Buffalo Wild Wings 2006 Annual Report Download

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2006
or
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
Commission File Number: 000-24743
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
Minnesota No. 31-1455915
(State or Other Jurisdiction of
Incorporation or Organization) (IRS Employer
Identification No.)
1600 Utica Avenue South, Suite 700, Minneap lis, MN 55416 o
(Address of Principal Executive Offices)
Registrant’s telephone number (952) 593-9943
Securities registered under Section 12(b) of the Exchange Act: Common Stock, no par value
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES NO
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 NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
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 NO
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the
Exchange Act). YES NO
The aggregate market value of the voting stock held by non-affiliates was $244 million based on the closing sale price
f the Company’ s Common Stock as reported on the NASDAQ Stock Market on June 23, 2006. o
The number of shares outstanding of the registrant’ s common stock as of March 1, 2007: 8,716,385 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by reference into Part
III of this report.

Table of contents

  • Page 1
    ... 12b-2 of the Exchange Act). YES NO ⌧ The aggregate market value of the voting stock held by non-affiliates was $244 million based on the closing sale price of the Company' s Common Stock as reported on the NASDAQ Stock Market on June 23, 2006. The number of shares outstanding of the registrant...

  • Page 2
    ... of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures Page 3 9 14 14 15 15...

  • Page 3
    ... obtain information for the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an established and growing owner, operator and franchisor of restaurants featuring a variety of boldly-flavored, made-to-order menu items including our Buffalo, New York-style chicken wings spun in any of...

  • Page 4
    ... 429 Buffalo Wild Wings restaurants in 37 states, of which 139 were company-owned and 290 were franchised. In 2007, we plan to achieve over 15% unit growth and open over 20 new company-owned restaurants. Our company-owned restaurants range in size from 4,000 to 7,600 square feet, with an average of...

  • Page 5
    ... order size, and iv) support strong restaurant openings. Marketing Campaigns. Our primary marketing campaigns focus on a particular menu item, day or daypart in an attempt to drive traffic and build brand awareness. For example, in 2006 we developed a campaign to promote the rollout of our new...

  • Page 6
    ...trainees will work in every aspect of the business, including line cook, server and manager. Our hourly employees in company-owned restaurants complete a comprehensive position certification process. A station certification process requires 16 to 20 hours of hands-on and classroom-style training. In...

  • Page 7
    ... an advertising fee in the amount of 3.5% of their restaurant sales, of which 3.0% was contributed to our Advertising Fund in 2006 and the remaining 0.5% was spent directly by the franchisee in the applicable local market. Our current form of franchise agreement permits us to increase the required...

  • Page 8
    ... to the "Buffalo Wild Wings®" service mark and to certain other service marks and trademarks used in our system. We attempt to protect our sauce recipes as trade secrets by, among other things, requiring a confidentiality agreement with our sauce supplier and executive officers. It is possible...

  • Page 9
    ... wing prices could reduce our operating income. The primary food product used by our company-owned and franchised restaurants is fresh chicken wings. We purchase fresh chicken wings based on current market prices that are subject to fluctuations. A material increase in fresh chicken wings costs...

  • Page 10
    ... new and existing markets; Negotiating acceptable lease or purchase terms for new restaurants; Recruiting, training and retaining qualified home office, field and restaurant personnel and management; Attracting and retaining qualified franchisees; Cost effective and timely planning, design and build...

  • Page 11
    ... to price, service, location, concept and the type and quality of food. We also face intense competition for real estate sites, qualified management personnel and hourly restaurant staff. A reduction in vendor allowances currently received could affect our costs of goods sold. During fiscal 2006...

  • Page 12
    ... of absence and mandated health benefits, increased tax reporting and tax payment requirements for employees who receive tips, a reduction in the number of states that allow tips to be credited toward minimum wage requirements, and increased employee litigation including claims relating to the Fair...

  • Page 13
    ... popularity of Buffalo, New York-style chicken wings, our other menu items, sports bars and casual dining restaurant styles. We also depend on trends toward consumers eating away from home more often. Shifts in these consumer preferences could negatively affect our future profitability. Such shifts...

  • Page 14
    ... square feet of office space at a new location. The new lease terminates on November 30, 2017, with an option to renew for one five-year term. We intend to move into this new location in September of 2007. As of December 31, 2006, we owned and operated 139 restaurants. We lease the land and building...

  • Page 15
    The following table sets forth the 37 states in which Buffalo Wild Wings restaurants are located and the number of restaurants in each state as of December 31, 2006: Number of Restaurants Open Company-owned Franchised Total Alabama Arkansas Arizona California Colorado Connecticut Delaware Florida ...

