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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
COMMISSION FILE NO. 0-21625
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FAMOUS DAVE'S OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1782300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8091 WALLACE ROAD
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (952) 294-1300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act (the Act) of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12-b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on June 29, 2003 (the last business day of the Registrant's most
recently completed second quarter), based upon the last sale price of the Common
Stock as reported on the NASDAQ National Market SM on June 29, 2003, was
$41,898,388. As of March 22, 2004, 12,303,182 shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our definitive Proxy Statement for our Annual Meeting of
Shareholders to be held on May 13, 2004 (the "2004 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K, to the extent
described in Part III. The 2004 Proxy Statement will be filed within 120 days
after the end of the fiscal year ended December 28, 2003.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 1A. Cautionary Statement Regarding Future Results, Forward-Looking
Information and Certain Important Factors 9
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Consolidated Financial Statements 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 27
Item 9A. Controls and Procedures 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accountant Fees and Services 28
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
SIGNATURES
2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
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 28, 2003, there were 92 Famous Dave's restaurants operating in 23
states, including 38 company-owned restaurants and 54 franchise-operated
restaurants. An additional 147 franchise restaurants were in development as of
December 28, 2003.
Until February 26, 2003, Famous Dave's was a 40% participant in a joint
venture to operate themed restaurant concepts based on the entertainment artist
Isaac Hayes. Pursuant to an agreement governing the joint venture, the
participants formed a Delaware limited liability company named FUMUME, LLC.
FUMUME, LLC opened its first location in Chicago, Illinois in June 2001 and
opened its second location in Memphis, Tennessee in October 2001. On February
26, 2003, we disposed of our 40% interest in FUMUME, LLC. As a result, we are no
longer participating in any revenues or expenses of the joint venture and we do
not have any further obligations with regard to the joint venture.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
Since our inception, our revenues, operating income (losses) and assets
have been attributable to the single industry segment of casual dining. Our
revenues, operating income (losses) and assets for each of the last three fiscal
years is set forth elsewhere in this Form 10-K under Item 8, Consolidated
Financial Statements.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Famous Dave's restaurants, a majority of which offer full table service,
feature hickory smoked off-the-grill meat entree favorites, served in one of our
three casual formats: a "Northwoods" style lodge, a nostalgic roadhouse "shack",
or a Blues Club featuring nightly musical entertainment. We seek to
differentiate ourselves by providing high-quality food in these distinctive and
comfortable environments.
We pride ourselves on the following:
High Quality Food - Each restaurant features a distinctive selection of
authentic hickory-smoked off-the-grill favorites such as flame-grilled St.
Louis-style ribs, Texas beef brisket, Georgia chopped pork, country-roasted
chicken, and generous signature sandwiches and salads. Enticing side items such
as honey-buttered corn bread, potato salad, coleslaw, Shack Fries(TM) and Wilbur
Beans(TM) accompany the broad entree selection. Homemade desserts, including
Famous Dave's Bread Pudding and Hot Fudge Kahlua(TM) Brownies, are a specialty.
To complement our smoked meat entree and appetizer items and to suit different
customer tastes, our BBQ sauces come in six variations: Rich & Sassy(TM), Texas
Pit(TM), Georgia Mustard(TM), Hot & Sassy(TM), Devil's Spit(TM) and Sweet and
Zesty(TM). These sauces and a variety of prepared meats and seasonings are also
distributed in retail grocery stores throughout the country under licensing
agreements. We believe that our high quality food is a principal point of
differentiation between us and other casual dining competitors and is a
significant contributing factor to our level of repeat business.
Distinctive Environment - Decor and Music. Our original theme, a nostalgic
roadhouse shack ("Shack"), is defined by the abundant use of rustic antiques
and items of Americana. The Shack promotes a very casual experience with
emphasis on value and speed of delivery. While initially the Shack format only
offered counter service, fourteen Shacks have been opened as, or converted to,
full service dining. In late 1997, we introduced the "Lodge" format which
features decor reminiscent of a comfortable "Northwoods" hunting lodge with a
full service dining room and bar. In addition, we have developed a larger "Blues
Club" format that features authentic Chicago Blues Club decor and live music
seven nights a week. Of our 38 restaurants as of December 28, 2003, 30 were
"lodge" format, 7 were "shack" format, and one restaurant, located in the
Minneapolis market, was a "Blues Club" format.
Broad-Based Appeal - We believe that our concept has broader appeal because
it attracts customers of all ages and the menu offers a variety of items that
appeal to many tastes. We believe that our distinctive concept, combined with
our high-quality food, make Famous Dave's appealing to children, teenagers and
adults of all ages.
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OPERATING STRATEGY
Our journey to sustaining profitability will require us to execute the
delivery of high quality experiences to every guest, every day, promote the
phenomenal value of our cravable products without the hook of discounting, and
enhance brand awareness, in our markets.
Key elements of our operating strategy include the following:
Operational Excellence - During fiscal 2004 we intend to focus our efforts
heavily around operational excellence and operational integrity. We define
operational excellence as an uncompromising focus on the details of our recipes,
preparation and cooking procedures, handling procedures, rotation, sanitation,
cleanliness and safety. It also means an unyielding commitment to our guest to
provide a "famous" experience with every visit through the execution of
precision service. In our restaurants, we strive to emphasize value and speed of
service by employing a streamlined operating system based on a focused menu and
simplified food preparation techniques.
The menu focuses on a number of popular smoked meat barbecue entree items
and delicious side dishes which are prepared using easy-to-operate kitchen
equipment and processes that use prepared seasonings, sauces and mixes. This
streamlined food preparation system helps lower the cost of operation by
requiring fewer staff, lower training costs and the elimination of a need for
highly compensated chefs. To enhance our appeal and expand our audience, we
periodically add menu items such as baby back ribs, BBQ salads, and other
promotional products such as a smoked pork tenderloin entree, a pork tenderloin
sandwich with jalapeno bacon, and in select regions, the shore fish fry. We
believe that constant and exciting new product introductions, offered for a
limited period of time, will drive our infrequent and lapsed guests into our
restaurants for additional meal occasions. In order to increase customer
frequency, we are currently building a research and development pipeline that
will generate six to eight product introductions annually. As the menu broadens
and food preparation techniques become more focused on meals prepared to order,
increased training may be necessary in order to prepare our staff for increased
levels of guest service.
Human Resources and Training - We believe that a key component of the
success of our concept rests with the ability to hire, train and motivate
qualified restaurant employees and managers. We joined the People Report in 2003
to track our "People P&L". This report is completed every quarter and benchmarks
Famous Dave's of America with industry leaders in employee satisfaction. This
report will help us track and reach our goal of being an employer of choice. In
2004 we will be introducing a new classroom training class for all managers
called FD 101. This class will teach basic restaurant management skills such as
food safety, alcohol awareness, interviewing and employee relations.
We are committed to recognizing and rewarding performance. In addition to
our training initiatives, our managers are incentivized with a new bonus plan
that rewards both top and bottom line increases. Our President's Club rewards
General Managers for accomplishments in many areas directly related to great
restaurant operations. The Support Center bonus plan has been developed to
reward all of our employees that are not directly serving our Guests. It
combines Company performance with individual successes. We believe that by
providing training, competitive compensation and opportunities for employee
involvement and advancement, we encourage a sense of personal commitment from
all of our employees.
RESTAURANT OPERATIONS
Our company's ability to manage multiple, geographically diverse units is
central to our overall success. At the unit level, we place specific emphasis on
the positions of Area Director ("AD") and General Manager ("GM"), and seek
employees with significant restaurant experience and management expertise. We
strive to maintain quality and consistency in each of our units through the
careful training and supervision of personnel and the establishment of, and
adherence to, high standards relating to personnel performance, food and
beverage preparation, and maintenance of facilities. We attempt to attract high
quality, experienced restaurant management and personnel with competitive
compensation and bonus programs.
All GMs must complete a seven-week training program, during which they are
instructed in areas such as food quality and preparation, customer service, and
employee relations. We have prepared operations manuals relating to food and
beverage quality and service standards. New staff members participate in
training under the close supervision of our management. Each GM reports up
through an AD, who manages from four to nine restaurants, depending on the
region.
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Our ADs have all been successful GMs, either for Famous Dave's or for other
casual dining concepts. Our ADs are responsible for ensuring that operational
standards are consistently applied in our restaurants and for the communication
of company focus and priorities. In addition to the training that the GMs are
required to complete, our ADs receive additional management training through AD
workshops that focus specifically on managing multiple locations.
We strive to instill enthusiasm and dedication in our employees and
regularly solicit employee suggestions concerning our operations and endeavors
in order to be responsive to employees' concerns. In addition, we have numerous
programs designed to recognize and reward employees for superior performance.
Staffing levels at each restaurant vary according to the time of day and size of
the restaurant. However, in general, each restaurant has approximately 40 to 60
employees.
Take-out and Catering - Focus on Customer Convenience - In addition to our
lively and entertaining sit-down experience, we provide our customers with
maximum convenience by offering expedient take-out service and catering. We
believe that Famous Dave's entrees and side dishes are viewed by guests as
traditional American "picnic foods" that maintain their quality and travel
particularly well, making them an attractive choice to replace a home-cooked
meal. We believe the high quality, reasonable cost and avoidance of preparation
time make take-out of our product particularly attractive to customers. During
fiscal 2003, approximately 24% of our restaurant revenues were derived from
take-out and catering, and we continue to seek ways to leverage these segments
of our business. Our restaurants have been designed specifically to accommodate
a significant level of take-out sales, including a separate take-out counter.
The off-premise portion of our business continues to grow as more consumers
and local business people become aware of the portability of our product. The
demand for Famous Dave's catering, which accounted for 6% of our sales for
fiscal 2003, has increased as consumers learn just how distinctive and flavorful
an event can be when they let Famous Dave's bring the food.
"TO GO," which accounted for 18% of our sales for fiscal 2003, continues to
grow as an integral part of our overall business plan as well as an opportunity
to sample our product with new consumers who would not otherwise have had the
opportunity to visit our restaurants. This program enables Famous Dave's to
capture a greater portion of the growing convenience and flexibility of the
"take-out" market. The company's efforts are implemented in all company-owned
and franchise-operated units and feature signage and merchandising tools both
inside and outside the restaurants. From the time a guest drives into the
parking lot to the time they leave the restaurant, they will be reminded of
Famous Dave's excellence in delivering the best BBQ "TO GO".
Customer Satisfaction - We believe that we achieve a significant level of
repeat business by providing high-quality food and efficient friendly service,
in an entertaining environment at moderate prices. We strive to maintain quality
and consistency in each of our restaurants through the training and supervision
of personnel and the establishment of, and adherence to, high standards of
personnel performance, food preparation and facility maintenance. We have also
built family-friendly strategies into each restaurant's food, service and design
by providing children's menus, smaller-sized entrees at reduced prices and
changing tables in restrooms.
Value Proposition and Guest frequency - We offer high quality food and a
distinctive atmosphere at competitive prices to encourage frequent patronage.
Lunch and dinner entrees range from $5 to $19 resulting in an average check of
approximately $13 during fiscal 2003. We believe that constant and exciting new
product introductions, offered for a limited period of time, will help drive our
infrequent and lapsed guests into our restaurants for additional meal occasions.
In order to increase customer frequency, we have increased our research and
development efforts for fiscal 2004 and plan on building a research and
development pipeline that will generate 6-8 product introductions annually.
MARKETING AND PROMOTION
Famous Dave's is a unique and distinctive brand specializing in grilled and
smoked food. This menu specialty helps to set the brand apart from the rest of
the crowded field in casual dining. Marketing and promotion for the owned and
operated restaurants have historically relied primarily upon an extensive
publicity effort, direct mail, and 4-walls/property-line marketing. Going
forward we will be focusing on strengthening our brand, and we will continue to
invest resources, both personnel and financial, towards our brand. During fiscal
2004, we expect to spend approximately 2.75% of restaurant revenues on marketing
and advertising, with approximately 1% of restaurant revenues dedicated to the
development of advertising and promotional materials and programs designed to
create brand awareness in the markets within which we operate. We recently hired
BBDO - Minneapolis as our first advertising agency of record to help carry the
concept forward and create a distinctive positioning and consistent creative
voice for the brand. In
5
coordination with our marketing department, BBDO will be responsible for the
advertising, promotion, creative development, branding and media buying for
Famous Dave's. In addition to the traditional marketing and publicity methods
embraced in the past, Famous Dave's will begin to use more aggressive outreach
marketing efforts as appropriate in 2004. This will include television and radio
advertising in those markets where there is sufficient penetration of the brand
to allow for media efficiencies.
We are also creating awareness for the Famous Dave's brand through
partnerships that extend our BBQ sauces, seasonings and rubs in retail outlets
across the United States. This retail distribution allows consumers to enrich
their at home BBQ experiences with Famous Dave's bold and zesty flavors.
GROWTH STRATEGY
We believe that the casual dining niche of the restaurant industry offers
strong growth opportunities, as it is highly fragmented. We have no plans to
open any new company-owned restaurants during fiscal 2004, but will begin
looking for real estate opportunities mid-year for company-owned expansion to
begin in fiscal 2005. During fiscal 2004 we plan to open 20-25 franchise
restaurants. The key elements of our long-term growth strategy include the
following:
Company-Owned Unit Expansion - We intend to build in our existing markets
in high profile, heavy traffic retail locations in order to build brand
awareness. Our plan is focused on sustainable, controlled growth, primarily in
markets where multiple restaurants can be opened, thereby expanding consumer
awareness and creating opportunities for operating, distribution and marketing
efficiencies. We are in the final stages of developing a prototype design,
called our "Smokehouse concept." During fiscal 2004 we plan to gain a better
understanding of the cost to build this concept before we construct, or require
our franchisees to construct, a restaurant under the new design. We intend to
finance development through the use of cash on hand, cash flow generated from
operations, and through various forms of real estate related financing, although
there can be no assurance, that any future financing will be available, or will
be available on terms acceptable to us.
Franchise-Operated Unit Expansion - As of December 28, 2003, we had 147
franchise development commitments. We continue to expand our franchisee network
throughout the United States. Generally we attempt to find franchise candidates
with prior franchise restaurant experience in the markets they will be granted.
The area development agreements generally range from a minimum of five to a
maximum of ten units and are scheduled to be developed within five years.
PURCHASING
We strive to obtain consistent quality items at competitive prices from
reliable sources. In order to maximize operating efficiencies and to provide the
freshest ingredients for our food products while obtaining the lowest possible
prices for the required quality, each unit's management team determines the
daily quantities of food items needed and orders such quantities, through
distributors, from major suppliers designated by us, which are then shipped
directly to the restaurants through foodservice distributors.
