Summary of FAMOUS DAVES OF AMERICA INC

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Famous Dave's of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of June 28, 2009, we had 176 Famous Dave's restaurants operating in 38 states, including 46 company-owned restaurants and 130 franchise-operated restaurants. We had an additional 94 franchise restaurants were in various stages of development as of June 28, 2009.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31st. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. This fiscal year, which ends on January 3, 2010 (fiscal 2009) consists of 53 weeks while the fiscal year ending December 28, 2008 (fiscal 2008) consisted of 52 weeks.
Revenue
Our revenue consists of restaurant sales, franchise-related revenue, and licensing and other revenue. Our franchise-related revenue is comprised of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee to secure the territory consists of a non-refundable payment equal to $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. These services include, but are not limited to, conducting market and trade area analysis, hosting a meeting with the potential franchise partner and the Famous Dave's Executive Team, and performing potential franchise background investigation, all of which are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Our initial franchise fee is typically $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining $35,000 is included in deferred franchise fees and is recognized as revenue, when a franchisee has secured a site, meaning a lease has been executed or a property purchase agreement has been signed, at which time we have substantially performed all of our obligations. Costs and expenses associated with these services are included in general and administrative expense. Franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a monthly royalty of 5% of their net sales. During a time when financing is difficult to obtain, we suspended our franchisees' development schedule requirements in 2009 and 2010. Additionally, we eliminated the extension fees that were previously required to be paid by a franchisee in order to retain their territory. At the same time, we announced an incentive program to encourage growth where it makes sense. Any of our franchisees who choose to build in 2009 or 2010 will receive a reduced royalty rate for 12 months from date of opening. Our measure of comparable sales represent net sales for restaurants open year-round for at least 24 months.
Costs and Expenses
Restaurant costs and expenses include food and beverage costs, operating payroll and employee benefits, occupancy costs, repair and maintenance costs, supplies, advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are corporate and restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to four months of operation. As restaurant management and staff gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control are improved to levels similar to those at our more established restaurants.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES General and Administrative Expenses
General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, bonuses, Associate benefits, legal fees, accounting fees, consulting fees, travel, rent and general insurance are major items in this category. Additionally, we record expense for Managers In Training ("MIT's") in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services for which the revenue is included in other revenue and the expenses are included in general and administrative expenses.
The following table presents items in our unaudited consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for the following periods:

                                                                                     Three Months                Six Months
                                                                                        Ended                      Ended
                                                                                June 28,     June 29,      June 28,     June 29,
                                                                                  2009         2008          2009         2008
Food and beverage costs (1)                                                       30.1 %         30.7 %      30.1 %         30.6 %
Labor and benefits (1)                                                            29.7 %         29.0 %      30.7 %         30.1 %
Operating expenses (1)                                                            25.9 %         27.3 %      25.9 %         26.5 %
Depreciation & amortization (restaurant level) (1)                                 3.6 %          3.4 %       3.8 %          4.0 %
Depreciation & amortization (corporate level) (2)                                  0.4 %          0.3 %       0.4 %          0.3 %
General and administrative expenses (2)                                           10.9 %         11.3 %      11.8 %         12.5 %
Pre-opening expenses and net loss on disposal of property(1)                         -            0.1 %         -            0.5 %
Asset impairment and estimated lease termination and other closing costs (1)      (1.4 %)           -        (0.5 %)           -

Total costs and expenses (2)                                                      87.8 %         90.0 %      90.2 %         92.3 %

