Rafe's Space

HPY News

2007-07-03T15:45:00.000-07:00

This section contains summaries of news articles and press releases related to Heartland Payment Systems. I've done my best to summarize those topics which pertain to the company or it's technology. If you wish to read the entire story, please follow the links provided. The entries are listed from newest to oldest. Please note that many of the headlines are my own and may be different from the writer's headline.

Strategic Relationship with Bremer Bank

Company Release - 07/05/2007 08:52
Initially, more than 1,500 of Bremer's current merchant clients will be converted to Heartland's processing system. Heartland and Bremer will also focus on a joint business development program that leverages both companies' regional customer bases for new business and cross selling opportunities.

HPY To Deliver Contactless Payments to Slippery Rock University of Pennsylvania

Company Release - 07/02/2007 16:05
This first-of-its-kind college campus solution in the United States - developed by Heartland's new micro-payments division - capitalizes on two well-established trends: the ubiquity of the mobile phone among college students; and the popularity of new contactless, or tap-and-go, payments among American consumers.

Beginning in July, Slippery Rock University's 8,500 students, faculty and staff will receive a new official campus ID card and a separate contactless token designed for use with their mobile phones.

Using either the card or the phone, they will be able to make payments at on-campus locations as well as participating merchants in the surrounding community. During the summer, campus vending machines, laundry facilities, photocopiers and printers will be outfitted with dual technology readers to enable contactless payments via mobile phone in addition to the traditional ID card payments.

The new mobile phone tokens incorporate the same standards-based contactless technology (ISO 14443) used worldwide by MasterCard, Visa and leading card issuers in the payment and identity sectors.

The technology enables data to be read without physical insertion into - or contact with - a card reader. Thus, it is more convenient and secure than prior payment options. By design, the phone must be held in close proximity - no more than 2 inches - to an approved contactless reader for communication to occur.

"We anticipate that our work with Slippery Rock University this summer will generate major interest from other campus administrators and local merchants as they see the benefits and opportunities for improved student service and administrative and payment cost savings," [says Robert O. Carr, chairman and chief executive officer of Heartland Payment Systems].

Heartland received the award through a competitive bid process initiated in March by Slippery Rock. Nationwide, Heartland processes $55 billion in transaction volume annually for more than 150,000 merchants. The company has served as Slippery Rock University's payment processor for nearly ten years.

CEO Bob Carr Wins Ernst & Young 2007 Entrepreneur of the Year Award

Company Release - 06/26/2007 09:23
The award - bestowed in the "Business Services" category - recognizes and celebrates outstanding entrepreneurs and business leaders in New Jersey.

Carr was recognized not only for his achievements as the founder and CEO of Heartland Payment Systems, but also for his charitable contributions as the founder of the Give Something Back Foundation.

Heartland Advances Micro-Payments Strategy with Acquisition of eSecure Peripherals and Hiring of Industry Leaders

Company Release - 06/18/2007 09:12
Financial terms of the transaction were not disclosed.

Formed in 1998, eSecure Peripherals developed some of the industry's most advanced technology around the vital interface between vending machines and the consumer. With eSecure Peripherals' technology, an entire range of transactions once thought of as exclusively cash or coin can be paid with credit, debit, or prepaid cards - including vending, parking, laundry, and others.

In line with this acquisition, Heartland has named Ron Farmer, former chief executive officer of Revenue Technologies Corporation, executive director of Heartland's new micro-payments division. This division will focus on the expansion of cashless technologies to small payments including parking, vending, laundries, print management and gaming.

Farmer is a 25-year veteran of the technology and payments space, having served in an executive capacity with companies such as AT&T and Oracle. During the late 1990's, he served as president and chief executive officer of Debitek, the global leader in electronic cash systems Heartland acquired in 2005. Most recently, Farmer engineered the turnaround of Revenue Technologies Corporation. His success at Revenue Technologies Corporation culminated in the sale of the company to Oracle earlier this month.

Allan Brown, the former president and founder of eSecure Peripherals, will join Farmer on the leadership team of Heartland's micro-payments division. Brown will serve as director of micro-payments products.

"The micro-payments space is one of the biggest growth opportunities for Heartland today," says Robert O. Carr, chairman and chief executive officer of Heartland Payment Systems. "The nature of payments is changing, and an array of transactions -- once the exclusive domain of cash and coin -- is now being completed with plastic."

Carr continued, "Over the past 24 months, we have gained access to a range of technologies in the micro-payments space through our acquisition of Debitek and our investment in Parcxmart Technologies, an electronics payments company. Now, with eSecure Peripherals' technology under the Heartland umbrella, we have the critical mass to formalize our micro-payments strategy and drive the transition to a cashless society."

Heartland's micro-payments division will focus on automating every part of the micro-payments process which encompasses transactions under five dollars. Its technology allows for a secure, more convenient alternative - or addition - to traditional cash and coin payment options.

HPY and Parcxmart Finalize Strategic Equity Partnership Deal

Forget about finding change for a parking meter, use a card!

Company Release - 06/14/2007 16:00
[HPY] increases its strategic investment in Parcxmart Technologies, an electronics payments company. The two companies also signed an exclusive marketing agreement whereby Heartland's national sales network has exclusive rights to sell Parcxmart's payment system to merchants nationally.

The Parcxmart(TM) Card and patent-pending payment solution is America's first fully functional parking and local merchant smart card payment system...

Currently, Parcxmart's smart card payment system is fully operable in Bridgeport, CT, New Haven, CT and Truckee, CA.

"In these cities, the Parcxmart Card acts as the municipality's card, providing people with an easy payment method that makes downtown shopping and parking convenient," continued Carr. "This, in turn, supports the economic development of these communities. The faster we are able to grow the merchant network, the more each city can benefit from the ease of use and convenience Parcxmart offers."

CEO Bob Carr Named ''Best Executive'' by American Business Awards

Company Release - 06/13/2007 09:24

[Carr] received a 2007 Stevie Award from the American Business Awards, the only national, all-encompassing awards program honoring great performances in business. Carr was recognized at the annual awards dinner held earlier this week in New York City.

Carr received the "Best Executive - Other Industries" award which recognizes the efforts and achievements of individual performers in American business. Carr competed with more than 2,000 executives from companies of all sizes and in virtually every industry.

HPY Valuation

2007-07-03T15:04:00.000-07:00

Points of Interest

This company has three primary points of interest to watch. (I'll list the progress of these when I get to the Quarterly Highlights section.)
1) Merchant base.
2) Merchant processing volumes
3) Operating Margin

Highlights

Form: 10-Q, Filing Date: 5/9/2007

Shares (Diluted) 39.971

Form: 10-K, Filing Date: 3/9/2007

Share Dilution

Year Ending	Shares	change	% Change
2002	15,642
2003	32,231
2004	33,786
2005	37,879
2006	39,943
	Average

Earnings

Quarter Ending	EPS	TTM EPS	% TTM Change
2005-MAR	0.08
2005-JUN	0.12
2005-SEP	0.17
2005-DEC	0.14
2006-MAR	0.11
2006-JUN	0.19
2006-SEP	0.25
2006-DEC	0.16
2007-MAR	0.17

HPY Introduction

2007-07-03T14:52:00.000-07:00

Heartland Payment Systems (HPY)

Last Trade Time:	7/5/2007 10:30
Market Cap:	$1.09B
Insider Ownership	44.81%
Current Price:	$28.90
Yahoo P/E Ratio:	37.23

Introduction

_{(From Heartland's investor relations page...)}

Heartland Payment Systems provides credit and debit card, payroll and related processing services to restaurant, hotel, and retail merchants throughout the United States. HPS provides services to over 137,000 merchants with 1,379 sales and servicing representatives and more than 600 employees in operations, information technology, marketing, administration and management positions.

Heartland processed its first card transaction on July 15, 1997 with a business investment of $1 million. Today, Heartland has become the sixth largest payment processor, with over $45 billion of annual processing volume from current merchants.

Heartland's success is the result of the combination of a superior long-term customer relationship sales model and its internally-developed, client-server based transaction processing platform. Heartland delivers tailored solutions to even the most demanding markets such as retail, restaurant, hospitality and community banks. In addition, Heartland has been effective in servicing auto repair facilities, convenience and liquor stores and professional service providers.

With its corporate headquarters in Princeton, New Jersey and satellite offices in North Olmsted, Ohio; Frisco, Texas; and Phoenix, Arizona; and its Service Center in Jeffersonville, Indiana providing customers with 24-hour support and technical service, Heartland is well positioned geographically to support its national sales organization of W-2 employed sales professionals.

While Heartland is the 6th largest payment processor, it only has around 3% of the market. With plenty of room to grow and an ongoing dedication to improving all aspects of itself and it's industry, I am proud to own a piece of Heartland Payment Systems. As you will see, this is a company which genuinely cares about it's clients, employees and community.

