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DAVE > SEC Filings for DAVE > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for FAMOUS DAVES OF AMERICA INC

Form 10-K for FAMOUS DAVES OF AMERICA INC


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Annual Report on Form 10-K include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are based on information currently available to us as of the date of this Annual Report, and we assume no obligation to update any forward-looking statements except as otherwise required by applicable law. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors listed in Item 1A of and elsewhere in this Annual Report and our other filings with the Securities and Exchange Commission. The following discussion should be read in conjunction with "Selected Financial Data" above (Item 6 of this Annual Report) and our financial statements and related footnotes appearing elsewhere in this Annual Report.

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 December 29, 2013, there were 194 Famous Dave's restaurants operating in 34 states, the Commonwealth of Puerto Rico, and 1 Canadian province, including 54 company-owned restaurants and 140 franchise-operated restaurants. An additional 60 franchise restaurants were committed to be developed through signed area development agreements as of December 29, 2013.

Fiscal Year

Our fiscal year ends on the Sunday nearest December 31st of each year. Our fiscal year is generally 52 weeks; however it periodically consists of 53 weeks. The fiscal years ended December 29, 2013 (fiscal 2013), December 30, 2012 (fiscal 2012), and January 1, 2012 (fiscal 2011) all consisted of 52 weeks. Fiscal 2014, which ends on December 28, 2014, will consist of 52 weeks.

Basis of Presentation - The financial results presented and discussed herein reflect our results and the results of our wholly-owned and majority-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year's presentation.

During fiscal 2013, in order to be more comparable to other public restaurant companies, the Company made the decision to reflect multi-unit supervision expenses within general and administrative expenses as opposed to operating expenses, where it previously had been reflected. All prior years' results shown have been reclassified to be comparable with the current fiscal year's presentation. For each of fiscal 2012 and fiscal 2011, this adjustment was approximately $1.9 million.

Application of Critical Accounting Policies and Estimates - The following discussion and analysis of the Company's financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgments. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. Our Company's significant accounting policies are described in (Note 1) to the consolidated financial statements included herein.


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We have discussed the development and selection of the following critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to such estimates in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Recognition of Franchise-Related Revenue - Initial franchise fee revenue is recognized when we have performed substantially all of our obligations as franchisor. Franchise royalties are recognized when earned.

Our franchise-related revenue is comprised of three separate and distinct earnings processes: area development fees, initial franchise fees and continuing royalty payments. Currently, our domestic area development fee for domestic growth consists of a one-time, non-refundable payment of approximately $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. For our foreign area development agreements the one time, non-refundable payment is negotiated on a per development basis and is determined based on the costs incurred to sell that development agreement. Substantially all of these services, which include, but are not limited to, a review of the potential franchisee's current operations, conducting market and trade area analysis, a meeting with Famous Dave's Executive Team, and performing a potential franchise background investigation, 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. Currently, our initial, non-refundable, franchise fee for domestic growth is $45,000 per restaurant, of which approximately $5,000 is recognized immediately when a franchise agreement is signed, reflecting expenses incurred related to the sale. The remaining non-refundable fee is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise entering into a lease agreement for the restaurant(s). Finally, 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.

Because of the continuing difficult economic environment and scarcity of capital for development, we offered reduced royalty rates, based on a sliding scale, for new restaurants opened during 2011. In 2012 and 2013, there were no reduced royalty rate programs. The company does not anticipate offering any reduced royalty rate programs for fiscal 2014.

Asset Impairment and Estimated Lease Termination and Other Closing Costs - We evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount rate and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating, but have been previously impaired, are reported at the lower of their carrying amount or fair value less estimated costs to sell.

Lease Accounting - We recognize lease expense for our operating leases over the entire lease term including lease renewal options where the renewal is reasonably assured and the build-out period takes place prior to the restaurant opening or lease commencement date. We account for construction allowances by recording a receivable when its collectability is considered probable, depreciating the leasehold improvements over the lesser of their useful lives or the full term of the lease, including renewal options and build-out periods, amortizing the construction allowance as a credit to rent expense over the full term of the lease, including renewal options and build-out periods, and relieving the receivable once the cash is obtained from the landlord for the construction allowance. We record rent expense during the build-out period and classify this expense in pre-opening expenses in our consolidated statements of operations.