Income from operations (2)                                                        12.2 %         10.0 %       9.8 %          7.7 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) Data regarding our restaurant operations as presented in the table, includes sales, costs and expenses associated with our Rib Team, which netted a loss of $13,000 and a loss of $18,000 for the three months ended June 28, 2009 and June 29, 2008, respectively. The Rib Team netted a loss of $28,000 and a loss of $36,000 for the six months ended June 28, 2009 and June 29, 2008, respectively. Our Rib Team travels around the country introducing people to our brand of barbeque, building brand awareness.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and notes, and the audited consolidated financial statements and notes included in our Form 10-K for the fiscal year ended December 28, 2008.
Total Revenue
Total revenue of approximately $36.3 million for the second quarter of fiscal 2009 was an approximate 6.0% decrease from revenue of approximately $38.8 million for the comparable quarter in fiscal 2008. For the six months ended June 28, 2009, total revenue of approximately $70.1 million decreased approximately $2.4 million, or 3.3% over revenue of approximately $72.5 million, for the six months ended June 29, 2008. This decrease reflects a 3.1% decrease in company-owned restaurant sales and a 2.5% decrease in franchise royalty revenue.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Restaurant Sales, net
Restaurant sales for the second quarter of fiscal 2009 were approximately $31.5 million, which decreased 6.0% compared to net sales of approximately $33.6 million for the same period in fiscal 2008. Restaurant sales for the six months ended June 28, 2009 were approximately $60.8 million compared to approximately $62.8 million for the six months ended June 29, 2008, reflecting a 3.1% decrease. Restaurant sales for the second quarter reflected a comparable sales decline of 9.4% partially offset by the annualization of sales from three restaurants that opened in the fourth quarter of 2008 and weighted average price increases of approximately 3.1%. Of the 9.4% comparable sales decline for company-owned restaurants, dine-in represented approximately 5.2% and To-Go represented the remaining 4.2%. While dine-in comparable sales declines were essentially in line with our peers in the casual dining industry, the decline in sales from our off-premise business, representing approximately 32% of our sales for the second quarter created a greater level of disparity for our concept.
Franchise-Related Revenue
Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees.
Franchise-related revenue was approximately $4.4 million for the second quarter of 2009, compared to $4.7 million, for the same period in 2008. Franchise royalty revenue reflected 12 new franchise restaurants net of 7 closures, including the 3 Atlanta restaurants, since the second quarter of 2008, and a comparable sales decrease of 10.9%. Three new franchise restaurants opened during the second quarter of fiscal 2009, and despite the challenging environment, these new restaurants had average opening weekly sales of approximately $90,000. Franchise-related revenue was approximately $8.7 million for the six months ended June 28, 2009 compared to approximately $9.2 million for the six months ended June 29, 2008, primarily reflecting a year-over-year decrease in royalty revenue of 2.5% for the six month timeframe. There were 130 franchise-operated restaurants opened at June 28, 2009 compared to 125 franchise-operated restaurants at June 29, 2008.
Licensing and Other Revenue
Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. For the second quarter of fiscal 2009, the licensing royalty revenue was approximately $223,000 compared to approximately $159,000 for the comparable period of fiscal 2008. Licensing royalty revenue was approximately $315,000 for the six months ended June 28, 2009 as compared to $238,000 for the comparable period of fiscal 2008. During fiscal 2009, as a result of continued growth in our restaurant base and expanded markets, we expect to see licensing revenue increase slightly compared to fiscal 2008 levels.
Other revenue includes opening assistance and training we provide to our franchise partners. Other revenue for the fiscal 2009 second quarter was approximately $123,000 compared to $157,000 for the comparable prior year quarter. Other revenue for the six months ended June 28, 2009 was approximately $276,000 compared to approximately $264,000 for the comparable period of fiscal 2008. The increase in other revenue is due to the opening of eight restaurants during the first six months of 2009 compared to seven restaurants that opened during the first six months of 2008. The amount of other revenue is expected to remain essentially flat for fiscal 2009 based on the level of opening assistance we may be required to provide during the remaining franchised openings for fiscal 2009.
Same Store Net Sales
It is our policy to include in our same store net sales base, restaurants that are open year round and have been open at least 24 months. Same store net sales for company-owned restaurants for the second quarter of fiscal 2009 decreased 9.4%, which compares to fiscal 2008's second quarter increase of 1.7%. At the end of the second quarter of fiscal 2009 and the second quarter of fiscal 2008, there were 38 restaurants,

