PART I
Summary of Business Results
and Plans
Famous Daves of America, Inc. (Famous Daves, the Company,
we, us or our) was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis, Minnesota in June 1995. As of January 1, 2017, there were 176 Famous Daves
restaurants operating in 32 states, the Commonwealth of Puerto Rico, Canada, and the United Arab Emirates, including 37 Company-owned restaurants and 139 franchise-operated restaurants. An additional 62 franchise restaurants were committed to be
developed through signed area development agreements at January 1, 2017.
The
Companys total revenue declined from $114.2 million in fiscal 2015 to $99.2 million in fiscal 2016. This decline was primarily the result of refranchising five, and the closure of one, company-owned restaurants in fiscal 2015, the
loss of the 53
rd
operating week which occurred in fiscal
2015, a Company-owned comparable sales decline of 5.0% and a decline in royalty revenue primarily driven by 4.7% franchise-operated comparable sales decline.
Fiscal 2016 loss per basic share was $0.42, which included approximately $4.8 million or $0.41 per basic share, of asset impairment and estimated lease terminations and other closing costs.
Approximately $4.4 million of these charges were associated with 11 restaurants which were slow to respond to several initiatives to turnaround operating performance. Additionally, there was a lease termination charge for a previously
refranchised restaurant. Finally, operating performance declined as a result of a year over year increase in food and beverage, labor and benefit, and restaurant operating and occupancy costs partially offset by a decline in general and
administrative expenses.
In first quarter of fiscal 2016, the Company refranchised seven company-owned
restaurants in the Chicago area (located in Addison, Algonquin, Bolingbrook, Evergreen Park, North Riverside, Orland Park, and Oswego, Illinois). This transaction resulted in classifying these restaurants as Discontinued Operations for
all years reported and excluding them from the operating results.
It is important to note, sales for
franchise-operated restaurants are not revenues of the Company and are not included in the Companys consolidated financial statements. The Companys management believes that disclosure of sales for franchise-operated restaurants provides
useful information to investors because historical performance and trends of Famous Daves franchisees relate directly to trends in franchise royalty revenues that the Company receives from such franchisees and have an impact on the perceived
success and value of the Famous Daves brand. It also provides a comparison against which management and investors may evaluate the extent to which Company-owned restaurant operations are realizing their revenue potential.
The Company continues to be focused on four key priorities: revitalizing sales and traffic, reducing costs, elevating
organizational effectiveness, and rebuilding culture. The Company plans to revitalize sales and traffic through the continued focus on the totality of the Guest experience; food and beverage innovation that concentrates on value; the continued
optimization of marketing platforms; restaurant refresh and remodel packages; and digital services to drive To Go and Catering sales.
The Company plans on reducing costs through continued investment in its labor model, based on time and motion studies that will allow the Company to achieve greater, sustained levels of labor
efficiencies. Additionally, the Company is driving simplification on the menu, thereby removing operational complexity and allowing it to leverage supply chain efficiencies. The Company will maintain a continued focus on theoretical food costs
versus actual food costs and on reducing waste in its restaurants. Also, the focus on reducing general and administrative expenses through the removal of redundant and unproductive costs and systems will continue.
Finally, the Company continues to work on improving organizational effectiveness through its allocation of time to more
value enhancing activities such as continued operations teach-backs of food execution and Guest services throughout the Company and franchise field organization. The Company is focused on improving its franchise relationships through improved data
analytics and the sharing of best practices, and is improving employee engagement throughout the organization.
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The Company continues to execute on its restaurant optimization plan. The
Company will aim to sell some of its existing restaurants to existing and new franchisees that have the ability to not only acquire these restaurants but also to develop additional restaurants. The Company believes refranchising focuses the
organization on serving its franchisees.
Financial Information about Segments
Since inception, the Companys revenue, operating income and assets have been attributable to the single industry
segment of the foodservice industry. The Companys revenue and operating income for each of the last three fiscal years, and our assets for each of the last two fiscal years, are set forth elsewhere in this Annual Report on Form
10-K
under Item 8, Financial Statements and Supplementary Data.