Contract pricing accounts for approximately 85% of all of our total
purchases. Contracts for various items are negotiated throughout the year and
typically fix prices for twelve months. Of our total purchases, pork is
approximately 30%, poultry is approximately 11%, and beef, including hamburger
and brisket, is approximately 8.5%. In 2003, we experienced a decrease in food
costs due to a favorable pork contract. Contracts negotiated for 2004 overall,
however, have resulted in less favorable pricing. Our pork contract renewal
resulted in a 9% contracted price increase in pork products. In addition, we
recently renewed our poultry and hamburger contracts, which resulted in a 3%
price increase in poultry and a 17% increase in hamburger. Our brisket contract
renews in July and we are watching the beef market closely. As a result of the
above negotiations, we anticipate that food costs, as a percent of net
restaurant revenues, will increase approximately 80-120 basis points for fiscal
2004 over the prior year.
Our food manufacturers produce our products and our distributors warehouse
and ship our products. Our primary broad line distributor accounts for
approximately 85% of our total purchases. We believe that our relationships with
our food manufacturers and distributors are excellent, and anticipate no
interruption in the supply of product delivered by any of these firms. In case
of a supply disruption, however, we believe we could obtain competitive products
and prices on
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short notice from a number of alternative suppliers. In an effort to protect us
from product disruption, we have identified a secondary supplier for ribs and
are pursuing secondary suppliers for other proprietary product offerings.
MANAGEMENT INFORMATION SYSTEMS
We believe that a strong information systems infrastructure is essential to
our current operations and is critical towards enhancing our competitive
position in our industry. We have invested significantly in building this
infrastructure. We have developed restaurant-level management information
systems that include a computerized point-of-sale system which facilitates the
movement of customer orders between the customer areas and kitchen operations,
processes credit card transactions, and provides management with revenue and
other key operating and financial information. We also use a time management
system which tracks the time worked by each employee, allowing management to
more effectively manage labor costs through better scheduling of employee work
hours. In fiscal 2002, we installed enterprise management software, which has
provided us with centralized control over restaurant database items such as menu
changes, tax structure and price changes. In addition, during fiscal 2002, we
developed reporting that allows us to track the average guest check daily, by
restaurant, by server, and by day part. This reporting is utilized by the GMs to
determine restaurant-level staffing needs in addition to supporting sales
initiatives, intended to increase the average guest check.
Our unit-level point-of-sale, time management and inventory management
systems provide data for posting to our general ledger and to other accounting
subsystems. Such reporting includes: (i) daily reports of revenues, (ii) daily
labor reports, (iii) weekly reports of selected controllable unit expenses and
(iv) detailed monthly reports of revenues and expenses. We continue to develop
and implement new enhancements to our systems. During fiscal 2004, we will focus
on a number of new developments with regard to communication, theoretical food
cost and labor cost management and unit level labor efficiency.
TRADEMARKS
Our Company has received various trademarks and intends to defend these
marks. There can be no assurance, however, that we will be granted trademark
registration for any new applications, or for any or all of the proposed uses in
our applications. In the event we are granted registration for additional marks,
there can be no assurance that we can protect such marks and designs against
prior users in areas where we conduct operations. There is also no assurance
that we will be able to prevent competitors from using the same or similar
marks, concepts or appearance.
FRANCHISE PROGRAM
We have offered franchises of our concept since June of 1995. Our growth
and success depends in part upon our ability to attract, contract with and
retain qualified franchisees. It also depends upon the ability of those
franchisees to successfully operate their stores and promote and develop Famous
Dave's brand awareness. Although we have established criteria to evaluate
prospective franchisees, and our franchise agreements include certain operating
standards, each franchisee operates his/her restaurants independently. Various
laws limit our ability to influence the day-to-day operation of our franchise
stores. We cannot assure you that franchisees will be able to successfully
operate Famous Dave's stores in a manner consistent with our standards for
operational excellence and food quality.
At December 28, 2003, we had 24 franchise partners operating 54 Famous
Dave's franchise units. Area development agreements representing commitments
from franchisees to build an additional 147 restaurants were in place as of
December 28, 2003. There can be no assurance, however, that these franchisees
will fulfill their commitments. We continue to pursue an aggressive franchise
program for our restaurants and anticipate that 20 to 25 additional franchise
units will open during fiscal 2004.
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As of December 28, 2003 we had franchise-operated restaurants in the
following locations:
STATE NUMBER OF RESTAURANTS
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Alabama 1
Arizona 1
Georgia 4
Illinois 4
Indiana 1
Iowa 2
Kansas 1
Kentucky 3
Michigan 3
Minnesota 7
Montana 1
Nebraska 4
New Jersey 4
North Dakota 1
Ohio 1
South Dakota 1
Tennessee 4
Utah 3
Wisconsin 8
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Total: 54
We assist franchisees in the site selection and the opening of a Famous
Dave's restaurant. During the pre-opening phase our support includes site
evaluation, store build-out assistance, opening advertising and marketing
materials and operations training.
We make periodic inspections of our franchise stores to ensure the
franchisee is complying with the same quality of service, operational excellence
and food specifications that is found at our company-owned units.
Our franchise revenues are comprised of area development fees, initial
franchise fees, and continuing royalty payments. Our area development fee
consists of a non-refundable payment equal to $10,000 per unit upon the signing
of the area development agreement. Since the fee is non-refundable to secure the
territory, we recognize this fee 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 and the remaining $35,000 is recognized upon
either the signing of a lease or upon receipt of a builder's permit, and at
which time we have substantially performed all of our services. Franchisees are
also required to pay us a continuing royalty equal to a percentage of their
weekly net sales, which has historically varied from 4% to 5%. Currently, new
franchises pay us a continuing royalty of 5% of their net sales.
The franchisee's investment depends primarily upon store size. This
investment includes the area development fee, initial franchise fee, real estate
and leasehold improvements, fixtures and equipment, point of sale systems,
business licenses, deposits, initial food inventory, smallwares, and working
capital. Beginning in 2004, all new franchisees will be required to contribute
1% of gross revenues for new restaurants to a national advertising campaign
dedicated to building brand awareness.
SEASONALITY
Our restaurants typically generate higher revenues in the second
and third quarters and lower revenues in the first and fourth quarters as a
result of seasonal traffic increases experienced during the summer months, and
possible adverse weather which can disrupt customer and employee transportation
to our restaurants.
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GOVERNMENT REGULATION
Our Company is subject to extensive state and local government regulation
by various governmental agencies, including state and local licensing, zoning,
land use, construction and environmental regulations and various regulations
relating to the sale of food and alcoholic beverages, sanitation, disposal of
refuse and waste products, public health, safety and fire standards. Our
restaurants are subject to periodic inspections by governmental agencies to
ensure conformity with such regulations. Any difficulty or failure to obtain
required licensing or other regulatory approvals could delay or prevent the
opening of a new restaurant, and the suspension of, or inability to renew, a
license could interrupt operations at an existing restaurant, any of which would
adversely affect our operations. Restaurant operating costs are also affected by
other government actions that are beyond our control, including increases in the
minimum hourly wage requirements, workers compensation insurance rates, health
care insurance costs, property and casualty insurance, and unemployment and
other taxes. We are also subject to "dram shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated persons.
As a franchisor, we are subject to federal regulation and certain state
laws that govern the offer and sale of franchises. Many state franchise laws
impose substantive requirements on franchise agreements, including limitations
on non-competition provisions and the termination or non-renewal of a franchise.
Bills have been introduced in Congress from time to time that would provide for
federal regulation of substantive aspects of the franchisor-franchisee
relationship. As proposed, such legislation would limit, among other things, the
duration and scope of non-competition provisions, the ability of a franchisor to
terminate or refuse to renew a franchise, and the ability of a franchisor to
designate sources of supply.
Federal Americans with Disabilities Act, prohibits discrimination on the
basis of disability in public accommodations and employment. We could be
required to expend funds to modify our restaurants in order to provide service
to, or make reasonable accommodations for, disabled persons. Our restaurants are
currently designed to be accessible to the disabled. We believe we are in
substantial compliance with all current applicable regulations relating to this
Act.
EMPLOYEES
As of December 28, 2003, we employed approximately 2,100 employees, of
which approximately 875 were full-time. None of our employees are covered by a
collective bargaining agreement. We consider our relationships with our
employees to be satisfactory.
ITEM 1(A). CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING
INFORMATION AND CERTAIN IMPORTANT FACTORS
Famous Dave's makes written and oral statements from time to time,
including statements contained in this Annual Report on Form 10-K regarding its
business and prospects, such as projections of future performance, statements of
management's plans and objectives, forecasts of market trends and other matters
that are forward-looking statements within the meaning of Sections 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934. Statements
containing the words or phrases "will likely result", "anticipates", "are
expected to", "will continue", "is anticipated", "estimates", "projects",
"believes", "expects", "intends", "target", "goal", "plans", "objective",
"should" or similar expressions identify forward-looking statements which may
appear in documents, reports, filings with the Securities and Exchange
Commission, news releases, written or oral presentations made by our officers or
other representatives to analysts, shareholders, investors, news organizations,
and others, and discussions with our management and other Company
representatives. For such statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
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Our future results, including results related to forward-looking
statements, involve a number of risks and uncertainties. No assurance can be
given that the results reflected in any forward-looking statements will be
achieved. Any forward-looking statements made by us or on our behalf speak only
as of the date on which such statement is made. Our forward-looking statements
are based upon assumptions that are sometimes based upon estimates, data,
communications and other information from suppliers, government agencies and
other sources that may be subject to revision. We do not undertake any
obligation to update or keep current either (i) any forward-looking statements
to reflect events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking statement
which may be made by us or on our behalf.
In addition to other matters identified or described by us from time to
time in filings with the SEC, there are several important factors that could
cause our future results to differ materially from historical results or trends,
results anticipated or planned by us, or results that are reflected from time to
time in any forward-looking statement that may be made by us or on our behalf.
OUR FUTURE REVENUES AND PROFITS ARE DEPENDENT ON OUR ABILITY TO SUCCESSFULLY
EXECUTE OUR PLAN
Our Company's future revenues and profits will depend upon various factors,
including continued and additional market acceptance of the Famous Dave's
concept, the quality of our restaurant operations, our ability to grow our
brand, our ability to successfully expand into new markets, our ability to
successfully execute our franchise program, our ability to raise additional
financing as required and general economic conditions. It is our plan to resume
opening company-owned restaurants beginning in 2005. There is no guarantee
that the planned openings in 2005 and later will open when planned, or at all,
due to the risks associated with the development of new units, such as
governmental approvals, the availability of sites, and the availability of
capital, many of which are beyond our control. There can be no assurance that we
will successfully implement our growth plan for our company-owned and
franchise-operated restaurants. In addition, we also face all of the risks,
expenses and difficulties frequently encountered in the development of an
expanding business.
WE HAVE RECENTLY EXPERIENCED LOSSES AND MAY NOT BE PROFITABLE
We incurred a net loss of approximately $2.9 million for fiscal 2003, or
$0.25 per diluted share, and a net loss of $928,000, or $0.08 per diluted share
for fiscal 2002. Our 2003 net loss reflects pre-tax charges of approximately
$4.2 million, or $0.22 per diluted share, related to impairment and
restructuring charges on five restaurant locations, two of which were
subsequently sold and two of which were subsequently closed. In addition, fiscal
2003 results include pre-tax charges of approximately $2.2 million, or $0.11 per
diluted share, which reflects losses in the Isaac Hayes Blues clubs, as well as
costs associated with our divestiture of those clubs. Famous Dave's has no
further obligations relating to the Isaac Hayes clubs. The net loss for fiscal
2002 included losses of approximately $6.0 million, or $0.23 per diluted share,
related to the Isaac Hayes clubs.
We cannot assure you that we will generate sufficient revenues or margins,
or control operating expenses, to achieve or sustain profitability in future
years. In addition, we cannot assure you that we will not take future impairment
or restructuring charges on our restaurants.
COMPETITION MAY REDUCE OUR REVENUES AND OPERATING INCOME
Competition in the restaurant industry is intense. Increased competition by
existing or future competitors may reduce our sales. Our restaurants compete
with moderately priced casual dining restaurants primarily on the basis of
quality of food and service, atmosphere, location and value. In addition to
existing themed and barbecue restaurants, we expect to face competition from
steakhouses and other restaurants featuring large portions of red meat. We also
compete with other restaurants and retail establishments for quality sites.
Competition in the food service industry is affected by changes in consumer
taste, economic and real estate conditions, demographic trends, traffic
patterns, the cost and availability of qualified labor, product availability and
local competitive factors.
Many of our competitors have substantially greater financial, marketing and
other resources than we do. Regional and national restaurant companies continue
to expand their operations into our current and anticipated market areas. We
believe our ability to compete effectively depends on our ongoing ability to
offer high-quality, competitively priced food in a distinctive and comfortable
environment.
10
OUR FAILURE TO EXECUTE OUR FRANCHISE PROGRAM MAY NEGATIVELY IMPACT OUR REVENUE
Our growth and success depends in part upon our ability to attract,
contract with and retain quality franchisees. It also depends upon the ability
of those franchisees to successfully operate their restaurants and promote the
Famous Dave's brand. Although we have established criteria to evaluate
prospective franchisees, and our franchise agreements include certain operating
standards, each franchisee operates his/her restaurant independently. Various
laws limit our ability to influence the day-to-day operation of our franchise
restaurants. We cannot assure you that our franchisees will be able to
successfully operate Famous Dave's restaurants in a manner consistent with our
concepts and standards, which could reduce their gross sales and
correspondingly, our franchise royalties and could adversely affect our ability
to leverage the Famous Dave's brand.
ITEM 2. PROPERTIES
The development cost of our restaurants varies depending primarily on the
size and style of the restaurant, whether the property is purchased or leased,
and whether it is a conversion of an existing building or a newly constructed
unit. Since January 2000, most of our restaurants have been converted from
existing restaurant properties. Average approximate size and costs of a
converted leased property and a converted purchased property have been
approximately 5,900 and 5,100 square feet and $1.1 million and $2.1 million,
respectively. Two of the restaurants opened in 2003 were ground-up construction
and one restaurant was a conversion of a previous restaurant concept. Such
development costs included land, building construction, fixtures, furniture and
equipment, and pre-opening costs. We are in the final stages of development and
design on a prototype, which will be the first-ever standard format for us.
Significant time has been invested in the project, and should the prototype
prove economically viable, we expect the first unit to be built in late fiscal
2004. Subject to consumer acceptance and economic viability, we anticipate that
the prototype will be required on all new development beginning sometime in
fiscal 2005. The prototype is approximately 6,100 square feet in size and would
represent a consistent brand image across all markets while still allowing for
new construction and the renovations of pre-existing restaurants.