Making Things Better

The above text briefly mention they have an internally-developed, or proprietary, "platform". This platform includes both software and hardware development. I believe this gives Heartland an edge on margins and application flexibility over the competition.

Heartland recently updated to a better version, which they say is more flexible for them as they grow (expandability). They released this to around 100,000 merchants. I'm in a technical field myself and I know how hard it can be to roll out new technology. To me this says they have a competent tech group in command which also has the ear of management. This is an important synergy to note and one that is rarely true at non-tech companies (Think how long it took your bank to get color touch-screens on ATMs). They had the internal knowledge and foresight to re-engineer their software. This should benefit both Heartland and it's customers.

I should note that the guy responsible for these technologies, Brooks Terrell, has just stepping down as Chief Technology Officer to "pursue other interests". I don't think this is a sign of anything. He put in 10 years and things have been running smoothly, and without downtime, for well over a year. I'm sure his team and procedures will hold up just fine.

Heartland isn't just re-organizing their technology, they are also improving operational efficiency. As I write this, they should be completing work on a new facility. Here is some additional info from a press release:

...The 120,000-square-foot facility is scheduled for completion in the first quarter of 2007 with additional expansion plans for construction of a second building (date yet to be determined)....

...Heartland Payment Systems will expand in Jeffersonville with the support and assistance of the State of Indiana through the IEDC and the City of Jeffersonville. The economic development incentives offered by the IEDC include:

Approximately $295,000 in training grants from the Skills Enhancement Fund (SEF) to train Indiana resident employees;

Up to $50,000 in training grants for technology professionals through the Technology Enhancement Certifications for Hoosiers (TECH) fund; and

Up to $1.8 million over 10 years in Economic Development for a Growing Economy tax credits (EDGE).

The Heartland Service Center is responsible for supporting all merchant servicing requirements including enrollment, installation, equipment supply, repair and downloading, fraud monitoring and chargeback dispute resolution assistance, and handles 98,000 Heartland sales and customer calls a month in the 24/7 facility.

This facility can house up to 1,000 employees, nearly 2x what they will move in with. They are the 3rd largest employer in the area and claim to have a very high retention rate. The new facility will help by offering some nice amenities, such as a cafeteria and exercise facilities.

The Heartland Service Center is unique. Many competitors outsource. Heartland is extremely focused on it's customer service and sales force. They want a customer to get right in to a customer service rep and get the issue handled without a transfer. The sales force is driven by an interesting profit sharing structure. Longer a rep is with HPY, and the more clients they have, the more they share in their client-created profits. So, they are encouraged to be a partner for their clients. The better the clients do, the better the sales person does.

Leadership and Company Background

Robert O. Carr has served as Chairman of the board and CEO since he co-founded the company. Heartland was formed on March 27, 1997 as a 50-50 limited liability corporation between Heartland Bank and Triad, a group of industry veterans comprised of Robert Carr, Don Lassiter and Alan Atkins. Larry Schiffer, Chairman of Heartland Bank, and Robert Carr negotiated the arrangement to form and operate Heartland Card Services, LLC, the predecessor company to Heartland Payment Systems, Inc. Mr. Carr joined after selling his interest in Credit Card Software Systems, Inc., an Independent Sales Organization he founded in 1987, specializing in the travel and entertainment industry. The company officially became Heartland Payment Systems, LLC in October 2000. HPY went public on August 11,2005 with an offer price of $18/share. The shares closed the day at $24.51.

Most of the executives at HPY have been around since inception in 2000 including Robert H.B. Baldwin, Jr., the Chief Financial Officer.

I get the feeling that these guys embody the blend we are looking for in management teams. The have been with the company a long time, and in the industry longer still. They own a good sized stake in the company, and on conference calls they come across as genuine. Heartland is their baby, and they are raising the best they can. Of course I don't know these guys nor do I have any insider information, so this is all based on filtered reading materials and a gut feeling. Do we ever really know our management teams though?

The Merchant Bill Of Rights

The Merchant Bill Of Rights is similar to BestBuy's Geek Squad. From what I can gather, the Bill of Rights is a genuine crusade to protect customers, and create clean branding. It is a carry over from Heartland's passion for creating a positive customer relationship. Needless to say it adds to Heartland's moat.

The Merchant Bill of Rights Home Page explains it better than I can...

The Merchant Bill of Rights promotes fair credit and debit card processing practices on behalf of small and mid-sized business owners. Proposed as an industry standard, it calls for the clear and straightforward presentation of card processing costs.

Its purpose: to enable merchants who don't have the resources of large purchasing organizations to effectively manage their costs, determine which processor best meets their needs and realize significant savings.
Click on each right to learn more.

1. The right to know the fee for every card transaction – and who’s charging it.

2. The right to know the markup of Visa and MasterCard fee increases.

3. The right to know all Visa and MasterCard fee reductions.

4. The right to know all transaction middlemen.

5. The right to know all surcharges and bill-backs.

6. The right to a dedicated local service representative.

7. The right to encrypted card numbers and secure transactions.

8. The right to real-time fraud and transaction monitoring.

9. The right to reasonable equipment costs.

10. The right to live customer support 24/7/365.

According to this Heartland sponsored survey,

Many small and mid-sized business owners don't understand credit/debit/prepaid card processing costs, the fees and surcharges they pay, and how these charges impact their bottom line.

That's according to a recent survey conducted by supporters of The Merchant Bill of Rights. The Merchant Bill of Rights is proposed as an industry standard to inform and educate business owners about card processing costs and drive savings for small and mid-sized businesses.

Nearly 400 merchants nationwide voluntarily responded to the survey. Findings indicate:

Only 26 percent of participants believe they are being treated fairly by the debit/ credit/prepaid card processing industry.

Only 32 percent understand unfair card processing practices and how they impact their business.

Only 21 percent understand the rates, fees and surcharges the pay.

Only 15 percent believe they are charged the same as larger businesses.

"It's clear that many owners of small and mid-sized businesses don't understand the complexities of card acceptance," says Robert O. Carr, chairman and CEO of Heartland Payment Systems, one of the nation's leading providers of credit/debit/prepaid card and payroll processing services and the founding supporter of The Merchant Bill of Rights. "Yet, card acceptance is often one of the three largest expenses they incur. Business owners need to educate themselves so they can manage these costs. What they don't know may be hurting their bottom line."

Company FAQ Highlights:

Q: Most successful companies have a philosophy of doing business that differentiates them from their competitors. Describe the Heartland philosophy and what sets it apart from others. How do you instill that philosophy in your employees?
A: Heartland's unique philosophy is based upon a national organization of sales professionals who provide local sales and servicing in a specific geographical area. All of Heartland's sales professionals must operate in the best interests of merchants and Heartland at all times. Heartland has provided a platform for hundreds of sales professionals to earn a good living while building wealth for their families working as respected professionals in their local communities. Heartland also believes in employee ownership and now boasts hundreds of employee owners and option holders who are providing value for over 100,000 merchants, as they build value for their own personal future

Q: From a financial perspective, what is Heartland's business model and how has it held up under the competitive environment of the last five years?
A: Heartland's model is complex and extremely difficult and costly to get started. The model has been under constant development for more than 15 years by the company's founders. Because it is so expensive to establish a national organization of sales professionals as employees with full benefits, we believe Heartland's model is unique in today's marketplace and will remain so unless someone chooses to make a substantial investment in unrecoverable expenses to duplicate Heartland's achievement. Heartland's model is a culture and a way of doing business that is inconsistent with the business philosophies of all of its major competitors except for the few remaining "pure bank" players.

Q: What is HPS Exchange, why is it important and what does it deliver that your customers couldn't get elsewhere?
A: Heartland's transaction authorization and data capture center, HPS Exchange, is an internally-developed, client-server based transaction processing platform. We believe it is one of the fastest and least expensive platforms to operate in the industry today.

Q: Restaurants and the hospitality industry seem to be your key vertical markets. What expertise do you bring to these markets and what do you provide those industries that is different from your competitors?
A: We have learned a tremendous amount of information from our restaurant customers and have tailored specific products and services that our customers have helped us to develop. Many of our competitors do not understand the restaurant industry as well as we understand it. There are lots of complications, especially with tip reporting and payroll.

Q: What sets your customer service and support groups apart from your competitors?
A: We have organized our call center into teams of focused experts at technical and back-end support providing pro-active service 24/7. We are continually developing tools that help teach our call center representatives how problems have been solved effectively in the past by others. Our focus is on "one call resolution" which means our customers have their issues resolved with one contact.