Narrative Description of Business
Famous Daves restaurants, a majority of which offer full table service, feature wood-smoked and
off-the-grill
entrée favorites that fit into the broadly defined barbeque category. We seek to differentiate ourselves by providing high-quality food in distinctive and
comfortable environments with signature décor and signage. As of January 1, 2017, 32 of our Company-owned restaurants were full-service and five were counter-service. Generally, our prototypical design includes the following elements: a
designated bar, a signature exterior smokestack, a separate entrance for our To Go business and a patio (where available). We have designs that can be adapted to fit various location sizes and desired service styles such as full-service or
counter-service.
In 2016, four franchise openings were a mixture of conversions of existing full-service
casual dining restaurants to our concept as well as new construction, including two restaurants opened in the United Arab Emirates. In fiscal 2016 and 2015, we did not open any Company-owned restaurants. In fiscal 2014, the Company completed a
significant remodel of two Chicago-area restaurants.
We offer conversion packages that provide our franchisees
with the flexibility to convert existing restaurants as well as existing retail footprints into a Famous Daves restaurant. Due to the flexibility and scalability of our concept, we believe that there are a variety of development opportunities
available now and in the future.
We pride ourselves on the following:
High Quality Food
Each restaurant features a distinctive selection of authentic
hickory-smoked and
off-the-grill
barbecue favorites, such as flame-grilled St. Louis-style and baby back ribs, Texas beef brisket, Georgia chopped pork, country-roasted
chicken, and signature sandwiches and salads. Also, enticing side items, such as corn bread, potato salad, coleslaw, Shack Fries
TM
and Wilbur Beans
TM
, accompany the broad entrée selection. Homemade desserts, including Famous Daves Bread Pudding and Hot
Fudge Kahlua Brownies, are another specialty. To complement our entrée and appetizer items and to suit different customer tastes, we offer six regional barbeque sauces: Rich & Sassy
®
, Texas Pit
TM
, Georgia Mustard
TM
, Devils Spit
®
, Sweet and Zesty
TM
and Wilburs Revenge
TM
. These sauces, in addition to a variety of seasonings, rubs,
marinades, and other items are also distributed in retail grocery stores throughout the country under licensing agreements.
We believe that high quality food, a menu that is over 85% scratch cooking and the fact that we smoke our meats daily at each of our restaurants are principal points of differentiation between
us and other casual dining competitors and are a significant contributing factor to repeat business. We also feel that our focus on barbecue being a noun, a verb and a culture allows for product innovation without diluting our brand. As a noun,
barbeque refers to the art of the smoke and sauce. As a verb, barbeque refers to the act of grilling. As a culture, barbeque refers to the competitive spirit. As a result, we see few geographic impediments to scaling our concept and brand.
Focus on Guest Experience
We believe that a renewed focus on enhancing our Guests
experience and listening to their feedback is an essential pillar of the Company. In 2017, we will continue to test and further enhance our guests experience by focusing on hospitality, food execution and training. We believe a positive guest
experience, combined with our high-quality food, makes Famous Daves appeal to families, children, teenagers and adults of all ages and socio-economic and demographic backgrounds.
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Distinctive Environment Décor and Music
Our original décor theme was a nostalgic roadhouse shack (Original Shack), as defined by the abundant use of rustic antiques and items of Americana. This format was used for both full-service and counter-service restaurant
formats. In late 1997, we introduced the Lodge format which featured décor reminiscent of a comfortable Northwoods hunting lodge with a full-service dining room and small bar. In addition, we developed a larger
Blues Club format that featured authentic Chicago Blues Club décor and live music seven nights a week. We have evolved our format to that of a full-service concept with several prototypical designs that incorporate the
best attributes of the past restaurants while providing a consistent brand image.
Operating Strategy
We believe that our ability to achieve sustainable profitable growth is dependent upon us delivering high-quality
experiences in terms of both food and hospitality to every guest, every day, and to enhance brand awareness in our markets. Key elements of our strategy include the following:
Operational Excellence
During fiscal 2016, we continued to focus on operational excellence and
integrity, and on creating a consistently enjoyable guest experience, both in terms of food and hospitality, across our system. We define operational excellence as also meaning an unyielding commitment to superior service for our Guests during every
visit. In our restaurants, we strive to emphasize value and speed of service by employing a streamlined operating system based on a focused menu and simplified food preparation techniques while remaining true to authentic barbeque. Operational
excellence is also an uncompromising attention to the details of our recipes, preparation and cooking procedures, handling procedures, rotation, sanitation, cleanliness and safety.
