ITEM 1B.
UNRESOLVED STAFF COMMENTS
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 restaurant. The company did not open any restaurants in 2009, however, the restaurants opened in 2008 were approximately 6,000 square feet, and had approximately 175 seats, with an additional 50 seats in the bar, and 32 additional seats on the patio. In addition to this restaurant design, that we currently offer, we have a variety of other development options. We have a 5,000 square foot package that can be built as a free standing building. A 4,000 square foot model that most likely would be constructed as an end cap of a building. Finally a 2,400 square foot design which would be constructed as a counter service location in an existing building. Additionally, we offer lower cost conversion packages that provide our franchisees with flexibility to build in cost effective formats, such as, opportunities to convert existing restaurants into a Famous Dave’s restaurant. In 2009, several franchisee’s successfully converted restaurants and in 2010, we will be converting an existing casual dining restaurant to a company-owned restaurant in Bel Air, Maryland. Due to the flexibility and scalability of our concept, there are a variety of development opportunities available now and in the future. In 2010, we expect to open this company-owned restaurant conversion, and up to eight new franchise-operated restaurants.
Our leased restaurant facilities are occupied under agreements with remaining terms ranging from 2 to 38 years, including renewal options. Such leases generally provide for fixed rental payments plus operating expenses associated with the properties. Several leases also require the payment of percentage rent based on net sales.
Our executive offices are currently located in approximately 23,900 square feet in Minnetonka, Minnesota, under a lease that expires in August 2013, with two five-year renewal options. The minimum annual rent commitment remaining over the base lease term is approximately $3.7 million net of sublease income. For 2010, in an effort to reduce general and administrative expense, we entered into a sublease for
2,100 square feet through the remainder of the base lease term. We believe that our properties will be suitable for our needs and adequate for operations for the foreseeable future.
The following table sets forth certain information about our existing company-owned restaurant locations, as of January 3, 2010, sorted by opening date:
All seat count and square footage amounts are approximate.
(1)
Restaurant is collateral in a financing lease.
(2)
Restaurant land and building are owned by the Company.
(3)
Counter service restaurant
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time-to-time, we are involved in various legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate dispositions of these matters will not have a material adverse effect on our consolidated financial position and results of operations. Currently, there are no significant legal matters pending.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has traded on the NASDAQ Stock Market since July 24, 1997 under the symbol DAVE. Currently, our common stock trades on the NASDAQ Global Market. The following table summarizes the high and low sale prices per share of our common stock for the periods indicated, as reported on the NASDAQ Global Market.
Holders
As of March 8, 2010, we had approximately 362 shareholders of record and approximately 4,992 beneficial shareholders.
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 and capital needs. 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, loan agreement restrictions, our financial condition and other factors deemed relevant by our Board of Directors.
Stock Performance Graph
Below is a line-graph presentation that compares the cumulative, five-year return to the Company’s shareholders (based on appreciation of the market price of the Company’s common stock) on an indexed basis with (i) a broad equity market index and (ii) an appropriate published industry or line-of-business index, or peer group index constructed by the Company. The following presentation compares the Company’s common stock price for the period from January 2, 2004 through January 3, 2010, to the S&P 500 Stock Index and to a Peer Group Index.
The Company has elected to create a Peer Group Index in compiling its stock performance graph because it believes a Peer Group Index represents a better comparison, to competitors with similar market capitalization to the Company.
The presentation assumes that the value of an investment in each of the Company’s common stock, the S&P 500 Index and the Peer Group Index was $100 on January 2, 2005, and that any dividends paid were reinvested in the same security.
Comparison of Five-Year Cumulative Total Return
Among Famous Dave’s of America, Inc., a Peer Group
and the S&P 500 Index
Total Return Analysis
*
Peer Group includes the following restaurant companies: O’Charley’s, Dine Equity, Landry’s, Red Robin, Ruby Tuesday, Steak n’ Shake, Buffalo Wild Wings, Cracker Barrel, California Pizza Kitchen and PF Chang’s
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
On August 6, 2008, our Board of Directors adopted a stock repurchase plan that authorized the repurchase of up to 1.0 million shares of our common stock from time-to-time in both the open market or through privately negotiated transactions. During the remainder of fiscal 2008 and all of fiscal 2009, we repurchased 107,012 shares under this program for approximately $869,000 at an average market price per share of $6.27, excluding commissions.
The following table includes information about our share repurchases for the fourth quarter of the fiscal year ended January 3, 2010.
ITEM 6.
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 January 3, 2010 (fiscal year 2009), December 28, 2008 (fiscal year 2008), December 30, 2007 (fiscal year 2007), December 31, 2006 (fiscal year 2006), and January 1, 2006 (fiscal year 2005) have been derived from our consolidated financial statements as audited by Grant Thornton LLP, independent registered public accounting firm.
FINANCIAL HIGHLIGHTS
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Annual Report on Form 10-K include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are based on information currently available to us as of the date of this Annual Report, and we assume no obligation to update any forward-looking statements except as otherwise required by applicable law. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors listed in Item 1A of and elsewhere in this Annual Report and our other filings with the Securities and Exchange Commission. The following discussion should be read in conjunction with “Selected Financial Data” above (Item 6 of this Annual Report) and our financial statements and related footnotes appearing elsewhere in this Annual Report.
Overview
Famous Dave’s of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of January 3, 2010, there were 177 Famous Dave’s restaurants operating in 37 states, including 45 company-owned restaurants and 132 franchise-operated restaurants. An additional 94 franchise restaurants were committed to be developed through signed area development agreements at January 3, 2010.
Impact of the Current Economic Environment - As outlined throughout this Annual Report, the economic recession that existed and impacted our fiscal 2009 operations and plans continue into fiscal 2010. Economic downturns typically impact restaurant traffic significantly as unemployment increases and consumers decrease spending on discretionary items. In fiscal 2009, this environment led to:
•
A 6.3% decline in same store sales for company-operated restaurants and an 8.5% decline in same store sales for franchise-operated restaurants, with decreases in all sales drivers: dine-in, catering and to-go sales.
•
Deteriorating financial health of some franchise partners that resulted in the closure of four franchise restaurants and a slowing of our franchise partners’ development plans.
A further discussion of our strategy to address the current economic environment is contained in the sections that follow.
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. Fiscal 2009, which ended on January 3, 2010, consisted of 53 weeks while fiscal 2008 and fiscal 2007 which ended on December 28, 2008 and December 30, 2007, respectively, each consisted of 52 weeks. Fiscal 2010 which ends on January 2, 2011 will consist of 52 weeks.
Basis of Presentation - The financial results presented and discussed herein reflect our results and the results of our wholly-owned and majority-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Application of Critical Accounting Policies and Estimates - The following discussion and analysis of the Company’s financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgments. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Our Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included herein.
We have discussed the development and selection of the following critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to such estimates in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recognition of Franchise-Related Revenue - Initial franchise revenue is recognized when we have performed substantially all of our obligations as franchisor. Franchise royalties are recognized when earned as promulgated by FASB Standards codification for Franchisors.
Our franchise-related revenue consists of area development fees, initial franchise fees and continuing royalty payments. Our area development fee consists of a one-time, non-refundable payment equal to $10,000 per restaurant in consideration for the services, we perform in preparation of executing each area development agreement. Substantially all of these services which include but are not limited to conducting market and trade area analysis, a meeting with Famous Dave’s Executive Team, and performing potential franchise background investigation, all are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Our initial, non-refundable, franchise fee is typically $30,000 to $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining non-refundable fee of $25,000 to $35,000 is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise entering into a lease agreement for the restaurant(s). The franchise agreement represents a separate and distinct earnings process from the area development agreements. Franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a monthly royalty of 5% of their net sales. During 2009, we offered a reduced royalty rate for twelve months from date of opening for franchisees that opened restaurants during 2009 and will offer the same rate for franchise restaurants that open during 2010.
Asset Impairment and Estimated Lease Termination and Other Closing Costs - In accordance with FASB Standards Codification for Property, Plant, and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell.
Lease Accounting - In accordance with FASB Standards Codification for Leases, we recognize lease expense for our operating leases over the entire lease term including lease renewal options where the renewal is reasonably assured and the build-out period takes place prior to the restaurant opening or lease commencement date. We account for construction allowances by recording a receivable when its collectability is considered probable, depreciating the leasehold improvements over the lesser of their useful lives or the full term of the lease, including renewal options and build-out periods, amortizing the construction allowance as a credit to rent expense over the full term of the lease, including renewal options and build-out periods, and relieving the receivable once the cash is obtained from the landlord for the construction allowance. We record rent expense during the build-out period and classify this expense as pre-opening expenses in our consolidated statements of operations.
Accounts Receivable, Net - We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days sales outstanding and deterioration in general economic market conditions. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary. Any changes to the reserve are recorded in general and administrative expenses. The allowance for uncollectible accounts was approximately $67,000
and $457,000 at January 3, 2010 and December 28, 2008, respectively. The allowance balance decreased from the prior year primarily due to a couple of significant events in 2009. In 2008, we reserved approximately $300,000 for a franchise accounts receivable when management deemed collection of this receivable doubtful. Subsequently, in 2009, this receivable and associated reserve was written off. Additionally, in 2009, based on the final ruling of the bankruptcy courts, two of our franchisee’s accounts receivable balances were deferred. According to the rulings, each franchisee is to make payments in monthly installments and, accordingly, its receivable, along with the accompanying allowance, was reclassified to short-term or long-term, respectively based on its maturity dates. Accounts receivable are written off when they become uncollectible, and payments subsequently received on such receivables are credited to allowance for doubtful accounts. Accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of the provided allowance are determined uncollectible, they are charged to expense in the period that determination is made. Outstanding past due accounts receivable are subject to a monthly interest charge on unpaid balances which is recorded as interest income in our consolidated statements of operations. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, and annual financial information, which the franchisees are required to submit to us, as well as other variances.
Income Taxes - We provide for income taxes based on our estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. Accrual for uncertain tax positions are accounted for under FASB Standards Codification of Income Taxes. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law. Accounting for uncertain tax positions requires significant judgment including estimating the amount, timing, and likelihood of ultimate settlement. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.
Results of Operations
Revenue - Our revenue consists of four components: company-owned restaurant sales, franchise-related revenue from royalties and franchise fees, licensing revenue from the retail sale of our sauces and rubs, and other revenue from the opening assistance we provide to franchise partners. We record restaurant sales at the time food and beverages are served. Our revenue recognition policies for franchising are discussed under “Recognition of Franchise-Related Revenue” above. Our franchise-related revenue consists of area development fees, initial franchise fees and continuing royalty payments. We record sales of merchandise items at the time items are delivered to the customer.
We have a licensing agreement for our retail products, with renewal options of five years, subject to the licensee’s attainment of identified minimum product sales levels. Based on achievement of the required minimum product sales, the agreement will be in force until April 2015 at which time these levels will be re-evaluated.
Periodically, we provide additional services, beyond the general franchise agreement, to our franchise operations, such as new restaurant training and décor installation services. The cost of these services is billed to the respective franchisee, is recorded as other income when the service is provided, and is generally payable on a net 30-day terms.
Costs and Expenses - Restaurant costs and expenses include food and beverage costs, operating payroll, associate benefits, restaurant level supervision, occupancy costs, repair and maintenance costs, supplies,
advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are corporate and restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first 12-14 weeks of operation. As restaurant Management and Associates gain experience following a restaurant’s opening, labor scheduling, food cost management and operating expense control are improved to levels similar to those at our more established restaurants.
General and Administrative Expenses - General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, bonuses, Associate benefits, legal fees, accounting fees, consulting fees, travel, rent, and general insurance are major items in this category. We record expenses for Managers in Training (“MITs”) in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services, the revenue of which are included in other revenue and the expenses of which are included in general and administrative expenses.
The following table presents items in our consolidated statements of operations as a percentage of total revenue or net restaurant sales, as indicated, for the following fiscal years (3):
Fiscal Year 2009 Compared to Fiscal Year 2008
Total Revenue - Total revenue of approximately $136.0 million for fiscal 2009 decreased approximately $4.4 million or 3.1% from total revenue of approximately $140.4 million for fiscal 2008. Fiscal 2009 consisted of 53 weeks, while fiscal 2008 consisted of 52 weeks.