Q: Leveraging technology to improve productivity and service (for both customers and employees) seems to be a Heartland strong point. What plans are there for future technological initiatives?
A: Our founders' background is technology and there are numerous projects competing for resources at all times. Robust authorization platforms, comprehensive organizational and servicing tools for our sales organization and improved tools for merchant service are the major categories of new development work.

Zecco: Company Update (June 7th, 2007)

2007-06-07T12:41:00.000-07:00

A couple of days ago I got an email from Zecco asking me if I would be willing to be interviewed by the Wallstreet Journal regarding Zecco and ZeccoShare. I said "yes" and sent in my details.

This morning (June 7th, 2007), Michiel, the Director of Product Development for Zecco, called me to verify that I was still willing before unleashing the shark (reporter) on me (my words not his). While I haven't given an interview yet, and may not since there are 3 of us they could call on, I did get an opportunity to chat with Michiel about where Zecco is and what's coming next.

First I want to share a general theme in the conversation (one which I already assumed but was nice to get confirmed). The Zecco team is literally working day and night to improve their initial offering as quickly as possible without sacrificing quality in the new releases. He echoed my thoughts that their coordinators and developers are top notch.

Zecco was an idea on a napkin just 8 months ago. They had to decide what they could reasonably build to get up and running as quickly as possible while sacrificing as little as possible (welcome to the world of software development). In October of 2006, they literally went on-line with the first release. I think it is truly impressive how far and fast they have come since then. The development team continues to operate on a 4 week release cycle. This means that every 4 weeks they plan to release an improved version of some piece of Zecco based on priority. I have seen them do this several times and I have never seen a release get rolled-back (go back to the old version) due to a bug. Having worked in a development environment myself, I can say I'm impressed with what I am seeing (obviously). This is why I believe what Micheil had to say. He came off humble and honest. Even a little soft-spoken and nervous - exactly what I would hope for when giving feedback to someone who cares about their "baby"

When I signed up in February, the trading section was solid enough that I didn't know it was still new. However, the Account section required a Thomas Guide to find the ACH transfer setup area. Since then they have re-vamped the section completely (though they still need to get rid of the website-in-website ACH area which just displays the Clearing House site.) They have also added Data import for quicken and other software, which is better than any other financial institution I have used. They have also added full PDF and on-demand history/statements, new functionality and information to the online trading interface, trailing stop-limit orders (they only lack a fixed dollar version), IRAs, more complex option options, and many other features.

While the customer service people at Zecco are very good, getting to them can be a serious problem. When I mentioned that I felt it is imperative for Zecco to keep all the customers they attract now, while there is no competition in their niche, he agreed and said the same thought has been discussed around metting rooms at the highest level. He assures me they have gotten the message loud and clear, and fixing the email and phone system is high on their list of priorities.

So What's next for Zecco? ZeccoShare. ZeccoShare is like a combination of CAPS and FaceBook which uses real portfolio data as a basis for a community. In fact, in the next release a week or two away, ZeccoShare will start feeding in Motley Fool CAPS data! ZeccoShare will tie together forums for discussion with stock research, idea sharing, education, and the general social aspects of FaceBook/MySpace. In Zecco's words, it puts your mouth where your money is - or is that the other way around? Both work.

ZeccoShare is currently in beta (which I am a part of (testing it, I don't work for Zecco). They will need, and will, be adding a few more features before it is ready. Namely more portfolio info (right now it only shows ticker symbols and percentage of portfolio, as well as the last 20 trades (no dollar amounts though, of course). I have asked for company name, ticker symbol, holding as a % of the portfolio, and performance (IRR - per stock and total). In addition to this we both used the same word for what the service needs to improve further before release...flow. Things we are already used to at CAPS such as getting from company research, to a user who thinks like you do and has information and other companies to recommend, which you can then research, etc, etc...flow.

They should also be adding a rec or rating system to their forums soon. As a quick aside, their forums are filled with novices, pump-and-dump posts and new-age tech traders. There are a couple really knowledgeable people there trying to shed some light in to the dark though. It can be enjoyable to challenge some of the posts =). I believe, as ZeccoShare develops, and the forums are more widely used, seeing how someone invests (You can enter information about your investment style + blogs), and how a poster's portfolio performs, will add some interesting dimension.

This summer Zecco is going to start offering the GainsKeeper service (https://www.gainskeeper.com/us/GainsKeeperBrokerag...) for both ZeccoShare and ZeccoTrading customers! (I think he said it would be free). This will add the much requested wash-sale tracking as well as share-lot tracking, short and long term tax tracking and other cost-basis issues, which make tax time and performance tracking accurate and easy. I honestly don't know much about it, but I saw a user-group member recommend it a while ago, and it looks good! Here are two major feature descriptions which we can look forward to at Zecco:
https://www.gainskeeper.com/us/PortfolioOptimizati...

Generate pre-trade analysis
Are you thinking of selling a stock and want to know if the trade will create a wash sale? Do you want to know your tax liability if you sell a security? GainsKeeper's trading simulation tool enables investors to evaluate the tax impact of a trade based on information in their portfolios before they place the trade with their broker.

Maintain investment objectives
GainsKeeper's portfolio analytics tool lets investors set portfolio targets for asset allocation, industry diversification and market caps. The tool calculates and displays holdings by market capitalization, stock exchanges, industry classification and top holdings, as a percent of your total investments. Diversification targets can be set for taxable accounts, retirement funds, or in the aggregate. The tool also provides trend analysis on your diversification mix going back monthly, quarterly, semi-annually and annually.

I got off the phone with a really good feeling about who is behind the curtains of my broker. While there are some bumps due to being new still, the service itself is really solid and improving all the time. Each month we will see new features added and existing features improved upon. The best part is these guys really care what customers think and are passionate about improving their vision. The fact that I, a simple user, have now had an exchange with the CEO, Forums Editor and now a voice-to-voice with the Director of Product Development simply because I've spoken my mind (and I haven't candy-coated a thing!). is proof of this.

I can't wait until Zecco goes public (The DD itself will be interesting).

Zecco will be at The Money Show in San Francisco in July (http://www.sanfranciscomoneyshow.com/?scode=008330). I'm looking forward to meeting them in person and quizzing them some more on the issues!

Learning Resources

2007-05-16T15:03:00.001-07:00

Reading List

Doyle Brunson's Super System 2 by Doyle Brunson (Hardcover - 2004) 30, 2006)

No Limit Hold 'em: Theory and Practice by David Sklansky and Ed Miller (Paperback - May 30, 2006)

Harrington on Hold 'em Expert Strategy for No Limit Tournaments, Vol. 1: Strategic Play by Dan Harrington and Bill Robertie (Paperback - Nov 2004)

Harrington on Hold 'em Expert Strategy for No Limit Tournaments, Vol. 2: Endgame by Dan Harrington and Bill Robertie (Paperback - Jun 9, 2005)

Harrington on Hold 'em: Expert Strategies for No Limit Tournaments, Vol. III--The Workbook (Harrington on Hold'em) by Dan Harrington and Bill Robertie (Paperback - May 30, 2006)

Phil Gordon's Poker Box Set: Phil Gordon's Little Black Book, Phil Gordon's Little Green Book, Phil Gordon's Little Blue Book by Phil Gordon (Hardcover - Oct 24, 2006) - Box set

Web Resources

Experienced Player Guide to Texas Hold'em - learn-texas-holdem.com
Two Plus Two Publishing - twoplustwo.com - Great free online magazine!

VLCM Introduction

2007-05-14T17:38:00.000-07:00

Volcom is no longer a publicly traded company.

I am leaving this post up simply because I can.

Volcom (VLCM)

Once You Feel The Stoke, You Change...

Without understanding this simple slang term, you can't really understand Volcom. I searched the Internet and built the most accurate definition I could:

Stoke, verb - stoked, stoking 1. To put coal or other fuel on (e.g. a fire, the furnace of a boiler). 2. To arouse or intensify (e.g. passion or enthusiasm).

Etymology: 17c: from Dutch stoken to feed (a fire).