Our menu focuses on a number of popular smoked, barbequed, grilled meats, entrée items and delicious side dishes
which are prepared using
easy-to-operate
kitchen equipment and processes that use proprietary seasonings, sauces and mixes. This streamlined food preparation system
helps manage the cost of operation by requiring fewer staff, lowering training costs, and eliminating the need for highly compensated chefs. Additionally, barbeque has the ability to be batch cooked and held, which enables our award winning food to
get to our Guests quickly, whether in the restaurant, at their homes, or at a catering event. In order to enhance our appeal, expand our audience, increase frequency, and feature our cravable products, we have assembled a research and development
product pipeline designed to generate new, delicious and exciting menu items that allow us to regularly update our menu.
During 2016, we offered our Guests several new products as well as featured several signature menu items. Early in 2016, and in support of the Lenten season, we featured several fish entrées
such as catfish, salmon, cod, and buffalo shrimp. We also offered an Easter holiday meal program with our own Signature Smoked Hams. In the spring, we launched a promotion that featured our House-Smoked Turkey, on a platter, a sandwich
or as the main protein on a salad. In the fall, the Company featured items showcased by Dave Anderson on the Destination Americas hit TV series SMOKED which included St. Louis Spare-Ribs, zesty pork loin, boar sausage, and blue ribbon broccoli
salad. Finally, during the holiday season, we featured system-wide a Signature Smoked Ham and Signature Smoked Turkey product available for
off-premise
occasions.
Human Resources and Training/Development
A key ingredient to our success lies with our ability
to hire, train, engage and retain employees at all levels of our organization. We place a great deal of importance on creating an exceptional working environment for all of our employees. Through our Human Resource and Training/Development
resources, tools and programs, we continually enhance and support superior performance within our restaurants and Support Center. Our foundational guiding principle is doing the right thing for the organization and our guests while ensuring we
have the right people in the right roles with the right resources and tools.
We are a performance-based
organization, committed to recognizing and rewarding performance at all levels of the organization. Our performance management process includes performance calibration at the organizational level as a means of providing measurable, comparative
employee evaluations relative to peer contribution, taking into account specific core competencies and goals. It is designed to provide a complete picture of performance that is consistent across the organization. We offer a total rewards
program that is benchmarked closely against the industry and includes health and welfare coverage, 401(k) and
non-qualified
deferred compensation with a company match, base pay and incentive pay programs
developed to sustain our market competitive position. Our Human Resource and Training organization focuses on the selection and retention of talent through programs in overall workforce planning, performance management, development, safety and risk
reduction, and continued enhancements in our organizational structures for all positions in the business.
5
In the Training and Development arena, we offer a variety of ongoing
on-the-job
and classroom training programs for the operations teams (hourly employees, Restaurant Managers, and Multi-Unit Managers) in an effort to create defined career
paths. Our Management Trainee program provides new restaurant managers a foundational based training for restaurant operations, including ServSafe Food and Alcohol Certification, and several learning sessions focused on the basic behaviors and
skills of a Famous Daves Manager. We also offer a Famous Daves Leadership Series program which provides a library of workshop offerings focused on building and strengthening core skills in the areas of communication, teamwork,
coaching, change management and performance management. In addition, we have incorporated
e-learning
training tasks, skills and processes
on-demand.
Restaurant Operations
Our ability to manage multiple restaurants in geographically diverse locations is central to our overall success. In each market, we place specific emphasis on the positions of Area Director and General
Manager, and seek talented individuals that bring a diverse set of skills, knowledge, and experience to the Company. We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of employees
and the establishment of, and adherence to, high standards relating to performance, food and beverage preparation, and maintenance of facilities.