Restaurant Sales - Restaurant sales were approximately $117.9 million for fiscal 2009 and approximately $122.0 million for fiscal 2008. Fiscal 2009 sales results included a restaurant sales decline of 3.3%, primarily reflecting a comparable sales decrease of 6.3%, partially offset by a weighted average price increase of 2.3%. The 2009 comparable sales decline reflects continued sales pressure in all three of our sales levers: dine-in, To-Go, and catering, resulting primarily from changes in consumer spending in the casual dining industry initiated largely by the recession. Of the 6.3% fiscal 2009 comparable sales decline, dine-in represented 3.4%, To-Go accounted for 1.5%, and catering comprised 1.4%. During fiscal 2009, our category
leadership in off-premise sales declined due to the sluggishness in the economy, as businesses and consumers have continued to be conscious of the discretionary dollars they spend. Catering and “TO GO” accounted for approximately 31.1% of sales in fiscal 2009, compared with approximately 32.4% of sales in fiscal 2008.
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 2009 was approximately $17.1 million, a 2.3% decrease when compared to franchise-related revenue of approximately $17.5 million for the same period in fiscal 2008. Royalties, which are based on a percent of franchise-operated restaurants’ net sales, decreased 0.7% during fiscal 2009. This decrease reflected the full year impact of higher sales level of franchise restaurants that opened in fiscal 2008, in addition to the net nine new franchise restaurants opened during fiscal 2009, offset by a comparable sales decrease of 8.5%. Fiscal 2009 included 6,758 franchise operating weeks, compared to 6,296 franchise operating weeks in fiscal 2008. There were 132 franchise-operated restaurants open at January 3, 2010, compared to 123 at December 28, 2008.
Licensing and Other Revenue - Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades, seasonings, and other items. Other revenue includes opening assistance and training we provide to our franchise partners. For fiscal 2009, the licensing royalty income was approximately $523,000 compared to approximately $408,000 for fiscal 2008. During fiscal 2010, as a result of continued growth in our restaurant base and expanded markets, we expect to see licensing revenue increase slightly compared to fiscal 2009 levels.
Other revenue for fiscal 2009 was approximately $448,000, compared to approximately $440,000 in fiscal 2008. The amount of other revenue is expected to decline compared to fiscal 2009 based on the level of opening assistance we expect to provide for a lower number of franchise openings planned for fiscal 2010.
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 24 months. At the end of fiscal 2009 and fiscal 2008, there were 37 and 35 restaurants, respectively, included in this base. Same store net sales for fiscal 2009 decreased approximately 6.3%, compared to fiscal 2008’s decrease of approximately 2.0%. The decrease in same store net sales reflects slower traffic in all three of our sales drivers: dine-in, to-go, and catering.
Same store net sales for franchise-operated restaurants decreased approximately 8.5% in 2009. The negative comparable sales trend reflects the economic challenges being faced across the country and in many of our franchise markets. Of the 8.5% fiscal 2009 decline, seven states, representing 38 franchise-operated restaurants, accounted for over half of the decline. Additionally, we saw a shift in the states with the largest declines from 2009 compared to 2008 due to changes in the geographic impact of the recession. For fiscal 2009 and fiscal 2008, there were 90 and 74 restaurants, respectively, included in franchise-operated comparable sales.
Average Weekly Net Sales - The following table shows company-owned and franchise-operated average weekly net sales for fiscal 2009 and fiscal 2008:
Food and Beverage Costs - Food and beverage costs for fiscal 2009 were approximately $35.5 million or 30.1% of net restaurant sales compared to approximately $37.6 million or 30.8% of net restaurant sales for
fiscal 2008. Results for fiscal 2009 reflect lower contract pricing for many of our core proteins. Our adult beverage sales at our company-owned restaurants in fiscal 2009 and fiscal 2008 were approximately 9% as a percentage of dine-in sales. We have determined that we are limited in our ability to “grow the bar” in the majority of our locations due to the fact that many of our locations have little to no designated bar, and some restaurants only have beer and wine licenses. During 2010, we will be evaluating various changes to our bar offerings as well as providing pairing suggestions to accompany our LTO offerings.
Approximately 85% of our food and non-alcoholic beverage purchases are on contract. Pork represents approximately 31.0% of our total purchases, while chicken is approximately 13.0%, beef, which includes hamburger and brisket, is approximately 9.0%, and seafood is approximately 2.0%. We are protected on our pork contract throughout 2010, and will benefit from an approximate 3.5% price decrease compared to fiscal 2009. However, we will continue to watch the pork market closely to determine if there are opportunities to blend and extend pricing, should we see increases on the horizon with regard to the pricing environment for 2011. Our chicken pricing is firm through December of 2010 at a price increase of approximately 2.5% over fiscal 2009. Our brisket contract extends through May 2010 at a price increase of approximately 5.7% compared to the pricing we paid in early 2010. We will watch the market closely as we move through the rest of the year to capitalize on favorable pricing opportunities. We currently anticipate an average price decrease of 1.0%, compared to 2009, in hamburger prices from our two suppliers, who are on contract through June and September, respectively. Our salmon and cod contracts are locked in through June of 2010, and our catfish and shrimp contracts are locked in through December of 2010, all at a blended price increase of approximately 4.1% over fiscal 2009. Lastly, in 2010, we currently anticipate an approximate 2.0% price decrease for our side items when compared to the prior year due to our continued focus on reducing overall food costs.
All of the Company-owned restaurants transitioned to a new food distributor in November of 2009, and we will be completing this transition throughout our franchise system in early 2010. The new distributor will give us more flexibility to maximize freight savings and to optimize our distribution network. We anticipate that these savings will begin to be realized over the next several months and throughout 2010.
We have continued our focus on identifying dual source suppliers for our 15 most critical items, and today, we have contracted a majority of those items. As we continue into 2010, we will expand our process of finding additional sources for items such as chicken, sauces, and seasonings when advantageous buying opportunities arise.
As a result of all of the initiatives just mentioned, for the fiscal 2010 timeframe, we anticipate an approximate 70 - 80 basis point decrease in our food and beverage costs as a percent of sales year over year.
Labor and Benefits - Labor and benefits at the restaurant level were approximately $37.0 million or 31.4% of net restaurant sales in fiscal 2009 compared to approximately $38.2 million or 31.3% of net restaurant sales in fiscal 2008. The slight increase in the percentage was a result of sales deleverage partially offset by a reduction in our labor matrix in early 2009 and the additional sales of the 53rd week of fiscal 2010, which positively impacted our fixed labor costs. For 2010, we expect labor and benefits costs as a percentage of sales, to be essentially flat to fiscal 2009’s percentage, due to sales leverage from the recently acquired restaurants, offset by the loss of the 53rd week.
Operating Expenses - Operating expenses for fiscal 2009 were approximately $31.5 million or 26.7% of net restaurant sales compared to approximately $32.5 million or 26.6% of net restaurant sales for fiscal 2008. The slight increase was due to sales deleverage and increased occupancy costs due to the three restaurants added in late 2008. These were partially offset by utility and advertising cost savings in 2009. In 2009, advertising, as a percent of sales, was approximately 3.4% compared to 3.7% for the prior year.
The Company has kept the 2010 national ad fund contribution flat to 2009, at 0.5%. We expect that in 2010, advertising expense will be approximately 3.5% of net sales, including the 0.5% contribution to the National Ad Fund.
Primarily as a result of the recently acquired restaurants, we are projecting operating expenses as a percentage of net sales for fiscal 2010 to be approximately 80 - 90 basis points higher than 2009’s percentage. During our due diligence, we discovered that there were multiple one-time repairs requiring investments in these locations. Additionally, our guests and associates are our main focus, and as such, we anticipate allocating additional supervisory dollars for a period of time to ensure a successful transition. Lastly, the seven restaurants carry higher restaurant occupancy costs which will impact this percentage.
Depreciation and Amortization - Depreciation and amortization for fiscal 2009 was approximately $5.2 million, or 3.8% of total revenue, compared to approximately $5.5 million, or 4.0% of total revenue for fiscal 2008. For fiscal 2009, depreciation and amortization expense was approximately $331,000 less than 2008, due to 2008 impairment charges and a reduction in capital spending year over year. For 2010, we expect depreciation to be 10 basis points unfavorable to flat as a percentage of total revenue, as compared to 2009, due to the increased capital spending for our existing and newly acquired restaurants.
General and Administrative Expenses - General and administrative expenses totaled approximately $16.1 million or 11.8% of total revenue in fiscal 2009 compared to approximately $16.5 million or 11.8% of total revenue in fiscal 2008. In fiscal 2009, general and administrative expenses included approximately $832,000, for stock-based compensation expense related to our performance share programs, options expense from FASB Standards Codification for Stock Compensation, and the issuance of shares to our Board of Directors for service during fiscal 2009. In fiscal 2008, general and administrative expenses included approximately $694,000 for stock-based compensation expense. Excluding bonus and stock-based compensation expense, the percentage would have been 10.0% for fiscal 2009 and 11.1% for fiscal 2008. The decrease in the percentage excluding bonus and stock-based compensation compared to prior year primarily reflects our prudent cost control over general administrative expenses in 2010. This was slightly offset by approximately $79,000 of unanticipated due diligence expenses incurred in fiscal 2009 associated with the acquisition of seven franchise restaurants in New York and New Jersey, completed in March 2010. Under current accounting guidance, costs associated with acquisitions are required to be expensed as incurred.
We intend to remain vigilant in controlling our general and administrative expenses will continue into 2010. We expect general and administrative expenses as a percentage of revenue, with full accrual for bonus achievement, will be approximately 60 - 70 basis points favorable to 2009’s percentage. This is primarily due to sales leverage from the recently acquired restaurants partially offset by the loss of revenue from the 53rd week. Additionally, we will have approximately $255,000 of estimated acquisition costs, related to our recent acquisition included in general and administrative expenses for 2010.
In 2010, we anticipate stock-based compensation, as it relates to performances shares, to significantly increase over the prior year due to a higher stock price and a lower anticipated forfeiture rate. For fiscal 2010, we expect stock-based compensation to be approximately $1,092,000, as follows (in thousands):
Given the limited number of shares that remain available for issuance under our 2005 Stock Incentive Plan, we will compensate the board of directors with cash, in lieu of common stock beginning in May 2010. Cash compensation for the board of directors will be approximately $218,000. We anticipate total board of director and stock-based compensation to be approximately $1.3 million in fiscal 2010.
Asset Impairment and Estimated Lease Termination and Other Closing Costs
In accordance with FASB Standards Codification for Property, Plant, and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. Here is a summary of these events and situations for fiscal 2009 and fiscal 2008.
2009 Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):
2008 Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):
(1)
The Company closed this restaurant in conjunction with the opening of a new prototype restaurant within four miles of the existing restaurant, supporting the company’s strategy to reposition legacy restaurants in markets when opportunities arise. The Company negotiated a lease buyout for this location and another location in the Chicago market that had been previously closed for a total of $80,000. The agreement with the landlord for these two locations was subject to a bankruptcy judge’s final approval, which was obtained in the third quarter of 2009. The final settlement was contained in the $1.3 million lease termination fees paid in 2009.
(2)
In accordance with FASB Standards Codification for Property Plant and Equipment, based on the Company’s assessment of expected cash flows from this location over the remainder of the respective lease terms.
(3)
Includes the three restaurants in the Atlanta market which were acquired by the company from a franchisee for amounts due that were subsequently closed. The lease reserve was recorded in accordance with FASB Standards Codification for Exit and Disposal Cost Obligations, and equals the net present value of the remaining lease obligations for the 3 closed Atlanta restaurants, net of zero expected sublease income.
(4)
Write off of failed site preparation costs for two locations that the Company decided not to open.
Pre-opening Expenses - During fiscal 2009, we had no pre-opening expenses. During fiscal 2008, we had approximately $1.1 million in pre-opening expenses, related to the opening of four company-owned restaurants in 2008. As we look to 2010, we will be opening one Company-owned restaurant in Bel Air, Maryland, a suburb of Baltimore, with estimated pre-opening costs of $290,000, including pre-opening rent of approximately $75,000.