Stoked, adj. (Slang) 1. Exhilarated or excited. 2. Feeling a very strong emotion (e.g. atingle, excited, fired up, thrilled, ready)

It is so much more than a word. It is a lifestyle, a way of living, a pursuit of something more. I found many definitions which included a drug reference, but this is totally inaccurate. The best way I can describe the feeling is "spiritual". Think of a time when you experienced something so pure and good, that it changed you. This is The Stoke. I remember the last time I felt it. I was at Cave Beach in/near Jervis Bay, Australia. 2.5 hours south of Sydney, another 20 min drive through a National Park , then a walk down a dirt path past a family of wallabies enjoying some sun. The path winds through some trees and comes out on a sandy beach embraced by cliffs on either side carpeted in lush green. I paddled out on crystal clear, glassy waters, in to perfect waves that seemed to line up for me. After a while I felt utterly exhausted, then I'd grab just the right wave and something wonderful and child-like would replace that exhaustion. That feeling lasted for days. Nothing could touch it, not even a busy work schedule which kept me from seeing daylight on most days. I guess it's a lot like falling in love. There is a place in side of me which remains a little bit empty, longing for that zen-like balance and acceptance of everything. Understanding this puts you on the road to understanding why Surfers appear to become addicted. In this write-up I'll speak mostly to surfing, but this can be found in the world of skateboarding and snowboarding (and skiing, which is on the comeback in a major way) as well. A side affect to this is a sort of bond between all those who know it. An unspoken community which naturallydevelops lifestyle, music, clothing, anything really which has to do with the spiritual search for The Stoke; whatever that might mean for each individual. Hopefully the idea isn't totally abstract at this point. Yes or no, I don't know if anything short of an experience can fully communicate it. If a picture is worth a thousand words, an experience is worth a billion, and I don't have that kind of time. I had to bring it in to this discussion, however, because we are about to look at a company which was founded by it, and caters to those that live in search of it. This is an important factor when investing in Volcom. It isn't a fashon company which is targeting a flipant age group. It is a part of a culture and is well positioned to not only pickup on trends in fashion (and other areas), but actually set them. I hope this becomes more apparent as you read on. So, on with the introduction... _{(For the first part of this introduction, I borrowed text liberally from the Volcom Investor Relations website.)}

Do What You Love...

During the March dumps [snow] of 1991, Richard Woolcott and Tucker Hall set off on a snowboard trip that would forever change their lives. Tucker had just been laid off of work and jumped in the car on a routine Tahoe trip to visit Nathan Fletcher and Mark Gabriel. After riding four days of fresh [powdery snow], Richard called work with the excuse that they were snowed in and extended his stay. For more than a week, they awoke every morning with two new feet of snow. It was their first real experience riding powder and the new obsession wouldn't stop. Two weeks later Richard quit his job to take some time off and snowboard. He and Tucker had also talked of starting a clothing company during the Tahoe trip but nothing was really final. Later that spring, the two came up with the idea of starting a riding company based around the three sports they enjoyed. With an initial $5000 from Richard's dad, they started the process. First the name and then the stone. Volcom was born. The Volcom idea would incorporate a major philosophy of the times, "youth against establishment". This energy was an enlightened state to support young creative thinking. Volcom was a family of people not willing to accept the suppression of the established ways . This was a time when snowboarding and skateboarding was looked down on. The U.S. was in a recession, there were riots in LA and the Gulf War. Change was in the air. Nirvana and Pearl Jam expressed it the best. For the first two years, Richard and Tucker traveled around the world on wild journeys with friends riding whatever they could. The business side of things was minimal. The headquarters were set up in Newport in Richard's bedroom and all sales were run out of tucker's bedroom in Huntington. The two knew nothing about how to make clothes but that didn't matter. It was all about spirit and creativity. Clothing sales for the first year were $2600.

...But Don't Forget To Get Paid For It...

We might not be here discussing Volcom if it wasn't for a wake up call from Dad, one truly fateful Saturday. He called with a simple message for his son, Richard Woolcott, one of the Volcom founders. He said, "Son, looking at your numbers, if you don't get your act together, you're going to be out of business in less than three months. I'm not going to help you or bail you out. So you better figure it out.". In this rare interview dated October 12, 1994 (prior to going public) Richard talks about that call and after, he told himself..."'Hey there's something special about Volcom, don't take it for granted and let's get serious about putting this thing together the way an apparel company needs to run.' There was the way we were operating, and then the way that the general market operates. The market is very, very competitive. There are a lot of very talented people out there running companies that make great product. In order to compete, you really have to put the effort in."

Going Public...

Cut to 2004. Volcom’s revenues have rocketed to $113.2 million, up 48% from the previous year, and showing a $24.6 million profit, which was 72% higher than 2003. They sported gross profit margins of 48.6 percent, on par with Quicksilver, one of the biggest and best in the industry. They had already established distribution and licensing agreements in Europe, Australia, Brazil, and Indonesia. It was time to take the next step in gaining market exposure at home and overseas. It was time to go public. President and CEO Richard Wolcott and Chairman Renee Wolcott announced they would own 21.3 percent and 20 percent of Volcom's stock respectively. Newport Beach-based Malcolm Trust will hold 20.7 percent. I've searched around and I can't seem to find any information on Tucker Hall other than he is no longer with the company but has a place on the board. Dad is sitting chair. Volcom also said the following people would join its board prior to the offering: Douglas Ingram, General Counsel at Allergan Inc., Anthony Palma, President and CEO of Easton Sports Inc., Kevin Wulff, President and COO of American Sporting Goods Corp., and (the most interesting to me...) Carl Womack, Vice President of Finance and CFO of Pacific Sunwear from May 1986 to September 1994 and as Secretary of Pacific Sunwear from November 1992 to October 2004. (Pacific Sunwear already made up 24% of Volcom's business and in 2006 would become a major part of the story when PacSun took a major beating and brought Volcom's shares down with it for about 50% of their value (in hindsight, a market overreaction.) Rather than sit back and panic, Volcom helped PacSun out and they both have climbed back out of the pit. Until writing this, I had no idea one of PacSun's own had left and now sat on the board at Volcom.) (I highly recommend reading through the management introductions on the Volcom website found here. ) June 30th, 2005, "Volcom IPO makes big debut". Volcom planed to raise just over $60mln, but ended up with closer to $90mln. Volcom said it planed to use $20 million from the IPO to pay off debt and spend the remainder on advertising, developing its infrastructure in Europe, and other purposes.

A Risk Realized...

As many smaller businesses have experienced, Volcom relied pretty heavily on just a couple primary customers. This can be a real risk when investing in small cap companies, and in this case, it was realized. In the summer following the first HiddenGems recommendation, Pacific Sunwear (a.k.a. PacSun), which accounted for around 30% of Volcomes business, hiccuped big time and, in spite of an impressive quarter, Volcom took a serious haircut (I love all these biological metaphors for a plummeting share-price). Volcom impressed me when they didn't panic, but instead worked with PacSun to work out the problems. HiddenGems made it's second recommendation at this heavily discounted price and it's been up and up ever since. If your interested in more detail, here is a Fool.com article on the matter. Volcom now distributes apparel through more than 1,100 different retail customers, including Pacific Sunwear(Nasdaq: PSUN), Zumiez (Nasdaq: ZUMZ), and Nordstrom (NYSE: JWN) - where it's childrens lines have been doing very well, and Its products are sold in more than 40 countries. While some of the risk is still there, it is greatly reduced. If anything like the PacSun issue occurs again, it would be a great opportunity for long term investors. The most exciting news, is that when a licensing agreement for distribution in Europe expired, Volcom decided it would rather take over sole control of its brand throughout Europe rather than renew. This should be happening throughout 2007 and in to 2008. I don't see why they won't continue this trend, if success full, in some of their other international markets when the time comes.

Conclusion...

In spite of turning a $5,000 investment in to a nearly $1 billion cultural phenomenon, Richard still reportedly hangs out in his trailer by his local surf spot, as often as possible, and uses the same makeshift desk he started with - made from a couple of filling cabinets and a door. The Company has matured internally but continues to run off the same philosophy it started with. The Volcom thinking now flows through its art, music, films, athletes and clothing. Just don't let the ambiance fool you, this is a well-run company. If you read about the board and key personnel, you'll find a LOT of expereince and talent and Richard holds a business degree from Pepperdine University. As I said at the beginning of this write-up, and as written in the last article I linked... "Volcom doesn't just market clothing -- it's selling a lifestyle, and it does so more aggressively than most old-school "lifestyle brands" could hope for. A visit to Volcom's website illustrates how close it is to its customers. Volcom sponsors athletes, runs tons of board-sports competitions, takes part in Volcom-branded concerts, makes board-sports-related films, and even has a Volcom music label. You might even feel hard-pressed to figure out exactly what it's selling, seeing how its website is more about the kids and the sports than the merchandise. In fact, in an interesting anecdotal aside, I ran across an article the other day that mentioned a teen with a tattoo of the Volcom brand symbol. That's some crazy loyalty." Recently Volcom even purchased a historical house on the North Shore of Hawaii. This prestigious property will house pro athletes on tour as well as be a permanent part of this important location to the surfing world. This sums up the approach in many ways. They don't just advertise, they are a part of the world they service. This is the strength of Volcom.

Competitors...

I've ranked these from top to bottom in order of how I feel their brand quality competes with Volcom.

Quicksilver
Billibong
Rip Curl
O'Neill
Rusty
Hurley (Mostly US) *
Mambo (mostly Australia) *

_{* Hurley and Mambo are both very high-quality brands which just haven't made it to the same level as the rest. If they were, I would place them 2nd and 3rd behind Quicksilver.}

Surf History Incoming...