  • Page 16
    ...following table sets out shares of our Common Stock repurchased by us in during 2006 that have not been previously disclosed. (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May...

  • Page 17
    ...on our Common Stock during the period ended December 31, 2006 with the cumulative total return on the Nasdaq U.S. Index and the S&P 600 Restaurants Index. The comparison assumes $100 was invested on November 21, 2003, the date of our initial public offering, in Buffalo Wild Wings Common Stock and in...

  • Page 18
    ... set forth in Item 8 of this Form 10-K. Fiscal Years Ended (1) Dec. 31, 2006 Consolidated Statements of Earnings Data: Revenue: Restaurant sales Franchising royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General...

  • Page 19
    ... wing prices with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of fresh chicken wings, as it can significantly change our cost of sales and cash flow from company...

  • Page 20
    ... statement of earnings under "Restaurant operating costs." Nearly all of our depreciation expense relates to assets used by our companyowned restaurants. Preopening costs are those costs associated with opening new company-owned restaurants and will vary annually based on the number of new locations...

  • Page 21
    ...days from the end of a month for that month' s purchases. During fiscal 2006, 2005, and 2004, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced by $4.2 million, $4.0 million, and $3.9 million, respectively. Revenue Recognition - Franchise Operations...

  • Page 22
    ... as a percentage of restaurant sales. Fiscal Years Ended Dec. 31, 2006 Dec. 25, 2005 Dec. 26, 2004 Revenue: Restaurant sales Franchising royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and administrative...

  • Page 23
    ... from 31.6% in 2005. The decrease in cost of sales as a percentage of restaurant sales was primarily due to the reduction of chicken wing prices and the leverage of food costs related to menu price increases. Fresh chicken wings were 24% of cost of goods sold in 2006 compared to 27% in 2005. This...

  • Page 24
    ....7% in 2006 from 38.0% in 2005. The effective tax rate decrease was primarily due to higher federal tax credits, increased tax-exempt income and reduced state income tax due to changes in state apportionment factors. The reduction in state taxes is a result of new restaurants opening in states with...

  • Page 25
    ... health insurance costs. The increase in income taxes payable and decrease in accounts payable was due to timing of payments. The increase in accounts receivable was due to higher credit card sales and tenant allowances compared to prior year. The purchase of marketable securities in 2006 relates...

  • Page 26
    ... income tax receivables. The increase in unearned franchise fees was due to a number of area development and franchise agreements sold but for which the restaurants had not yet opened. The increase in accounts payable is relative to the growth in the number of company-owned restaurants. The increase...

  • Page 27
    ... annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in fresh chicken wing prices, the timing and number of new restaurant openings and their related expenses, asset impairment charges, store closing...

  • Page 28
    ... 2006(1) Revenue: Restaurant sales Franchise royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and administrative Preopening Restaurant impairment and closures Total costs and expenses Income from operations...

  • Page 29
    ... 2006(1) Revenue: Restaurant sales Franchise royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and administrative Preopening Restaurant impairment and closures Total costs and expenses Income from operations...

  • Page 30
    ...purchase requirements do not create a market risk. The primary food product used by company-owned and franchised restaurants is fresh chicken wings. We purchase fresh chicken wings based on current market prices that are subject to monthly fluctuation. A material increase in fresh chicken wing costs...

  • Page 31
    ... of Operations." BUFFALO WILD WINGS, INC. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005 Consolidated Statements of Earnings for the Years Ended December 31, 2006, December...

  • Page 32
    ... Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," on December 26, 2005. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company' s internal control over financial reporting...

  • Page 33
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2006 and December 25, 2005 (Dollar amounts in thousands) December 31, 2006 December 25, 2005 Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable - franchisees, net of allowance ...

  • Page 34
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Fiscal years ended December 31, 2006, December 25, 2005, and December 26, 2004 (Dollar amounts in thousands except share and per share data) Fiscal years ended December 31, 2006 December 25, 2005 December 26, 2004 Revenue...

  • Page 35
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Fiscal years ended December 31, 2006, December 25, 2005, and December 26, 2004 (Dollar amounts in thousands) Common Stock Shares Amount Deferred Compensation Retained Earnings Total Balance at December 28, ...

  • Page 36
    ... Tax benefit from stock issuance Excess tax benefit from stock issuance Change in operating assets and liabilities: Purchase of marketable securities Accounts receivable Inventory Prepaid expenses Other assets Unearned franchise fees Accounts payable Income taxes Accrued expenses Net cash...

  • Page 37
    ... Financial Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (1) Nature of Business and Summary of Significant Accounting Policies (a) Nature of Business The Company was organized for the purpose of operating Buffalo Wild Wings® restaurants...

