||
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The Company expects the deferred tax assets to be fully realizable within the next
several years. Significant components of the Companys deferred income tax assets and liabilities
are summarized as follows:
December 26 | December 27 | |||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carry forwards |
$ | 1,252,609 | $ | 954,370 | ||||
Deferred rent expense |
68,509 | 78,998 | ||||||
Start-up costs |
190,076 | 104,327 | ||||||
Tax credit carry-forwards |
540,533 | 164,366 | ||||||
Swap loss recognized for book |
| 56,970 | ||||||
Other including state deferred tax assets |
487,139 | 193,781 | ||||||
Total deferred assets |
2,538,866 | 1,552,812 | ||||||
Deferred tax liabilities: |
||||||||
Other including state deferred tax assets |
547,522 | 146,325 | ||||||
Tax depreciation in excess of book |
1,505,800 | 1,159,733 | ||||||
Total deferred tax liabilities: |
1,931,122 | 1,306,058 | ||||||
Net deferred income tax assets |
$ | 607,744 | $ | 246,754 | ||||
If deemed necessary by management, the Company establishes valuation allowances in accordance with
the provisions of FASB ASC 740, Income Taxes (ASC 740). Management continually reviews
realizability of deferred tax assets and the Company recognizes these benefits only as reassessment
indicates that it is more likely than not that such tax benefits will be realized.
The Company expects to use net operating loss and general business tax credit carry-forwards before
its 20-year expiration. A significant amount of net operating loss carry forwards were used when
the Company purchased nine affiliated restaurants, which were previously managed by DRH. Net
operating loss carry forwards of $1,241,025 and $2,443,119 will
expire in 2030 and 2028, respectively. General business tax credits of
$347,989, $86,678, $59,722 and $46,144 will expire in 2030, 2029, 2028 and 2027, respectively.
On January 1, 2007, the Company adopted the provisions ASC 740 regarding the accounting for
uncertainty in income taxes. There was no impact on the Companys consolidated financial statements
upon adoption.
The Company classifies all interest and penalties as income tax expense. There are no accrued
interest amounts or penalties related to uncertain tax positions as of December 26, 2010.
In July 2007, the State of Michigan signed into law the Michigan Business Tax Act (MBTA),
replacing the Michigan Single Business Tax, with a business income tax and a modified gross
receipts tax. This new tax took effect January 1, 2008, and, because the MBTA is based on or
derived from income-based measures, the provisions of ASC 740 apply as of the enactment date. The
law, as amended, established a deduction to the business income tax base if temporary differences
associated with certain assets results in a net deferred tax liability as of December 31, 2007 (the
year of enactment of this new tax). This deduction has a carry-forward period to at least tax year
2029. This benefit amounts to $33,762.
The Company is a member of a unitary group with other parties related by common ownership according
to the provisions of the MBTA. This group will file a single tax return for all members. An
allocation of the current and deferred Michigan business tax incurred by the unitary group has been
made based on an estimate of Michigan business tax attributable to the Company and has been
reflected as state income tax expense in the accompanying consolidated financial statements
consistent with the provisions of ASC 740.
The Company files income tax returns in the United States federal jurisdiction and various state
jurisdictions.
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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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Table of Contents
10. CAPITAL LEASES
Starting January 2009 through February 2010, the Company entered into agreements to sell and
immediately lease back various equipment and furniture at its Flint BWW, Port Huron BWW, and Novi
Bagger Daves locations, respectively. These leases required between 36 and 48 monthly payments of
approximately $29,787 combined, including applicable taxes, with options to purchase the assets
under lease for a range of $1 to $100 at the conclusion of the lease. These transactions, prior to
the Credit Facility, were reflected in the consolidated financial statements as capital
leases with combined asset values recorded at their combined purchase price of $1,108,780 and
depreciated as purchased furniture and equipment, and the lease obligations included in long-term
debt at its present value. As a result of the Senior Secured Term Loan of the Credit Facility,
these lease obligations were paid in full, along with applicable prepayment penalties, and are
properly reflected in the consolidated financial statements as a component of the Senior
Secured Term Loan of the Credit Facility.
11. COMMITMENTS AND CONTINGENCIES
Prior to the Affiliates Acquisition on February 1, 2010, the Company had management service
agreements in place with nine BWW restaurants located in Michigan and Florida. These management
service agreements contained options that allowed WINGS to purchase each restaurant for a price
equal to a factor of twice the average EBITDA of the restaurant for the previous three fiscal years
(2007, 2008, and 2009) less long-term debt. These options were exercised on February 1, 2010, six
months prior to the expiration of the options and in line with the Companys strategic plan. Refer
to Note 2 for further details.