Famous Dave's leased restaurant facilities are occupied under agreements
with terms ranging from three to 15 years, excluding renewal options. Such
leases generally provide for fixed rental payments plus operating expenses
associated with the properties. Our executive offices are located in
approximately 18,000 square feet in Eden Prairie, Minnesota, under a lease
expiring in 2005. We have recently completed a renovation at our executive
offices in order to accommodate additional positions at our corporate
headquarters. It is our desire to add a test kitchen to our corporate
headquarters. In order to accomplish this objective, in addition to negotiating
with our current landlord, we are also exploring alternative suitable sites
within a reasonable proximity to our current location. We believe that our
current restaurant, and potential corporate office leased spaces will be
suitable for our needs and adequate for our operations for the foreseeable
future.
11
The following table sets forth certain information about our existing
company-owned restaurant locations as of December 28, 2003:
SQUARE INTERIOR LAND OWNED
LOCATION FOOTAGE SEATS OR LEASED DATE OPENED
-------- ------- -------- ---------- -----------
1 Roseville, MN 4,800 105 Leased June 1996
2 Calhoun Square (Minneapolis, MN) 10,500 380 Leased September 1996
3 Maple Grove, MN 5,200 125 Owned* April 1997
4 Highland Park (St. Paul, MN) 5,200 125 Leased June 1997
5 Stillwater, MN 5,200 130 Owned* July 1997
6 Apple Valley, MN 3,800 90 Owned* July 1997
7 Forest Lake, MN 4,500 100 Leased October 1997
8 Minnetonka, MN 5,500 140 Owned December 1997
9 Plymouth, MN 2,100 20 Leased December 1997
10 West St. Paul, MN 6,800 140 Leased January 1998
11 West Des Moines, IA 5,500 150 Leased April 1998
12 Des Moines, IA 5,800 150 Leased April 1998
13 Naperville, IL 5,500 170 Leased April 1998
14 Cedar Falls, IA 5,400 130 Leased September 1998
15 Bloomington, MN 5,400 140 Leased October 1998
16 Woodbury, MN 5,900 180 Owned October 1998
17 Lincoln, NE 6,300 190 Owned December 1999
18 Columbia, MD 7,200 270 Leased January 2000
19 Annapolis, MD 7,000 210 Leased January 2000
20 Frederick, MD 5,600 180 Leased January 2000
21 Woodbridge, VA 5,600 190 Leased January 2000
22 Vernon Hills, IL 6,600 230 Leased February 2000
23 Addison IL 4,600 140 Owned March 2000
24 Lombard, IL 7,200 250 Leased July 2000
25 North Riverside, IL 5,000 160 Leased August 2000
26 Sterling, VA 5,200 200 Leased December 2000
27 Carpentersville, IL 6,000 227 Leased February 2001
28 Streamwood, IL 7,200 260 Leased March 2001
29 Oakton, VA 4,300 150 Leased May 2001
30 Laurel, MD 5,200 170 Leased August 2001
31 Palatine, IL 7,200 260 Leased August 2001
32 Richmond I (Richmond, VA) 5,200 165 Owned December 2001
33 Gaithersburg, MD 4,800 170 Leased May 2002
34 Richmond II (Richmond, VA) 5,100 165 Owned June 2002
35 Orland Park, IL 5,000 165 Leased June 2002
36 Tulsa, OK 4,900 180 Owned September 2002
37 Virginia Commons, VA 5,300 190 Owned June 2003
38 Rogers, AR 5,300 190 Owned June 2003
All seat count and square footage amounts are approximate
*Unit is collateral in a sale-leaseback financing
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material litigation and are not aware of any
threatened litigation that would have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 28, 2003.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
Our Company's common stock has traded on the NASDAQ National Market (SM)
under the symbol DAVE since July 24, 1997. Our common stock traded on the NASDAQ
Small Cap Market (SM) prior to July 24,1997 and since November 1996 under the
same symbol.
The following table summarizes the high and low closing sale prices per
share of our common stock for the periods indicated, as reported on the NASDAQ
National Market (SM):
2003 2002
--------------- ----------------
Period High Low High Low
- ------------- ----- ----- ----- -----
1st Quarter $4.94 $2.88 $8.75 $6.90
2nd Quarter $4.38 $3.60 $8.16 $7.15
3rd Quarter $6.37 $4.30 $7.96 $5.08
4th Quarter $5.63 $4.75 $5.35 $2.97
(b) HOLDERS
As of March 22, 2004, we had 463 shareholders of record and an estimated
6,046 beneficial shareholders.
(c) DIVIDENDS
Our Board of Directors has not declared any dividends on our common stock
since our inception, and does not intend to pay out any cash dividends on our
common stock in the foreseeable future. We presently intend to retain all
earnings, if any, to provide for our growth. The payment of cash dividends in
the future, if any, will be at the discretion of the Board of Directors and will
depend upon such factors as earnings levels, capital requirements, our financial
condition and other factors deemed relevant by our Board of Directors.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company maintains the 1995 Stock Option and Compensation Plan (the
"Management Plan"), the 1997 Employee Stock Option Plan (the "Employee Plan")
and the 1998 Director Stock Option Plan (the "Director Plan"). The Management
Plan is designed to furnish a variety of economic incentives designed to
attract, retain and motivate employees (including management level employees)
of, and consultants to, the Company. The purpose of the Employee Plan is to
attract, retain and motivate employees of the Company (not including officers
and directors of the Company) by furnishing opportunities to purchase or receive
shares of the Company's Common Stock. The purpose of the Director Plan is to
encourage share ownership by Company directors who are not employees of the
Company in order to promote long-term shareholder value through continuing
ownership of the Company's Common Stock.
The Management Plan and the Director Plan have each been approved by the
Company's shareholders. The Employee Plan has not been submitted for approval to
Company's shareholders.
13
The following table sets forth certain information as of December 28, 2003
with respect to the Management Plan, the Employee Plan and the Director Plan.
Information in response to this Item is incorporated herein by reference to our
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this form 10-K.
Number of Securities
Remaining Available for
Number of Securities Future Issuances Under
to be Issued Upon Weighted-Average Equity Compensation
Exercise of Outstanding Exercise Price of Plans (Excluding
Options Outstanding Options Securities Reflected
(A) (B) in Column (A))
--- --- --------------
Plan Category
Equity Compensation Plans Approved By Security
Holders:
1995 Stock Option and Compensation Plan 578,000 $3.96 198,000
1998 Director Stock Option Plan 255,000 $4.17 60,000
Miscellaneous Director Stock Options 37,000 $2.00 ---
--------- -------
Total: 870,000 $3.94 258,000
Equity Compensation Plans Not Approved By Security
Holders:
1997 Employee Stock Option Plan 330,000 $3.95 194,000
--------- -------
TOTAL: 1,200,000 $3.94 452,000
========= =======
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below should be read in conjunction
with the consolidated financial statements and notes included elsewhere in this
Form 10-K, and in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
The selected financial data as of and for the fiscal years ended December
28, 2003 (fiscal year 2003) and December 29, 2002 (fiscal year 2002) have been
derived from our consolidated financial statements as audited by Grant Thornton
LLP, independent certified public accountants. The selected financial data for
the fiscal years ended December 30, 2001 (fiscal year 2001), December 31, 2000
(fiscal year 2000) and January 2, 2000 (fiscal year 1999) have been derived from
our consolidated financial statements as audited by Virchow, Krause & Company,
LLP, independent certified public accountants.
14
FINANCIAL HIGHLIGHTS
FISCAL YEAR 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
($'s in 000's, except per share data)
STATEMENT OF OPERATIONS DATA
Revenue $ 97,740 $ 90,820 $ 87,673 $ 70,160 $ 47,629
Asset impairment and restructuring
charges (1) $ (4,238) $ --- $ --- $ --- $ (5,513)
(Loss) income from operations $ (193) $ 4,470 $ 6,209 $ 2,581 $ (6,223)
Equity in loss of unconsolidated
affiliate (2) $ (2,155) $ (5,994) $ (1,029) $ --- $ ---
Income tax benefit $ 1,778 $ 1,211 $ 4,010 $ --- $ ---
Net (loss) income $ (2,898) $ (928) $ 8,118 $ 2,112 $ (6,610)
Basic net (loss) income per common share $ (0.25) $ (0.08) $ 0.81 $ 0.23 $ (0.75)
Diluted net (loss) income per common share $ (0.25) $ (0.08) $ 0.75 $ 0.22 $ (0.75)
OTHER DATA
Number of restaurants open at year end:
Company-owned restaurants 38 40 37 33 28
Franchise-operated restaurants 54 33 19 9 2
Comparable store sales (decrease)
increase (3) (3.0)% (0.3)% 2.9% 5.3% 2.6%
System-wide sales (5) $ 187,153 $ 150,231 $ 112,178 (6) (6)
Average Weekly Sales:
Company-owned restaurants $ 42,491 $ 45,783 $ 46,429 $ 44,698 $ 37,750
Franchise-operated restaurants $ 47,400 $ 46,642 $ 45,190 (6) (6)
BALANCE SHEET DATA (AT YEAR END)
Cash and cash equivalents $ 9,964 $ 9,473 $ 7,398 $ 1,895 $ 1,712
Total assets $ 73,767 $ 74,817 $ 70,440 $ 52,963 $ 43,326
Working capital $ 9,041 $ 5,769 $ 4,706 $ (3,416) $ (7,170)
Long-term debt less current maturities (4) $ 16,954 $ 17,354 $ 14,579 $ 13,147 $ 5,077
Total shareholders' equity $ 46,872 $ 47,292 $ 46,689 $ 30,061 $ 27,010
(1) Fiscal 2003 charges reflect impairment and restructuring costs associated
with 5 stores, 2 of which were subsequently sold and 2 of which were
subsequently closed.
(2) Represents our 40% unconsolidated interest in FUMUME, LLC. Fiscal 2003
expenses represent losses and transaction costs related to our divestiture.
We have no further obligation regarding this joint venture.
(3) Our comparable store sales base includes company-owned restaurants that are
open year round and have been open more than 18 months.
(4) Long-term debt consists of total debt, including capital lease obligations,
less current maturities.
(5) System-wide sales for fiscal 2003 of approximately $187.2 million increased
24.6% over system-wide sales for the prior year. System-wide sales is a
non-GAAP financial measure that includes sales of all restaurants,
company-owned and franchise, operating under the Famous Dave's brand name.
(6) This information was not available for these fiscal years.
15
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 forward-looking statements in this Annual
Report on Form 10-K are based on information currently available to us as of the
date of this Annual Report on Form 10-K, and we assume no obligation to update
any forward-looking statements. 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 this Annual Report on
Form 10-K and elsewhere in this Annual Report on Form 10-K, 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 on Form 10-K) and our financial statements and related
footnotes appearing elsewhere in this Annual Report on Form 10-K.
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 28, 2003, there were 92 Famous Dave's restaurants operating in 23
states, including 38 company-owned restaurants and 54 franchise-operated
restaurants. An additional 147 franchise restaurants were in development as of
December 28, 2003.
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. Our
fiscal years ended December 28, 2003 (fiscal year 2003), December 29, 2002
(fiscal year 2002) and December 30, 2001 (fiscal year 2001) all consisted of 52
weeks. Fiscal 2004, which ends on January 2, 2005, will consist of 53 weeks.
BASIS OF PRESENTATION
The financial results presented and discussed herein reflect our results
and the results of our wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. Additionally, until February
26, 2003, we were a 40% participant in a joint venture to operate themed
restaurant concepts based on the entertainment artist Isaac Hayes. On February
26, 2003, we disposed of our 40% interest, and as a result, we are no longer
participating in any revenues or expenses of the joint venture and we do not
have any further obligations with regard to the joint venture. Our financial
results for fiscal 2003 reflect our equity in the losses of this unconsolidated
affiliate up until February 26, 2003, in addition to the transaction costs
related to the divestiture. Our financial results for fiscal 2002 and fiscal
2001 reflect our equity in the losses of this unconsolidated affiliate.
16
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, among
others, affect 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 One to
the consolidated financial statements included in our annual report for the year
ended December 28, 2003. The accounting policies used in preparing our fiscal
year 2003 consolidated condensed financial statements are the same as those
described in our annual report.
We prepare our consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America. This
requires us to make estimates and judgments that affect reported amounts and
related disclosures. Actual results could differ from those estimates. We
consider the following policies to be the most critical in understanding the
judgments that are involved in the preparation of our consolidated financial
statements and the uncertainties that could impact our financial condition,
results of operations and cash flows.
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.
RECOGNITION OF FRANCHISE RELATED REVENUE - Initial franchise revenue is
recognized when our Company has performed substantially all of its obligations
as franchisor. Franchise royalties are recognized when earned as promulgated in
Statement of Financial Accounting Standards (SFAS) No. 45, "Accounting for
Franchise Fee Revenue". Franchise-related revenue consists of royalty revenue
and franchise fees, which include initial franchise fees and area development
fees. Franchise-related revenue for fiscal 2003 was approximately $5.7 million,
a 34.8% increase when compared to franchise-related revenue of approximately
$4.2 million for the same period in 2002, primarily reflecting increased
royalties. Royalties, which are based on a percent of net sales, increased
50.9%, reflecting the annualization of franchise restaurants that opened in
fiscal 2002 in addition to the 18 franchise restaurants opened during fiscal
2003. There were 54 franchise-operated restaurants open at December 28, 2003,
compared to 33 at December 29, 2002. During fiscal 2004, we expect to realize
higher franchise-related revenue from 3 company-owned restaurants sold to a
franchise partner in the fourth quarter of fiscal 2003 in addition to the
opening of 20 to 25 new franchise restaurants throughout fiscal 2004.
ASSET IMPAIRMENT AND RESTRUCTURING CHARGES - In accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 its
fair value, as determined by the discounted future net cash flows expected to be
generated on a restaurant-by-restaurant basis. Any impairment recognized is the
amount by which the carrying amount of the restaurant site exceeds its fair
value. Restaurant sites to be disposed of are reported at the lower of their
carrying amount or fair value on a restaurant-by-restaurant basis, less
estimated costs to sell. Our December
17
28, 2003 consolidated balance sheet reflects approximately $1.3 million of
assets held for sale, which include the land and building for our Mesquite
location that was recently closed. During fiscal 2003, we recorded impairment
and restructuring charges of approximately $4.2 million related to five units,
two of which were subsequently closed and two of which were subsequently sold to
a franchisee. No asset impairment charges were recorded on company-owned units
during fiscal 2002 or fiscal 2001.
DEFERRED TAX ASSET - Deferred taxes recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for financial
statement purposes and such amounts measured in accordance with tax laws.
Realization of the net operating loss carry forwards and other deferred tax
temporary differences are contingent on future taxable earnings. During fiscal
2003, our deferred tax asset was reviewed for expected utilization using a "more
likely than not" approach as required by SFAS No. 109, "Accounting for Income
Taxes", by assessing the available positive and negative evidence surrounding
its recoverability. We believe that the realization of the deferred tax asset is
more likely than not based on the expectations that our Company will generate
the necessary taxable income beginning in fiscal 2004.