Loss on Early Extinguishment of Debt - During 2009, we elected to repay five notes prior to their expiration, related to two of our Minnesota restaurants and three of our Virginia restaurants. These notes had annual interest rates ranging from 8.10% to 10.53% and were originally due between February 2020 and October 2023. A total of approximately $7.1 million was paid to retire these notes early. Included in the debt retirement payment was a pre-payment penalty of approximately $350,000 reflected as a loss on early extinguishment of debt in our consolidated statements of operations. We recorded a non-cash charge of approximately $159,000 to write-off associated deferred financing fees as a result of the early repayment, also reflected as early extinguishment of debt in our consolidated statement of operations.
Interest Expense - Interest expense totaled approximately $1.4 million or 1.1% of total revenue for fiscal 2009, compared to approximately $2.0 million or 1.4% of total revenue for fiscal 2008. This category includes interest expense for notes payable, financing lease obligations and the interest for deferrals made under our non-qualified deferred compensation plan. Due to the early payoff of five high-rate, long-term notes, lower balances and lower interest rates on our line of credit year over year, our interest expense in 2009 decreased 27% from the prior year. For 2010, we expect interest expense to be approximately 20 - 30 basis points lower, as a percentage of revenue, due to early debt repayments made in 2009 and sales leverage from the recently acquired restaurants, partially offset by estimated moderate increases in interest rates and anticipated increases in our line of credit balance during 2010. Additionally, as a result of the recent acquisition, we obtained a term loan for approximately $6.8 million that has a seven year term, a 5.0% annual amortization with a balloon payment in year 7, and bears interest at LIBOR plus 225 basis points. There is no prepayment penalty
associated with this term loan. In connection with this term loan, the Company has amended its existing Credit Agreement with Wells Fargo Bank, N.A. to address future covenant requirements to ensure compliance as a result of the additional indebtedness. We incurred approximately $25,000 for debt financing costs associated with the amended and restated credit agreement which will be deferred and amortized over the remaining term of the agreement. Our line of credit had a balance of $13.5 million as of January 3, 2010.
Interest Income - Interest income was approximately $129,000 and $246,000 for fiscal 2009 and fiscal 2008, respectively. Interest income reflects interest received on short-term cash and cash equivalent balances. We expect fiscal 2010 interest income to be essentially flat compared to fiscal 2009.
Income Tax Expense/Benefit - We recorded income tax expense during fiscal 2009 of approximately $3.0 million which compares to a benefit of approximately $119,000 in fiscal 2008. We utilized $2,599,000 of federal and state net operating loss carry forwards in fiscal 2009 as compared to approximately $529,000 in fiscal 2008. Utilization of state net operating losses will be achieved through offsetting tax liabilities generated through earnings. We did not utilize any general business credit carry forwards in fiscal 2009 or fiscal 2008. We estimate a 34.3% effective tax provision rate for fiscal 2010 due to a lower effective state tax rate.
Basic and Diluted Net Income Per Common Share - Net income for fiscal 2009 was approximately $5.7 million or $0.63 per basic common share on approximately 9,114,000 weighted average basic shares outstanding compared to net income of approximately $389,000 or $0.04 per basic common share on approximately 9,406,000 weighted average basic shares outstanding for fiscal 2008.
Diluted net income per common share for fiscal 2009 was $0.62 per common share on approximately 9,211,000 weighted average diluted shares outstanding compared to $0.04 per common share on approximately 9,542,000 weighted average diluted shares outstanding for fiscal 2008.
Fiscal Year 2008 Compared to Fiscal Year 2007
Total Revenue - Total revenue of approximately $140.4 million for fiscal 2008 increased approximately $14.5 million or 11.5% over total revenue of approximately $125.9 million for fiscal 2007. Fiscal 2008 and fiscal 2007 both consisted of 52 weeks.
Restaurant Sales - Restaurant sales were approximately $122.0 million for fiscal 2008 and approximately $107.8 million for fiscal 2007. Fiscal 2008 sales results included the impact of four new company-owned restaurants opened during the year, a weighted average price increase of approximately 3.8% offset by a comparable sales decrease of 2.0%. Fiscal 2007 sales reflected 2.1% comparable sales growth, primarily from an increase in our catering and “TO GO” business, and the impact of weighted-average price increases equal to approximately 1.5%. During fiscal 2008, our category leadership in off-premise sales weakened due to the sluggishness in the economy, as catering and “TO GO” accounted for approximately 32.4% of sales in fiscal 2008, compared with approximately 33.5% of sales in fiscal 2007.
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 2008 was approximately $17.5 million, a 2.8% increase when compared to franchise-related revenue of approximately $17.0 million for the same period in fiscal 2007, reflecting increased royalties. Royalties, which are based on a percent of franchise-operated restaurants’ net sales, increased 8.3% during fiscal 2008. This increase reflected the full year impact of higher sales levels of franchise restaurants that opened in fiscal 2007, in addition to the net three new franchise restaurants opened during fiscal 2008, offset by a comparable sales decrease of 3.6% in 2008 compared to a decrease of 3.3% in 2007. Fiscal 2008 included 6,296 franchise operating weeks, compared to 5,654 franchise operating weeks in fiscal 2007. There were 123 franchise-operated restaurants open at December 28, 2008, compared to 120 at December 30, 2007.
Licensing and Other Revenue - Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades, seasonings, and other items. Other revenue includes opening assistance and training we provide to our franchise partners. For fiscal 2008, the licensing royalty income was approximately $408,000 compared to approximately $334,000 for fiscal 2007.
Other revenue for fiscal 2008 was approximately $440,000, compared to approximately $678,000 in fiscal 2007. The amount of other revenue declined due to a down turn in the economy, thus slowing franchise restaurant 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 24 months. At the end of fiscal 2008 and fiscal 2007, there were 35 and 36 restaurants, respectively, included in this base. Same store net sales for fiscal 2008 decreased approximately 2.0%, compared to fiscal 2007’s increase of approximately 2.1%. The decrease in same store net sales reflected slower traffic in all three of our sales drivers: dine-in, to-go, and catering. Same store net sales for franchise-operated restaurants for fiscal 2008 decreased approximately 3.6%, compared to a decrease of approximately 4.0% for the prior year comparable period. Much of the decline in fiscal 2008 was explained by a weak national economy. Restaurants in four states accounted for almost 54% of the decline of our franchise comparable sales. For fiscal 2008 and fiscal 2007, there were 74 and 56 restaurants, respectively, included in franchise-operated comparable sales.
Average Weekly Net Sales - The following table shows company-owned and franchise-operated average weekly net sales for fiscal 2008 and fiscal 2007:
Food and Beverage Costs - Food and beverage costs for fiscal 2008 were approximately $37.6 million or 30.8% of net restaurant sales compared to approximately $32.4 million or 30.1% of net restaurant sales for fiscal 2007. Results for fiscal 2008 reflected higher contract pricing for many of our core proteins, partially offset by the favorable impact from the realization of vendor rebates of approximately $501,000 in fiscal 2008 that had previously been given to the National Ad Fund. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants in fiscal 2008 and fiscal 2007 were approximately 9%.
Labor and Benefits - Labor and benefits at the restaurant level were approximately $38.2 million or 31.3% of net restaurant sales in fiscal 2008 compared to approximately $32.7 million or 30.3% of net restaurant sales in fiscal 2007. The increase in labor and benefits reflected higher labor costs, partially due to higher health insurance claims and increases in various state and federal minimum wages, slightly offset by lower workers compensation insurance costs. The takeover of the Atlanta restaurants in July 2008 had an approximate 10 basis point impact on labor costs year over year. Also, we experienced inefficiencies in the form of higher labor costs associated with opening three new company-owned restaurants late in fiscal 2008.
Operating Expenses - Operating expenses for fiscal 2008 were approximately $32.5 million or 26.6% of net restaurant sales compared to approximately $27.5 million or 25.6% of net restaurant sales for fiscal 2007. The increase in fiscal 2008 restaurant operating expenses was due to higher utility, supplies, and repairs and maintenance costs. Additionally, sales deleverage on fixed occupancy costs also played a role, contributing approximately 30 basis points of the year over year difference.
Depreciation and Amortization - Depreciation and amortization for fiscal 2008 was approximately $5.5 million, or 4.0% of total revenue, compared to approximately $5.0 million, or 4.0% of total revenue for fiscal 2007. Depreciation and amortization increased by $285,000 due to new capital deployed in the opening of four new company-owned restaurants in 2008.
General and Administrative Expenses - General and administrative expenses totaled approximately $16.5 million or 11.8% of total revenue in fiscal 2008 compared to approximately $15.6 million or 12.4% of total revenue in fiscal 2007. In fiscal 2008, general and administrative expenses included approximately $694,000, for stock-based compensation expense as related to our performance share programs, options expense from FASB Standard Codification for Compensation-Stock Compensation, and the issuance of shares to our Board of Directors for service during fiscal 2008. In fiscal 2007, general and administrative expenses included approximately $820,000 for stock-based compensation expense. The departure of our prior CEO in December 2007 resulted in the recapture of approximately $920,000 in stock-based compensation. Excluding stock-based compensation expense, the percentage would have been 11.3% for fiscal 2008 and 11.7% for fiscal 2007. The decrease in the percentage excluding stock-based compensation compared to prior year, primarily reflects the recapture of bonus related to our CEO who left the company in September 2008, another position at the executive level that remained open for the entire fourth quarter of 2008, in addition to other savings.
There was no bonus payout on 2008 earnings performance. At year end, we recorded a reserve of approximately $269,000 in corporate severance and outplacement assistance for corporate headquarters staff. The balance in the reserve at year end was $207,000, and was paid out within the first six months.
Asset Impairment and Estimated Lease Termination and Other Closing Costs
During fiscal 2008, there were several situations requiring the recording of charges for asset impairment, estimated lease termination and other closing costs. In accordance with FASB Standard Codification for Property, Plant and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. See below for a summary of these events and situations for fiscal 2008 and fiscal 2007.
2008 Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):
(1)
The Company closed this restaurant in conjunction with the opening of a new prototype restaurant within four miles of the existing restaurant, supporting the company’s strategy to reposition legacy restaurants in markets when opportunities arise. The Company negotiated a lease buyout for this location and another location in the Chicago market that had been previously closed for a total of $80,000. The agreement with the landlord for these two locations was subject to a bankruptcy judge’s final approval, which was obtained in the third quarter of 2009. The final settlement was contained in the $1.3 million lease termination fees paid in 2009.In accordance with FASB Standard Codification for Property, Plant and Equipment based on the Company’s assessment of expected cash flows from this location over the remainder of the respective lease terms.
(2)
Includes the three restaurants in the Atlanta market which were acquired by the company from a franchisee for amounts due that were subsequently closed. We do not expect to incur any significant additional costs related to these locations. The lease reserve was recorded in accordance with FASB Standard Codification for Exit and Disposal Cost Obligations, and equals the net present value of the remaining lease obligations for the three closed Atlanta restaurants, net of zero expected sublease income.
(3)
Write off of failed site preparation costs for two locations that the Company decided not to open.
During fiscal 2007, we recorded an asset impairment charge of approximately $596,000 primarily for our Palatine, Illinois restaurant which included the write-down of its assets reflected in impairment and estimated lease termination and other closing costs. This impairment also resulted in a reduction in rent expense of approximately $185,000 reflected in operating expenses, for the write-off of the deferred rent balance for this location, as it was determined that lease option periods would not be executed. Additionally, we recorded a write-off of approximately $395,000 for a software development project that was determined to have no future value. This write-off was reflected in loss on disposal of property in the consolidated statements of operations.
Pre-opening Expenses - During fiscal 2008, we had approximately $1.1 million in pre-opening expenses, including pre-opening rent, related to the opening of four company-owned restaurants in 2008. During fiscal 2007, we had approximately $1.2 million in pre-opening expenses, related to the opening of four company-owned restaurants in 2007 and pre-opening rent for a restaurant that opened in early fiscal 2008.
Loss on Early Extinguishment of Debt - During fiscal 2007, we repaid early, approximately $1.0 million in notes payable related to our Tulsa, Oklahoma company-owned restaurant which resulted in an approximate $12,000 non-cash charge to write-off deferred financing fees.