All Managers must complete an eight-week training program, during which they are instructed in areas such as food quality and preparation, customer service, hospitality, and employee relations. We have
prepared operations manuals relating to food and beverage quality and service standards. New employees participate in training under the close supervision of our Management. Each General Manager reports to an Area Director, who manages from six to
nine restaurants, depending on the region. Our Area Directors have all served as General Managers, either for Famous Daves or for other restaurants, and are responsible for ensuring that operational standards are consistently applied in our
restaurants, communicating Company focus and priorities, and supporting the development of restaurant management teams. In addition to the training that the General Managers are required to complete as noted above, our Area Directors receive
additional training through Area Director Workshops that focus specifically on managing multiple locations, planning, time management, staff and management development skills.
We have a Vice President of Company Operations who is responsible for overseeing all Company-owned restaurants. This
individual works closely with the Area Directors to support
day-to-day
restaurant operations. In addition, the Vice President of Company Operations assists in the
professional development of our multi-unit supervisors and general managers and is also instrumental in driving our vision of operational integrity and contributing to the improvement of results achieved at our restaurants, including building sales,
developing personnel and growing profits. The Vice President of Company Operations reports to the Chief Executive Officer/Chief Operating Officer.
Staffing levels at each restaurant vary according to the time of day and size of the restaurant. However, in general, each restaurant has approximately 40 to 60 employees.
Off-Premise
Occasions Focus on Convenience
In
addition to our lively and entertaining
dine-in
experience, we provide our guests with maximum convenience by offering an expedient
take-out
service along
with catering. We believe that Famous Daves entrées and side dishes are viewed by Guests as traditional American picnic foods that maintain their quality and travel particularly well, making them an attractive choice to
replace a home-cooked meal. Also, the high quality, fair prices and avoidance of preparation time make
take-out
of our product particularly attractive. Our
off-premise
sales provide us with revenue opportunities beyond our
in-house
seating capacity and we continue to seek ways to leverage these segments of our business.
Catering accounted for approximately 13.0% of our net sales for fiscal 2016, as compared to 12.3% in fiscal 2015 and 9.8%
in fiscal 2014. We see catering as an opportunity for new consumers to sample our product who would not otherwise have had the opportunity to visit our restaurants, and each restaurant has a dedicated vehicle to support our catering initiatives.
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To Go accounted for approximately 30.0% of net restaurant sales for fiscal
2016, as compared to 28.2% in fiscal 2015 and 26.5% in Fiscal 2014. Our restaurants have been designed specifically to accommodate a significant level of To Go sales, including a separate To Go entrance with prominent and distinct signage, and for
added convenience, we separately staff the To Go counter. To further enhance To Go sales, we offer our Guest the ability to order online to improve convenience. We believe our focus on To Go enables Famous Daves to capture a greater portion of
the
take-out
market by allowing consumers to trade within our brand, when dining in is not always an option. We pursue efforts to increase awareness of To Go in all Company-owned and
franchise-operated restaurants by featuring signage and merchandising both inside and outside the restaurants.
Guest Satisfaction
We
believe that we achieve a significant level of repeat business by
providing high-quality food, efficient friendly service, and warm caring hospitality in an entertaining environment at moderate prices. We strive to maintain quality and consistency in each of our restaurants through the purposeful hiring, training
and supervision of personnel and the establishment of, and adherence to, high standards of performance, food preparation and facility maintenance. We have also built family-friendly strategies into each restaurants food, service and design by
providing childrens menus,
smaller-sized
entrees at reduced prices and changing tables in restrooms.
Value Proposition and Guest Frequency
We offer high quality food and a distinctive atmosphere at competitive prices to encourage frequent patronage. Lunch and dinner entrees range
from $6.99 to $26.99, resulting in a per person
dine-in
and To Go average of $15.38 during fiscal 2016. During fiscal 2016, per person average tickets for lunch averaged $13.29 and per person average ticket
for dinner averaged $17.48. We intend to use value priced offerings, new product introductions, and the convenience of connecting with guests on their own terms, to drive new and infrequent guests into our restaurants for additional meal occasions.
Marketing, Promotion and Sales
We believe that by specializing in unique and distinctive smoked meats, poultry & fish, our menu specialty helps set the brand apart from the rest of the crowded field in casual dining. To
further develop the advertising and promotional materials and programs designed to create brand awareness and increase the reach of the brand, we have a system-wide marketing fund. All Company-owned restaurants, and those franchise-operated
restaurants with agreements signed after December 17, 2003 are generally required to contribute 1.0% of net sales to this fund. In fiscal 2016, the Marketing Ad Fund contribution was 1.0% of net sales and will continue to be so in fiscal
2017.