RESULTS OF OPERATIONS
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 consists of a non-refundable payment equal to $10,000 per
unit upon the signing of the area development agreement. Since the fee to secure
the territory is non-refundable, we recognize this fee 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 and the remaining $35,000 is
recognized upon either the signing of a lease or upon receipt of a builder's
permit, and at which time we have substantially performed all of our services.
Franchise royalties are equal to a percentage of weekly net sales, currently at
5%. Licensing revenue includes royalties from a retail line of business,
including sauces and seasonings. Other revenue includes opening assistance and
training we provide to our franchise partners. Comparable sales represent net
sales for restaurants open year-round for 18 months or more.
COSTS AND EXPENSES
Components of operating expenses include food and beverage costs, operating
payroll and employee benefits, occupancy costs, repair and maintenance costs,
supplies and advertising and promotion. Certain of these costs are variable and
will increase with sales volume. The primary fixed costs are corporate and
restaurant management 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 months of operation.
As restaurant management and staff gain experience following the opening, labor
scheduling, food cost management and operating expense control are improved to
levels similar to those at our more established restaurants.
General and administrative expenses include all corporate and
administrative functions that provide an infrastructure to support existing
operations and support future growth. Salaries, employee benefits, legal fees,
consulting fees, travel, rent, depreciation, general insurance and marketing
expenses are major items in this category.
18
A breakdown of our restaurant and total company operating results were as
follows (amounts in $000's):
Restaurant Operations
------------------------------------------------------------
Fiscal Year 2003 Fiscal Year 2002 Fiscal Year 2001
---------------- ---------------- ----------------
Restaurant Sales, net................ $91,491 100.0% $86,378 100.0% $85,360 100.0%
Restaurant Costs and Expenses:
Food and Beverage Costs............ 27,982 30.6 27,355 31.7 26,980 31.6
Labor and Benefits................. 27,301 29.8 25,252 29.2 23,830 27.9
Operating Expenses................. 23,307 25.5 20,009 23.2 19,158 22.4
Depreciation and Amortization...... 4,562 5.0 4,358 5.0 4,222 4.9
Total Costs and Expenses........ 83,152 90.9 76,974 89.1 74,190 86.8
------- ----- ------- ----- ------- -----
Income from Restaurant
Operations...................... $ 8,339 9.1% $ 9,404 10.9% $11,170 13.2%
======= ===== ======= ===== ======= =====
Total Company
------------------------------------------------------------
Fiscal Year 2003 Fiscal Year 2002 Fiscal Year 2001
---------------- ---------------- ----------------
Total Revenue........................ $97,740 100.0% $90,820 100.0% $87,673 100.0%
Total Costs and Expenses:
Food and Beverage Costs............ 28,014 28.7 27,355 30.1 26,980 30.8
Labor and Benefits................. 27,586 28.2 25,252 27.8 23,834 27.2
Operating Expenses................. 23,376 23.9 20,009 22.0 19,158 21.9
Depreciation and Amortization...... 4,840 5.0 4,630 5.1 4,463 5.1
Asset Impairment and Restructuring
Charges......................... 4,238 4.3 --- --- --- ---
Pre-opening Expenses............... 543 0.6 1,040 1.2 629 0.7
General and Administrative ........ 9,336 9.6 8,064 8.9 6,400 7.3
-------- ----- ------- ----- ------- -----
(Loss) Income from Total Company
Operations........................ ($ 193) 0.2% $ 4,470 4.9% $ 6,209 7.0%
======== ===== ======= ===== ======= =====
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Total Revenue - Total revenue of approximately $97.7 million for fiscal
2003 increased $6.9 million or 7.6% over revenues of approximately $90.8 million
for fiscal 2002.
Restaurant Sales - Restaurant sales increased by approximately $5.1
million or 5.9% to approximately $91.5 million for fiscal year 2003 from
approximately $86.4 million for fiscal year 2002. The increase in sales was due
primarily to the annualization of sales on restaurants that opened late in 2002
as well as our 2003 openings.
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 for fiscal 2003 were approximately
$5.7 million, a 34.8% increase when compared to approximately $4.2 million for
the same period in 2002, primarily reflecting increased royalties. Royalties,
which are based on a percent of net sales, increased 50.9%, reflecting the
annualization of franchise restaurants that opened in fiscal 2002 in addition to
the 18 franchise restaurants opened during fiscal 2003. There were 54 franchise
operated restaurants open at December 28, 2003, compared to 33 at December 29,
2002. During fiscal 2004, we expect to realize higher franchise related revenue
from three company-owned restaurants sold to a franchise partner in the fourth
quarter of fiscal 2003 in addition to the opening of 20 to 25 new franchise
restaurants throughout fiscal 2004.
19
Licensing and Other Revenue - Licensing revenue includes royalties from a
retail line of business, including sauces, seasonings and prepared meats. Other
revenue includes opening assistance and training we provide to our franchise
partners. For fiscal year 2003, the licensing royalty income was $209,000, flat
to fiscal 2002. During fiscal 2004, we expect to see licensing revenue remain
relatively flat, due to the elimination of the refrigerated segment of our
business, offset by continued market penetration of our sauces and seasonings.
The amount of other revenue will be dependent on the level of opening assistance
we will be required to provide during franchise openings.
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 for at least
18 months. At the end of fiscal 2003, there were 33 restaurants included in this
base. Same store net sales for fiscal 2003 decreased approximately 3.0%,
compared to fiscal 2002's decrease of approximately 0.3%. We believe that the
decrease in same store net sales reflects our decision, during the third quarter
of fiscal 2003, to eliminate routine discounting throughout our company-owned
restaurants. Although discounting during fiscal 2002 had increased restaurant
traffic, the majority of the incremental sales derived had substantially lower
margins. We believe that the decision to discontinue discounting was the right
decision to protect our brand for the long-term. Same store net sales are
expected to continue to remain soft, at a minimum, through the second quarter of
2004.
Average Weekly Net Sales - Weighted average weekly net sales for our
company-owned and franchise-operated restaurants during fiscal 2003 were $42,491
and $47,400, respectively. During fiscal 2002, weighted average weekly net sales
for our company-owned and franchise-operated restaurants were $45,783 and
$46,642, respectively.
Food and Beverage Costs - Food and beverage costs for fiscal 2003 were
approximately $28.0 million or 30.6% of net restaurant revenue compared to
approximately $27.4 million or 31.7% of net restaurant revenue for fiscal 2002.
The improvement primarily reflects a favorable pork contract and the improved
pricing we received. Approximately 85% of our purchases are on contract.
Contracts negotiated for 2004 overall, however, have resulted in less favorable
pricing. Our pork contract renewal resulted in a 9% contracted price increase in
pork products. In addition, we recently renewed our poultry and hamburger
contracts, which resulted in a 3% price increase in poultry and a 17% increase
in hamburger. Our brisket contract renews in July and we are watching the beef
market closely. As a result of the above negotiations, we anticipate that food
costs, as a percent of net restaurant revenues, will increase approximately
80-120 basis points for fiscal 2004 over the prior year. We believe that we have
an opportunity to mitigate the impact that the recently renewed food contracts
have on our margin. In 2004 we will focus on increasing our adult beverage
sales, which are currently 11% of our dine-in sales and on average carry 500-800
basis points higher margin than food. We are currently working with a consultant
that is assisting us in developing this program, which we are expecting to roll
out during the second quarter of fiscal 2004.
Labor and Benefits - Labor and benefits at the restaurant level were
approximately $27.3 million or 29.8% of net restaurant revenue in fiscal 2003
compared to approximately $25.3 million or 29.2% of net restaurant revenue in
fiscal 2002. The increase in labor and benefits as a percentage of restaurant
revenue reflects a 25% increase in benefits costs, partially offset by a lower
level of bonus payout at the restaurant level. Full service restaurants that
operate in states without a "tip credit" (such as Minnesota) experience a higher
wage rate for dining room labor than do restaurants located in states where a
tip credit is available to reduce wages paid to food servers. The migration
toward full service dining in the majority of our restaurants is part of our
strategy for increasing unit-level revenue, but may result in higher labor
costs. During fiscal 2004, we are expecting labor and benefits as a percentage
of net revenues to remain relatively flat to fiscal 2003.
Operating Expenses - Operating expenses for fiscal 2003 were approximately
$23.3 million or 25.5% of net restaurant revenue, compared to approximately
$20.0 million or 23.2% of net restaurant revenue for fiscal 2002. The increase
in operating expenses reflects significant investments made at the restaurant
level to upgrade and repair stores that had been neglected, in addition to
higher utilities related to increased gas pricing. Repair and
20
maintenance costs for fiscal year 2003 were $1.1 million compared to $530,000
for fiscal 2002. The increase in operating expenses as a percentage of
restaurant revenue for fiscal 2003, compared to fiscal 2002, was primarily due
to lower average restaurant revenues against slightly higher fixed costs. During
fiscal 2004, operating expenses as a percentage of net revenues are expected to
decrease from the percentage in fiscal 2003, primarily due to lower levels of
repairs and maintenance costs and further leverage of fixed costs.
Depreciation and Amortization - Depreciation and amortization for fiscal
2003 was approximately $4.8 million, or 5.0% of total revenue, compared to
approximately $4.6 million, or 5.1% of total revenue for fiscal 2002. The
increase in depreciation and amortization reflects investments in store
openings, restaurant level enhancements, catering vehicles and continuing
investments in information systems. During fiscal 2004, depreciation and
amortization is expected to remain relatively flat to fiscal 2003 levels as
depreciation from asset additions are offset by assets that will be fully
depreciated during fiscal 2004.
Asset Impairment and Restructuring Charges - During fiscal 2003 we recorded
asset impairment and restructuring charges equal to approximately $4.2 million
on five restaurant locations, two of which were subsequently sold and two of
which were subsequently closed. As of December 28, 2003, we had approximately
$1.3 million of assets held for sale on our consolidated balance sheet related
to one of the restaurants in Texas that was closed.
Pre-opening Expenses - Pre-opening expenses were $543,000 or 0.6% of total
revenue for fiscal 2003 compared to approximately $1.0 million or 1.2% of total
revenue for fiscal 2002. These expenses reflect the opening of three restaurants
during fiscal 2003 as compared with eight in fiscal 2002. We do not anticipate
opening any company-owned restaurants during fiscal 2004.
General and Administrative Expenses - General and administrative expenses
totaled $9.3 million or 9.6% of total revenue in fiscal 2003 compared to $8.1
million or 8.9% of total revenue in fiscal 2002. The increase in general and
administrative expenses reflects severance and recruiting costs related to
changes in management and additions at the board level, consulting expenses
associated with the development of our media plan and our new Smoke-House
prototype and increases in the corporate infrastructure to support system-wide
restaurant growth. During fiscal 2004, we expect general and administrative
expenses to increase both in dollars and as a percentage of total revenue due
to investments in the corporate infrastructure to support the growth in
franchise operations in addition to our company-owned restaurant base.
Interest Expense, Net - Interest expense, net, totaled $1.7 million or
1.7% of total revenue for fiscal 2003 compared to $1.0 million or 1.1% of total
revenue for fiscal 2002. This line item represents interest expense from capital
lease obligations, notes payable and financing lease obligations. The increase
in expense from fiscal 2002 to fiscal 2003 is the result of lower capitalization
of construction period interest on fewer openings in 2003 than in 2002. As a
result of no anticipated openings of company-owned restaurants for fiscal 2004,
in addition to our levels of fixed rate debt, for fiscal 2004, we are expecting
interest expense to remain flat to fiscal 2003 levels.
Other Expense, Net - Other expense, net of approximately $667,000 reflects
losses related to expenses of an unopened site and early extinguishments of debt
associated with the early payoff of a note, partially offset by gains
attributable to the sale of three units in Georgia to a franchisee. In
comparison, during fiscal 2002 we realized other income of approximately
$423,000 related to the gains attributable to the sale of three units in
Wisconsin to a franchisee.
Equity in Loss from Unconsolidated Affiliate - Until February 26, 2003, we
were a 40% participant in a joint venture to operate themed restaurant concepts
based on the entertainment artist Isaac Hayes. Pursuant to an agreement
governing the joint venture, the participants in the joint venture formed a
Delaware limited liability company named FUMUME, LLC. On February 26, 2003, we
disposed of our 40% interest in FUMUME, LLC. The equity in loss from
unconsolidated affiliate was $2.2 million for fiscal 2003, reflecting losses in
the Isaac Hayes Blues clubs, in addition to transaction costs associated with
our divestiture of those clubs. We are no longer participating in any revenue
or expenses of the joint venture and we do not have any further obligations with
regard to the joint venture. The equity in loss for 2002 was $6.0 million.
21
Benefit from income taxes - Our Company realized a benefit from income
taxes during fiscal 2003 of $1.8 million, which includes the recognition of the
net operating loss carry forwards created in the year ended December 28, 2003
that can be used to reduce future tax liabilities. Realization of the net
operating loss carry forwards and other deferred tax timing differences is
contingent on future taxable earnings. Our deferred tax asset was reviewed for
expected utilization using a "more likely than not" approach as required by SFAS
No. 109, "Accounting for Income Taxes", by assessing the available positive and
negative evidence surrounding the recoverability of the deferred tax asset. We
believe that the realization of the deferred tax asset is more likely than not
based on the expectations that our Company will generate the necessary taxable
income beginning in fiscal year 2004.
Net loss / Diluted Net Loss per Share - As a result of the factors above,
we realized a net loss for fiscal 2003 of $2.9 million, or $0.25 per diluted
share, on 11,771,584 weighted average shares outstanding, compared to a net loss
of $928,000, or $0.08 per diluted share, on 11,335,000 weighted average shares
outstanding for fiscal 2002.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
Total Revenue - Total revenue of approximately $90.8 million for fiscal
2002 increased 3.6% over revenue of approximately $87.7 million for fiscal
2001.
Restaurant Sales - Restaurant sales increased by approximately $1.0
million or 1.2% to approximately $86.4 million for fiscal year 2002 from
approximately $85.4 million for fiscal year 2001. The increase in revenue was
due primarily to an additional eight restaurants opened during fiscal 2002, the
contribution of a full year of revenue from restaurants which were open for only
part of 2001, partially offset by the sale of five company restaurants to
franchisees and a decrease in revenue from restaurants open for all of both
periods. During fiscal 2002, we increased menu prices an average of 0.5%.
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 for fiscal 2002 were approximately
$4.2 million, a 100% increase when compared to franchise related revenues of
approximately $2.1 for the same period in 2001, primarily reflecting an increase
in royalties due to franchise openings. There were 33 franchise-operated
restaurants open at December 29, 2002, compared to 19 at December 30, 2001.
Licensing Revenue - Licensing revenue includes royalties from a retail line
of business, including sauces, seasonings and prepared meats. For fiscal year
2002, the licensing royalty income was $210,000, compared to $192,000 for the
same period in 2001.