I saved this for last because it arguably goes even more off topic than the first part of this introduction. Here you will find more information about the origins of the company and it's key competitor. I think it also contains improtant information if your thinking about owning a piece of this rich culture, and should help put future events in perspective. For example, when the before-mentioned North Shore house was purchased, I read many investor's posts of dismay on what a waste of capital it was, as if it was as frivolous as a new corporate jet for weekend use by the CEO. Besides the fact that most of the founders are pros and enthusiasts, which bodes well for a critical point in the business, keeping in touch with their customers, I noticed something which pops up under several names, experience at Quicksilver, I consider this to be a very good thing, even if guys like Volcom founder Richard Woolcott down-play the significance of it. By the way, Richard not only worked for Quicksilver, but was sponsored by them when he was entered in to the National Scholastic Surfing Association Hall of Fame. He might still be with Quicksilver if he hadn't hit a sandbar while on a routine surfing photo shoot in Mexico, and broke his neck. Sadly, this ended his pro surfing career. Quicksilver is perhaps the oldest and biggest boarder-culture retailer (Rip Curl is up there too, but I personally don't think their products compare, even if I do own some of them). While Volcom is my personal favorite clothing company of this genre, Quicksilver is still right there at the top as well, and hold some lines which no one really competes with yet (e.g. Quicksilver has a high-end line. I bought one of these lined high quality wool jackets in Paris for about E280.00. Great quality, and quite dressy when a proper suit isn't required). So Volcom's guys have been in the business a long time and worked at a company which had been doing it right for 20 years before they founded Volcom. Allow me to get a little nostalgic again here. I think it is worthwhile to take a very general look at some surf history (for the die-hards, please cut me some slack for leaving out some stuff or understating/overstating parts) I'm going to keep it short, but it comes full circle... You see, I'm from Southern California. Hermosa Beach to be exact.... Surfing made it's way from Hawaii to the South Bay in the early 1900s when the place was still pretty much a couple of roads through sand dunes and wheat fields ('South Bay' is the local term for the area south of Marina Del Ray along the beaches of Los Angeles. We also refer to the area as the Beach Cities, but usually mean just Manhattan Beach, Hermosa Beach and Redondo Beach). In the 50s and 60s, Hermosa Beach grew to be the epicenter of the new surf world, thanks in part, to guys like Doc Ball, who was one of the first to photograph and publish the lifestyle. Big wave surfing was born-again in Hawaii but the guys were from Hermosa - Greg Noll's surf shop is still open there. Needless to say there is a lot of history in my home town (I'm not even going in to the ties to skateboarding and music.) One day in Torquay (pronounced 'tor-key'), Australia (about 2.5 hours south of Melbourne at the beginning of the Great Ocean Road), at a friendly Lifeguard (Lifesavers over there) competition, during a break, the Lifeguards from the Southbay (and Malibu) pulled out their balsa-wood surfboards and started riding the waves. The closest thing the Aussies had seen up until that moment, was their big heavy wooden boards mostly used in rescues. It wasn't long before the nation was hooked. In the early 70s Quicksilver and RipCurl opened their doors in Torquay. In 1973 RipCurl sponsored the first Rip Curl Pro Championship (3 years before the creation of the ASP which recognized the first professional world champ in 1976.) (I had the honor of going to Bells beach during the 2006 tournament, visiting Torquay, the surf museums, and even taking the longest board I could find in to the waters of Torquay.) I found a great history of surfing here if your hungry for more (It covers the early years, but not much past 1970 - see the ASP link above as well). I love this quote made by Mark Twain in his 1866 book Roughing It (according to the site).:"I tried surf-bathing once, subsequently, but made a failure of it. I got the board placed right and at the right moment, too; but missed the connection myself. The board struck the shore in three-quarters of a second, without any cargo, and I struck the bottom about the same time, with a couple of barrels of water in me." I should mention the site says Australia became hooked in 1915 at Manly, which is near where I lived in Sydney. This is the first I have heard this, and not what I saw at the surf museums, however, if you read through it, you'll find there are a lot of people involved and, in reality, the history is not as black and white as I might have made it sound. They mention Redondo on page two by the way. This was well before Redondo Beach and Hermosa Beach were founded, so I can only assume they refer to Rancho Sausal Redondo. Later a 1500-acre tract was bought and the development was promptly dubbed "Hermosa" (beautiful in Spanish).

Investing wisdom

2007-05-03T14:31:00.000-07:00

Foreword

I'll be collecting words of wisdom from the investing world here. Just like a good ratio, such as P/E, basing an entire investment or philosopy on a single quote would be foolish indeed. It is important to keep in mind that a single quote, by itself, lacks meaning out of context. I hope at some point, the collection might paint a picture of how I approach investing.

Quote Collection

Quote: In matters of style, swim with the current; in matters of principle, stand like a rock. - Thomas Jefferson, 1743 - 1826

Interpretation: n/a

Quote: On earnings expectations a fellow Fool, handle: simplicius posted:

"Either result would be a net positive for my long-term investment strategy."

Interpretation: If the price goes up, we profit. If the price goes down, it might be a buying opportunity, which, with a good investment, equates to profit later.

BWLD Key Considerations

2007-05-01T22:29:00.000-07:00

Two businesses in one…

On the business side of the picture, Buffalo Wild Wings is actually two businesses in one: The company-owned store operation and the franchise management business. This has both risks and rewards. The risks are, as Jim Gillies points out on the 8^th of March 2007, “These businesses aren't necessarily natural brothers; they compete for attention from management, company resources, favorable locations, etc. A strong leadership team is required to manage these competing interests”. The rewards could be that franchised stores, especially franchisers who own multiple stores, take some of the management burden off the company as the number of stores increases beyond the capabilities of current management. At some point they will have to increase the size of management without sacrificing quality and focus.

I like the mix. It seems to me that either the franchises or the company owned stores could each expose the other to new areas and allow for more intelligent growth. The bottom line here is that management has been growing at a very controlled methodical rate with little or no over-saturation problems. As long as the current management stocks around, BWLD will be more than ok.

I honestly don’t know if they need to increase the company owned side of the ratio. It’s a lead by example thing for me. When Sally Smith first took the reigns and redesigned the way the stores look and operate, several franchisers decided they didn’t want to follow suit. After seeing the new stores perform, they converted their own. I believe BWLD is the best at operating B-Dubs stores, but how many in relation to franchises? The balance is something I have to trust BWLD to figure out.

In 2006, they gave guidance that they plan to open 20 new company-owned restaurants and 50 to 55 new franchised restaurants. This may or may not mean they plan to keep the ratio.

10-20 year contracts w/ franchisees encourage opening multiple units within an area.

Ethanol and the flu?...

It is important to remember that in life, The Universe or when investing in Buffalo Wings, that all things are connected. In this case it is all about the chicken. When chicken prices go up, so do BWLD’s costs. This can either lower margins or be passed on through the menu. Of course, a menu update is the less liquid of the two, so when looking for short term pricing, unless there is a menu change, this is factored in to the bad side.

There are two stories in the news of late which greatly affect the price of chicken. The first is not a long term concern. This is Avian Flu. Over the last couple of years it has poped up several times, always affecting things in the short term before falling to the background. The second may or may not be a long term issue. This is the availability of corn due to a greater demand for production of Ethanol, an alternative fuel. Again I’m not too worried here. Keeping it simple…As the technology of Ethinol progresses, it will be made from other things in addition to corn. There was also a recent report by American farmers that more corn will be available than expected. This is something to keep an eye/ear on, but the situation looks stable for now. Management has handled this extremely well as well.

When is 20 selections still not too many?...

The answer is beer (in this case). The last thing to watch is the Alcohol sales. Raise your hand if you like beer with your wings. Now, raise your hand if you like beer, period. Good, now go get me a beer. At more than 30% sales, this is something I had to mention, but not something I expect to matter in the long term. The marriage between products is just to concrete. Short of prohibition, I don’t see this changing, and they tried that once…it didn’t work.

BWLD Introduction

2007-05-01T22:02:00.000-07:00

Buffalo Wild Wings (BWLD )

Sauces, Chicken, Beer, Sports, and… Daddies?...

When the founders, Disbrow and Scott Lowery, relocated to Kent, Ohio from New York in 1981, they faced a powerful craving - one which I felt in Australia a couple years back. My choice was easier than theirs however; I couldn’t drive to New York if I wanted to! Luckily, they came to the same decision I did… Make your own. Hence, the birth of Buffalo Wild Wings & Weck which later changed it’s name to Buffalo Wild Wings Grill & Bar.