The marketing team, working with outside consultants and other resources, is responsible for the
advertising, promotion, creative development, and branding for Famous Daves. Franchise-operated restaurants place the advertising and marketing programs in their local markets based on contractual requirements, while the Famous
Daves marketing team plans and executes the advertising and marketing for Company-owned restaurants. Famous Daves uses industry standard marketing efforts that include broadcast media, digital, online & social media
platforms, public relations and
out-of-home
vehicles. During 2016, we had approximately 1.7 million Famous Nation members.
The strategic focus for marketing and promotion is to ensure that Famous Daves is recognized as the
categorydefining brand in BBQ, to create and sustain attractive differentiation in consumers mind, and to continue to strengthen the brands positioning and consistency. To help drive
top-line
sales, we are implementing a guest research driven innovation process to create its rolling
18-month
marketing calendar with specific strategic
goals. Additionally, a number of new initiatives were planned around enhancing the menu, the guest experience, events marketing and social media.
In 2016, we highlighted value and affordability in our menu along with promoting additional value offerings through LTOs and day of the week offerings such as Wednesday Slowdown Lowdown
or a Sunday fried chicken offering as well as featuring a lunch menu. Famous Daves also continued to promote its To Go and Catering offering. This has allowed us to connect with Guests on their terms and offer unique and often compelling
sources of growth, and each occasion is growing at a different rate. Leveraging this occasions matrix, we are uniquely poised to offer more immediate relevancy and sales opportunities by solving the guests daily dinner dilemma and address
these differences in our marketing, including menu, promotional outreach, pricing, and new product news.
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Location Strategy
We believe that the barbeque segment of the casual dining niche of the restaurant industry continues to offer strong
growth opportunities, and we see few impediments to our growth on a geographical basis. Our geographical concentration, as of January 1, 2017, was 38% Midwest, 11% Middle Atlantic, 8% South, 31% West, 8% Northeast, 1% in Canada, 2% in
Puerto Rico and 1% in the United Arab Emirates. We were located in 32 states, the Commonwealth of Puerto Rico, Canada and the United Arab Emirates as of January 1, 2017.
We prepare an overall market development strategy for each market. The creation of this market strategy starts with
identifying trade areas that align demographically with the target guest profile. The identified trade areas are then assessed for viability and vitality and prioritized as initial, second tier, or future development. Since markets are
dynamic, the market strategy includes a continual and ongoing assessment of all existing restaurant locations. If financially feasible, a restaurant may be relocated as the retail or residential focus in a trade area shifts.
We have a real estate site selection model to assist in assessing the site and trade area quality of new
locations. This process involves consumer research in our existing restaurants, the results of which are captured in a target guest profile that is regularly updated. Each location is evaluated based on three primary sales drivers that
include: sales potential from the residential base (home quality), employment base (work quality), and retail activity (retail quality). Locations are also evaluated on their site characteristics that includes seven categories of key site
attributes, including, but not limited to, access, visibility, and parking.
As part of our development
strategy, we have engaged design firms to redesign and reimage the traditional full-service prototype. These firms have assisted in developing plans for future service style models such as an updated counter-service, line-service and hybrid
flex-service models. The future service-style models will allow us access new markets or strategically locate restaurants in existing markets where a full-service restaurant is unlikely to be financially viable. The surrounding trade area will
determine which service style is appropriate. Site selection will focus on newly developed green-field retail developments or existing retail projects being
re-developed. Conversion
opportunities will be considered on a case by case basis. We intend to finance company restaurant development through the use of cash on hand, cash flow generated from operations, and through availability on our revolving line of credit.
Company-Owned Restaurant Development
In fiscal 2017, we do not expect to open a
Company-owned restaurant. In the future we expect to continue to build in our existing markets in high profile, heavy traffic retail locations. Our plan is to focus on sustainable, controlled growth, primarily in markets where multiple
restaurants can be opened, thereby expanding consumer awareness, and creating opportunities for operating, distribution, and marketing efficiencies.