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES respectively, included in this base. Same store net sales for company-owned restaurants open at least 24 months for the six months ended June 28, 2009 decreased 7.5%, compared to fiscal 2008's six months ended June 29, 2008 increase of 2.3%. For the six months ended June 28, 2009 and June 29, 2008, there were 38 and 36 restaurants, respectively, included in the company-owned 24 month comparable sales base. We attribute the sales decline in the second quarter to continued industry-wide pressure related to the general economy, as we suffered declines in all three sales levers: dine-in, to-go, and catering. Additionally, the Easter holiday shift from the first quarter of 2008 to the second quarter of 2009 had an approximate 1.0% negative comparable sales impact.
Same store net sales for franchise-operated restaurants for the second quarter of fiscal 2009 decreased approximately 10.9%, compared to a decrease of approximately 1.4% for the prior year comparable period. For the second quarter of 2009 and the second quarter of 2008, there were 94 and 85 restaurants, respectively, included in the franchise-operated comparable sales base. The decline in franchise comparable sales for the 2009 year-to-date period reflects the continuation of economic challenges being faced in many franchise markets, as restaurants in seven states accounted for over 54% of the decline in second quarter franchise comparable sales.
Same store net sales on a 24 month basis for franchise-operated restaurants for the first six months of fiscal 2009 and fiscal 2008 decreased 8.6% and 1.9%, respectively. For the first six months of fiscal 2009 and fiscal 2008, there were 93 and 78 restaurants, respectively, included in the franchise-operated 24 month comparable sales base.
Average Weekly Net Sales and Operating Weeks The following table shows company-owned and franchise-operated average weekly net sales and company-owned and franchise-operated operating weeks for the second quarter of fiscal 2009 and fiscal 2008:

                                         Three Months Ended         Six Months Ended
                                       June 28,      June 29,     June 28,     June 29,
                                         2009          2008         2009         2008
        Average Weekly Net Sales:
        Company-Owned                  $ 52,667     $ 57,259     $ 50,278     $ 53,903
        Full-Service                   $ 54,220     $ 59,649     $ 52,202     $ 56,267
        Counter-Service                $ 39,930     $ 41,725     $ 35,929     $ 38,629

        Franchise-Operated             $ 56,441     $ 61,339     $ 55,567     $ 58,537

        AWS 2005 and Post 2005: (1)
        Company-Owned                  $ 62,359     $ 73,117     $ 60,694     $ 70,658
        Franchise-Operated             $ 62,179     $ 69,101     $ 61,528     $ 66,268

        AWS Pre-2005: (1)
        Company-Owned                  $ 49,246     $ 53,295     $ 46,654     $ 49,822
        Franchise-Operated             $ 48,225     $ 52,180     $ 47,252     $ 49,578

(1) Provides further delineation of AWS for restaurants opened during the pre-fiscal 2005, and restaurants opened during the fiscal 2005 and post-fiscal 2005, timeframes.

               Operating Weeks:
               Company-Owned            598         585       1,209       1,164
               Franchise-Operated     1,656       1,587       3,250       3,126