If your interested… The “Weck” part of the original name comes from a roll that makes the roast beef kummelweck (alternatively spelled kimmelweck) sandwich unique. Made only in the Buffalo-Rochester area, sandwich is basically a Kaiser roll topped with lots of pretzel salt and caraway seeds. Kummelweck is simply shortened to “weck.” The sandwich is usually served with sinus-clearing horseradish (you can tell a native Buffalonian by the amount of horseradish he or she used), a couple of huge kosher dill pickle slices on the side, and extra beef juice served straight from the roast. Wash it all down with a cold, locally brewed ale.

Anyway, the now Minneapolis-based restaurant chain, which started with the first restaurant near the Ohio State University campus, today has over 415 company-owned and franchised Buffalo Wild Wings Grill & Bar restaurants in 37 states, with their sights currently set to 1,000. One of the major reasons for BWLD’s success is their President and CEO, Sally Smith, who really turned things around in 1996. Here is a nice interview with her.

If you haven’t figured it out already, Buffalo Wild Wings sells chicken - but not just Buffalo wings. If your not familiar with what makes a wing a buffalo wing, I’ll give you a quick intro. It is the sauce! Buffalo sauce is commonly made up of Franks Red-Hot Sauce (or a substitute) a lot of butter and to control the level of heat (of if your like me and just love the stuff), vinegar is added. The chicken is fried (can be baked) first then rolled in warm sauce to serve. Along with this favorite, Buffalo Wild Wings offers a choice 13 additional sauces and variations, Beer, burgers, the Buzztime® Trivia system and many big-screen TVs.

Add great food to an emphasis on great service (including the option of ordering to-go, or you can sit down and have the food brought to you), and a family atmosphere, and you have the B-dubs phenomenon, where it isn’t unusual of to see a bunch of daddies hanging out with their kids while watching a game and munching some wings, or packed on big game nights - or any night for that matter.

But What Does the Company Say?...

If your interested in really getting under the hood, here is how Buffalo Wild Wings introduces itself, it’s restaurants, business and growth principals, operations, management and more.

(This text is taken directly from the 2006 Form 10-K.)

“..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 our signature sauces. Our restaurants create an inviting neighborhood atmosphere that includes an extensive multi-media system, a full bar and an open layout, which appeals to sports fans and families alike. Our concept offers elements of the quick casual and casual dining restaurant concepts featuring a flexible service model that allows our guests to choose among convenient dining options such as quick casual counter service, casual dining table service or take-out. Our award-winning food and inviting atmosphere, combined with our guests' ability to customize their dining experience, drives guest visits and loyalty.

The widespread appeal of our concept establishes our restaurants as a neighborhood destination with 429 restaurants in 37 states as of December 31, 2006. Our menu, competitively priced between the quick casual and casual dining segments, features fresh chicken wings and other items including boneless wings, chicken tenders, popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito(R) soft tacos, appetizers and salads. Our made-to-order menu items are enhanced by the bold flavor profile of our signature sauces, ranging from mild Teriyaki(TM) to Blazin'(R). Our restaurants serve approximately 20 domestic and imported beers on tap, including several local or regional micro-brews and a wide selection of bottled beers, wines, and liquor. The inviting and energetic environment of our restaurants is complemented by furnishings that can be easily rearranged to accommodate parties of various sizes. Our guests have the option of watching sporting events or other popular programs on our projection screens and approximately 40 additional televisions, playing Buzztime(R) Trivia or video games. The open layout of our restaurants offers dining and bar areas that provide distinct seating choices for sports fans and families. Our unique service model, which provides the flexibility of ordering at the counter or table, allows our guests to customize their Buffalo Wild Wings(R) experience to meet the different time demands or service preferences of a workday lunch, a dine-in dinner, a take-out meal, an afternoon or evening enjoying a sporting event or a late-night craving.

We have established our brand through coordinated marketing and operational execution that ensures brand recognition and the quality and consistency of our concept. These efforts include marketing programs and irreverent, award-winning advertising to support both our company-owned and franchised restaurants. We also prominently feature our trademark Buffalo insignia and yellow and black colors in our restaurants and brand our company materials. Our concept is further strengthened by our emphasis on operational excellence supported by stringent operating guidelines and comprehensive employee training in both company-owned and franchised restaurants.

Buffalo Wild Wings was founded in 1982 by Jim Disbrow and Scott Lowery at a location near The Ohio State University. Our original name was Buffalo Wild Wings & Weck(R) and we became more popularly known as bw-3(R). In 1991, we began our franchising program. In November 2003, we completed an initial public offering and became a publicly-held company.

Our Concept and Business Strategy

Our goal is to continue to grow and develop the Buffalo Wild Wings(R) Grill & Bar concept into a leading national restaurant chain. To do so, we plan to execute the following strategies:

Open restaurants in new and existing markets;
Offer boldly-flavored menu items with broad appeal;
Create an inviting, neighborhood atmosphere;
Enable our guests to customize their dining experience;
Continue to strengthen the Buffalo Wild Wings brand;
Focus on operational excellence; and
Increase same-store sales and average unit volumes.

Growth Strategy

Our growth strategy involves opening company-owned and franchised restaurants in both new and existing markets. We believe that we have established the necessary infrastructure and control systems to support our disciplined growth strategy and that our concept can support over 1,000 restaurants in the United States. We have developed procedures for identifying new market opportunities, determining our company and franchising strategy in those markets and identifying sites for company-owned and franchised restaurants. Our growth strategy for the near-term projects a mix of approximately one-third company-owned restaurants and approximately two-thirds franchised restaurants.

We intend to build additional company-owned restaurants in both new and existing markets. In most of our existing markets, we plan to continue to develop new company-owned restaurants until a market is penetrated to a point that will enable us to gain marketing and cost efficiencies. We intend to enter new markets by opening several restaurants within a one-year period to quickly build our brand awareness. We intend to grow our franchise system through the development of new restaurants by existing and new franchisees, focusing on multiple-unit area development agreements.

The Buffalo Wild Wings Menu

Our restaurants feature a variety of menu items including our Buffalo, New York-style chicken wings spun in one of our signature sauces (from sweet to screamin' hot: Teriyaki(TM), Sweet BBQ(TM), Mild(TM), Medium(TM), Spicy Garlic(TM), Caribbean Jerk(TM), Hot BBQ(TM), Hot(TM), Wild(R) and Blazin'(R) , and our newest sauces: Parmesan Garlic(TM), Honey BBQ(TM), Asian Zing(TM), and Mango Habanero(TM)). Our fresh chicken wings can be ordered in sizes ranging from six to 100 wings, with larger orders available for parties. Our sauces complement and distinguish our chicken wings to create a bold flavor profile for our guests. In addition to chicken wings, our menu features a wide variety of food items including boneless wings, chicken tenders, popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito soft tacos, finger foods and salads. We also provide a 12 & Under Menu for kids.

Our restaurants feature a full bar which offers an extensive selection of approximately 20 domestic and imported beers on tap as well as bottled beers, wine and liquor. Additionally, in order to continually improve our menu, we have a research and development department that tests and implements new menu items. Our goal is to balance the established menu offerings that appeal to our loyal guests with new menu items that increase guest frequency and attract new guests.

Restaurant Atmosphere and Layout

Our restaurants are designed to provide an inviting neighborhood atmosphere and allow our guests the flexibility to customize their dining experience. The inviting and energetic environment of our restaurants is created using furnishings that can be easily rearranged to accommodate parties of various sizes. Our restaurants also feature distinct dining and bar areas with select restaurants having patio seating.

We strategically place approximately 40 televisions and up to seven projection screen televisions throughout the restaurant to allow for easy viewing. These televisions, combined with our sound system, Buzztime(R) Trivia and assorted video games, provide a source of entertainment for our guests and reinforce the energetic nature of our concept. We tailor the content and volume of our video and audio programming to reflect our guests' tastes. We believe the design of our restaurants enhances our guests' experiences, drives repeat visits and solidifies the broad appeal of our concept.

All of our menu items are made-to-order and are available for take-out, which approximated 16% of restaurant sales for company-owned restaurants in 2006. Many of our restaurants have separate parking spots for our take-out guests.

Current Restaurant Locations

As of December 31, 2006, we owned or franchised 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 approximately 5,600 square feet for restaurants that have opened in the last three years. We anticipate that future restaurants will range in size from 4,500 square feet to 6,400 square feet with an average cash investment per restaurant of approximately $1.2 million, excluding pre-opening expenses of approximately $180,000. From time to time, we expect that our restaurants may be smaller or larger or cost more or less than our targeted range, depending on the particular circumstances of the selected site or market. Also, from time to time, we expect to purchase the building or the land and building for certain restaurants, in which case the cash investment would be significantly higher.

Our restaurants are typically open on a daily basis from 11 a.m. to 2 a.m. Closing times vary depending on the day of the week and city and state regulations governing the sale of alcoholic beverages. Our franchise agreements require franchisees to operate their restaurants for a minimum of 12 hours a day.