Franchise-Operated Restaurant Development
We expect to continue to grow the franchise program. Our goal is to continue to improve the economics of our current restaurant prototypes,
while providing more cost-effective development options for our franchisees. As of January 1, 2017, we had signed franchise area development agreements with aggregate commitments for 61 additional units that are expected to open over
approximately the next five years, including an additional two units in the United Arab Emirates. However, there can be no assurance that these franchisees will fulfill their commitments or fulfill them within the anticipated timeframe. Our
franchise system is a significant part of our brands success. As such, another one of our goals is to be a valued franchisor; to enhance communication and recognition of best practices throughout the system and to continue to expand our
franchisee network here and outside of the United States.
Generally, we find franchise candidates with prior
franchise casual-dining restaurant experience in the markets for which they will be granted. In the past, area development agreements generally ranged from 3 to 15 restaurants, however, we have been willing to discuss smaller unit agreements as
well as individual franchise restaurants in the right markets where it makes sense. Additionally, we have begun to focus on certain strategic international markets where it makes sense. We do believe that the additional service-style formats will
allow us to bring new franchisees, with diverse restaurant experience, into the system.
Purchasing
To provide the freshest ingredients and in order to maximize operational efficiencies for our food products, we strive to
obtain consistent quality items at competitive prices from reliable sources, including identifying secondary suppliers for many of our key products. Additionally, our secondary suppliers help us assure supply chain integrity and
8
better logistics. Finally, to reduce freight costs, we continually aim to optimize our distribution networks, where the products are shipped directly to the restaurants through our
foodservice distributors. Each restaurants management team determines the daily quantities of food items needed and orders such quantities to be delivered to their restaurant.
Approximately 85% of our food and
non-alcoholic
beverage purchases are on
contract, with the majority being proteins. Pork represents approximately 32% of our total purchases, while beef, which includes hamburger and brisket, is approximately 13%, chicken is approximately 13%, and seafood is approximately
2%. Our purchasing department contracts, as well as our food and beverage costs and trends associated with each, are discussed under Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Our purchasing team is also responsible for managing the procurement of
non-food
items for our restaurants, including restaurant equipment, small wares and restaurant supplies. Also, they contract many of our restaurants repair and maintenance services along with managing our
utility costs.
Information Technology
Famous Daves recognizes the importance of leveraging information and technology to support and extend our competitive position in the restaurant industry. We continue to invest
in capabilities that provide secure and efficient operations, maximize the guest experience, and provide the ability to analyze data that describes our operations.
We have implemented a suite of restaurant and general headquarter systems which support operations by providing
transactional functions (ordering, card processing, etc.) and reporting at both the unit and support center level. Interfaces between
Point-of-Sale
(POS), labor
management, inventory management, menu management, key suppliers, and employee screening/hiring and financial systems all contribute to the following operator and corporate visibility:
|
|
|
Average guest check broken down by location, by server, by day part, and by revenue center;
|
|
|
|
Daily reports of revenue and labor (both current and forecasted);
|
|
|
|
Weekly reports of selected controllable restaurant expenses;
|
|
|
|
Monthly reporting of detailed revenue and expenses; and
|
|
|
|
Ideal vs. actual usage variance reporting for critical restaurant-level materials
|
Trademarks
Our Company has registered various trademarks, makes use of various unregistered marks, and intends to vigorously defend these marks. Famous Daves and the Famous Daves logo are
registered trademarks of Famous Daves of America, Inc. The Company highly values its trademarks, trade names and service marks and will defend against any improper use of its marks to the fullest extent allowable by law.
Franchise Program
We are currently authorized to offer and sell franchises in 48 of 50 states, the Commonwealth of Puerto Rico, the United Arab Emirates, and have a Canadian franchise disclosure document available. Our
growth and success depends in part upon our ability to attract, contract with and retain qualified franchisees. It also depends upon the ability of those franchisees to successfully operate their restaurants with our standards of quality and
promote and develop Famous Daves brand awareness.
Although we have established criteria to evaluate
prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her restaurants independently. Various laws limit our ability to influence the
day-to-day
operation of our franchise restaurants. We cannot assure you that franchisees will be able to successfully operate Famous Daves restaurants in a manner consistent with our standards for
operational excellence, service and food quality.