Same Store Net Sales - It is our policy to include in our same store sales
base, restaurants that are open year round and that have been open more than 18
months. At the end of fiscal 2002, there were 28 restaurants included in this
base. Same store net sales for fiscal 2002 decreased approximately 0.3%,
compared to fiscal 2001's increase of approximately 2.9%. We believe that the
decrease in same store net sales was a result of a difficult economic
environment during 2002.
Average Weekly Sales - Weighted average weekly volume for our
company-owned restaurants was $45,783 during 2002 and $46,642 for
franchise-operated restaurants. Weighted average weekly volume for our
company-owned restaurants was $46,429 during 2001 and $45,190 for
franchise-operated restaurants.
Food and Beverage Costs - Food and beverage costs for fiscal 2002 were
approximately $27.4 million or 31.7% of net restaurant revenue compared to
approximately $27.0 million or 31.6% of net restaurant revenue for fiscal 2001.
An increase in the price of pork products earlier in 2002 was offset by
decreases in other commodity costs, including beef and chicken.
22
Labor and Benefits - Labor and benefits were $25.3 million or 29.2% of net
restaurant revenue in fiscal 2002 compared to $23.8 million or 27.9% of net
restaurant revenue in fiscal 2001. The increase in labor and benefits as a
percentage of net restaurant revenue is primarily due to decreased efficiencies
in scheduling and managing labor hours, increases in benefits costs and
additional staffing in preparation for new restaurant openings. Full service
restaurants that operate in states without a "tip credit" (such as Minnesota)
experience a higher wage rate for dining room labor than do restaurants located
in states where a tip credit is available to reduce wages paid to food-servers.
The migration toward full service dining in most of our restaurants is part of
our strategy for increasing unit-level revenue, but results in higher labor
costs.
Operating Expenses - Operating expenses for fiscal 2002 were $20.0 million
or 23.2% of net restaurant revenue, compared to $19.2 million or 22.4% of net
restaurant revenue for fiscal 2001. The dollar increase in operating expenses
was related to the increased number of restaurants. The increase in operating
expenses as a percentage of net restaurant revenue in fiscal 2002, compared to
fiscal 2001, was primarily due to lower average restaurant revenues against
slightly higher fixed costs.
Depreciation and Amortization - Depreciation and amortization for fiscal
2002 was approximately $4.6 million or 5.1% of total revenue, compared to
approximately $4.5 million or 5.1% of total revenue in fiscal 2001. The slight
increase in depreciation and amortization expense is the result of construction
costs of new units opened in fiscal 2002.
Pre-opening Expenses - Pre-opening expenses were approximately $1.0
million for 2002 compared to approximately $629,000 for fiscal 2001. These
expenses reflect the opening and conversion of eight new restaurants in fiscal
2002 compared to six new restaurants in fiscal 2001.
General and Administrative Expenses - General and administrative expenses
totaled approximately $8.1 million or 8.9% of total revenue in fiscal 2002
compared to approximately $6.4 million or 7.3% of total revenue in fiscal 2001.
The dollar increase reflects an increase in the corporate infrastructure to
support restaurant growth.
Interest Expense, Net - Interest expense, net, totaled approximately $1.0
million or 1.1% of total revenue for fiscal 2002 compared to approximately $1.4
million or 1.6% of total revenue for fiscal 2001. This line item primarily
represents interest expense from capital lease obligations, a line of credit,
notes payable and financing lease obligations, and interest income from notes
receivable our Company holds with its franchisees. The decrease in interest
expense from fiscal 2001 was primarily due to additional interest income
received via notes receivable our Company holds with franchisees, as well as a
decrease in interest expense on our existing borrowings from lower interest
rates.
Other Income - During fiscal 2002, we recorded a gain on the sale of
property and other income of $423,000, or 0.5% of total revenue. This compares
to $367,000, or 0.4% of total revenue for fiscal 2001. These gains are
attributable to various sales of property, partially offset by losses on
disposals of property.
Equity in Loss from Unconsolidated Affiliate - The equity in loss from
unconsolidated affiliate was $6.0 million, or 6.6% of total revenue for fiscal
2002. This compares to $1.0 million, or 1.2% of total revenue for fiscal 2001.
These losses relate to our 40% investment in FUMUME, LLC. Effective June 1,
2001, Famous Dave's Ribs-U, Inc., our wholly-owned subsidiary, entered into a
joint venture with Memphis-based Lifestyle Ventures, LLC, H&H Holding Company,
LLC and another investor to develop a themed restaurant concept based on the
entertainment artist Isaac Hayes. Pursuant to the agreement governing the joint
venture, the participants in the joint venture formed a Delaware limited
liability company named FUMUME, LLC. FUMUME, LLC opened its first location in
Chicago in June 2001 and its second location in Memphis, Tennessee in October
2001. Each location is structured as a separate Delaware limited liability
company, each of which is wholly owned by FUMUME, LLC.
In exchange for a 40% interest in FUMUME, LLC, our Company agreed to
contribute: (i) $825,507 in working capital, (ii) the assets comprising Famous
Dave's Ribs and Blues Club in Chicago and (iii) certain rights to use Famous
Dave's various licensed marks. Our Company had agreed to reimburse FUMUME, LLC
for operating losses incurred at the Memphis and Chicago clubs.
23
This obligation terminated February 26, 2003 upon our disposition of our
40% interest in FUMUME, LLC. See Footnote 5.
Benefit from income taxes - Our Company realized a benefit from income
taxes during fiscal 2002 of approximately $1.2 million, which includes the
recognition of the net operating loss carry-forwards created in the year ended
December 29, 2002 that can be used to reduce future tax liabilities. The tax
benefit of approximately $4.0 million recognized in 2001 was primarily due to
the reduction of a valuation allowance established in previous years, which
related to the Company's net operating loss carry-forward.
Net Loss / Diluted Net Loss per Share - As a result of the factors above,
we realized a net loss for fiscal 2002 of approximately $928,000 or $0.08 per
diluted share on 11,335,000 weighted average shares outstanding, compared to net
income of approximately $8.1 million or $0.75 per diluted share on 10,879,000
weighted average shares outstanding for fiscal 2001.
ACCOUNTING PRONOUNCEMENTS AND PASSED LEGISLATION
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
The changes in this statement will result in a more complete depiction of an
entity's liabilities and equity and will, thereby, assist investors and
creditors in assessing the amount, timing, and likelihood of potential future
cash outflows and equity share issuances. Reliability of accounting information
will be improved by providing a portrayal of an entity's capital structure that
is unbiased, verifiable, and more representational than information reported
prior to issuance of this statement. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We currently do not have instruments impacted by the adoption of this
Statement and therefore the adoption did not have an effect on our consolidated
financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 is an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", and
addresses consolidation of business enterprises of variable interest entities.
FIN 46 applies immediately to variable interest entities created or obtained
after January 31, 2003 and it applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
During fiscal 2003 we sold 3 of our Atlanta stores to a franchisee, and recorded
a note receivable for approximately $1.3 million. We reviewed the transaction in
accordance with FIN 46, and determined that we did not have a variable interest
entity that would require consolidation under FIN 46.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Act of
1933 and Securities Exchange Act of 1934. It has far reaching effects on the
standards of integrity for corporate management, board of directors, and
executive management. The Act will require additional disclosures,
certifications and procedures. We do not expect any material adverse effect on
our company as a result of the passage of this legislation.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 addresses the disclosure requirements of a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. FIN 45 also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN 45 were effective for our Company for the year ending December 31, 2002.
The liability recognition
24
requirements will be applicable prospectively to all guarantees issued or
modified after January 1, 2003. We currently do not have guarantees within the
scope of this pronouncement, and therefore this pronouncement did not have a
material impact on our company's financial position or results of operations.
In June 2002, the FASB issued Statement SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred versus the date our Company commits to
an exit plan. In addition, SFAS No. 146 states the liability should be initially
measured at fair value. The requirements of SFAS No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. During fiscal
year 2003, our Company incurred approximately $558,000 in restructuring disposal
expenses related to the closing of two units in Texas. There were no costs
associated with disposal or exit activity in 2002 or 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 2003, our Company held cash and cash equivalents of
approximately $10.0 million compared to approximately $9.5 million as of
December 29, 2002.
Our working capital was approximately $9.0 million for the year ended
December 28, 2003 as compared to approximately $5.8 million at December 29,
2002. Our quick ratio, which measures our immediate short-term liquidity, was
1.59 at December 28, 2003 compared to 1.35 at December 29, 2002. The year over
year change in our working capital and quick ratio was primarily due to cash
generated from operations.
Net cash provided by operations for each of the last three fiscal years
was approximately $6.4 million in fiscal 2003, $9.5 million in fiscal 2002 and
$7.8 million in fiscal 2001. Cash generated in fiscal 2003 was primarily from
a decrease in prepaid expenses and an increase in other current liabilities,
offset by an increase in accounts receivable and a decrease in accounts payable.
During fiscal 2003, we took advantage of cash discounts offered by our vendors
and decreased accounts payable by approximately $1.6 million. For fiscal 2002,
sources of cash generation were primarily from increased accounts payable and
decreases in accounts receivable. Net cash provided by operations during fiscal
2001 was primarily from net income.
Net cash used for investing activities for each of the last three fiscal
years was approximately $5.6 million, $5.7 million and $8.2 million. In fiscal
2003, we used cash of $2.1 million to fund losses and exit from our 40% FUMUME,
LLC partnership and $4.3 million for capital expenditures on construction of
three new company-owned restaurants and to upgrade existing facilities. The use
of cash was partially offset by payments on notes receivable and cash proceeds
from the sale of assets. During fiscal 2002, we used approximately $1.3 million
to fund the losses in FUMUME, LLC and approximately $9.5 million on capital
expenditures on eight company-owned restaurants. These uses of cash were
partially offset by approximately $2.9 million cash provided by payments on
notes receivable from financing arrangements with franchisees. During fiscal
2001, we used approximately $2.8 million to fund the losses in FUMUME, LLC,
approximately $6.2 million for capital expenditures and leasehold improvements
on the construction of six new company-owned restaurants and to upgrade existing
facilities partially offset by proceeds from the sale of one existing unit.
Net cash (used for) provided by financing activities was approximately
($323,000) in fiscal 2003 approximately ($1.7) million in 2002 and
approximately $5.9 million for fiscal 2001. During fiscal 2003 and 2002,
payments on long-term debt and capital lease obligations were the primary uses
of cash partially offset by proceeds from stock option exercises. Net cash
provided by financing activities in fiscal 2001 was primarily from the exercise
of stock options and the issuance of common stock. On November 12, 2001, our
Company issued 1,000,000 shares of common stock in a private equity placement at
a value of $6.00 per share, and received net cash proceeds after commissions and
expenses of approximately $5.3 million. The proceeds were used primarily to
develop new restaurants and for general corporate purposes.
25
At December 30, 2001, we were a party to a credit agreement with a bank
that provided approximately $4.5 million of borrowing capability to us, of which
approximately $100,000 was outstanding at December 31, 2001. This agreement was
secured by substantially all of our property, and in addition was guaranteed by
and secured by certain of the assets of our former Chairman, David Anderson. For
fiscal year 2001, the credit agreement carried an interest rate of 4% above the
prime rate, and provided for borrowing up to a maximum of 50% of the value of a
collateral pool which consisted of our property and certain of the property
pledged to secure the credit agreement by Mr. Anderson. Total availability on
this agreement as of December 30, 2001 was $1,680,000 due to collateral limits.
The credit agreement was paid off in January of fiscal 2002.
Under an agreement entered into in 2001, our Company was obligated to
reimburse FUMUME, LLC for operating losses incurred at the Isaac Hayes
Entertainment clubs in Memphis and Chicago. Total cash funding under this
obligation was $365,000 in 2003, $1.2 million in 2002 and $1.0 million in 2001.
On February 26, 2003 we disposed of our 40% interest in FUMUME, LLC and, at the
same time, terminated our cash funding obligation. On March 21, 2003 we
completed a $1.6 million transaction with the landlord at the Chicago location
that terminated our obligation under the lease. Losses of approximately $2.2
million related to the exit of this investment were recorded during fiscal 2003.
When we continue our expansion, we anticipate that additional financing
will likely be required. We anticipate that future development and expansion
will be real estate funded or financed primarily through currently held cash and
short-term investments, and proceeds from forms of financing such as leases,
mortgages or other credit facilities. There are no assurances, however, that
additional financing required for expansion will be available on terms
acceptable or favorable to us. We do not anticipate financing through the sale
of additional equity.
In addition to commitments we have related to our lease obligations, we
also have required payments to be made on our outstanding debt. The following
table provides aggregate information about our contractual payment obligations
and the periods in which payments are due:
Payments Due by Period
(in thousands)
Contractual
Obligations Total 2004 2005 2006 2007 2008 Thereafter
-------- ------- ------- ------- ------- ------- --------
Long Term Debt $ 12,707 $ 358 $ 392 $ 427 $ 466 $ 507 $ 10,557
Financing Leases 4,500 --- --- --- --- --- 4,500
Capital Leases 493 388 97 8 --- --- ---
Operating Leases 44,823 2,530 2,587 2,674 2,666 2,639 31,727
-------- ------- ------- ------- ------- ------- --------
Total $ 62,523 $ 3,276 $ 3,076 $ 3,109 $ 3,132 $ 3,146 $ 46,784
======== ======= ======= ======= ======= ======= ========
See Notes 6, 7, 8 and 14 to our Consolidated Financial Statements included in
this Annual Report on Form 10-K for details of our contractual obligations.
OFF-BALANCE SHEET ARRANGEMENTS
Our Company does not have any off-balance sheet arrangements.
INCOME TAXES
At December 28, 2003, we had federal and state net operating loss carry
forwards ("NOL's") for tax reporting purposes of approximately $19.0 million and
$13.3 million respectively, which if not used will begin to expire in 2011. In
addition, we had tax credit carryforwards of approximately $1.3 million, which
if not used, will begin to expire in 2011. Future changes in ownership, if any,
may place limitations on the use of these NOL's.
26
INFLATION
The primary inflationary factors affecting our operations include food and
beverage and labor costs. In addition, our leases require us to pay taxes,
maintenance, repairs and utilities and these costs are subject to inflationary
increases. We are also subject to interest rate changes based on market
conditions.
We believe low inflation rates have contributed to relatively stable costs.