Interest Expense - Interest expense totaled approximately $2.0 million or 1.4% of total revenue for fiscal 2008, compared to approximately $1.6 million or 1.3% of total revenue for fiscal 2007. This category includes interest expense for notes payable, financing lease obligations and the interest for deferrals made under our non-qualified deferred compensation plan. Our line of credit had a balance of $18.0 million as of December 28, 2008.
Interest Income - Interest income was approximately $246,000 and $293,000 for fiscal 2008 and fiscal 2007, respectively. Interest income reflects interest received on short-term cash and cash equivalent balances.
Income Tax Benefit/Expense - We recorded a benefit for income taxes during fiscal 2008 of approximately $119,000 which compared to expense of approximately $3.1 million in fiscal 2008. We utilized $529,000 of federal and state net operating loss carry forwards in fiscal 2008 as compared to approximately $2.4 million in fiscal 2007. Utilization of state net operating losses will be achieved through offsetting tax liabilities generated through earnings. We utilized no general business credit carry forwards in fiscal 2008 and $1.3 million of general business credit carry forwards in fiscal 2007. The resulting tax benefit reflects a lower level of pre-tax income and a higher amount of business credits.
Basic and Diluted Net Income Per Common Share - Net income for fiscal 2008 was approximately $389,000 or $0.04 per basic common share on approximately 9,406,000 weighted average basic shares outstanding compared to net income of approximately $6.1 million or $0.61 per basic common share on approximately 9,960,000 weighted average basic shares outstanding for fiscal 2007.
Diluted net income per common share for fiscal 2008 was $0.04 per common share on approximately 9,542,000 weighted average diluted shares outstanding compared to $0.59 per common share on approximately 10,298,000 weighted average diluted shares outstanding for fiscal 2007.
Financial Condition, Liquidity and Capital Resources
As of January 3, 2010, our Company held unrestricted cash and cash equivalents of approximately $3.0 million compared to approximately $1.7 million as of December 28, 2008. Our cash balance reflects net debt repayment of approximately $11.5 million and the purchases of property, equipment, and leasehold improvements for approximately $2.0 million during the year ended January 3, 2010.
Our current ratio, which measures our immediate short-term liquidity, was 1.0 at January 3, 2010 compared to 1.1 at December 28, 2008. The current ratio is computed by dividing total current assets by total current liabilities. The change in our current ratio was primarily due to increased current liabilities resulting from a higher accrued bonus at the end of the 2009 fiscal year, partially offset by a lower accounts payable balance resulting from a fifty-third week in fiscal 2009. As is true with most restaurant companies, we often operate in a negative working capital environment due to the fact that we receive cash up front from customers and then pay our vendors on a delayed basis.
Net cash provided by operations for each of the last three fiscal years was approximately $14.5 million in fiscal 2009, $11.2 million in fiscal 2008, and $13.0 million in fiscal 2007. Cash generated in fiscal 2009 was primarily from net income of approximately $5.7 million, depreciation and amortization of approximately $5.2 million, and increased accrued compensation and benefits of approximately $2.0 million. These increases were partially offset by a decrease in deferred taxes of approximately $1.8 million a decrease in accounts payable of approximately $1.7 million, and a decrease in other liabilities of approximately $1.0 million.
Cash generated in fiscal 2008 was primarily from net income of approximately $389,000, asset impairment, estimated lease termination and other closing costs of approximately $6.9 million and depreciation and amortization of approximately $5.5 million. These increases were partially offset by a decrease in accounts payable of approximately $1.7 million, a decrease in accrued compensation and benefits of approximately $909,000 and a decrease in deferred income taxes of approximately $542,000.
Cash generated in fiscal 2007 was primarily from net income of approximately $6.1 million, depreciation and amortization of approximately $5.0 million, the utilization of our deferred tax asset of approximately $1.8 million, stock-based compensation of approximately $838,000, an asset impairment of approximately $597,000 related to one company-owned location, and a loss on disposal of approximately $465,000. These increases were partially offset by an approximate $1.8 million increase in accounts receivable, and an approximate $507,000 decrease in accrued compensation and benefits.
Net cash used for investing activities for each of the last three fiscal years was approximately $1.9 million in fiscal 2009, $10.5 million in fiscal 2008, and $12.3 million in fiscal 2007. In 2009, our cash spend on fixed assets was approximately $2.0 million, we also had approximately $300,000 in accrued fixed asset charges at the end of the year for projects in process that had not been paid for. Additionally, a portion of our corporate infrastructure projects, originally planned to occur in fiscal 2009, were moved to fiscal 2010. In fiscal 2008, we used approximately $8.7 million for the construction of our Alexandria, Virginia, Salisbury, Maryland, Algonquin, Illinois, and Greenwood, Indiana restaurants and $1.8 million for continued maintenance and other infrastructure projects. In fiscal 2007, we used approximately $14.3 million primarily for the construction of our Fredericksburg, Virginia, Oswego, Illinois, Bolingbrook, Illinois, Owings Mills, Maryland and Alexandria, Virginia restaurants and other infrastructure projects. This was partially off-set by proceeds of approximately $1.8 million from the sale of our Rogers, Arkansas company-owned restaurant to a franchisee. We expect total 2010 capital expenditures to be approximately $5.5 million, primarily reflecting continued investments in our existing restaurants, capital expenditures planned for the seven restaurants acquired in March 2010, reimaging of existing restaurants, the conversion costs of the Bel Air, Maryland restaurant, and investments in corporate infrastructure systems.
Net cash used for financing activities was approximately $11.3 million in fiscal 2009, $542,000 in fiscal 2008, and $586,000 in fiscal 2007. In fiscal 2009, we had draws on our line of credit of approximately $9.0 million and had repayments of approximately $13.5 million. The maximum balance on our line of credit during fiscal 2009 was $18.0 million. Additionally, we repaid $7.0 million of high interest rate debt. In fiscal 2008, we repurchased 592,956 of our shares, representing the culmination of our fourth authorization and beginning of our fifth, for approximately $5.1 million, including commissions. We had draws of approximately $26.0 million on our line of credit and had repayments of $21.0 million. The maximum balance on our line of credit during fiscal 2008 was $20.0 million. In addition, we repaid $383,000 of debt. In fiscal 2007, we repurchased 871,000 of our shares, representing the culmination of our third authorization and approximately half of the fourth, for approximately $14.2 million, including commissions. We had draws of approximately $19.5 million on our line of credit and had repayments of approximately $6.5 million. In addition, we repaid $1.4 million of debt. We also received approximately $1.4 million from the exercise of stock options upon the departure of our Chief Executive Officer in December 2007.
The Company and certain of its subsidiaries (collectively known as the “Borrower”) currently have a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent and lender (the “Lender”). The Credit Agreement, contains a $30.0 million revolving credit facility (the “Facility”) with an opportunity, subject to the Company meeting identified covenants and elections, to increase the commitment to $50.0 million.
During fiscal 2009, the Company reclassified the balance on its line of credit from short-term to long-term debt on its balance sheet, with a maturity date of the facility of May 1, 2013. Previously, the line of credit was classified as a current liability due to subjective acceleration provisions in the Credit Agreement. While the subjective acceleration language is still present in the credit agreement, the Company is in a strong financial position due to the recent $11.5 million debt pay down of the long-term notes, our line of credit, and five solid years of positive earnings. Additionally, the Company has had no occurrences of default for which a waiver was not obtained. Therefore, the likelihood of acceleration is deemed remote. Based on the Company’s strong financial position and for comparability purposes, the Company has reclassified the prior year’s line of credit balance to a long-term liability.
If the bank were to call the line of credit prior to expiration, the Company believes there are multiple options available to obtain other sources of financing. While possibly at different terms, the Company believes there would be other lenders available and willing to finance a new credit facility. Additionally, in 2009, the Company paid off approximately $7.0 million of long-term mortgage debt. As such, the Company could leverage these restaurants by entering into sale leaseback transactions to provide additional cash to the Company.
Principal amounts outstanding under the Facility bear interest either at an adjusted Eurodollar rate plus an applicable margin or at a Base Rate plus an applicable margin. The Base Rate is defined in the agreement as the greater of the Federal Funds Rate (0.25% at January 3, 2010) plus 1.5% or Wells Fargo’s prime rate (3.25% at January 3, 2010). The applicable margin will depend on the Company’s Adjusted Leverage Ratio, as defined, at the end of the previous quarter and will range from 1.00% to 2.00% for Euro Dollar Rate Loans and from -0.50% to +0.50% for Base Rate Loans. Unused portions of the Facility will be subject to an unused Facility fee which will be equal to either 0.25% or 0.375% of the unused portion, depending on the Company’s Adjusted Leverage Ratio. Our rate for the unused portion of the Facility as of January 3, 2010, was 0.375%. An increase option exercise fee will apply to increased amounts between $30.0 and $50.0 million.
The Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Borrower with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Borrower, among others. The Facility also includes various financial covenants that have maximum target capital expenditures, cash flow ratios, and adjusted leverage ratios. If the Company’s Adjusted Leverage Ratio is greater than 3.00 to 1.00, an additional covenant applies that limits the maximum royalty receivable aged past 30 days. In addition, capital expenditure limits include permitted stock repurchase limits (limited to $10.0 million in aggregate during any 12 month period, and $20.0 million in aggregate during the term of the agreement).
The Credit Agreement currently provides for up to $3.0 million in letters of credit to be used by the Company, with any amounts outstanding reducing our availability for general corporate purchases, and also allows for the termination of the Facility by the Borrower without penalty at any time. At January 3, 2010 we had $13.5 million in borrowings under this Facility. We had $150,000 in Letters of Credit as required by our fiscal 2005 self-funded workers’ compensation insurance policy, and $255,000 in letters of credit for real estate locations. We were in compliance with all covenants as of January 3, 2010.
Due to the impairment charges and lease termination fees recorded during fiscal 2008, we were not in compliance with the adjusted leverage ratio covenant under the Facility. We amended our credit agreement to change the definition of consolidated EBITDA to include a defined amount of impairment charges and lease termination fees in any fiscal 2008 quarter. Additionally, we were also not in compliance with the franchise royalty receivable covenant as of December 28, 2008. After receipt of the waivers, we were in compliance with all covenants under the Facility as of December 28, 2008. We paid fees of approximately $45,000 related to the amendment, which were deferred during the first quarter of 2009 and are being amortized over the remaining life of the facility.
We expect to use any borrowings under the Credit Agreement for general working capital purchases as needed. Under the Facility, the Borrower has granted the Lender a security interest in all current and future personal property of the Borrower.
On March 4, 2010, the Company financed its acquisition of seven franchise locations with a $6.8 million term loan from Wells Fargo Bank, N.A. This loan has a seven year term, bears interest at LIBOR plus 225 basis points and has no prepayment penalties associated with it. In connection with this term loan, the Company has amended its existing Credit Agreement to address future covenant requirements to ensure compliance as a result of the additional indebtedness. Additionally, the Company incurred approximately $25,000 for debt financing costs associated with the amended and restated credit agreement which will be deferred and amortized over the remaining term of the agreement.
In addition to commitments we have related to our operating lease obligations, we also have required payments on our outstanding debt and financing leases, including principal and interest. The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:
Contractual Obligations
See Notes 6 and 7 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 (as such term is defined in Item 303 of regulation S-K) that are reasonably likely to have a current or future effect on our financial condition or changes in financial condition, operating results, or liquidity.
Income Taxes
At January 3, 2010, we had cumulative state net operating loss carry-forwards for tax reporting purposes of approximately $700,000 for state purposes, which if not used will begin to expire in fiscal 2019. This amount will be adjusted when we file our fiscal 2009 income tax returns in 2010. In addition, we had cumulative tax credit carry forwards of approximately $2.2 million, which if not used, will begin to expire in fiscal 2024.
Inflation
The primary inflationary factors affecting our operations include food, 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. In some cases, some of our lease commitments are tied to consumer price index (CPI) increases. We are also subject to interest rate changes based on market conditions.
We believe that relatively low inflation rates have contributed to relatively stable costs. There is no assurance, however, that low inflation rates will continue.