At January 1, 2017, we had 35 ownership groups
operating 139 Famous Daves franchise restaurants. Signed area development agreements, representing commitments to open an additional 62 franchise restaurants, were in place as of January 1, 2017. There can be no assurance that these
franchisees will fulfill their commitments or fulfill them within the anticipated timeframe.
9
As of January 1, 2017, we had franchise-operated restaurants in the following
locations:
|
|
|
United States
|
|
Number of Franchise-Operated
Restaurants
|
Arizona
|
|
6
|
California
|
|
19
|
Colorado
|
|
6
|
Delaware
|
|
2
|
Florida
|
|
3
|
Idaho
|
|
2
|
Illinois
|
|
10
|
Indiana
|
|
4
|
Iowa
|
|
3
|
Kansas
|
|
2
|
Kentucky
|
|
2
|
Maine
|
|
1
|
Maryland
|
|
1
|
Michigan
|
|
7
|
Minnesota
|
|
4
|
Missouri
|
|
2
|
Montana
|
|
4
|
Nebraska
|
|
4
|
Nevada
|
|
6
|
New Jersey
|
|
1
|
New York
|
|
2
|
North Dakota
|
|
3
|
Oregon
|
|
2
|
Ohio
|
|
2
|
Pennsylvania
|
|
4
|
South Dakota
|
|
2
|
Tennessee
|
|
5
|
Texas
|
|
3
|
Utah
|
|
3
|
Washington
|
|
7
|
Wisconsin
|
|
10
|
|
|
|
United States Total
|
|
132
|
The Commonwealth of Puerto Rico
|
|
4
|
Canada
|
|
1
|
United Arab Emirates
|
|
2
|
|
|
|
Total franchise-operated restaurants
|
|
139
|
Our Franchise Operations Department is led by the Chief Executive and Operating Officer,
who guides the efforts of a Sr. Vice President of Franchise Operations, supported by four Franchise Business Consultants. The Sr. Vice President of Franchise Operations has the responsibility of supporting our franchisees throughout the system and
plays
10
a critical role for us as well as for our franchise community. The Sr. Vice President of Franchise Operations as well as the Franchise Business Consultants manages the relationship between the
franchisee and the franchisor and provides an understanding of the roles, responsibilities, differences, and accountabilities of that relationship. They are an active participant towards enhancing performance, as they partner in strategic and
operations planning sessions with our franchise partners and review the individual strategies and tactics for obtaining superior performance for the franchisee. They ensure compliance with obligations under our area development and franchise
agreements. Franchisees are encouraged to utilize all available assistance from the Sr. Vice President of Franchise Operations and the Franchise Business Consultants and the Support Center but are not required to do so.
The Company has a comprehensive operations scorecard and training tool that helps us measure the operational effectiveness
of our Company-owned and franchise-operated restaurants. This scorecard is used to evaluate, monitor and improve operations in areas such as guest satisfaction, health and safety standards, community involvement, and local store marketing
effectiveness, among other operating metrics. Also, we generally provide support as it relates to all aspects of franchise operations including, but not limited to, store openings and operating performance. Finally, the Company solicits feedback
from our franchise system by having an active dialogue with all franchisees throughout the year.
Our
franchise-related revenue is comprised of three separate and distinct earnings processes: area development fees, initial franchise fees and continuing royalty payments. Currently, our area development fee for domestic growth consists of a
one-time,
non-refundable
payment of approximately $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development
agreement. For our foreign area development agreements, the one time,
non-refundable
payment is negotiated on a per development agreement basis and is determined based on the costs incurred to sell that
development agreement. Substantially all of these services, which include, but are not limited to, conducting market and trade area analysis, a meeting with Famous Daves Executive Team, and performing a potential franchise background
investigation, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Currently, our initial,
non-refundable,
franchise fee for domestic growth is $45,000 per restaurant, of which approximately $5,000 is recognized immediately when a franchise agreement is signed, reflecting expenses incurred related to the
sale. The remaining
non-refundable
fee is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise
entering into a lease agreement for the restaurant(s). Finally, franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a
monthly royalty of 5% of their net sales.