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Catering and "TO GO" accounted for approximately 31.8% of 2009's second quarter net sales compared with approximately 33.6% for the second quarter of 2008, with the decline in the percentage year-over-year reflecting a reduction in corporate and individual caterings. During the second quarter, we also realized an impact to our To-Go business. As the economy continues to struggle, companies and consumers have become even more conscious of discretionary dollars, and events have been scaled back considerably.
Food and Beverage Costs
Food and beverage costs for the second quarter of fiscal 2009 were approximately $9.5 million or 30.1% of net restaurant sales, compared to approximately $10.3 million or 30.7% of net restaurant sales for the second quarter of fiscal 2008. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 8.8% and 8.9% for the second quarter of fiscal years 2009 and 2008, respectively.
Food and beverage costs for the first six months of fiscal 2009 were approximately $18.3 million or 30.1% of net restaurant sales compared to approximately $19.2 million or 30.6% of net restaurant sales for the comparable period of fiscal 2008.
Our core proteins make up approximately 50% of our purchases. Pork is approximately 30%, chicken is 10%, brisket is 6%, seafood is 2% and hamburger is 1%. At this time, we continue to benefit from an approximate 2.0% decrease in our pork contract which extends throughout the balance of fiscal 2009. We are currently evaluating our options regarding our pork contract for 2010, and we expect to disclose updated information related to our 2010 pork contract in conjunction with our fiscal third quarter earnings conference call. Our chicken contract has been locked in through December of 2009 at a price decrease of approximately 6.0% from the prior year. We are currently evaluating an option to extend our chicken contract through the first quarter of 2010 at a slight price decrease compared to our current pricing. Our brisket contract is firm through December 2009 at a price decrease of approximately 2.0% compared to the prior year, and we are projecting similar savings for the balance of 2009. Our seafood contracts are firm through December at an average price increase of 7.6% compared to the prior year. This increase is due to product enhancements in our current menu. Due to our supplier adjusting to 2009 market prices we are anticipating an average price increase of 9.0% for hamburger, which is contracted through December. With regard to other food and beverage categories, while we've had to absorb increases in certain items such as corn, apples and beans, we've realized savings in others, such as sauces and seasonings, as a result of a new supplier, and freight costs due to reduced diesel fuel prices. We continue to watch the markets closely and have seen the benefit this year of being flexible through negotiating shorter-term contracts. Additionally, we have made progress with regards to identifying secondary suppliers that we expect will further protect our supply chain and ensure a more fair and competitive pricing environment. As of today, we are making progress sourcing secondary suppliers for our top 15 most critical items and anticipate having that initiative essentially completed by the end of this fiscal year. Lastly, from a position of looking at any and all areas of opportunity, we continue to investigate ways to optimize distribution for our system.
We are in the second phase of implementing our food cost management system, which consists of establishing an ideal food cost at the restaurant unit level and mitigating target variances for individual restaurants. We have already gathered great information from this system, which has been providing our operations team with insight into pricing, product mix, and waste issues.
As a result of all of the initiatives discussed above, we anticipate a 50 to 60 basis point decrease in our food costs for the full fiscal 2009 timeframe as a percent of sales year over year.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Labor and Benefits Costs
Labor and benefits costs for the second quarter ended June 28, 2009 were approximately $9.4 million or 29.7% of net restaurant sales, compared to approximately $9.7 million or 29.0% of net restaurant sales for the second quarter ended June 29, 2008. Labor and benefits for the six months ended June 28, 2009 were approximately $18.7 million or 30.7% of net restaurant sales, compared to approximately $18.9 million or 30.1% of net restaurant sales for the six months ended June 29, 2008. We have seen dollar savings in labor and benefits costs year-over-year, predominantly due to the reduction in our labor matrix in early 2009. However, labor as a percentage of net restaurant sales was 70 basis points higher than the prior year, reflecting a 180 basis point unfavorable impact due to the reduction in sales. As we look to the balance of 2009, primarily as a result of realized and expected sales de-leveraging, we expect labor and benefits costs as a percentage of sales, to be approximately flat to fiscal 2008's percentage.
Operating Expenses
Operating expenses for the second quarter of fiscal 2009 were approximately $8.2 million or 25.9% of net restaurant sales, compared to operating expenses of approximately $9.2 million or 27.3% of net restaurant sales for the second quarter of fiscal 2008.