ITEM 7A.
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 unrestricted cash and cash equivalents investments with original maturities of three months or less when purchased and which are readily convertible into known amounts of cash. Our Company’s unrestricted 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 January 3, 2010 was approximately $18.0 million, including financing lease obligations. Of the outstanding long-term debt, $4.5 million was subject to a fixed interest rate. The terms of our credit facility with Wells Fargo Bank, National Association, as administrative agent and lender are discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources.”
Some of the food products purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control. To control this risk in part, we have fixed-priced purchase commitments for food from vendors. In addition, we believe that substantially all of our food is available from several sources, which helps to control these risks. In 2009, we continued our focus on identifying dual source suppliers for all 15 of our most critical items and have contracted a majority of those items. As we continue into 2010, we are expanding our process of finding additional sources for other items such as our chicken, sauces, and seasonings when advantageous buying opportunities arise. Additionally, we believe we have the ability to increase menu prices, or vary the menu options offered, if needed, in response to a food product price increase.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Famous Dave’s of America, Inc. are included herein, beginning on page.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
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(e) 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 as of such date our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). Our Management assessed the effectiveness of our internal control over financial reporting as of January 3, 2010. In making this assessment, our Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Our Management has concluded that, as of January 3, 2010, our internal control over financial reporting is effective based on these criteria.
Our independent registered public accounting firm, Grant Thornton LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during our most recently-completed fiscal quarter ended January 3, 2010 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Our Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Famous Dave’s of America have been detected.
None.
PART III
ITEM 10.
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 specifically applicable to its CEO, CFO and Key Financial & Accounting Management. In addition, there is a more general Code of Ethics applicable to all Associates. 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.
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.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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”), the 1998 Director Stock Option Plan (the “Director Plan”) and the 2005 Stock Incentive Plan (the “2005 Plan”). We have also granted stock incentives outside of these equity compensation plans in limited situations. The Management Plan prohibits the granting of incentives after December 29, 2005, the tenth anniversary of the date the Management Plan was approved by the Company’s shareholders. Similarly, the Employee Plan prohibits the granting of incentives after June 24, 2007, the tenth anniversary of the date the Employee Plan was approved by the Company’s board of directors. The Director Plan prohibits the granting of incentives after June 10, 2008, the tenth anniversary of the date the Director Plan was approved by the Company’s shareholders. As such, no further grants of incentives may be made under the Management Plan, the Employee Plan or the Director Plan. Nonetheless, these plans will remain in effect until all outstanding incentives granted there under have either been satisfied or terminated.
The purpose, of the 2005 Plan, which was approved by the Company’s shareholders at the May 2005 annual shareholders meeting, is to increase shareholder value and to advance the interests of the Company by furnishing a variety of economic incentives designed to attract, retain and motivate Associates (including officers), certain key consultants and directors of the Company. Under the 2005 Plans, an aggregate of 338,042 shares of our Company’s common stock remained unreserved and available for issuance at January 3, 2010.
The Management Plan, the Director Plan and the 2005 Plan have each been approved by the Company’s shareholders. The Employee Plan was not submitted for approval to the Company’s shareholders. The following table sets forth certain information as of January 3, 2010 with respect to the Management Plan, the Employee Plan, the Director Plan and the 2005 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.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
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.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Reports of Independent Registered Public Accounting Firm
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II. Schedule of Valuation and Qualifying Accounts
Exhibits:
See “exhibit index” on the page following the consolidated financial statements and related footnotes
Report of Independent Registered Public Accounting Firm
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”) (a Minnesota Corporation) as of January 3, 2010 and December 28, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 3, 2010. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 January 3, 2010 and December 28, 2008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 3, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 19, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Minneapolis, Minnesota
March 19, 2010
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Famous Dave’s of America, Inc.
We have audited Famous Dave’s of America, Inc.’s and subsidiaries’ (the “Company”) (a Minnesota Corporation) internal control over financial reporting as of January 3, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Famous Dave’s of America, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 3, 2010, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of January 3, 2010 and December 28, 2008 and for each of the three years in the period ended January 3, 2010 of Famous Dave’s of America Inc., and subsidiaries and our report dated March 19, 2010 expressed an unqualified opinion on those financial statements.
Minneapolis, Minnesota
March 19, 2010
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 2010 AND DECEMBER 28, 2008
(in thousands, except share and per-share data)
See accompanying notes to consolidated financial statements.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JANUARY 3, 2010, DECEMBER 28, 2008 AND DECEMBER 30, 2007
(in thousands, except share and per-share data)
See accompanying notes to consolidated financial statements.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED
JANUARY 3, 2010, DECEMBER 28, 2008, AND DECEMBER 30, 2007
(in thousands)
See accompanying notes to consolidated financial statements.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
JANUARY 3, 2010, DECEMBER 28, 2008, AND DECEMBER 30, 2007
(in thousands)
See accompanying notes to consolidated financial statements.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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”. As of January 3, 2010, there were 177 restaurants operating in 37 states, including 45 company-owned restaurants and 132 franchise-operated restaurants. An additional 94 franchise restaurants were committed to be developed through signed area development agreements at January 3, 2010.
Seasonality - Our restaurants typically generate higher revenue in the second and third quarters of our fiscal year as a result of seasonal traffic increases and high catering sales experienced during the summer months, and lower revenue in the first and fourth quarters of our fiscal year, due to possible adverse weather which can disrupt customer and Associate transportation to our restaurants.
Principles of consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.
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 amount 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 foodservice. We make operating decisions on behalf of the Famous Dave’s brand which includes both company-owned and franchise-operated restaurants. In addition, all operating expenses are reported in total and are not allocated to franchising operations for either external or internal reporting.
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 year ended January 3, 2010 (fiscal 2009) consisted of 53 weeks and the fiscal years ended December 28, 2008 (fiscal 2008), and December 30, 2007 (fiscal 2007), both consisted of 52 weeks.
Unrestricted cash and cash equivalents - Cash equivalents include all investments with original maturities of three months or less or which are readily convertible into known amounts of cash and are not legally restricted. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000, while the remaining balances are uninsured at January 3, 2010. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable, Net - We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days sales outstanding and deterioration in general economic market conditions. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary. Any changes to the reserve are recorded in general and administrative expenses. The allowance for uncollectible accounts was approximately $67,000 and $457,000 at January 3, 2010 and December 28, 2008, respectively. The allowance balance decreased from the prior year primarily due to a couple of significant events in 2009. In 2008, we reserved approximately $300,000 for accounts receivable from a franchisee when management deemed collection of this receivable doubtful. Subsequently, in 2009, this receivable and associated reserve was written off. Additionally, in 2009, based on the final ruling of the bankruptcy courts, two of our franchisees’ accounts receivable balances were deferred. According to the rulings, each franchisee is to make payments in monthly installments and, accordingly, its receivable along with the accompanying allowance, was reclassified to short-term or long-term, respective based on its maturity dates. Accounts receivable are written off when they become uncollectible, and payments subsequently received on such receivables are credited to allowance for doubtful accounts. Accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivables in excess of provided allowances are determined uncollectible, they are charged to expense in the period that determination is made. Outstanding past due accounts receivable are subject to a monthly interest charge on unpaid balances which is recorded as interest income in our consolidated statements of operations. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, and annual financial information, which the franchisees are required to submit to us, as well as other variances.
Inventories - Inventories consist principally of small wares and supplies, food and beverages, and retail goods, and are recorded at the lower of cost (first-in, first-out) or market.
Property, equipment and leasehold improvements, net - Property, equipment and leasehold improvements are capitalized at a level of $250 or greater and are recorded at cost. Repair and maintenance costs are charged to operations when incurred. Furniture, fixtures, and equipment are depreciated 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 reasonably assured renewal options, or the estimated useful life of the assets. Décor that has been installed in the restaurants is recorded at cost and is depreciated using the straight-line method over seven years.
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. In the event of early debt re-payment, the capitalized debt issuance costs are written-off as a loss on early extinguishment of debt. During 2009, we recorded $159,000 as a loss on early extinguishment of debt for the early pay off of five long-term notes payable. The carrying value of our deferred debt issuance costs, classified as other long-term assets, is approximately $175,000, and $348,000 respectively, net of accumulated amortization of $532,000 and $313,000, respectively, as of January 3, 2010 and December 28, 2008.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Construction overhead and capitalized interest - We capitalize construction overhead costs at the time a building is turned over to operations, which is approximately two weeks prior to opening. In 2009, we did not have any new restaurant construction and, therefore, did not have any capitalized construction overhead. However, in fiscal 2008, we capitalized construction overhead costs of approximately $160,000. There was no capitalized interest in fiscal years 2009, 2008, or 2007 because construction was funded with cash flow from operations. We depreciate and amortize construction overhead and capitalized interest over the same useful life as leasehold improvements.
Advertising costs - Advertising costs are charged to expense as incurred. Advertising costs were approximately $4.0 million, $4.5 million, and $3.9 million for fiscal years 2009, 2008, and 2007, respectively, and are included in operating expenses in the consolidated statements of operations.
Software implementation costs - We capitalize labor costs associated with the implementation of significant information technology infrastructure projects. This is based on actual labor rates per person including benefits, for all the time spent in the implementation of software in accordance with the FASB Standard Codification for Goodwill and Other Intangibles. In fiscal 2009 and fiscal 2008, we capitalized approximately $4,000 and $11,000, respectively, in software implementation costs.
Research and development costs - Research and development costs represent salaries and expenses of personnel engaged in the creation of new menu and Limited-Time Offering (“LTO”) items, recipe enhancements and documentation activities. Research and development costs were approximately $369,000, $349,000, and $301,000, for fiscal years 2009, 2008, and 2007, respectively, and are included in general and administrative expenses in the consolidated statements of operations.
Pre-opening expenses - All start-up and pre-opening costs are expensed as incurred. In fiscal 2009, we did not open any new company-owned restaurants. We had pre-opening expenses of approximately $1.1 million in fiscal 2008 related to four new company-owned restaurants that opened in 2008 and approximately $1.2 million in fiscal 2007 related to four new company-owned restaurants that opened in 2007. Included in pre-opening expenses is pre-opening rent during the build-out period.
Lease accounting - In accordance with the FASB Standard Codification for Leases, we recognize lease expense on a straight-line basis for our operating leases over the entire lease term including lease renewal options and build-out periods where the renewal is reasonably assured and the build-out period takes place prior to the restaurant opening or lease commencement date. Rent expense recorded during the build-out period is reported as pre-opening expense. We account for construction allowances by recording a receivable when its collectability is considered probable, and relieving the receivable once the cash is obtained from the landlord for the construction allowance. Construction allowances are amortized as a credit to rent expense over the full term of the lease, including reasonably assured renewal options and build-out periods.
Recoverability of property, plant, equipment and leasehold improvement, impairment charges, and exit and disposal costs - In accordance with the FASB Standard Codification for Property, Plant and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. Fair value, as determined by the discounted future net cash flows, is estimated based on the best information available including estimated
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 future cash flows. Accordingly, actual results could vary significantly from the estimates.
We account for exit or disposal activities, including restaurant closures, in accordance with the FASB Standard Codification for Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets associated with a closed restaurant, any gain or loss is recorded in the same caption as the original impairment within our consolidated statements of operations.
Asset retirement obligation - We account for asset retirement obligations under the FASB Standard Codification for Asset Retirement and Environmental Obligations, which requires recognition of a liability for the fair value of a required asset retirement obligation (“ARO”) when such obligation is incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually obligated to remove in order to comply with the lease agreement. The net ARO liability included in other long term liabilities in our consolidated balance sheets was $89,000 at January 3, 2010 and $78,000 at December 28, 2008.
Public relations, marketing development fund and restricted cash - In fiscal 2004, we established a system-wide Public Relations and Marketing Development Fund. Company-owned restaurants, in addition to franchise-operated restaurants, that entered into franchise agreements with the Company after December 17, 2003, are required to contribute a percentage of net sales to the fund that is used for Public Relations and Marketing Development Fund efforts throughout the system. These restaurants were required to contribute 0.5% of net sales to this fund during fiscal 2009 and the percentage will remain the same for fiscal 2010. The assets held by this fund are considered restricted. Accordingly, we reflected the cash related to this fund in restricted cash and the liability is included in accounts payable on our consolidated balance sheets as of January 3, 2010 and December 28, 2008. As of January 3, 2010 and December 28, 2008, we had approximately $627,000 and $1.2 million in this fund, respectively.