There is no assurance, however, that low inflation rates will continue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company's financial instruments include cash and cash equivalents and
long-term debt. Our Company includes as cash and cash equivalents certificates
of deposits and all other investments with original maturities of three months
or less when purchased and which are readily convertible into known amounts of
cash. Our Company's cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these instruments. We have no
derivative financial instruments or derivative commodity instruments in our cash
and cash equivalents. The total outstanding long-term debt of our Company as of
December 28, 2003 was $12.7 million. Of the outstanding long-term debt,
approximately $1.3 million consists of a variable interest rate while the
remainder was subject to a fixed interest rate. Our Company does not see the
variable interest rate long-term debt as a significant interest rate risk. Some
of the food products purchased by us are effected by commodity pricing and are
therefore, subject to price volatility caused by weather, production problems,
delivery difficulties and other factors that are outside of our control. To
mitigate this risk in part, we have fixed price purchase commitments from our
vendors. In addition, we believe that substantially all of our food is available
from alternate sources which helps to control food commodity risks. We believe
we have the ability to increase or vary menu options offered in response to a
food product price increase.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Famous Dave's of America, Inc. are
included herein, beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 26, 2002, the Company dismissed Virchow, Krause & Company,
LLP, which had previously served as the Company's independent accountants.
The reports of the Company's principal accountant on the consolidated
financial statements of the Company for the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
The Company's audit committee and Board of Directors participated in, and
approved the decision to, change independent accountants on September 26, 2002.
In connection with its audit of the consolidated financial statements for
the 2001 and 2000 fiscal years ending December 30, 2001 and December 31, 2000,
respectively, and through September 26, 2002, there were no disagreements with
Virchow, Krause & Company, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Virchow, Krause & Company,
LLP, would have caused Virchow, Krause & Company, LLP to make reference to such
disagreements in their report on the financial statements for such years.
27
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(c) promulgated under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report. Based on
this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this form 10-K. The Company has
adopted a Code of Ethics applicable to its CEO, CFO and Controller. The Code of
Ethics is available on our website at www.famousdaves.com and a copy is
available free of charge to anyone requesting it.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information in response to this Item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item appears in our definitive proxy
statement for our 2004 annual meeting of shareholders under the caption "Fees
billed to Company by Its Independent Auditors," which information is
incorporated herein by reference.
28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits.
See "exhibit index" on the page following the consolidated financial
statements and related footnotes.
(b) Reports on Form 8-K.
During the Fourth Quarter of fiscal 2003, the Company filed four current
reports on Form 8-K as follows:
On October 6, 2003, we filed a Current Report on Form 8-K dated October 2,
2003 under Item 7 and 12, releasing preliminary financial information related to
the Third Quarter of fiscal 2003.
On October 23, 2003, we filed a Current Report on Form 8-K dated October
21, 2003 under Item 7 and 12, releasing financial information related to the
Third Quarter of fiscal 2003, including certain non-GAAP financial measures.
On November 19, 2003, we filed a Current Report on Form 8-K dated November
17, 2003 under Item 5 and 7, announcing the addition of Diana Garvis Purcel as
Famous Dave's new Chief Financial Officer, effective November 19, 2003.
On December 16, 2003, we filed a Current Report on Form 8-K dated December
15, 2003 under Item 5 and 7, announcing that David W. Anderson was confirmed by
the U.S. Senate as Assistant Secretary of the U.S. Department of the Interior
and Indian Affairs, and resigned as Chairman of the Board in connection with the
confirmation. In addition, K. Jeffrey Dahlberg was elected Chairman of the
Board, and F. Lane Cardwell, Jr. was elected to the Board of Directors to fill
the vacancy created by Mr. Anderson's resignation.
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Famous Dave's of America, Inc.:
We have audited the accompanying consolidated balance sheets of Famous Dave's of
America, Inc. and subsidiaries (the Company) as of December 28, 2003 and
December 29, 2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Famous
Dave's of America, Inc. and subsidiaries as of December 28, 2003 and December
29, 2002, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 6, 2004
F- 1
INDEPENDENT AUDITORS' REPORT
The Audit Committee, Board of Directors and Shareholders
Famous Dave's of America, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Famous Dave's of America, Inc. and
subsidiaries for the year ended December 30, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Famous Dave's of America, Inc. and subsidiaries for the year ended
December 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
January 30, 2002
F- 2
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 2003 AND DECEMBER 29, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 28, DECEMBER 29,
2003 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,964 $ 9,473
Accounts receivable, net 1,661 1,026
Inventories 1,599 1,775
Prepaid expenses and other current assets 3,126 1,276
-------- --------
TOTAL CURRENT ASSETS 16,350 13,550
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 47,147 51,861
OTHER ASSETS:
Notes receivable, less current portion 2,395 1,364
Deferred tax asset, less current portion 6,938 7,014
Other assets, net 937 1,028
-------- --------
$ 73,767 $ 74,817
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 358 $ 387
Current portion of capital leases 388 708
Accounts payable 2,035 3,459
Other current liabilities 4,528 3,227
-------- --------
TOTAL CURRENT LIABILITIES 7,309 7,781
LONG-TERM LIABILITIES:
Long-term debt, less current portion 12,349 12,422
Capital leases, less current portion 105 432
Financing leases 4,500 4,500
Other liabilities, net 2,632 2,390
-------- --------
TOTAL LIABILITIES 26,895 27,525
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
12,157,782 and 11,388,295 shares issued and outstanding 122 114
Additional paid-in capital 56,692 54,222
Accumulated deficit (9,942) (7,044)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 46,872 47,292
-------- --------
$ 73,767 $ 74,817
======== ========
See accompanying notes to consolidated financial statements.
F- 3
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002 2001
------------ ------------ ------------
REVENUE:
Restaurant sales, net $ 91,500 $ 86,378 $ 85,360
Franchise royalty revenue 4,567 3,027 1,270
Franchise fee revenue 1,139 1,205 851
Licensing and other revenue 534 210 192
------------ ------------ ------------
TOTAL REVENUE 97,740 90,820 87,673
------------ ------------ ------------
COSTS AND EXPENSES:
Food and beverage costs 28,014 27,355 26,980
Labor and benefits 27,586 25,252 23,834
Operating expenses 23,376 20,009 19,158
Total depreciation and amortization 4,840 4,630 4,463
Asset impairment and restructuring charges 4,238 --- ---
Pre-opening expenses 543 1,040 629
General and administrative 9,336 8,064 6,400
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 97,933 86,350 81,464
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (193) 4,470 6,209
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net (1,661) (1,038) (1,439)
Other income (expense), net (667) 423 367
Equity in loss of unconsolidated affiliate (2,155) (5,994) (1,029)
------------ ------------ ------------
TOTAL OTHER EXPENSE (4,483) (6,609) (2,101)
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (4,676) (2,139) 4,108
INCOME TAX BENEFIT 1,778 1,211 4,010
------------ ------------ ------------
NET (LOSS) INCOME $ (2,898) $ (928) $ 8,118
============ ============ ============
BASIC NET (LOSS) INCOME PER COMMON SHARE $ (0.25) $ (0.08) $ 0.81
============ ============ ============
DILUTED NET (LOSS) INCOME PER COMMON SHARE $ (0.25) $ (0.08) $ 0.75
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 11,771,584 11,334,997 9,973,227
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 11,771,584 11,334,997 10,879,233
============ ============ ============
See accompanying notes to consolidated financial statements.
F- 4
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(IN THOUSANDS)
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
-------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 2000 9,346 $ 93 $ 44,202 $(14,234) $ 30,061
Issuance of common stock (net of
expenses of $678) 1,000 10 5,312 --- 5,322
Exercise of stock options 774 8 1,881 --- 1,889
Exercise of warrants 60 1 298 --- 299
Tax benefit for stock options exercised --- --- 1,000 --- 1,000
Net income --- --- --- 8,118 8,118
-------- -------- -------- -------- --------
BALANCE - DECEMBER 30, 2001 11,180 112 52,693 (6,116) 46,689
Issuance of common stock 26 --- 206 --- 206
Exercise of stock options 137 1 305 --- 306
Exercise of warrants 45 1 270 --- 271
Tax benefit for stock options exercised --- --- 707 --- 707
Options issued below market price --- --- 41 --- 41
Net loss --- --- --- (928) (928)
-------- -------- -------- -------- --------
BALANCE - DECEMBER 29, 2002 11,388 114 54,222 (7,044) 47,292
Exercise of stock options 770 8 2,027 --- 2,035
Tax benefit for stock options exercised --- --- 443 --- 443
Net loss --- --- --- (2,898) (2,898)
-------- -------- -------- -------- --------
BALANCE - DECEMBER 28, 2003 12,158 $ 122 $ 56,692 $ (9,942) $ 46,872
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F- 5
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 2003, DECEMBER 29, 2002, AND DECEMBER 30, 2001
(IN THOUSANDS)
2003 2002 2001
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(2,898) $ (928) $ 8,118
Adjustments to reconcile net (loss) income to cash flows provided by operations:
Depreciation and amortization 4,840 4,630 4,463
Gain on disposal of property (112) (549) (155)
Asset impairment and restructuring charges 3,687 --- ---
Deferred tax asset (1,778) (1,211) (4,010)
Deferred rent 568 630 506
Equity in loss of unconsolidated affiliate 2,155 5,994 1,029
Other noncash items effecting earnings 67 --- ---
Changes in operating assets and liabilities:
Accounts receivable, net (648) 440 (896)
Inventories (42) (506) (83)
Prepaids and other current assets 547 (70) (543)
Deposits 60 36 245
Accounts payable (1,635) 1,010 (1,259)
Other current liabilities 1,625 (6) 393
------- ------- -------
Cash flows provided by operations 6,436 9,470 7,808
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, equipment, and leasehold improvements 685 3,083 870
Purchases of property, equipment and leasehold improvements (4,321) (9,490) (6,168)
Investment and repayments of advances in unconsolidated affiliate (2,125) (1,255) (2,772)
Advances on notes receivable --- (941) (167)
Payments received on notes receivable 139 2,891 68
------- ------- -------
Cash flows used for investing activities (5,622) (5,712) (8,169)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for debt issuance costs (9) (44) (35)
Net payments on line of credit --- (100) (444)
Proceeds from capital lease obligations --- --- 1,013
Payments on long term debt (1,703) (1,153) (1,233)
Payments on capital lease obligations (646) (963) (947)
Proceeds from exercise of stock options and warrants 2,035 577 2,188
Proceeds from issuance of common stock, net --- --- 5,322
------- ------- -------
Cash flows (used for) provided by financing activities (323) (1,683) 5,864
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 491 2,075 5,503
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,473 7,398 1,895
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,964 $ 9,473 $ 7,398
======= ======= =======
See accompanying notes to consolidated financial statements.
F- 6
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - We, Famous Dave's of America, Inc. ("Famous Dave's" or
the "Company"), were incorporated in Minnesota on March 14, 1994. We develop,
own, operate and franchise restaurants under the name "Famous Dave's". At
December 28, 2003, we had 38 company-owned restaurants and 54
franchise-operated restaurants in 23 states, and an additional 147 signed
franchise-operated development agreements with 15 of them in various stages of
development.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. Any inter-company transactions and balances have been eliminated
in consolidation.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FINANCIAL INSTRUMENTS - Due to their short-term nature, the carrying value
of our current financial assets and liabilities approximates their fair value.
The fair value of long-term debt approximates the carrying amounts based upon
our expected borrowing rate for debt with similar remaining maturities and
comparable risk.
SEGMENT REPORTING - We have company-owned and franchise-operated
restaurants in the United States, and operate within the single industry segment
of casual dining. Because we manage both types of restaurants in a similar
manner and allocate resources to each based upon their relative size to the
company we have aggregated our operating segments into a single reporting
segment.
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 28, 2003 (fiscal 2003),
December 29, 2002 (fiscal 2002) and December 30, 2001 (fiscal 2001) were all 52
weeks.
CASH AND CASH EQUIVALENTS - Cash equivalents include certificates of
deposit and all other investments with original maturities of three months or
less or which are readily convertible into known amounts of cash.
ACCOUNTS RECEIVABLE - We provide an allowance for uncollectible accounts on
accounts receivable. The allowance for uncollectible accounts was $98,438 and
$125,000 at December 28, 2003 and December 29, 2002, respectively. We believe
all accounts receivable in excess of the allowance are fully collectible. If
accounts receivable in excess of the provided allowance are determined
uncollectible, they are charged to expense in the year that determination is
made.
INVENTORIES - Inventories consist principally of food, beverages and retail
goods, and are recorded at the lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Property, equipment and
leasehold improvements are recorded at cost. Improvements are capitalized while
repair and maintenance costs are charged to operations when incurred. Furniture,
fixtures, equipment and antiques are depreciated or amortized using the
straight-line method over estimated useful lives ranging from 3-7 years, while
buildings are depreciated over 30 years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term, including
renewal options, or the estimated useful life of the assets.
DEBT ISSUANCE COSTS - Debt issuance costs are amortized to interest expense
over the term of the related financing on a straight-line basis, which
approximates the interest method.
CAPITALIZED INTEREST - Interest costs capitalized during the construction
period of restaurants were approximately $122,000, $441,000, and $314,000 for
fiscal 2003, 2002 and 2001, respectively.
F- 7
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS - Advertising costs are charged to expense as incurred.
Advertising costs were approximately $2.4 million, $1.9 million, and $1.8
million for fiscal 2003, 2002 and 2001, respectively, and are included in
operating expenses in the consolidated statements of operations.
PRE-OPENING EXPENSES - All start-up and pre-opening costs are expensed as
incurred.
RECOVERABILITY OF PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" 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 its fair value,
as determined by the discounted 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 as the amount by which the carrying amount of the
restaurant exceeds its fair value. Fair value is an estimate based on the best
information available including estimated future cash flows, expected growth
rates in comparable restaurant sales, remaining lease terms 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 undiscounted future cash flows. Accordingly, actual
results could vary significantly from such estimates. Restaurant sites to be
disposed of are reported at the lower of their carrying amount or fair value on
a restaurant-by-restaurant basis, less estimated costs to sell. Our December 28,
2003 consolidated balance sheet reflects approximately $1.3 million of assets
held for sale, which includes the land and building for our Mesquite location
that was recently closed. During fiscal 2003, we recorded impairment charges of
approximately $3.7 million on five under-performing restaurants, two of which
were subsequently closed and two of which were subsequently sold. There were no
impairment charges recorded during fiscal 2002 or fiscal 2001.
NET INCOME (LOSS) PER COMMON SHARE - Basic net income (loss) per common
share ("EPS") is computed by dividing the net income (loss) by the weighted
average number of common shares outstanding for the reporting period. Diluted
EPS equals net income (loss) divided by the sum of the weighted average number
of shares of common stock outstanding plus all additional common stock
equivalents relating to stock options and warrants when dilutive.
Following is a reconciliation of basic and diluted net income (loss) per
common share:
Fiscal Year
------------------------------------------
2003 2002 2001
-------- -------- --------
NET (LOSS) INCOME PER COMMON SHARE - BASIC:
Net (loss) income $ (2,898) $ (928) $ 8,118
Weighted average shares outstanding 11,772 11,335 9,973
Net (loss) income per common share - basic $ (0.25) $ (0.08) $ 0.81
NET (LOSS) INCOME PER COMMON SHARE - DILUTED:
Net (loss) income $ (2,898) $ (928) $ 8,118
Weighted average shares outstanding 11,772 11,335 9,973
Dilutive Common stock equivalents --- --- 906
Weighted average shares and
potential diluted shares outstanding 11,772 11,335 10,879
Net (loss) income per common share - diluted $ (0.25) $ (0.08) $ 0.75
F- 8
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Options to purchase approximately 1.2 million shares of common stock with a
weighted average exercise price of $3.94 and warrants to purchase approximately
95,000 shares of common stock with a weighted average exercise price of $6.63
were excluded from the fiscal 2003 diluted EPS computation because they were
anti-dilutive.