  • Page 38
    ... food product used by Companyowned and franchised restaurants is fresh chicken wings. Fresh chicken wings are purchased by the Company based on current market conditions and are subject to fluctuation. Material increases in fresh chicken wing costs may adversely affect the Company' s operating...

  • Page 39
    ... Buffalo Wild Wings brand. Franchised restaurants open for a full year averaged $2,299 in sales in 2006. The franchisee is required to operate their restaurants in compliance with their franchise agreement that includes adherence to operating and quality control procedures established by the Company...

  • Page 40
    ... based upon monthly purchases. The Company generally receives payment from vendors approximately 30 days from the end of a month for that month' s purchases. During fiscal 2006, 2005, and 2004, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced...

  • Page 41
    ...in the consolidated statement of earnings for fiscal year 2006 was $3,216 before income taxes and consisted of restricted stock, stock options, and employee stock purchase plan (ESPP) expense of $3,000, $82 and $134, respectively. The related total tax benefit was $1,153 during 2006. All stock-based...

  • Page 42
    ... disclosures for the fiscal year ended December 31, 2006 are not presented because stock-based compensation is recognized in the consolidated financial statements. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton ("BSM") option valuation model with...

  • Page 43
    .... SAB 108 establishes an approach that requires quantification of financial statement errors using both an income statement and a cumulative balance sheet approach. SAB 108 is effective for fiscal years ending after November 15, 2006, and we adopted the new requirements in fiscal 2006. The adoption...

  • Page 44
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (2) Marketable Securities Marketable securities were comprised as follows: December 31, 2006 December 25, 2005 Held-to...

  • Page 45
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (4) Lease Commitments The Company leases all of its restaurants and corporate offices under operating leases that have ...

  • Page 46
    ... for income taxes is as follows: Fiscal Years Ended December 31, 2006 December 25, 2005 December 26, 2004 Expected federal income tax expense State income tax expense, net of federal effect Nondeductible expenses Tax exempt income General business credits Statutory rate changes, deferred tax impact...

  • Page 47
    ... plan to 2013. Option activity is summarized as follows: Average remaining contractual life (years) Number of shares Weighted average exercise price Aggregate Intrinsic Value Outstanding, December 25, 2005 Granted Exercised Cancelled Outstanding, December 31, 2006 Exercisable, December 31, 2006...

  • Page 48
    ... employees subject to employment eligibility requirements. The Plan became effective upon the effective date of the Company' s initial public offering (IPO). Participants may purchase the Company' s common stock at 85% of the beginning or ending closing price, whichever is lower, for each six-month...

  • Page 49
    ... Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (7) Earnings Per Common Share The following is a reconciliation of basic and fully diluted earnings per common share for fiscal 2006, 2005, and 2004: Fiscal year ended December 31, 2006...

  • Page 50
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (8) Supplemental Disclosures of Cash Flow Information Fiscal Years Ended December 31, 2006 December 25, 2005 December ...

  • Page 51
    ... revenue, net income, restaurant openings, same-store sales, and employee turnover. Further, under the Company' s Management Deferred Compensation Plan, an amount equal to a percentage of an officer' s base salary is credited on a monthly basis to that officer' s deferred compensation account...

  • Page 52
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2006 and December 25, 2005 (Dollar amounts in thousands, except per-share amounts) (12) Related Party Transactions It is the Company' s policy that all related party transactions must be disclosed and ...

  • Page 53
    ... the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC' s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as...

  • Page 54
    ... Company Accounting Oversight Board (United States), the consolidated balance sheets of Buffalo Wild Wings, Inc. and subsidiaries as of December 31, 2006 and December 25, 2005, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the fiscal years...

  • Page 55
    ... by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is contained in the section entitled "Independent Registered Public Accounting Firm" appearing in our Proxy Statement to be delivered to shareholders in connection with the 2007 Annual Meeting of...

  • Page 56
    ... with this report and can be found at Item 8 of this Form 10-K. Report of Independent Registered Public Accounting Firm dated March 8, 2007 Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005 Consolidated Statements of Earnings for the Years Ended December 31, 2006, December 25...

  • Page 57
    ... signed on its behalf by the undersigned, thereunto duly authorized. Date: March 12, 2007 BUFFALO WILD WINGS, INC. By /s/ SALLY J. SMITH Sally J. Smith Chief Executive Officer and President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of...

  • Page 58
    ... Registered Public Accounting Firm on Financial Statement Schedule The Board of Directors and Stockholders Buffalo Wild Wings, Inc.: Under the date of March 8, 2007 we reported on the consolidated balance sheets of Buffalo Wild Wings, Inc. and subsidiaries (the Company) as of December 31, 2006...