Gift cards - We record a liability in the period in which a gift card is issued and proceeds are received. As gift cards are redeemed, this liability is reduced and revenue is recognized. We recognize gift card breakage income as an offset to operating expense based on a stratified breakage rate per year based on a percentage of sales when the likelihood of the redemption of the card becomes remote.
Interest income - We recognize interest income when earned.
Net income per common share - Basic net income per common share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income 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.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Following is a reconciliation of basic and diluted net income per common share:
There were 158,640 and 376,960 options outstanding as of January 3, 2010 and December 28, 2008, respectively that were not available to be included in the computation of diluted EPS because they were anti-dilutive. All options outstanding as of December 30, 2007 were used in the computation of diluted EPS for fiscal 2007.
Stock-based compensation - We follow the provisions of the FASB Standard Codification for Compensation-Stock Compensation, which requires us to recognize compensation cost for share-based awards granted to Associates based on their fair values at the time of grant over the requisite service period. Our pre-tax compensation cost for stock options and other incentive awards is included in general and administrative expenses in our consolidated statements of operations (see Note 9).
The FASB Standard Codification for Compensation-Stock Compensation requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
compensation cost (excess tax benefits) be classified as cash flows from financing activities. There were no stock options granted during fiscal years 2009, 2008 or 2007.
Revenue recognition - We record restaurant sales at the time food and beverages are served. We record sales of merchandise items at the time items are delivered to the guest. All sales taxes are presented on a net basis and are excluded from revenue. We have detailed below our revenue recognition policies for franchise and licensing agreements.
Franchise arrangements - Our franchise-related revenue consists of area development fees, initial franchise fees and continuing royalty payments. Our area development fee consists of a one-time, non-refundable payment equal to $10,000 per restaurant in consideration for the services, we perform in preparation of executing each area development agreement. Substantially all of these services, which include but are not limited to conducting market and trade area analysis, a meeting with Famous Dave’s Executive Team, and performing potential franchise background investigation, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Our initial, non-refundable, franchise fee is typically $30,000 to $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining non-refundable fee of $25,000 to $35,000 is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise entering into a lease agreement for the restaurant(s). The franchise agreement represents a separate and distinct earnings process from the area development agreements. Franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a monthly royalty of 5% of their net sales. During 2009, we offered a reduced royalty rate for twelve months from date of opening for franchisees that opened restaurants during 2009 and will offer the same rate for franchise restaurants that open during 2010.
Licensing and other revenue - We have a licensing agreement for our retail products, the initial term of which expires in April 2010 with renewal options of five years, subject to the licensee’s attainment of identified minimum product sales levels which were met in 2009. Licensing revenue is recorded based on royalties earned by the company in accordance with our agreement. Licensing revenue for fiscal years 2009, 2008, and 2007 was approximately $523,000, $408,000, and $334,000, respectively.
Periodically, we provide additional services, beyond the general franchise agreement, to our franchise operations, such as new restaurant training, information technology and décor installation services. The cost of these services is recognized upon completion and is billed to the respective franchisee and is generally payable on net 30-day terms. Other revenue related to these services for fiscal years 2009, 2008, and 2007 was approximately $449,000, $440,000, and $678,000, respectively.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) INVENTORIES
Inventories consisted approximately of the following at:
(3) NOTES RECEIVABLE
Notes receivable consisted approximately of the following at:
(1)
The note was originally classified as accounts receivable, but was reclassified to a note receivable due to the payment terms established by the bankruptcy court.
(2)
This note is net of a reserve of $99
(3)
This note is net of a reserve of $1
Future principal payments to be received on notes receivable are approximately as follows:
(in thousands)
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements, net, consisted approximately of the following at:
(5) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at:
(6) CREDIT FACILITY AND DEBT COVENANTS, LONG-TERM DEBT, AND FINANCING LEASE OBLIGATIONS
Credit Facility and Debt Covenants
The Company and certain of its subsidiaries (collectively known as the “Borrower”) currently have a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent and lender (the “Lender”). The Credit Agreement, contains a $30.0 million revolving credit facility (the “Facility”) with an opportunity, subject to the Company meeting identified covenants and elections, to increase the commitment to $50.0 million.
During fiscal 2009, the Company reclassified the balance on its line of credit from short-term to long-term debt on its balance sheet, with a maturity date of the facility of May 1, 2013. Previously, the line of credit was classified as a current liability due to subjective acceleration provisions in the Credit Agreement. While the subjective acceleration language is still present in the credit agreement, the Company is in a strong financial position due to the recent $11.5 million debt pay down of the long-term notes, our line of credit, and five solid years of positive earnings. Additionally, the Company has had no occurrences of default for which a waiver was not obtained. Therefore, the likelihood of acceleration is deemed remote. Based on the Company’s strong financial position and for comparability purposes, the Company has reclassified the prior year’s line of credit balance to a long-term liability.
If the bank were to call the line of credit prior to expiration, the Company believes there are multiple options available to obtain other sources of financing. While possibly at different terms, the
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) CREDIT FACILITY AND DEBT COVENANTS, LONG-TERM DEBT, AND FINANCING LEASE OBLIGATIONS (continued)
Company believes there would be other lenders available and willing to finance a new credit facility. Additionally, in 2009, the Company paid off approximately $7.0 million of long-term mortgage debt. As such, the Company could leverage these restaurants by entering into sale leaseback transactions to provide additional cash to the Company.
Principal amounts outstanding under the Facility bear interest either at an adjusted Eurodollar rate plus an applicable margin or at a Base Rate plus an applicable margin. The Base Rate is defined in the agreement as the greater of the Federal Funds Rate (0.25% at January 3, 2010) plus 0.5% or Wells Fargo’s prime rate (3.25% at January 3, 2010). The applicable margin will depend on the Company’s Adjusted Leverage Ratio, as defined, at the end of the previous quarter and will range from 1.00% to 2.00% for Euro Dollar Rate Loans and from -0.50% to +0.50% for Base Rate Loans. Unused portions of the Facility will be subject to an unused Facility fee which will be equal to either 0.25% or 0.375% of the unused portion, depending on the Company’s Adjusted Leverage Ratio. Our rate for the unused portion of the Facility as of January 3, 2010, was 0.375%. An increase option exercise fee will apply to increased amounts between $30.0 and $50.0 million.
The Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Borrower with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Borrower, among others. The Facility also includes various financial covenants that have maximum target capital expenditures, cash flow ratios, and adjusted leverage ratios. If the Company’s Adjusted Leverage Ratio is greater than 3.00 to 1.00, an additional covenant applies that limits the maximum royalty receivables aged past 30 days. In addition, capital expenditure limits include permitted stock repurchase limits (limited to $10.0 million in aggregate during any 12 month period, and $20.0 million in aggregate during the term of the agreement).
The Credit Agreement currently provides for up to $3.0 million in letters of credit to be used by the Company, with any amounts outstanding reducing our availability for general corporate purchases, and also allows for the termination of the Facility by the Borrower without penalty at any time. At January 3, 2010 we had $13.5 million in borrowings under the Facility. We had $150,000 in Letters of Credit as required by our fiscal 2005 self-funded workers’ compensation insurance policy, and $255,000 in letters of credit for real estate locations. As of January 3, 2010 we were in compliance with all covenants under the Credit Agreement.
Due to the impairment charges and lease termination fees recorded during fiscal 2008, we were not in compliance with adjusted leverage ratio covenant under the Facility. We amended our credit agreement to change the definition of consolidated EBITDA to include a defined amount of impairment charges and lease termination fees in any fiscal 2008 quarter. Additionally, we were also not in compliance with the franchise royalty receivable covenant as of December 28, 2008. We received waivers from the Lender for each of these events of non-compliance and were in compliance with all covenants under the Facility as of December 28, 2008. We paid fees of approximately $45,000 related to the amendment, which were deferred during the first quarter of 2009 and are being amortized over the remaining life of the Facility.
We expect to use any borrowings under the Credit Agreement for general working capital purchases as needed. Under the Facility, the Borrower has granted the Lender a security interest in all current and future personal property of the Borrower.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) CREDIT FACILITY AND DEBT COVENANTS, LONG-TERM DEBT, AND FINANCING LEASE OBLIGATIONS (continued)
Our credit facility consisted of the following at:
Required principal payments under our credit facility are as follows:
Long-Term Debt
During 2009, we elected to repay five notes prior to their expiration. These notes, which were related to two of our Minnesota restaurants and three of our Virginia restaurants, had annual interest rates ranging from 8.10% to 10.53% and were originally due between February 2020 and October 2023. A total of approximately $7.1 million was paid to retire these notes early. Included in the debt retirement payment was a pre-payment penalty of approximately $350,000 reflected as a loss on early extinguishment of debt in our consolidated statements of operations. We recorded a non-cash charge of approximately $159,000 to write-off associated deferred financing fees as a result of the early repayment.
Long-term debt consisted approximately of the following at:
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) CREDIT FACILITY AND DEBT COVENANTS, LONG-TERM DEBT, AND FINANCING OBLIGATIONS (continued)
Financing Lease Obligation
On March 31, 1999, the Company completed a $4.5 million financing obligation involving three existing restaurants as part of a sale/leaseback transaction. Under this financing, we are obligated to make monthly payments of $48,331 (which increases 4.04% every two years) for a minimum of 20 years. At the end of the 20 year lease term we may extend the lease for up to two additional five year terms. We also have the option to purchase the leased restaurants on the 20th anniversary of the lease term and between the first and second five year option terms. The option purchase price is the greater of $4.5 million or the fair market value, as defined, of the properties at the time the purchase option is exercised. 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 had been depreciated over a 30 year term until fiscal 2007 when it was determined that it was likely that we would not renew the lease at the end of the original term. This resulted in a change in accounting estimate for the useful life of the restaurant’s assets to 20 years from 30 years. Accelerated depreciation of $61,000 was recorded in 2007 and will continue to be recorded on an accelerated basis prospectively. In addition, as the monthly lease payments are made, the obligation will be reduced by the revised 20 year amortization table.
Financing lease obligations consisted of the following at:
Required principal payments under our financing lease are as follows:
(7) OPERATING LEASE OBLIGATIONS
We have various operating leases for existing and future restaurants and corporate office space with remaining lease terms ranging from 2 to 38 years, including lease renewal options. Eleven of the leases require percentage rent of between 4% and 7% of annual gross sales, typically above a natural breakeven
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7)
OPERATING LEASE OBLIGATIONS (continued)
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 costs for fiscal years 2009, 2008, and 2007, including rent, common area maintenance costs, real estate taxes and percentage rent, were approximately $7.1 million, $7.2 million, and $5.5 million, respectively. Rent expenses only (excluding percentage rent) were approximately $5.1 million, $4.6 million, and $3.8 million, for fiscal years 2009, 2008, and 2007, respectively. Percentage rent was approximately $368,000, $264,000, and $172,000 for fiscal years 2009, 2008 and 2007, respectively. In December of 2009, the Company sublet 2,100 square feet of its corporate office space until the end of its base lease term. Sublease income has reduced the future minimum lease payments.
Future minimum lease payments (including renewal options) existing at January 3, 2010 were:
(8)
RELATED PARTY TRANSACTIONS
Famous Ribs of Georgia, Snellville, Marietta and Alpharetta, LLC - In fiscal 2008 and 2007, we sublet three restaurants to our former President and CEO, Martin O’Dowd, for a total of $296,000 and $496,000, respectively, in lease and real estate tax payments. Mr. O’Dowd did not reimburse us for the fiscal 2008 amounts. He reimbursed us for the 2007 amounts which offset our rent expense for these three location in fiscal 2007. These restaurants were acquired in August 2008 and subsequently closed by the Company in November 2008.