Options to purchase approximately 1.9 million shares of common stock with a
weighted average exercise price of $3.56, and warrants to purchase approximately
95,000 shares of common stock with a weighted average exercise price of $6.63
were excluded from the fiscal 2002 diluted EPS computation because they were
anti-dilutive.
Options to purchase approximately 50,000 shares of common stock with a
weighted average exercise price of $7.54, and warrants to purchase 66,667 shares
of common stock with a weighted average exercise price of $7.00 were excluded
from the fiscal 2001 diluted computation because they were anti-dilutive.
STOCK-BASED COMPENSATION - In accordance with Accounting Principles Board
(APB) Opinion No. 25, we use the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of Famous Dave's common stock at the date of
grant over the amount the employee must pay for the stock. Our policy is to
grant stock options at fair value at the date of grant. No compensation expense
has been recognized for options issued to employees in fiscal years 2003, 2002
and 2001. The following table illustrates the effect on net income (loss) and
net income (loss) per common share if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
($'s in 000's, except per share data)
Fiscal Year
------------------------------------
2003 2002 2001
-------- -------- --------
Net (loss) income as reported $ (2,898) $ (928) $ 8,118
Less: Compensation expense
determined under the fair value
method, net of tax (1,057) (880) (2,150)
-------- -------- --------
Pro forma net (loss) income $ (3,955) $ (1,808) $ 5,968
======== ======== ========
Net (loss) income per common share:
Basic EPS - as reported $ (0.25) $ (0.08) $ 0.81
Basic EPS - pro forma (0.34) (0.16) 0.60
Diluted EPS - as reported (0.25) (0.08) 0.75
Diluted EPS - pro forma (0.34) (0.16) 0.55
In determining the compensation cost of the options granted during fiscal
2003, 2002 and 2001, the fair value of each option grant has been estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
Fiscal Year
------------------------------------------
2003 2002 2001
-------- -------- --------
Risk free interest rate 4.2% 4.7% 5.0%
Expected life of options 10 years 10 years 10 years
Expected volatility 102.3% 92.9% 104.6%
Dividend yield 0.0% 0.0% 0.0%
F- 9
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE ARRANGEMENTS - Individual franchise arrangements generally
include initial fees, as well as royalty fees based upon a percentage of sales.
Our franchisees are granted the right to operate a restaurant using our system
for a range of 10 to 20 years. Operating results at franchise-operated
restaurants, including restaurant revenue and related expenses, are the
responsibility of the franchise owner. Franchisees pay a non-refundable initial
fee for each franchised location, which is recognized when we, the franchisor,
have performed substantially all of our obligations. The amount of
non-refundable initial franchise fee income was approximately $1.1 million, $1.2
million and $851,000, for fiscal years 2003, 2002, and 2001 respectively.
Franchising royalty fee income was approximately $4.6 million, $3.0 million, and
$1.3 million for fiscal 2003, 2002 and 2001, respectively.
LICENSING AGREEMENTS AND OTHER INCOME - We have licensing agreements for
our retail products, one which expires in April 2010 with a renewal option of
five years, and the other which is indefinite. Licensing revenue for fiscal
years 2003, 2002 and 2001 was approximately $209,000, $210,000 and $192,000,
respectively.
Periodically, we provide additional services, beyond the general franchise
agreement, to our franchised operations. The cost of these services are
reflected in an invoice to the franchisee and are generally payable on net 30
day terms. Other income for fiscal year 2003 was approximately $325,000. There
was no additional income recorded in fiscal years 2002 and 2001.
REVENUE RECOGNITION - We record revenue at the time food and liquor is
served. We record retail sales at the time items are delivered to the customer.
ACCOUNTING PRONOUNCEMENTS AND PASSED LEGISLATION - In May 2003, the
Financial Accounting Standards Board (FASB) issued SFAS 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The changes in this
statement will result in a more complete depiction of an entity's liabilities
and equity and will, thereby, assist investors and creditors in assessing the
amount, timing, and likelihood of potential future cash outflows and equity
share issuances. Reliability of accounting information will be improved by
providing a portrayal of an entity's capital structure that is unbiased,
verifiable, and more representational than information reported prior to
issuance of this statement. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We currently do not have instruments impacted by the adoption of this
statement and therefore the adoption did not have an effect on our consolidated
financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 is an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", and
addresses consolidation of business enterprises of variable interest entities.
FIN 46 applies immediately to variable interest entities created or obtained
after January 31, 2003 and it applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
During fiscal 2003 we sold 3 of our Atlanta stores to a franchisee, and recorded
a note receivable for approximately $1.3 million. We reviewed the transaction in
accordance with FIN 46, and determined that we did not have a variable interest
entity that would require consolidation under FIN 46.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is the most comprehensive since the passage of the Securities Act of
1933 and Securities Exchange Act of 1934. It has far reaching effects on the
standards of integrity for corporate management, board of directors, and
executive management. The Act will require additional disclosures,
certifications and procedures. We do not expect any material adverse effect on
our Company as a result of the passage of this legislation.
F- 10
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 addresses the disclosure requirements of a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. FIN 45 also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN 45 were effective for our Company for the year ending December 31, 2002.
The liability recognition requirements will be applicable prospectively to all
guarantees issued or modified after January 1, 2003. We currently do not have
guarantees within the scope of this pronouncement, and therefore this
pronouncement did not have a material impact on our Company's financial position
or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred versus the date our Company commits to
an exit plan. In addition, SFAS No. 146 states the liability should be initially
measured at fair value. The requirements of SFAS No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. During fiscal
year 2003, our Company incurred approximately $558,000 in restructuring disposal
expenses related to the closing of two units in Texas. There were no costs
associated with disposal or exit activity in 2002 or 2001.
(2) INVENTORIES
Inventories consisted approximately of the following at:
December 28, December 29,
2003 2002
----------- -----------
Food and beverage $ 540,000 $ 554,000
Retail goods 121,000 129,000
Smallwares and supplies 938,000 1,092,000
----------- -----------
$ 1,599,000 $ 1,775,000
=========== ===========
F- 11
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(3) NOTES RECEIVABLE
Notes receivable consisted of the following at:
December 28, December 29,
2003 2002
------------ ------------
Old School BBQ, Inc. - monthly installments of approximately $5,700
including interest at 9.0%, due November 2012, secured by property and
equipment and guaranteed by the franchise owners. $ 422,000 $ 452,000
Michael's First, LLC - monthly installments of approximately
$5,000 including interest at 9.6%, due May 2010, secured by
property and equipment and guaranteed by the franchise owner. 287,000 318,000
River Valley BBQ, Inc. - quarterly interest only payments through
December 2003, quarterly installments of approximately $19,000
including interest at prime plus 1.50% (5.50% at December 28, 2003 and
5.75% at December 29, 2002), due December 2006, unsecured. 225,000 225,000
Famous Ribs of Georgia, LLC, Famous Ribs of Snellville, LLC,
Famous Ribs of Marietta, LLC, Famous Ribs of Alpharetta, LLC, -
$1,300,000 amortized over 9 years at 3.27% interest, due November
2012, secured by property and equipment and guaranteed by the
franchise owner. 1,300,000 ---
Competition BBQ, Inc. - monthly installments of approximately $398
including interest at 7.0%, due May 2004, unsecured. 18,000 59,000
Line of credit for up to $50,000 - Rivervalley BBQ, Inc. - monthly
interest only through December 2007 with total outstanding balance
due December 2007 including interest at prime plus 1.50% (5.50% at
December 28, 2003 and 5.75% at December 29, 2002), unsecured. 50,000 50,000
Utah BBQ, Inc. - monthly installments of approximately $900 and $8,600
including interest at 9.5%, due July 2007, secured by property and
equipment and guaranteed by the franchise owners. 345,000 416,000
----------- -----------
Total notes receivable 2,647,000 1,520,000
Current maturities (252,000) (156,000)
----------- -----------
Long-term portion of notes receivable $ 2,395,000 $ 1,364,000
=========== ===========
Future principal payments to be received on notes receivable are
approximately as follows:
Fiscal Year
-----------
2004 $ 252,000
2005 245,000
2006 280,000
2007 342,000
2008 240,000
Thereafter 1,288,000
-----------
Total $ 2,647,000
===========
F- 12
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted approximately of
the following at:
December 28, December 29,
2003 2002
------------ ------------
Land, buildings and improvements $ 46,167,000 $ 46,846,000
Furniture, fixtures and equipment 20,093,000 20,103,000
Antiques 2,083,000 1,952,000
Accumulated depreciation and amortization (20,499,000) (16,277,000)
Reserve for loss on restaurants to be disposed of (1,978,000) (804,000)
Land and building held for sale 1,281,000 ---
------------ ------------
47,147,000 51,820,000
Construction in progress --- 41,000
------------ ------------
$ 47,147,000 $ 51,861,000
============ ============
Depreciation and amortization expense on property, equipment and leasehold
improvements was approximately $4.8 million, $4.6 million and $4.5 million for
fiscal years 2003, 2002 and 2001, respectively.
(5) INVESTMENT IN UNCONSOLIDATED AFFILIATE
Through February 26, 2003 we held an investment in an unconsolidated
affiliate which related to our Company's 40% investment in FUMUME, LLC (FUMUME),
accounted for on the equity method of accounting. FUMUME operated two Isaac
Hayes themed restaurants, one each in Chicago, Illinois and Memphis, Tennessee.
In May 2001 our Company contributed (i) $825,507 in working capital, (ii) the
assets comprising Famous Dave's Ribs and Blues Club in Chicago and (iii) certain
rights to use Famous Dave's various licensed marks. Although FUMUME was
responsible for the payment of the rent for the Chicago club, our Company
remained contingently liable under the lease with the landowner. Our Company had
an agreement with FUMUME to manage and operate the Chicago club. In addition,
FUMUME opened a second club in Memphis in October 2001. The difference between
the investment and the amount of the underlying net assets of FUMUME relates to
monies our Company funded for leasehold improvements pursuant to the FUMUME
operating agreement which were being amortized over the lesser of the lease term
or the estimated useful life of the related improvements. Our Company recorded
equity in loss of unconsolidated affiliate based on the greater of 40% of the
net loss for the years ended December 29, 2002 and December 30, 2001 or 100% of
the cash loss our Company was obligated to fund pursuant to the FUMUME operating
agreement.
For the year ended December 29, 2002, we recorded 100% of the cash losses,
or approximately $1.1 million. We also recorded an impairment reserve of $4.8
million, of which $4.6 million was included in Equity in Losses and Impairment
Reserve in Unconsolidated Affiliate. The impairment charge reflected our
conclusion that we would not be able to recover the carrying value of the
investment in the unconsolidated subsidiary. For the year ended December 30,
2001, we recorded 100% of the cash loss, which approximated $1.0 million.
On February 26, 2003, we disposed of our 40% investment in FUMUME, thereby
terminating our obligations to fund cash operating losses. On March 21, 2003, we
completed a transaction with the landlord at the Chicago location that
terminated our obligations under the lease. Losses of approximately $2.2 million
relating to this equity investment were recorded during the first quarter of
fiscal year 2003 and included lease termination fees, and rent, property tax and
legal fees through April 30, 2003, of approximately $1.6 million.
F- 13
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(6) LONG-TERM DEBT
Long-term debt consisted approximately of the following at:
December 28, December 29,
2003 2002
------------ ------------
Notes payable - GE Capital Franchise Finance Corporation - monthly
installments from approximately $13,000 to $20,000 including interest
between 8.20% and 10.53%, due between February 2020 and October 2023,
secured by property and equipment. $ 11,318,000 $ 9,932,000
Notes payable - GE Capital Franchise Finance Corporation -
monthly installments from approximately $3,800 to $10,000
including interest between 3.80% and 3.89% plus the annual
LIBOR rate (effective rate between 5.30% and 5.39% at
December 28, 2003, and between 5.24% and 5.33% at December
29, 2002), due between October 2009 and May 2017,
secured by property and equipment. 1,389,000 2,877,000
------------ ------------
Total long-term debt 12,707,000 12,809,000
Capital lease obligations (Note 8) 493,000 1,140,000
Less current maturities (746,000) (1,095,000)
------------ ------------
Long-term debt $ 12,454,000 $ 12,854,000
============ ============
Required principal payments on long-term debt over the next five years,
excluding capital lease obligations are as follows:
Fiscal Year
-----------
2004 $ 358,000
2005 392,000
2006 427,000
2007 466,000
2008 507,000
Thereafter 10,557,000
------------
Total $ 12,707,000
============
(7) FINANCING LEASE OBLIGATION
We have a $4.5 million financing obligation involving three existing
restaurants as a result of a sale/leaseback transaction. Under this financing,
we are obligated to make monthly interest payments of $42,917 (which increases
4.04% every two years) for a minimum of 20 years. We have the option to purchase
the leased restaurants for the greater of $4.5 million or fair market value of
the properties at the date of purchase at any time or renew the lease for two
additional five-year terms. Based upon our continued involvement in the leased
property and its purchase option, the transaction has been accounted for as a
financing arrangement. Accordingly, the three existing restaurants are included
in property, equipment and leasehold improvements and are being depreciated, and
a portion of the monthly payments are accounted for as interest expense in the
consolidated statements of operations. The principal financing lease obligation
payment of $4.5 million is due in March 2019.
F- 14
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(8) CAPITAL AND OPERATING LEASE OBLIGATIONS
Our assets under capital leases consist of agreements for furniture,
equipment and leasehold improvements. Capital leases outstanding under this
agreement bear interest at an average rate of 8.1% and expire through February
2006. The obligations are secured by the property under lease. Total cost and
accumulated amortization of the capital leased assets were approximately $4.3
million and $3.7 million at December 28, 2003, and approximately $4.3 million
and $2.8 million at December 29, 2002, respectively.
We have various operating leases for existing and future restaurants and
corporate office space with lease terms ranging from 3 to 35 years, including
lease options. Eight of the leases require percentage rent of between 3% and 7%
of annual gross sales, typically above a natural breakeven point, in addition to
the base rent. All of these leases contain provisions for payments of real
estate taxes, insurance and common area maintenance costs. Total occupancy lease
cost for fiscal years 2003, 2002 and 2001, including rent, common area
maintenance costs, real estate taxes and percentage rent, was approximately $5.6
million, $4.6 million, and $4.3 million, respectively. Percentage rent was
approximately $128,000, $145,000 and $188,000 for fiscal years 2003, 2002 and
2001, respectively.