Site Selection and Development

Our site selection process is integral to the successful execution of our growth strategy. We have processes for identifying, analyzing and approving new markets, as defined by the A.C. Nielson designated market areas in the United States. In selecting designated market areas, we collect and review restaurant industry data relating to restaurant sales, spending on food away from home and expected restaurant growth in the market, as well as market demographics, population data and relative media costs for radio and television advertising. Once a market is identified, we use a trade area and site selection evaluation system, which has been customized for the requirements of the Buffalo Wild Wings system, to assist in identifying suitable trade areas within that market and suitable sites within identified trade areas. Criteria examined to determine appropriate trade areas include the presence of a casual dining corridor, projected growth within the trade area, the locations of key big box retailers and multi-screen movie theaters in the neighborhood, key demographics and population density, drive time and trade area analysis and other quantitative and qualitative measures. Once a suitable trade area is identified, we examine site-specific details including visibility, signage, access and parking. Final approval by two or more members of our executive management team is required for each company-owned site. At least one senior franchise executive reviews each franchise site.

Marketing and Advertising

We have created a unique marketing program designed to communicate a distinctive and consistent brand that differentiates Buffalo Wild Wings from our competitors and that showcases our food in a fun and energetic atmosphere. These efforts include marketing campaigns and irreverent, award-winning advertising to support both our company-owned and franchised restaurants. The primary goal of these efforts is to build brand awareness throughout the United States. In addition, advertising campaigns are also designed to: i) drive positive same-store sales through additional visits by our existing guests and visits by new guests, ii) increase margins, iii) increase average 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 "Ribs & Combos" menu items. Our secondary marketing campaigns focus on reaching beyond the core Buffalo Wild Wings guest. Given our strategy to be a neighborhood destination, community marketing is also a key to developing brand awareness in each market. Our restaurants actively sponsor local sporting teams and sporting events to drive guest traffic associated with those activities.

Advertising. Our media advertising focuses on positioning the Buffalo Wild Wings brand as an inviting neighborhood dining location. Our commercials, print advertisements and radio spots are irreverent by design and have been recognized in the restaurant and advertising industries for their creativity.

Franchise Involvement. System-wide campaigns and promotions are developed and implemented with input from the Buffalo Wild Wings National Advertising Advisory Board. This volunteer franchisee board is elected by franchisees annually and meets regularly to review marketing strategies, provide input on advertising messages and vendor co-op programs, and discuss marketing objectives.

Operations

Our management team strives for operational excellence by recruiting, training and supporting the highest quality management teams and employees and through the implementation of operational best practices within our restaurants.

Restaurant Management. Our management structure consists of a general manager, one assistant general manager and up to three other managers depending on sales volume of the restaurant. We utilize regional managers to oversee our general managers, ensuring that they receive the training and support necessary to effectively operate their restaurants. Currently, we have 16 regional managers who oversee four to nine restaurants each. As we expand geographically, we expect to add additional regional managers. We have five Directors of Operations who lead the Regional Managers.

Kitchen Operations. An important aspect of our concept is the efficient design, layout and execution of our kitchen operations. Due to the relatively simple preparation of our menu items, the kitchen consists of fryers, grill and food prep stations that are arranged assembly-line style for maximum productivity. Given our menu and kitchen design, we are able to staff our kitchen with hourly employees who require only basic training before reaching full productivity. Additionally, we do not require the added expense of an on-site chef. The ease and simplicity of our kitchen operations allows us to achieve our goal of preparing casual dining quality food with minimal wait times. We also believe the ease of our kitchen operations is a significant factor in attracting franchisees.

Training. We provide extensive training for management and hourly employees at company-owned restaurants, with the goal of providing an excellent guest experience based on our service, food preparation and facilities maintenance. Further, we require each franchisee to send their general manager, assistant manager and "control person" to attend our management training program.

Managers of our company-owned restaurants are trained using a two-part process. This includes hands-on education during a five-week training period at one of our certified training restaurants, coupled with an additional one-week management skills class. During this training period, our manager 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 addition, our hourly employees are encouraged to participate in an on-the-job training program called the Wing Certified Trainer, or WCT, program that utilizes both detailed training guides and hands-on instruction by restaurant management. The certification process requires that the employee have a high level of knowledge of all 10 components of restaurant operations. These 10 components represent the six different job positions in our restaurant: cashier and greeter, bartender, server, expedite station, grill and southwest station, and chip and shake station. Monetary incentives and additional benefits are used to encourage employees to participate in this certification process. Our objective is to have at least four WCTs at each company-owned and franchised restaurant.

Career Opportunities. We attempt to motivate and retain our field operations team by providing them with opportunities for increased responsibilities and advancement. In addition, we offer performance-based cash incentives tied to sales, profitability and qualitative measures such as mystery shop scores. It is our preference to promote from within whenever possible.

Recruiting. We actively recruit and select individuals who demonstrate enthusiasm and dedication and who share our passion for high quality guest service delivered through teamwork and commitment. To attract high caliber managers, we have developed a competitive compensation plan that includes a base salary and an attractive benefits package, including participation in a management incentive plan that rewards managers for achieving performance objectives.

Food Preparation, Quality Control and Purchasing

We strive to maintain high quality standards. Our systems are designed to protect our food supply throughout the preparation process. We provide detailed specifications to suppliers for our food ingredients, products and supplies. Our restaurant managers are certified in a comprehensive food safety and sanitation course, ServSafe, developed by the National Restaurant Association Educational Foundation.

We negotiate directly with independent suppliers for our supply of food and paper products. We use members of UniPro Food Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our restaurants. To maximize our purchasing efficiencies and obtain the lowest possible prices for our ingredients, products and supplies, our purchasing team negotiates prices based on system-wide usage for both company-owned and franchised restaurants. We believe that competitively priced, high quality alternative manufacturers, suppliers, growers and distributors are available should the need arise.

We utilize T. Marzetti company for the production of our signature sauces. They maintain sufficient inventory levels to ensure consistent supply to our restaurants. We have a confidentiality agreement with Marzetti which prevents our sauces from being supplied to, or manufactured for, anyone else.

Fresh chicken wings are an important component of our cost of sales. Prices are generally based on the underlying commodity price of chicken wings plus additional costs for handling and distribution. Fresh chicken wings accounted for approximately 24%, 27%, and 34% of our cost of sales in 2006, 2005, and 2004, respectively. We ensure consistent supply of high quality chicken wings by utilizing four to six suppliers, with Peco Foods, Inc. currently accounting for approximately 33% of the total system-wide supply. Given our multiple suppliers and the commodity nature of fresh chicken wings, we believe we have sufficient supplier flexibility to maintain a consistent chicken wing supply. We regularly review our buying procedures to ensure quality and cost optimization.

Restaurant Franchise Operations

Our concept continues to attract a strong group of franchisees, many of whom have substantial prior restaurant operations experience. Our franchisees execute a separate franchise agreement for each restaurant opened, typically providing for a 15 to 20-year initial term, with an opportunity to enter into a renewal franchise agreement subject to certain conditions. Our agreement currently requires franchisees to pay an initial franchise fee of $42,500 for the first restaurant opened and $32,500 for each additional restaurant they open. The $32,500 fee is reduced to $12,500 if the additional restaurant is in the designated area of the franchisee's existing restaurant. If a franchisee has entered into an area development agreement with us, the initial franchise fee is $42,500 for the first restaurant, $32,500 for the second restaurant and $27,500 for each subsequent restaurant. These amounts are reduced to $32,500 for the first restaurant and $12,500 for each subsequent restaurant if the franchisee is an existing area developer signing an additional area development agreement. If the franchisee is an existing franchisee that subsequently signs an area development agreement, the franchise fee is $32,500 for the first restaurant and $22,500 for each subsequent restaurant.

Franchisees also pay us a royalty fee of 5.0% of their restaurant sales. Franchise agreements typically allow us to assess franchisees 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 contribution to the Advertising Fund by 0.5% once every three years. The amount contributed to the Advertising Fund increased from 2.5% to 3.0% on December 26, 2005.

All of our franchise agreements require that each franchised restaurant be operated in accordance with our defined operating procedures, adhere to the menu established by us, meet applicable quality, service, health and cleanliness standards and comply with all applicable laws. We ensure these high standards are being followed through a variety of means including mystery shoppers and announced and unannounced quality assurance inspections. We also employ franchise consultants to assist our franchisees in developing profitable operations and maintaining our operating standards. We may terminate the franchise rights of any franchisee who does not comply with our standards and requirements. We believe that maintaining superior food quality, an inviting and energetic atmosphere and excellent guest service are critical to the reputation and success of our concept; therefore, we aggressively enforce the contractual requirements of our franchise agreements.