The Company assumed, from a related entity, an Area Development Agreement with BWWI in which the
Company undertakes to open 23 BWW restaurants within its designated development territory, as
defined by the agreement, by October 1, 2016. On December 12, 2008, this agreement was amended
adding nine additional restaurants and extending the date of fulfillment to March 1, 2017. Failure
to develop restaurants in accordance with the schedule detailed in the agreement could lead to
potential penalties of $50,000 for each undeveloped restaurant, payment of the initial franchise
fees for each undeveloped restaurant, and loss of rights to development territory. As of December
26, 2010, of the 32 restaurants required to be opened under the Area Development Agreement, 13 of
these restaurants had been opened for business, leaving a balance of 19 restaurants to be opened by
March 2017. In February 2011, we opened two additional BWW restaurants one in Traverse City,
Michigan and the other in Lakeland, Florida. As of March 25, 2010, we are ahead of schedule and
have 17 more restaurant locations to open.
The Company is required to pay BWWI royalties (5% of net sales) and advertising fund contributions
(3% of net sales) for the term of the individual franchise agreements. The Company incurred
$2,108,061 and $1,996,901 in royalty expense for the fiscal years ended December 26, 2010 and
December 27, 2009, respectively. Advertising fund contribution expenses were $1,290,205 and
$1,215,493 for the fiscal years ended December 26, 2010 and December 27, 2009, respectively.
The Company is required by its various BWWI franchise agreements to modernize the restaurants
during the term of the agreements. The individual agreements generally require improvements between
the fifth year and the tenth year to meet the most current design model that BWWI has approved. The
modernization costs can range from approximately $50,000 to approximately $500,000 depending on the
individual restaurants needs. Please refer to the Liquidity and Capital Resources section of the
Managements Discussion and Analysis above for further details.
The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and
threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of
any litigation is uncertain. While unfavorable outcomes could have adverse effects on the Companys
business, results of operations, and financial condition, management believes that the Company is
adequately insured and does not believe that any pending or threatened proceedings would adversely
impact the Companys results of operations, cash flows, or financial condition.
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Table of Contents
12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was $1,333,190 and $781,913 during the years ended December 26, 2010 and
December 27, 2009, respectively.
Cash paid for income taxes was $183,441 and $0 during the years ended December 26, 2010 and
December 27, 2009, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Capital expenditures of $250,000 were funded by capital lease borrowing during the year ended
December 26, 2010.
Promissory notes of $3,134,790 were issued to fund the February 1, 2010 Affiliates Acquisition.
The Brandon Property transaction resulted in $2,322,800 of notes payable.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, ASC 820 Fair Value Measurements and
Disclosures, establishes the authoritative definition of fair value, sets out a framework for
measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair
value is the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. We use a three-tier fair value
hierarchy based upon observable and non-observable inputs as follows:
| Level 1 Quoted market prices in active markets for identical assets and liabilities; |
| Level 2 Inputs, other than level 1 inputs, either directly or indirectly observable; and |
| Level 3 Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use. |
As of December 26, 2010 and December 27, 2009, our financial instruments consisted of cash
equivalents, accounts payable, and debt. The fair value of cash equivalents, accounts payable and
short-term debt approximate its carrying value, due to its short-term nature. Also, the fair value
of notes payable related party approximates the carrying value due to its short-term maturities.
The fair value of our interest rate swaps is determined based on third-party valuation models,
which utilize quoted interest rate curves to calculate the forward value and then discount the
forward values to the present period. The Company measures the fair value using broker quotes which
are generally based on market observable inputs including yield curves and the value associated
with counterparty credit risk. Our interest rate swaps are classified as a Level 2 measurement as
these securities are not actively traded in the market, but are observable based on transactions
associated with bank loans with similar terms and maturities.
There were no transfers between levels of the fair value hierarchy during the fiscal years ended
December 26, 2010 and December 27, 2009. Unrealized loss associated with interest rate swap
positions in existence at December 26, 2010, which are reflected in the statement of stockholders
(deficit) equity, totaled $367,181 for the fiscal year ended December 26, 2010 and are included in
comprehensive (loss) income.
F-23
Table of Contents
The following table presents the fair values for those assets and liabilities measured on a
recurring basis as of December 26, 2010:
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||
Asset/(Liability) | ||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Total | |||||||||||||||
Interest Rate Swaps |
$ | | (367,181 | ) | | (367,181 | ) | (367,181 | ) |
The following table presents the fair values for those assets and liabilities measured on a
recurring basis as of December 27, 2009:
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||
Asset/(Liability) | ||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Total | |||||||||||||||
Interest Rate Swaps |
$ | | (213,604 | ) | | (213,604 | ) | (213,604 | ) |
As of December 26, 2010, our total debt, less related party debt, was approximately $13.5 million
and had a fair value of approximately $8.7 million. As of December 27, 2009, our total debt, less
related party debt, was approximately $8.6 million and had a fair value of approximately $5.7
million. The Company estimates the fair value of its fixed-rate debt using discounted cash flow
analysis based on the Companys incremental borrowing rate.
14. SUBSEQUENT EVENTS
Subsequent
to December 26, 2010, the Company opened its 20th and 21st BWW
restaurants Traverse City, Michigan, opened on February 7, 2011 and Lakeland,
Florida, opened on February 13, 2011.
In
addition, the Company opened its fourth Bagger Daves location in Brighton,
Michigan on February 27, 2011.
The Company evaluated subsequent events for
potential recognition and/or disclosure through the date of the
issuance of these consolidated financial statements.
F-24