Liquor licenses - The Company owns transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses. These licenses were capitalized as indefinite-lived intangible assets and are included in intangible assets, net in our consolidated Balance Sheets (see note 4 to our consolidated financial statements) at December 29, 2013 and December 30, 2012. We annually review the liquor licenses for impairment and in fiscal 2013 and 2012, no impairment charges were required to be recorded. Additionally, the costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. Annual liquor license renewal fees are expensed over the renewal term.


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Accounts receivable, net - We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days' sales outstanding and deterioration in general economic market conditions. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary. Any changes to the reserve are recorded in general and administrative expenses. The allowance for uncollectible accounts was approximately $72,000 and $236,000, at December 29, 2013 and December 30, 2012, respectively. In 2013, the decrease in the allowance for doubtful accounts was primarily due to payments received throughout fiscal 2013 for balances previously reserved for. Accounts receivable are written off when they become uncollectible, and payments subsequently received on such receivables are credited to allowance for doubtful accounts. Accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of provided allowances are determined uncollectible, they are charged to expense in the period that determination is made. Outstanding past due accounts receivable are subject to a monthly interest charge on unpaid balances which is recorded as interest income in our consolidated statements of operations. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, including annual financial information, which the franchisees are required to submit to us.

Stock-based compensation - We recognize compensation cost for share-based awards granted to team members based on their fair values at the time of grant over the requisite service period. Additionally, our board members receive share-based awards for their board service. Our pre-tax compensation cost for stock options and other incentive awards is included in general and administrative expenses in our consolidated statements of operations (see Note 9 to our financial statements).

Income Taxes - We provide for income taxes based on our estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. Accounting for uncertain tax positions requires significant judgment including estimating the amount, timing, and likelihood of ultimate settlement. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law. During 2012, we realized the benefit from the cumulative impact of tax credits for employee reported tips for 2012 as well as four previous tax years that were amended, or in the case of fiscal 2011, initially filed. This resulted from a more precise calculation methodology for this tax credit, and will continue to benefit us in the future.

Results of Operations

Revenue - Our revenue consists of four components: company-owned restaurant sales, franchise-related revenue from royalties and franchise fees, licensing revenue from the retail sale of our sauces and rubs, and other revenue from the opening assistance we provide to franchise partners. We record restaurant sales at the time food and beverages are served. Our revenue recognition policies for franchising are discussed under "Recognition of Franchise-Related Revenue" above. Our franchise-related revenue consists of area development fees, initial franchise fees and continuing royalty payments. We record sales of merchandise items at the time items are delivered to the customer.

We have a licensing agreement for our retail products, with renewal options of five years, subject to the licensee's attainment of identified minimum product sales levels. Based on achievement of the required minimum product sales, the agreement will be in force until April 2015 at which time these levels will be re-evaluated.


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Periodically, we provide additional services, beyond the general franchise agreement, to our franchise operations, such as new restaurant training and décor installation services. The cost of these services is billed to the respective franchisee, is recorded as other income when the service is provided, and is generally payable on net 30-day terms. Since 2010, the franchise agreements require a 50% deposit be paid in advance for these services.

Costs and Expenses - Restaurant costs and expenses include food and beverage costs, labor and benefits costs, operating expenses which include 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 team members gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control typically improve to levels similar to those at our more established restaurants.

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, including restaurant-level supervision, bonuses, team member benefits, legal fees, accounting fees, consulting fees, travel, rent, and general insurance are major items in this category. Additionally, we record expenses for Managers in Training ("MITs") in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services, the revenue of which are included in other revenue and the expenses of which are included in general and administrative expenses.