  • Page 59
    ... to Exhibit 10.11 to our Form 10-K for the fiscal year ended December 25, 2005) 10.10 Form of 2005 Area Development Agreement (incorporated by reference to Exhibit 10.12 to our Form 10-K for the fiscal year ended December 25, 2005) 10.11 Employee Stock Purchase Plan and Amendment No. 1 (1) (2) 10.12...

  • Page 60
    ...25* Form of 2006 Franchise Agreement 10.26* Form of 2006 Area Development Agreement 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Form 10-K for the fiscal year ended December 26, 2004) 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm 24.1* Power...

  • Page 61
    ... INCENTIVE PLAN THIS AWARD, made effective as of this 1st day of January, 2007, by and between Buffalo Wild Wings, Inc., a Minnesota corporation (the "Company"), and ____ ("Participant"). W I T N E S S E T H: WHEREAS, Participant on the date hereof is a key employee or officer of the Company or...

  • Page 62
    ... federal or state payroll, income or other taxes attributable to this Award are withheld from any amounts payable by the Company to the Participant. The Company may, solely at its option, require the Participant to satisfy such obligations, in whole or in part, by delivering shares of Common Stock...

  • Page 63
    ... be Hennepin County, Minnesota. m. Delay in Issuance. In the event the Administrator reasonably anticipates that the Company' s income tax deduction with respect to the vesting and issuance of any shares of Stock required by this Agreement would be limited or eliminated by Code Section 162(m), the...

  • Page 64
    ...10,000 per year, payable quarterly $5,000 per year, payable quarterly *Annual grant of restricted stock units to be granted as of the first day of each fiscal year, with the number of units to be granted determined by dividing $20,000 by the closing price at fiscal year end. These units vest to the...

  • Page 65
    ...as exhibits to our Form 10K for the year ended December 31, 2006. 2007 Annual Base Salary $500,000 2007 Restricted Stock Units* 9,398 Executive Officer and Title Sally J. Smith Chief Executive Officer and President Mary J. Twinem Executive Vice President, Chief Financial Officer and Treasurer James...

  • Page 66
    ... mean Buffalo Wild Wings, Incorporated, a Minnesota corporation, any subsidiaries thereof, and any Successors or assigns. Company Business means the operation, management and franchising of sports-themed grill and bar restaurants, including but not limited to food production and development, sports...

  • Page 67
    ... with this position, as the President shall determine from time to time. (b) Exclusive Services. The Executive shall (i) devote Executive' s full business time and attention and best efforts to the business and affairs of the Company, (ii) use Executive' s best efforts to promote and further...

  • Page 68
    ... employment is terminated by the Company without Cause, if Executive resigns for Good Reason, or if the Company fails to extend this Agreement, Executive shall be entitled to receive from the Company an amount equal to half of Executive's Base Salary, payable during the six months following the date...

  • Page 69
    ... after the Effective Date and continuing until the six-month anniversary of termination or cessation of Executive' s employment with the Company, Executive will not, individually or in any capacity with another legal entity: (i) directly or indirectly, own any interest in, control, be employed by or...

  • Page 70
    ... to be signed by its President pursuant to the authority of its Board, and Executive has executed this Agreement, effective as of October 30, 2006. EXECUTIVE: /s/ LINDA G. TRAYLOR _____ Address THE COMPANY: BUFFALO WILD WINGS, INCORPORATED /s/ SALLY J. SMITH Sally J. Smith, President 70

  • Page 71
    EXHIBIT 10.25 [INSERT 2006 FRANCHISE AGREEMENT] 71

  • Page 72
    EXHIBIT 10.26 [INSERT 2006 AREA DEVELOPMENT AGREEMENT] 72

  • Page 73
    ... 31, 2006 annual report on Form 10-K of Buffalo Wild Wings, Inc. Our report on the consolidated financial statements refers to the Company' s adoption of the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, on December 26, 2005. Minneapolis...

  • Page 74
    ... ACT I, Sally J. Smith, certify that: 1. I have reviewed this report on Form 10-K for fiscal year ended December 31, 2006 of Buffalo Wild Wings, Inc.; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the...

  • Page 75
    ... ACT I, Mary J. Twinem, certify that: 1. I have reviewed this report on Form 10-K for fiscal year ended December 31, 2006 of Buffalo Wild Wings, Inc.; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the...

  • Page 76
    ... ACT OF 2002 In connection with the Annual Report of Buffalo Wild Wings, Inc. (the "company") on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission (the "Report"), I, Sally J. Smith, Chief Executive Officer of the company, certify, pursuant to 18...

  • Page 77
    ... ACT OF 2002 In connection with the Annual Report of Buffalo Wild Wings, Inc. (the "company") on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission (the "Report"), I, Mary J. Twinem, Chief Financial Officer of the company, certify, pursuant to 18...