Operating expenses as a percentage of sales for the second quarter of 2009 were 140 basis points lower than prior year, reflecting lower advertising expense due to a reduction of 0.5% for the National Ad Fund, savings in media placement fees, and a shift in the timing of advertising spending. We still expect that advertising expense in 2009 will be approximately 3.5% of net sales, including a 0.5% contribution to the National Ad Fund. Additionally, we saw favorability in utility costs compared to the prior year due to favorable rate and usage declines stemming from cooler average temperatures.
Operating expenses for the six months ended June 28, 2009 were approximately $15.8 million or 25.9% of net restaurant sales, compared to approximately $16.7 million or 26.5% of net restaurant sales for the six months ended June 29, 2008. The decrease in restaurant level operating expenses as a percentage of net restaurant sales for the 2009 year-to-date period is primarily due to lower utilities and lower advertising costs. Primarily as a result of realized and expected sales de-leverage, operating expenses as a percentage of net sales for fiscal 2009 are now expected to be approximately 50 to 60 basis points higher than 2008's percentage.
Depreciation and Amortization
Depreciation and amortization expense for the second quarter of 2009 was approximately $1.3 million or 3.5% of total revenue, compared to the second quarter of 2008 at approximately $1.3 million or 3.3% of total revenue. Depreciation and amortization expense was flat to the second quarter of 2008, reflecting the impairments recorded during the last half of 2008 and the closure of the West St. Paul restaurant in March 2009, essentially offset by the 3 new restaurants added in the fourth quarter of 2008. Depreciation and amortization expense for the six months ended June 28, 2009 and June 29, 2008 was approximately $2.6 million and $2.7 million, respectively, and was 3.7% and 3.8% respectively, of total revenue. During fiscal 2009, depreciation and amortization as a percent of total revenue is expected be flat to fiscal 2008.
Asset Impairment and Estimated Lease Termination and Other Closing Costs During the second quarter, the company terminated two of its Atlanta, Georgia leases for a total of approximately $1.0 million, resulting in the recapture of the lease termination reserve of approximately $453,000 partially offset by approximately $20,000 of expenses paid for closed restaurants including West St. Paul and the Atlanta restaurants. We continue negotiations to buy out the lease for the third and final property in Atlanta.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Pre-opening Expenses
Pre-opening expenses consist of labor, food, utilities, training and rent costs incurred prior to the opening of a restaurant. Included in pre-opening costs is pre-opening rent for approximately 16 weeks prior to opening which will vary based on lease terms. During the second quarter of 2009, we had no pre-opening expenses and had approximately $49,000 of pre-opening expenses in the second quarter of 2008. We did not have any pre-opening expenses for the six months ended June 28, 2009 and had $303,000 for the six months ended June 29, 2008. We do not plan to open any company-owned restaurants in fiscal 2009 and therefore do not expect any pre-opening expenses. As previously disclosed, however, for the rest of 2009, and as we look to 2010, we will remain watchful and open to any opportunities that make sense.
General and Administrative Expenses
General and administrative expenses for the second quarter of 2009 were approximately $4.0 million or 10.9% of total revenue, compared to approximately $4.4 million or 11.3% of total revenue for the second quarter of fiscal 2008. The percentage for 2009 reflects a 70 basis point impact from reduced revenue year over year. General and administrative expenses as a percent of total revenue, excluding stock-based compensation, were 10.3% for the second quarter of 2009 and 10.5% for the second quarter of 2008.
General and administrative expenses for the first six months of fiscal 2009 were approximately $8.3 million or 11.8% of total revenue compared to approximately $9.0 million or 12.5% of total revenue for the first six months of fiscal 2008. General and administrative expenses, excluding stock-based compensation expense, as a percentage of total revenue was 11.3% and 11.6%, for the year-to-date periods of 2009 and 2008, respectively. Including performance shares for the 2009-2011 program and grants to our board of directors, we are expecting stock-based compensation to be approximately $900,000 in fiscal 2009, as follows (in thousands):

         Performance   Restricted    Board of Directors
           Shares      Stock Units         Shares         Stock Options   Total
            $397          $136              $342               $25        $900

We continue to remain vigilant in our spend of general administrative expenses. We expect that general and administrative expenses in 2009, as a percentage of revenue, with full accrual for bonus achievement, will be approximately 10 basis points higher to fiscal 2008's general and administrative expense as a percentage of revenue which included an approximate $200,000 bonus payout for individual achievement for associates below the executive level.
Loss on Early Extinguishment of Debt
During the quarter, we elected to retire early two notes for our Minnetonka and Woodbury, Minnesota restaurants. Total cash paid for the early extinguishment of debt was $3.3 million, including a pre-payment penalty of $350,000. Additionally, as a result of this transaction, we wrote off . . .