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The following table presents items in our consolidated statements of operations as a percentage of total revenue or net restaurant sales, as indicated, for the following fiscal years:(6)

                                                              2013         2012         2011
Food and beverage costs(1)                                     30.3 %       31.3 %       29.8 %
Labor and benefits(1)                                          32.4 %       32.6 %       31.5 %
Operating expenses(1)(3)                                       25.6 %       26.9 %       26.6 %
Restaurant level cash flow margin(1)(5)                        11.7 %        9.2 %       12.0 %
Depreciation & amortization (restaurant level)(1)               4.0 %        4.0 %        3.8 %
Asset impairment and estimated lease termination and
other closing costs(1)                                          0.9 %        0.3 %        0.4 %
Pre-opening expenses and net loss on disposal of
property(1)                                                     0.5 %        0.4 %        0.3 %
Costs and expenses (restaurant level)(1)                       93.7 %       95.5 %       92.5 %
Restaurant level margin(1)(4)                                   6.3 %        4.5 %        7.5 %
Depreciation & amortization (corporate level)(2)                0.5 %        0.4 %        0.4 %
General and administrative(2)(3)                               12.2 %       12.1 %       11.9 %
Total costs and expenses(2)                                    95.0 %       96.0 %       93.9 %
Income from operations(2)                                       5.0 %        4.0 %        6.1 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) In order to be consistent with what the Company believes to be a more prevalent practice among other public restaurant companies, the Company has decided to reflect multi-unit supervision expenses within general and administrative expenses, rather than as operating expenses, where they previously have been reflected. Both fiscal years ended 2012 and 2011 had an adjustment of approximately $1.9 million.

(4) Restaurant level margin is equal to taking restaurant sales, net less restaurant level costs and expenses. Restaurant level costs and expenses include food and beverage costs, labor and benefit costs, operating expenses, restaurant level depreciation and amortization, asset impairment and estimated lease termination and other closing costs, pre-opening expenses and net loss on disposal of equipment.

(5) Restaurant level cash flow margin is equal to taking restaurant sales, net less restaurant level food and beverage costs, labor and benefit costs, and operating expenses.

(6) Data regarding our restaurant operations as presented in this table includes sales, costs and expenses associated with our Rib Team, which netted a loss of $54,000, $69,000, and $26,000, respectively, in fiscal years 2013, 2012, and 2011. Our Rib Team travels around the country introducing people to our brand of barbeque and building brand awareness.

Fiscal Year 2013 Compared to Fiscal Year 2012

On February 10, 2014, we appointed Edward H. Rensi to serve as our interim Chief Executive Officer. Following this recent change, and under Mr. Rensi's leadership, we are in the process of evaluating and assessing various aspects of our business that may impact our budgets and expected financial performance for fiscal 2014. As a result, we believe that it is premature to provide any guidance for fiscal 2014 in this report and have elected not to do so. We will re-assess the advisability of providing guidance in the future commencing with our quarterly report on Form 10-Q for the first fiscal quarter of 2014.

Total Revenue

Total revenue of approximately $155.4 million for fiscal 2013 increased approximately $444,000, or 0.3%, from total revenue of $155.0 in fiscal 2012. Fiscal 2013 and 2012 both consisted of 52 weeks.

Restaurant Sales, net

Restaurant sales for fiscal 2013 were approximately $136.9 million, compared to approximately $135.7 million for fiscal 2012 reflecting a 0.9% increase. Total restaurant sales reflected a 0.2% comparable sales increase, by the annualized impact of two company-owned restaurants that opened in fiscal 2012, and the partial year impact of two company-owned restaurants that opened in fiscal 2013, as well as a weighted average price increase of approximately 2.5%. This increase was partially offset by the closure of one company owned restaurant. The overall 0.2% comparable sales increase was, on a weighted basis, comprised of a 1.9% comparable sales decrease for dine-in sales, a


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0.6% comparable sales decrease for catering, partially offset by a comparable sales increase for To Go of 2.6%. For fiscal 2013, off-premise sales were 35.6% of total sales, with catering at 9.8% and To Go at 25.8%. This compares to 2012's off-premise sales of 33.4 % with catering at 10.5% and To Go at 22.9%. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were approximately 9.5% for both fiscal 2013 and 2012.