Future minimum lease payments existing at December 28, 2003 were:
Fiscal Year Operating Leases Capital Leases
- -------------------------------------- ---------------- --------------
2004 $ 2,530,000 $ 418,000
2005 2,587,000 104,000
2006 2,674,000 8,000
2007 2,666,000 ---
2008 2,639,000 ---
Thereafter 31,727,000 ---
------------ ---------
Total future minimum lease commitments $ 44,823,000 $ 530,000
============
Less: Interest at 4.9% - 15.4% 37,000
---------
Total capital lease obligations $ 493,000
=========
(9) RELATED PARTY TRANSACTIONS
FAMOUS RIBS OF GEORGIA, SNELLVILLE, MARIETTA AND ALPHARETTA, LLC - In
November 2003, we executed a signed purchase agreement with our former President
and CEO, Martin O'Dowd, to purchase our three Atlanta area restaurants and
operate them under franchise agreements. As part of the purchase price, we
executed a signed note receivable in the amount of $1.3 million, with Mr. O'Dowd
expected to submit periodic principal and interest payments, to us, over nine
years. In addition, Mr. O'Dowd entered into an area development agreement to
develop additional Famous Dave's franchise restaurants in defined areas of
Georgia, and transferred his rights to the North Carolina market back to us.
S&D LAND HOLDINGS, INC. - S&D Land Holdings, Inc. (S&D) is a company wholly
owned by our founding shareholder and former Chairman. Through May 29, 2003, we
subleased three real estate units from S&D. On May 30, 2003, we acquired all of
S&D's leasehold interest in one of these properties and negotiated a new
operating lease directly with the landlord. We paid S&D $243,707 as full
consideration for the assignment of the lease and termination of the sublease.
This amount represented the unamortized balance of S&D's original purchase price
of the leasehold interest utilizing the 10% interest factor that was assumed by
S&D and us on January 1, 1996 at the time the sublease was executed.
F- 15
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
On October 28, 2003, S&D assigned its leasehold interest in another one of
the properties to one of our franchisees who had previously been subleasing the
property from us. As a result of this transaction and pursuant to the terms of
the existing agreements, our sub-lease with S&D at that location was also
terminated. The third and final real estate lease agreement with S&D terminated
on November 5, 2003 when an unrelated party purchased S&D's leasehold interest
in the property.
(10) STOCK OPTIONS AND WARRANTS
As part of our acquisition of four restaurants during fiscal year 1999, we
issued 200,000 warrants which expire in December 2004. At December 28, 2003,
there were approximately 95,000 stock warrants outstanding and exercisable at an
average exercise price of $6.63 per share.
We have adopted a 1995 Stock Option and Compensation Plan, a 1997 Employee
Stock Option Plan and a 1998 Director Stock Option Plan (the Plans), pursuant to
which we grant options and other awards to retain eligible participants. We have
also granted options outside of the Plans in limited situations. Under the
plans, an aggregate of 3.5 million shares of our Company's common stock are
available for issuance. Stock options, stock appreciation rights, restricted
stock, other stock and cash awards may be granted under the Plans. In general,
options vest over a period of five years and expire 10 years from the date of
grant.
Information regarding our Company's stock options is summarized below:
Weighted
Number of Average
Options Exercise Price
---------- --------------
Options outstanding - December 31, 2000 2,291,000 $ 2.42
Granted 373,000 4.34
Canceled or expired (143,000) 2.50
Exercised (774,000) 2.44
--------- ------
Options outstanding - December 30, 2001 1,747,000 2.82
Granted 415,000 6.82
Canceled or expired (147,000) 5.10
Exercised (138,000) 2.22
--------- ------
Options outstanding - December 29, 2002 1,877,000 3.56
Granted 450,000 4.34
Canceled or expired (357,000) 5.65
Exercised (770,000) 2.64
--------- ------
Options outstanding - December 28, 2003 1,200,000 $ 3.94
========= ======
Options exercisable - December 30, 2001 1,017,000 $ 2.59
========= ======
Options exercisable - December 29, 2002 1,259,000 $ 2.71
========= ======
Options exercisable - December 28, 2003 630,000 $ 3.28
========= ======
Weighted average fair value of options granted
during the year ended December 28, 2003 $ 1.94
======
Weighted average fair value of options granted
during the year ended December 29, 2002 $ 5.80
======
Weighted average fair value of options granted
during the year ended December 30, 2001 $ 3.98
======
F- 16
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(10) STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 28, 2003:
Options
----------------------------------------------------------------------------------------
Total outstanding Exercisable
----------------------------------------------- --------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- ------------- ----------- ----------- --------- ----------- --------------
$1.00 - $2.50 345,000 5.04 years $2.08 326,000 $2.07
$2.63 - $3.94 247,000 6.56 years 3.41 164,000 3.50
$4.00 - $6.00 448,000 9.01 years 4.51 66,000 4.05
$6.60 - $8.20 160,000 8.30 years 7.17 74,000 7.48
--------- -------
$1.00 - $8.20 1,200,000 6.53 years $3.94 630,000 $3.28
========= =======
(11) INCOME TAXES
At December 28, 2003, we had cumulative net operating loss carryforwards of
approximately $19.0 million for federal and approximately $13.3 million for
state, which will begin to expire in 2011 if not used. We also had cumulative
tax credit carry-forwards of approximately $1.3 million which, if not used, will
begin to expire in 2011.
The benefit from income taxes consisted of the following:
Fiscal Year
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Current income tax benefit --- --- ---
Deferred income tax benefit $ 1,778,000 $ 1,211,000 $ 4,010,000
----------- ----------- -----------
Total benefit from income taxes $ 1,778,000 $ 1,211,000 $ 4,010,000
=========== =========== ===========
Deferred taxes, detailed below, recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for financial
statement purposes and such amounts measured in accordance with tax laws.
Realization of the net operating loss carry-forwards and other deferred tax
temporary differences are contingent on future taxable earnings. During fiscal
2003, our deferred tax asset was reviewed for expected utilization using a "more
likely than not" approach as required by SFAS No. 109, "Accounting for Income
Taxes" by assessing the available positive and negative evidence surrounding its
recoverability. We believe that the realization of the deferred tax asset is
more likely than not based on the expectations that our Company will generate
the necessary taxable income beginning in fiscal 2004.
F- 17
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(11) INCOME TAXES (CONTINUED)
Our Company's deferred tax assets are as follows at:
December 28, December 29,
2003 2002
----------- -----------
Net operating loss carry-forwards $ 7,151,000 $ 5,055,000
Property and equipment basis difference 1,043,000 950,000
Tax credit carryovers 1,290,000 1,009,000
Other (261,000) ---
----------- -----------
Total deferred tax asset 9,223,000 7,014,000
Less: current portion 2,285,000 ---
----------- -----------
Deferred tax asset, long-term $ 6,938,000 $ 7,014,000
=========== ===========
Reconciliation between the statutory rate and the effective tax rate for
the fiscal years is as follows:
Fiscal Year
------------------------------------------
2003 2002 2001
------- ------- -------
Federal statutory tax rate (34.0%) (34.0%) 35.0%
State taxes, net of federal benefit (5.0%) (5.0%) 6.0%
Tax effect of permanent differences 3.6% 5.9% 3.7%
Tax effect of tip credit (6.1%) (13.1%) (5.7%)
Other 3.5% (10.5%) ---
Change in valuation allowance --- --- (136.6%)
----- ----- ------
Effective tax rate (38.0%) (56.7%) (97.6%)
===== ===== ======
F- 18
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(12) SUPPLEMENTAL CASH FLOWS INFORMATION:
Fiscal Year
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash paid for interest $1,786,000 $1,402,000 $1,674,000
========== ========== ==========
Cash paid for taxes $ 6,000 $ 141,000 $ 122,000
========== ========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property, equipment and leasehold improvements
purchased with notes payable $1,600,000 $4,377,000 $1,483,000
========== ========== ==========
Deposits transferred to investment in
unconsolidated affiliate $ --- $ --- $ 107,000
========== ========== ==========
Property and equipment transferred to investment
in unconsolidated affiliate $ --- $ --- $2,665,000
========== ========== ==========
Deferred tax asset related to tax benefit of stock
options exercised $ 443,000 $ 707,000 $1,000,000
========== ========== ==========
Common stock issued in connection with
restaurants acquired $ --- $ 206,000 $ ---
========== ========== ==========
Notes receivable in connection with sale of
restaurants, net of deferred gain recorded $1,300,000 $2,187,000 $ ---
========== ========== ==========
Equipment purchased under capital lease
obligation $ --- $ 45,000 $2,382,000
========== ========== ==========
(13) RETIREMENT SAVINGS PLAN
We have a pre-tax salary reduction/profit-sharing plan under the provisions
of Section 401(k) of the Internal Revenue Code, which covers employees meeting
certain eligibility requirements. Currently, we match 30% of the employee's
contribution up to 9% of their earnings. Employer matching contributions were
approximately $96,000, $61,000, and $52,000 for fiscal years 2003, 2002 and
2001, respectively.
(14) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS - We are involved in legal actions in the ordinary course
of business. Although the outcome of any such legal actions cannot be
predicted, we believe that there are no pending legal proceedings against or
involving our Company for which the outcome is likely to have a material adverse
effect upon our financial position or results of operations.
EMPLOYMENT AGREEMENT - On July 25, 2003, we entered into an employment
agreement with our Chief Executive Officer. The agreement requires minimum
annual compensation of $450,000 and has a term of two years commencing on
August 11, 2003.
F- 19
FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2003, DECEMBER 29, 2002 AND DECEMBER 30, 2001
(15) SELECTED QUARTERLY DATA - UNAUDITED
The following represents unaudited selected quarterly financial information
for fiscal years 2003 and 2002:
($ in 000's, except per share data)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------- ------------------- ------------------ -------------------
2003 2002 2003 2002 2003 2002 2003 2002
------- ------- ------- ------- ------- ------- ------- -------
Revenue $23,007 $21,206 $25,941 $24,207 $25,970 $23,868 $22,822 $21,539
Income (loss) from
operations 776 1,226 (1,505) 2,020 1,247 1,202 (710) 22
Net (loss) income (1,095) 791 (1,503) 1,071 478 (2,560) (779) (230)
Basic Net (loss) income
per common share (0.10) 0.07 (0.13) 0.09 0.04 (0.22) (0.06) (0.02)
Diluted net (loss) income
per common share (0.10) 0.07 (0.13) 0.09 0.04 (0.22) (0.06) (0.02)
F- 20
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Articles of Incorporation, incorporated by reference from Exhibit 3.1 to
our Registration Statement on Form SB-2 (File No. 333-10675) filed with
the Securities and Exchange Commission on August 23, 1996
3.2 Bylaws, incorporated by reference from Exhibit 3.2 to the Registration
Statement on Form SB-2 (File No. 333-10675) filed on August 23, 1996
10.1 Trademark License Agreement between Famous Dave's of America, Inc. and
Grand Pines Resorts, Inc., incorporated by reference from Exhibit 10.11
to the Registration Statement on Form SB-2 (File No. 333-10675) filed on
August 23, 1996
10.2 Agreement, dated as of January 21, 2000, by and between S&D Land
Holdings, Inc., Grand Pines Resorts, Inc. and Famous Dave's of America,
Inc., incorporated by reference from Exhibit 10.19 to Form 10-Q filed
May 16, 2000
10.3 Promissory Note, dated January 21, 2000, by Famous Dave's of America,
Inc. and payable to S&D Land Holdings, Inc., in the initial principal
amount of $750,000, incorporated by reference from Exhibit 10.20 to Form
10-Q filed May 16, 2000
10.4 Loan Agreement, dated as of January 21, 2000, by and between FFCA
Acquisition Corporation and MinWood Partners, Inc., incorporated by
reference from Exhibit 10.21 to Form 10-Q filed May 16, 2000
10.5 Master Lease, dated as of January 21, 2000, by and between MinWood
Partners, Inc. and Famous Dave's of America, Inc., incorporated by
reference from Exhibit 10.22 to Form 10-Q filed May 16, 2000
10.6 Loan Agreement, dated as of August 4, 2000, by and between FFCA Funding
Corporation and FDA Properties, Inc., incorporated by reference from
Exhibit 10.13 to Form 10-K filed March 29, 2001
10.7 Master Lease, dated as of August 4, 2000, by and between FDA Properties,
Inc. and Famous Dave's of America, Inc., incorporated by reference from
Exhibit 10.5 to Form 10-K filed March 29, 2001
10.8 Amendment No. 1 to Employment Agreement dated September 1, 2001 between
Famous Dave's of America, Inc. and Martin J. O'Dowd, incorporated by
reference from Exhibit 10.1 to Form 10-Q filed November 14, 2001
10.9 Agreement and Assignment of Lease Rights dated May 30, 2003 by and
between S&D Land Holdings, Inc. and the Company, incorporated by
reference from Exhibit 10.1 to Form 10-Q filed August 12, 2003
10.10 1997 Employee Stock Option Plan (as amended through May 22, 2002),
incorporated by reference from Exhibit 10.11 to Form 10-Q filed August
14, 2002
10.11 1995 Stock Option and Compensation Plan (as amended through May 22,
2002), incorporated by reference from Exhibit 10.2 to Form 10-Q filed
August 14, 2002
10.12 1998 Director Stock Option Plan (as amended through May 22, 2002),
incorporated by reference from Exhibit 10.3 to Form 10-Q filed August
14, 2002
10.13 Employment Agreement dated July 25, 2003 by and between Famous
Dave's of America, Inc. and David Goronkin, incorporated by
reference to Exhibit 10.1 to Form 10-Q filed November 10,
2003
21 Subsidiaries of Famous Dave's of America, Inc.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Virchow, Krause & Company, LLP
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. ss. 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FAMOUS DAVE'S OF AMERICA, INC.
("REGISTRANT")
Dated: March 29, 2004 By /s/ David Goronkin
------------------------
David Goronkin
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on March 29, 2004 by the following persons on behalf
of the Registrant, in the capacities indicated.
Signature Title
/s/ David Goronkin Chief Executive Officer, President
- ------------------ and Director (principal executive officer)
David Goronkin
/s/ Diana Garvis Purcel Vice President, Chief Financial Officer (principal
- ----------------------- financial and accounting officer) and Secretary
Diana Garvis Purcel
/s/ K. Jeffrey Dahlberg Director
- -----------------------
K. Jeffrey Dahlberg
/s/ Richard L. Monfort Director
- ----------------------
Richard L. Monfort
/s/ Dean A. Riesen Director
- ------------------
Dean A. Riesen
/s/ Mary L. Jeffries Director
- --------------------
Mary L. Jeffries
/s/ F. Lane Cardwell, Jr. Director
- -------------------------
F. Lane Cardwell, Jr.