The area development agreement establishes the number of restaurants that must be developed in a defined geographic area and the deadlines by which these restaurants must open. For area development agreements covering three to seven restaurants, restaurants are usually required to open in 12-month intervals. For larger development agreements, the interval is typically shorter. The area development agreement can be terminated by us if, among other reasons, the area developer fails to open restaurants on schedule.

Management Information Systems

We have our core management information systems in place and believe they are scalable to support our future growth plans. We utilize a standard point-of-sale system in all of our company-owned restaurants that helps facilitate the operation of the restaurants by recording sales, cost of sales, labor and other operating metrics and allows managers to create various reports. We currently are reviewing the capabilities of our current point-of-sale system to ensure it is sufficient to support our planned expansion. Certain information from the point-of-sale system is transferred to our headquarters on a daily basis and is reported daily to various levels of management through email and our corporate intranet. Franchisees are required to report sales on a daily basis through an on-line reporting network and submit their restaurant-level financial statements on a quarterly or annual basis…”

BWLD Foreword

2007-05-01T21:41:00.000-07:00

The Lazy Investor…Sort of.

Thank you Muji* for compiling much of the coverage listings and historical information which has given me such a wonderful and complete starting point. While I have reformatted, altered, and expanded a large amount of the original post, I have also left most of the historical write-up unchanged. The write-up I started with can be found here**, in this post dated 4/27/07:

_{* Muji is a fellow member of the MotleyFool: HiddenGems community
** You must be a MotleyFool HiddenGems member to access the post at this link}

Zecco: Info & Answers

2007-05-01T16:58:00.000-07:00

Summery

Free trades. Up to 10 per day and 40 per month
Free real-time quotes
No inactivity or other account fees.
Money Market Sweep so your cash earns around 4.3% while "on-deck"
IRAs at $30/year also with the same free trade allotment.
Market, limit, stop-limit, and trailing ($) orders all free
If you leave Zecco, the ACAT fee is $50, which I find to be quite low
Can trade no-load mutual funds, but cost is $10/trade. ETFs are free since they are essentially stocks.
Dividend re-investment available, but Zecco only deals in whole shares

Important Links

Link to Zecco pricing and price comparison:
http://www.zecco.com/trading/FreeTrading.aspx

Link to the FAQ where most questions are answered, You'll find info on subjects ranging from how Zecco makes money to security and insurances.
http://www.zecco.com/trading/TradingReference.aspx?tab=FAQ

Rafe's FAQ

If I transfer my TD Ameritrade account what will happen to the fractional shares I now own??
Check with TDAmeritrade to be sure, but they should liquidate for free and send the proceeds 1-2 weeks later without additional fee (it should fall under the same transfer)

Does Zecco offer free DRIP services?
As in dividend re-investment program? Yes but only whole shares. Fractions are paid as cash.

Should I open the Zecco account first and then request the transfer into it? (I also have a TD Ameritrade ROTH-IRA to transfer)
For a regular account you can open it and fund it at the same time with an ACAT (transfer). For the IRA you have to wait for the account to be completely active before you can submit the ACAT (or any other type of funding request). For those who are new to Zecco, I suggest opening a regular account, and putting a small amount of money in to give it a test run. They removed the minimum deposit requirements for non-margin accounts, so you can deposit $1 if you want. See the section below for more into on transfer types and times.

Does Zecco offer a download of sales for a tax year into Turbo Tax like TD Ameritrade does?
I know they download to MSMoney and Quicken. I bet TurboTax uses the Quicken file format, but I'm not sure. The download is the best I have used. It takes a date range so you can do any amount of time, and Quicken (at least) filters for repeated transactions, which makes things really easy.

Customer Service & Review

I've moved all of my broker accounts (portfolios) to Zecco.com and I couldn't be happier. There are a couple of bumps, but Zecco has only been around since late 2006, so some issues should be expected. Surprisingly though, I experienced more at BofA Investment Services and InteractiveBrokers, than I have at Zecco.

Zecco is not just listening to feedback, but acting on it. Several of us (MotleyFool:HiddenGems members) are active on their customer feedback user-group, and there are signs that they are addressing our issues. For example, during the third week of April 2007, Zecco emailed out a survey to their customers which asked questions regarding just about every area of feedback. In march (I believe it was), they completely redesigned a large part of the account management interface. It has been impressive to watch the speed of the improvements. Having been on a development team professionally, I feel I'm well qualified to make such a statement.

Now you are probably thinking, "That's some pretty smoke your blowing up our A$#es, but what Issues?" Well, the phone system when calling a customer service rep is absolutely awful. You'll hear the statement about finding answers in the online FAQ about 6 times before your through it. The key is to not listen and just dial 2-4-1-1-1!

UPDATE: (07 SEPT 2007) I just called for some help on a few items, and I noticed they finally updated their phone menu system. I just pressed 1 for trade help and another selection for "all other..." and I was in the hold queue. They moved the "You can get help on-line by visiting our FAQ..." line as part of the on-hold in-queue audio. Much much better now!

I still had a 5-10min hold time, but it was peak hours, so forgivable. As always the guy on the phone was more patient than I could believe as I jumped between websites to try and figure out where my records had gone wrong.

I have found the email customer service to be laughable as well. There we're times where I wondered if they were even reading the questions.

There is a silver lining to this though. These issues are surface level and can be addressed easily. As I said before, Zecco is listening and there were questions about the phone and email systems on that survey I mentioned. I say surface level, because the customer service representatives have been very good. Once you get a person on the phone, it is a pleasant experience. They have been able to answer every question (and I call on behalf of the HiddenGems message board looking for answers sometimes, so I've asked some crazy questions!). If the rep has any doubt, they can transfer you to a specialist who knows the rules and laws of the trade. I have even had a customer service rep call the clearing house, to find out the details of a transfer, while I was still on the phone.

Signing Up, And What To Expect

Coming soon...

Transfers

ACH

ACH stands for "Automated Clearing House". An Automated Clearing House is a financial institution which is used by all banks and brokerage firms to transfer funds and holdings back and forth. When you hear the term ACH, however, it refers to a cash transfer. ACH transfers are always free and take between 2 and 7 business days. In reality this is rarely the case. The standard expectation is 2-4 days. In my experience, Zecco tends to be on the very fast side. Usually within 2 days, or if posted early enough in the day, the day of the posting can be counted. It is very rare, but I have had a transfer make it the next day. In general it is better to expect 3 days and be consistently, pleasantly surprised.

Before you can place an ACH transfer you have t establish an "ACH Relationship" between the two financial institutions. I have done this at banks, direct banks and 3 brokers and it has always worked the same way. You initiate the process at either end (I use the Zecco interface but I assume I could do it from the bank side to). An ACH transfer period later (2-4 days), two small transactions appear in your account. One deposit and one withdrawal. They are usually just $0.05-$0.30 each. When this happens, simply go back to the origin of the process and enter these amounts. This is how the system verifies the relationship is good. Now you are free to make your first real transfer. A couple of days later, those two small transactions will reverse themselves.

ACAT

ACAT stands for "Automated Customer Account Transfer". You file the request at your new broker and pay your old one for the transfer itself. So if you transfer out of Zecco, you will file at your new broker and Zecco will charge $50 (at the time of this writing). This isn't a bad price either. BofA charged me $75.
You have the option of transferring single positions, or an entire account (portfolio). When you do the entire account, there is an option to bring over cash balances as well. Also, Zecco doesn't handle partial shares, so your old broker will have to liquidate them. It is common for this to be free, and the broker should then send the proceeds to your account about a week later. I have heard of at least one case where this was not true, so I recommend checking with your old broker.
When the ACAT lands at Zecco, the cost basis (or average paid/share) will be $0. The reason for this is that information regarding share-lots (a block of shares purchased together for a single stock) is tracked by the broker and not kept in the portfolio. So when you transfer a holding, it is lost. The upside, is you get to tell the IRS anything you want when sell. To setup your cost basis at Zecco, simply email them the ticker and the cost basis and they will set it for you with in a couple of days.
I have heard there are some brokers which allow you to set the cost basis yourself. It is possible Zecco will allow this later, but I'm not aware of any plans to change it. I have gone through this process twice now and it really isn't a big deal.

[This document is a work in progress...]

1.	The right to know the fee for every card transaction – and who’s charging it.
2.	The right to know the markup of Visa and MasterCard fee increases.
3.	The right to know all Visa and MasterCard fee reductions.
4.	The right to know all transaction middlemen.
5.	The right to know all surcharges and bill-backs.
6.	The right to a dedicated local service representative.
7.	The right to encrypted card numbers and secure transactions.
8.	The right to real-time fraud and transaction monitoring.
9.	The right to reasonable equipment costs.
10.	The right to live customer support 24/7/365.