Franchise-Related Revenue

Franchise-related revenue consists of royalty revenue and franchise fees, which includes initial franchise fees and area development fees. Franchise-related revenue was approximately $17.4 million for fiscal 2013, compared to $18.1 million for 2012. The decrease in franchise-related revenue is primarily related to decreases in franchise fees and royalty revenue resulting from a franchise comparable sales decrease of 2.9%, partially offset by revenue generated from a net five new franchise restaurants year over year. Although our committed units to be developed decreased by two units year over year; the commitments were reflected by the execution of several smaller agreements. Fiscal 2013 included 6,971 franchise operating weeks, compared to 6,848 franchise operating weeks in fiscal 2012. There were 140 franchise-operated restaurants open at December 29, 2013, compared to 135 at December 30, 2012.

Licensing and Other Revenue

Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. Other revenue includes opening assistance and training we provide to our franchise partners. Licensing royalty revenue was approximately $805,000 for fiscal 2013 as compared to $731,000 for fiscal 2012.

Other revenue for fiscal 2013 was approximately $311,000 compared to approximately $443,000 for the comparable period of fiscal 2012. The decrease was primarily due to a decrease in the number of franchise openings year over year and a corresponding decrease in the opening assistance required.

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 open at least 24 months ended December 29, 2013 increased 0.2%, compared to fiscal 2012's decrease of 1.8%. For fiscal 2013 and fiscal 2012, there were 48 and 49 restaurants, respectively, included in the company-owned 24 month comparable sales base.

Same store net sales on a 24 month basis for franchise-operated restaurants for fiscal 2013 decreased 2.9%, compared to fiscal 2012's comparable sales which were down 2.0%. For fiscal 2013 and fiscal 2012, there were 114 and 107 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 for fiscal 2013 and fiscal 2012:



                                                  Fiscal Years Ended
                                            December 29,       December 30,
                                                2013               2012
         Average Weekly Net Sales (AWS):
         Company-Owned                     $       49,514     $       49,172
         Full-Service                      $       51,327     $       50,963
         Counter-Service                   $       37,572     $       35,454
         Franchise-Operated                $       52,136     $       52,714

Food and Beverage Costs

Food and beverage costs for fiscal 2013 were approximately $41.4 million or 30.3% of net restaurant sales compared to approximately $42.4 million or 31.3% of net restaurant sales for fiscal 2012. This decrease is primarily due to more favorable food contracts compared to fiscal 2012.


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For 2014, we currently anticipate an approximate 5.5% deflation for our contracted food and beverage costs for comparable restaurants, based on what we have contracted to date and based on a projection of the remainder of the year. Late in 2013, we locked in a majority of our pork contracts for all of fiscal 2014 which positions us to capitalize on future savings should we see further opportunities in 2014 to blend and extend our contract into fiscal 2015. As we move through 2014, we will determine whether or not we will take any menu price increases in 2014.

Labor and Benefits Costs

Labor and benefits costs for fiscal 2013 were approximately $44.3 million or 32.4% of net restaurant sales, compared to approximately $44.3 million or 32.6% of net restaurant sales for fiscal 2012. This decrease was primarily due to lower direct labor costs, somewhat offset by sales deleverage on manager labor.

Operating Expenses

Operating expenses for fiscal 2013 were approximately $35.0 million or 25.6% of net restaurant sales, compared to approximately $36.5 million or 26.9% of net restaurant sales for fiscal 2012. This decrease was primarily due to the redeployment of our marketing spend during 2013 in more effective ways, such as discontinuing investing in a direct mail program similar to the prior year. Additionally, 2013 operating expenses were positively impacted by lower supply and repair and maintenance costs.

In fiscal 2013, advertising, as a percentage of sales, was approximately 2.5%, compared to fiscal 2012's percentage at 3.4%. Due to a carryover of funds, the Company had decreased the Marketing Fund contribution system-wide, to 0.75% for fiscal 2013, from 1.0% for fiscal 2012. For 2014, the Marketing Fund contribution will remain at the 0.75% level.

Depreciation and Amortization

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