On December 13, 2007, our former Chief Executive Officer resigned. In accordance with our Company by-laws and succession policy, F. Lane Cardwell, Jr. became the Interim-Chief Executive Officer effective immediately. In conjunction with those new interim responsibilities, he was paid $78,000 in 2008 and $18,000 in 2007. A new Chief Executive Officer was named in April 2008 who subsequently resigned in September 2008, when our current Chief Executive Officer was named. F. Lane Cardwell remained on the Company’s Board of Directors until May 2009. As a member of our Board of Directors he received stock compensation through fiscal 2008 for his service on our Board of Directors.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES
We recognized stock-based compensation expense in our consolidated statements of operations for fiscal years 2009, 2008 and 2007, respectively, as follows:
Stock-based Compensation
We have adopted a 1995 Stock Option and Compensation Plan, a 1997 Employee Stock Option Plan, a 1998 Director Stock Option Plan and a 2005 Stock Incentive Plan (the Plans), pursuant to which we may grant stock options, stock appreciation rights, restricted stock, performance shares, and other stock and cash awards to eligible participants. Under the Plans, an aggregate of 338,042 shares of our Company’s common stock remained unreserved and available for issuance at January 3, 2010. The stock options we had issued under the Plans were fully vested as of January 3, 2010 and expire 10 years from the date of grant. The 1995 Stock Option and Compensation Plan expired on December 29, 2005, the 1997 Employee Stock Option Plan expired on June 24, 2007, and the 1998 Director Stock Option Plan expired on June 19, 2008. Although incentives are no longer eligible for grant under these plans, each such plan will remain in effect until all outstanding incentives granted hereunder have either been satisfied or terminated.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
Information regarding our Company’s stock options is summarized below:
The following table summarizes information about stock options outstanding at January 3, 2010:
(number outstanding and number exercisable in thousands)
The aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during fiscal 2009 was approximately $45,000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
As of January 3, 2010, the aggregate intrinsic value of options outstanding and exercisable was approximately $307,000.
2005 Stock Incentive Plan
On May 12, 2005, the Company’s shareholders approved the adoption of the Famous Dave’s of America, Inc. 2005 Stock Incentive Plan (the “2005 Plan”). The purpose of the 2005 Plan is to increase shareholder value and to advance the interests of the Company by furnishing a variety of economic incentives designed to attract, retain and motivate Associates, certain key consultants and directors of the Company. The maximum number of shares of common stock which may be issued under the 2005 Plan is currently 950,000 shares, subject to adjustment. The Compensation Committee of the Company’s Board of Directors administers the 2005 Plan. Awards may be granted to Associates (including officers), members of the Board of Directors and consultants or other independent contractors. Awards that may be granted under the 2005 Plan include performance shares, incentive and non-statutory stock options, stock appreciation rights, stock awards, and restricted stock. The 2005 Plan shall remain in effect until all incentives granted under the 2005 Plan have either been satisfied by the issuance of shares of common stock, the payment of cash, or have been terminated under the terms of the 2005 Plan and all restrictions imposed on shares of common stock in connection with their issuance under the 2005 Plan have lapsed. No incentives may be granted under the 2005 Plan after the tenth anniversary of the date the 2005 Plan was approved by the shareholders of the Company.
Performance Shares
Since fiscal 2005, stock incentive awards for employees of the Company (whom we refer to as Associates), including officers, have primarily taken the form of performance shares. We have a program under which management and certain director-level Associates may be granted performance shares under the 2005 Stock Incentive Plan, subject to certain contingencies. Issuance of the shares underlying the performance share grants is contingent upon the Company achieving a specified minimum percentage of the cumulative earnings per share goals (as determined by the Compensation Committee) for each of the three fiscal years covered by the grant. Upon achieving the minimum percentage, and provided that the recipient remains an Associate during the entire three-year performance period, the Company will issue the recipient a percentage of the performance shares that is based upon the percentage of the cumulative earnings per share goals achieved. No portion of the shares will be issued if the specified percentage of earnings per share goals is achieved in any one or more fiscal years but not for the cumulative three-year period.
No recipient will have any rights as a shareholder based on the performance share grants unless and until the conditions have been satisfied and the shares have been issued to the recipient. In accordance with this program, we recognize as compensation expense the value of these stock grants as they are earned in our consolidated statements of operations throughout the performance period.
As of January 3, 2010, we had three performance share programs in progress. All of these performance share awards qualify for equity-based treatment as required under the FASB Standards Codification for Stock Compensation. Accordingly, we recognize compensation cost for these share-based awards based on their fair value, which is the closing stock price at the date of grant over the requisite service period (i.e. fixed treatment). In the third year of any performance share program the estimated attainment percentage is based on the forecasted earnings per share for that program. For the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
2007-2009 program, the attainment percentage was 88.5%. Based on our historical average of approximately 90% attainment of performance share payout, we estimated our attainment rate for the performance share program in year two to be approximately 90%. In the first year of any program, we estimate the attainment rate to be 100%. In accordance with FASB Standards Codification for Stock Compensation, we have recorded compensation net of the estimated non-attainment rates. We will continue to evaluate the need to adjust the attainment percentages in future periods.
During the first quarter of fiscal 2009, we issued 26,484 shares upon satisfaction of conditions under the 2006-2008 performance share program, representing the achievement of approximately 82.3% of the target payout for this program. Recipients elected to forfeit 10,336 of those shares to satisfy tax withholding obligations, resulting in a net issuance of 16,148 shares.
For each of the three programs currently in progress, if the Company achieves at least 80% of the Cumulative EPS Goal, then each recipient will be entitled to receive a percentage of the “Target” number of Performance Shares granted that is equal to the percentage of the Cumulative EPS Goal achieved, up to 100%. With all of the plans, except the 2009 - 2011 plan, if the Company achieves between 100% and 150% of the Cumulative EPS Goal, each recipient will be entitled to receive an additional percentage of the “Target” number of Performance Shares granted equal to twice the incremental percentage increase in the Cumulative EPS Goal over 100% (e.g., if the Company achieves 120% of the Cumulative EPS Goal, then the recipient will be entitled to receive 140% of his or her “Target” Performance Share amount). The maximum share payout a recipient will be entitled to receive under the 2009 - 2011 plan is 100% of the “Target” number of Performance Shares granted if the Cumulative EPS Goal is met.
The current status of our performance share programs as of January 3, 2010, is as follows:
(1)
Assumes achievement of 100% of the applicable Cumulative EPS Goal.
(2)
The aggregate Target Number of Performance Shares awarded under this program increased significantly over prior years as a result of one-time grants related to the hiring of several new executives and board members in late 2008 and early 2009, and a significantly lower stock price at the grant date.
(3)
Performance Share amount net of forfeitures due to employee departures. Based on actual achievement of 88.48% of the Cumulative EPS Goal over the completed three year performance period.
(4)
Based on achievement of 90.7% of the Cumulative EPS Goal over the first two years of the performance period.
(5)
Assumes achievement of 100% of the applicable Cumulative EPS Goal.
Restricted Stock Units
On September 11, 2008, Christopher O’Donnell was promoted to President and Chief Executive Officer. Also on September 11, 2008, and pursuant to the agreement governing Mr. O’Donnell’s employment, the Company granted 50,000 restricted stock units having an aggregate grant date fair value of $454,000. These restricted stock units will vest in three equal installments on the three, four and five
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
year anniversaries of the grant date provided that Mr. O’Donnell remains employed by the Company through the applicable vesting date, and will vest in its entirety upon a “change of control” as defined in the employment agreement. In accordance with FASB Standard Codification for Compensation-Stock Compensation, the compensation expense for this grant will be recognized in equal quarterly installments as general and administrative expense in our consolidated statements of operations commencing in the third quarter of 2008 and continue through the applicable service period which expires in the third quarter of fiscal 2013.
In addition, on the same date, the Company made a grant of 25,000 restricted stock units to the Company’s Chief Financial Officer, Diana Purcel, for a grant date fair value of $227,000. This grant is subject to the same terms and conditions as Mr. O’Donnell’s grant.
Deferred Stock Unit Plan
We have an Executive Elective Deferred Stock Unit Plan (Deferred Stock Unit Plan), in which executives can elect to defer all or part of their compensation or commissions, if applicable, for a specified period of time. The amount of compensation that is deferred is converted into a number of stock units, as determined by the share price of our common stock on the date the annual bonuses are approved by the Board of Directors. In accordance with the FASB Standard Codification for Compensation-Stock Compensation, this plan qualifies for liability treatment. Accordingly, we recognize compensation expense throughout the deferral period to the extent that the share price of our common stock increases, and reduce compensation expense throughout the deferral period to the extent that the share price of our common stock decreases. (i.e. “mark-to-market”). As of January 3, 2010 and December 28, 2008 we had no deferrals.
One of our prior executives elected to defer for a two-year period, a portion of their fiscal 2006 bonus, the amount of which was determined on February 21, 2007, totaling approximately $71,000, in accordance with the Deferred Stock Unit Plan discussed above. We recognized income of approximately $19,000 in our consolidated statements of operations for fiscal 2007, as related to this plan. The executive left the Company in December 2007 and in accordance with the plan document was paid out in February 2008.
Common Share Repurchases
On September 27, 2007, our Board of Directors authorized a stock repurchase program that authorized the repurchase of up to 1.0 million shares of our common stock from time to time in both the open market or through privately negotiated transactions. As of December 30, 2007 we had repurchased 482,000 shares under this program for approximately $6.9 million at an average market price per share of $14.38, excluding commissions. As of August 2008, we had repurchased all of the shares under the program for approximately $11.3 million at an average market price of $11.33, excluding commissions.
On August 6, 2008, our Board of Directors authorized a stock repurchase program that authorized the repurchase of up to 1.0 million shares of our common stock in both the open market or through privately negotiated transactions. In fiscal 2009, we had repurchased 31,600 shares under this program for approximately $188,000 at average market price of $5.95. Total repurchases under this authorization were 107,012 shares under this authorization for approximately $868,000 at an average market price per share of $6.27, excluding commissions as of January 3, 2010.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
Board of Directors’ Compensation
On March 12, 2009, the chairperson of the Audit Committee of our Board of Directors resigned, and a replacement was named to fill her seat on an interim basis as of such date. At the Company’s annual shareholders meeting held May 5, 2009, the interim Audit Committee chairperson was elected along with the other Company directors, to a one-year term on the Board of Directors. Commensurate with her assuming her new position, she was granted 25,000 restricted shares with a grant date fair value of $168,000 on May 5, 2009, which will vest ratably over a period of five years beginning on March 12, 2009, the date on which she assumed her interim role on the Company’s Board of Directors.
In May 2009, we awarded our independent board members shares of common stock for their service on our board for May 2009 - April 2010. These shares were unrestricted upon issuance, but require repayment of the prorated portion, or equivalent value thereof in cash, in the event that a board member fails to fulfill his or her term of service. In total, 66,000 shares were issued on May 5, 2009, on which date the closing price of our common stock was $6.72. The total compensation cost of approximately $444,000 will be reflected in general and administrative expenses in our consolidated statements of operations for fiscal 2009, and fiscal 2010, and will be recognized over the term of the director’s service from May 2009 to April 2010. In total, compensation expense for the board of directors for the term of their service fulfilled during fiscal 2009 was $340,000.
On May 29, 2009, F. Lane Cardwell, Jr. resigned from the Board of Directors, and September 29, 2009, the Company named Wallace B. Doolin to its Board of Directors to fill the vacated seat. Upon assuming his new position, Mr. Doolin was granted 25,000 restricted shares on which date the closing price of our common stock was $6.00. The grant date fair value was $150,000, which will vest ratably in annual installments over a period of five years. He was also granted 5,000 shares with a total fair value of $30,000 which will vest over the term of his service from September 2009 until the annual shareholders’ meeting in May 2010.
In February 2008, we awarded our independent board members shares of common stock for their service on our board for fiscal 2008. These shares were unrestricted upon issuance, but would have required repayment of the prorated portion or equivalent value thereof, in cash, in the event of a board member not fulfilling his or her term of service. In total, 25,500 shares were issued on February 20, 2008, on which date the price of our common stock at the close of market was $10.42. The total compensation cost of approximately $266,000 was reflected in general and administrative expenses in our consolidated statements of operations for fiscal 2008.
In February 2007, we awarded our independent board members shares of common stock for their service on our board for fiscal 2007. These shares were fully vested upon grant and were unrestricted, but would have required repayment of the prorated portion or equivalent value thereof, in cash, in the event of a board member not fulfilling their term of service. In total, 25,500 shares were issued on February 21, 2007, on which date the price of our common stock at the close of market was $18.74. The total compensation cost of approximately $478,000 was reflected in general and administrative expenses in our consolidated statements of operations for fiscal 2007.
Warrants
As part of our acquisition of four restaurants during fiscal year 1999, we issued 200,000 warrants which were set to expire in December 2004. All stock warrants had been exercised or redeemed prior to
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
STOCK OPTIONS, PERFORMANCE SHARES, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES (continued)
their expiration. During fiscal 2004, 10,000 of the warrants were exercised at a price of $6.00 per share and we redeemed the remainder of the warrants for approximately $143,000 which represents the difference between the original exercise price of the warrants and the closing market price of the Company’s stock on the date of the transactions. These warrants were paid for in 2007.
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (“ESPP”), which gives eligible employees the option to purchase Common Stock (total purchases in a year may not exceed ten percent of an employee’s current year compensation) at 100% of the fair market value of the Common Stock at the end of each calendar quarter. There were approximately 10,050 and 8,100 shares purchased with a fair value of $5.22 and $6.11 during the fiscal year ended January 3, 2010 and December 28, 2008, respectively. For the fiscal years ended January 3, 2010 and December 28, 2008 the Company did not recognize any expense related to the stock purchase plan due to it being non-compensatory as defined by IRS Section 423.
We provide for income taxes based on our estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
At January 3, 2010, we had cumulative net operating loss carry-forwards of approximately $27.7 million for state tax purposes, (a valuation allowance has been computed on $27.0 million of the state net operating loss carry forward); the remaining $700,000 will begin to expire in fiscal 2019 if not used. We also had cumulative tax credit carry-forwards of approximately $2.2 million which, if not used, will begin to expire in fiscal 2021.
The following table summarizes the income tax (expense) benefit for income taxes:
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the FASB Standards Codification for Accounting for Uncertainty in Income Taxes - An interpretation of this Standard effective January 1, 2007. The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to be taken on a tax return. Under this Standard, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.
The impact on the Company’s financial statements of adopting this Standard was insignificant; as a result, a cumulative effect adjustment to the January 1, 2007 balance of retained earnings was not recorded.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits for the years ended January 3, 2010 and December 28, 2008, is presented in the table below:
Unrecognized tax benefits of $55,000 at January 3, 2010 had an effect on the annual effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of January 3, 2010 will change significantly by January 2, 2011.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $9,000 and $0 on a gross basis at January 3, 2010 and December 28, 2008, respectively. Interest and penalties recognized in the Consolidated Statements of Operations related to uncertain tax positions amounted to $9,000 of expense in 2009 and none in 2008.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As of January 3, 2010, the Company was no longer subject to income tax examinations for taxable years before 2006 in the case of U.S. federal, respectively, and taxable years generally before 2005 in the case of state taxing authorities, consisting primarily of Minnesota.
At January 3, 2010, we believe that the realization of the deferred tax asset is more likely than not based on our taxable income for fiscal 2009 and fiscal 2008 and based on the expectation that our Company will generate the necessary taxable income in future years, except for a portion of the state net operating loss carry forward, for which the Company has created a $1.4 million (tax effected) valuation allowance.
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 years 2009, 2008 and 2007, our deferred tax asset was reviewed for expected utilization using a “more likely than not”
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approach as required by FASB Standard Codification for Income Taxes, by assessing the available positive and negative evidence surrounding its recoverability.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) INCOME TAXES (continued)
Reconciliation between the statutory rate and the effective tax rate is as follows:
(11) SUPPLEMENTAL CASH FLOWS INFORMATION
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) 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. During fiscal 2009, we matched 25.0%, and during fiscal 2008 and fiscal 2007, we matched 50.0%, respectively, of the employee’s contribution up to 4.0% of their earnings. Employee contributions were approximately $538,000, $593,000, and $556,000 for fiscal 2009, 2008, and 2007, respectively. The employer match was $82,000, $178,000 and $171,000 for fiscal years 2009, 2008, and 2007, respectively. There were no discretionary contributions to the Plan during fiscal years 2009, 2008, and 2007.
Non-Qualified Deferred Compensation Plan
We have a Non-Qualified Deferred Compensation Plan effective as of February 25, 2005 (the “Plan”). Eligible participants are those employees who are at the “director” level and above and who are selected by the Company to participate in the Plan. Participants must complete a deferral election each year to indicate the level of compensation (salary, bonus and commissions) they wish to have deferred for the coming year. This deferral election is irrevocable except to the extent permitted by the Plan Administrator, and the Regulations promulgated by the IRS. During fiscal 2009, we matched 25%, and in fiscal 2008, we matched 50%, respectively, of the first 4.0% contributed and paid a declared interest rate of 6.0% in fiscal 2009 and 8.0% in fiscal 2008 and fiscal 2007, respectively, on balances outstanding. The Board of Directors administers the Plan and could change the interest rate or any other aspects of the Plan at any time.
Deferral periods are capped at the earlier of termination of employment or not less than three calendar years following the end of the applicable Plan Year. Extensions of the deferral period for a minimum of five years are allowed provided the election is made at least one year before the first payment affected by the change. Payments can be in a lump sum or in equal payments over a two-, five- or ten-year period, plus interest from the commencement date.
The Plan assets are kept in an unsecured account that has no trust fund. In the event of bankruptcy, any future payments would have no greater rights than that of an unsecured general creditor of the Company and they confer no legal rights for interest or claim on any assets of the Company. Benefits provided by the Plan are not insured by the Pension Benefit Guaranty Corporation (PBGC) under Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”), because the pension insurance provisions of ERISA do not apply to the Plan.
For the Plan year ended January 3, 2010, eligible participants contributed approximately $65,000 to the Plan and the Company provided matching funds and interest of approximately $60,000, net of distributions of approximately $189,000, due to executive departures. In accordance with our plan, executive distributions were made in fiscal 2009.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial information for fiscal years 2009 and 2008.
(in thousands, except per share data)
(14) LITIGATION
In the normal course of business, the Company is involved in a number of litigation matters that are incidental to the operation of the business. These matters generally include, among other things, matters with regard to employment and general business-related issues. The Company currently believes that the resolution of any of these pending matters will not have a material adverse effect on its financial position or liquidity, but an adverse decision in more than one of the matters could be material to its consolidated results of operations.
(15) ASSET IMPAIRMENT AND ESTIMATED LEASE TERMINATION AND OTHER CLOSING COSTS
In accordance with the FASB Standard Codification for Property, Plant and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. Fair value, as determined by the discounted future net cash flows, is estimated 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 future cash flows. Accordingly, actual results could vary significantly from the estimates.
We account for exit or disposal activities, including restaurant closures, in accordance with the FASB Standard Codification for Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants.
These costs are generally expensed as incurred. Additionally, at the date we cease using a property under
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) ASSET IMPAIRMENT AND ESTIMATED LEASE TERMINATION AND OTHER CLOSING (continued)
an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets associated with a closed restaurant, any gain or loss is recorded in the same caption as the original impairment within our consolidated statements of operations.
During fiscal 2009, we executed lease termination agreements with the landlords of three previously closed restaurants and negotiated a lease termination settlement for a restaurant site where construction had never commenced. The termination fees were approximately $1.3 million, including commissions and legal fees. This resulted in a gain of approximately $162,000, which represents the difference between the amount of the termination payments and the remaining lease reserve for these locations. This gain was reflected as a credit to asset impairment and estimated lease termination and other closing costs in our consolidated statement of operations. Also, the Company recorded asset impairment charges of approximately $129,000, which was related to a software product that was replaced with an alternative solution prior to implementation. The Company recorded costs for restaurants previously closed of approximately $231,000 during fiscal year 2009.
In 2008, the Company closed an existing restaurant in Chicago, Illinois, in conjunction with opening a new prototype restaurant within four miles of the existing restaurant, supporting the Company’s strategy to reposition legacy restaurants within a market when opportunities arise. The closure resulted in a charge of approximately $177,000 representing the disposal of assets net of a deferred rent credit. The Company negotiated a lease buyout for this location and another location in the Chicago market, that had previously closed, for a total of $80,000. The agreement with the landlord for these two locations was subject to a bankruptcy judge’s final approval, which was obtained in the third quarter of 2009. This final settlement was contained in the $1.3 million repayment above. Additionally, during fiscal 2008, the Company recorded non-cash impairment charges for three other locations, one in Chicago and two in Minneapolis for the impairment of fixed assets for a total of approximately $2.6 million, based on the Company’s assessment of expected cash flows from these locations over the remainder of the respective original lease terms. Also, the Company wrote off approximately $105,000 of failed site preparation costs for two locations that we abandoned.
Also, during fiscal 2008, the Company acquired three franchise restaurants in Atlanta from a franchisee in exchange for amounts owed and deemed uncollectible. Based on the Company’s assessment of expected cash flows from those locations, a net impairment charge of approximately $1.8 million was recorded related to assets acquired. In December 2008, the Company recorded a lease reserve in accordance with the FASB Standards Codification for Exit or Disposal Cost Obligations, of approximately $2.2 million for the three locations in total due to the closure of these locations. This represented the net present value of all lease obligations, net of estimated sublease income, which was estimated at zero as of December 28, 2008. The long-term portion of the $1.7 million lease reserve was classified as other long-term liabilities and the balance of the reserve was in current liabilities. We did not incur any significant additional costs related to these locations.
During the fourth quarter of 2007, we recorded an asset impairment charge of approximately $569,000 for an underperforming company-owned restaurant in the Chicago, Illinois market. This impairment charge reflected the non-cash write-down of the net book value of the assets of that restaurant.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) ASSET IMPAIRMENT AND ESTIMATED LEASE TERMINATION AND OTHER CLOSING COSTS (continued)
(16) SUBSEQUENT EVENTS
The Company evaluated for the occurrence of subsequent events through the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events occurred except as noted below.
On March 3, 2010, the Company purchased certain assets of seven of nine Famous Dave’s restaurants located in New York and New Jersey previously owned and operated by a Famous Dave’s franchisee, North Country BBQ Ventures, Inc. (North Country). The assets include: inventory, property, equipment, leasehold improvements, lease interests and liquor licenses. These assets were purchased under Section 363 of Chapter 11 of the U.S. Bankruptcy Code and the acquisition was approved by the United States Bankruptcy Court for the District of New Jersey. The Company did not assume any liabilities of North Country except for the outstanding gift cards that the Company chose to honor. Famous Dave’s of America, Inc. will continue to operate the restaurants. For the two restaurants that were not acquired, one was subsequently closed and the other was purchased by another buyer.
The net cash paid of approximately $6.8 million was funded by a loan from Wells Fargo Bank, N.A., and was net of approximately $649,000 of pre- and post-petition notes receivable repaid by the seller for a total purchase price of approximately $7.4 million. This loan has a seven year term, bears interest at LIBOR plus 225 basis points and has no prepayment penalties associated with it. In connection with this term loan, the Company has amended its existing Credit Agreement with Wells Fargo Bank, N.A. to address future covenant requirements to ensure compliance as a result of the additional indebtedness. We incurred approximately $25,000 for debt financing costs associated with the amended and restated credit agreement which will be deferred and amortized over the remaining term of the agreement.
This acquisition was accounted for using the purchase method of accounting in accordance with FASB Standards Codification for Business Combinations.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) SUBSEQUENT EVENTS (continued)
The excess of the aggregate fair market value of the assets acquired over the purchase price resulted in a gain on the acquisition which will be reflected in the quarter ended April 4, 2010. We are currently in the process of completing the valuation of acquired assets. Finally, the Company expects to incur approximately $334,000 of acquisition-related costs, $79,000 of which were recorded in fiscal 2009, and we estimate $255,000 which will be recorded in fiscal 2010.
FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
Financial Statement Schedule
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 19, 2010 by the following persons on behalf of the registrant, in the capacities indicated.
EXHIBITS
EXHIBITS (continued)
EXHIBITS (continued)