The franchisees investment depends primarily upon restaurant
size. This investment includes the area development fee, initial franchise fee, real estate and leasehold improvements, fixtures and equipment, POS systems, business licenses, deposits, initial food inventory, small wares, décor and training
fees as well as working capital. In 2016, franchisees were required to contribute 1.0% of net sales to a marketing fund dedicated to building system-wide brand awareness. In 2017, franchisees will be required to contribute 1.0% of net sales to the
marketing fund. Additionally, franchisees have historically spent 1.5% to 2.0% of their net sales annually on local marketing activities. Currently, franchisees are required to spend approximately 1.5% of their net sales annually on local marketing
activities.
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 guest and team member transportation to our restaurants.
Government Regulation
Our Company is subject to extensive
state and local government regulation by various governmental agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various regulations relating to the sale of food and alcoholic beverages,
sanitation, disposal of refuse and waste products, public health, safety and fire standards. Our restaurants are subject to periodic inspections by governmental agencies to ensure conformity with such regulations. Any difficulty or failure to obtain
required licensing or other regulatory
11
approvals could delay or prevent the opening of a new restaurant, and the suspension of, or inability to renew a license, could interrupt operations at an existing restaurant, any of which would
adversely affect our operations. Restaurant operating costs are also affected by other government actions that are beyond our control, including increases in minimum hourly wage requirements, workers compensation insurance rates, health care
insurance costs, property and casualty insurance, and unemployment and other taxes. We are also subject to dram-shop statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated person.
As a franchisor, we are
subject to federal regulation and certain state laws that govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on
non-competition
provisions and the termination or
non-renewal
of a franchise. Bills have been introduced in Congress from time to time that would provide for federal
regulation of substantive aspects of the franchisor-franchisee relationship. As proposed, such legislation would limit, among other things, the duration and scope of
non-competition
provisions, the ability of
a franchisor to terminate or refuse to renew a franchise, and the ability of a franchisor to designate sources of supply.
The 1990 Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We could be required to incur costs to modify our restaurants
in order to provide service to, or make reasonable accommodations for, disabled persons. Our restaurants are currently designed to be accessible to the disabled, and we believe we are in substantial compliance with all current applicable regulations
relating to this Act.
Team Members
As of January 1, 2017, we employed approximately 1,645 team members of which approximately 173 were salaried full-time employees. None of our team members are covered by a collective bargaining
agreement. We consider our relationships with our team members to be good.
Famous Daves makes written and oral statements from time to time, including statements contained in this Annual Report on Form
10-K
regarding its business and
prospects, such as projections of future performance, statements of managements plans and objectives, forecasts of market trends and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases will likely result, anticipates, are expected to, will continue, is
anticipated, estimates, projects, believes, expects, intends, target, goal, plans, objective, should or similar expressions
identify forward-looking statements which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, shareholders,
investors, news organizations, and others, and discussions with our management and other Company representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements,
involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statements made by us or on our behalf speak only as of the date on which such
statement is made. Our forward-looking statements are based upon our managements current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these
forward-looking statements are reasonable, we may not achieve these plans or objectives. In addition, forward-looking statements may reflect assumptions that are sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to revision. Except as otherwise required by applicable law, we do not undertake any obligation to update or keep current either (i) any forward-looking statements to reflect
events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are
reflected from time to time in any forward-looking statement which may be made by us or on our behalf.
In
addition to other matters identified or described by us from time to time in filings with the SEC, including the risks described below and elsewhere in this Annual Report on Form
10-K,
there are several
important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by
us or on our behalf.
12
Challenging economic conditions may have a negative effect on our business and
financial results.
The restaurant industry is affected by macro-economic factors, including changes in
national, regional, and local economic conditions, employment levels and consumer spending patterns. Challenging economic conditions may negatively impact consumer spending and thus cause a decline in our financial results. For example,
international, domestic and regional economic conditions, consumer income levels, financial market volatility, social unrest, governmental, political and budget matters and a slow or stagnant pace of economic growth generally may have a negative
effect on consumer confidence and discretionary spending. In recent years, we believe these factors and conditions have affected consumer traffic and comparable restaurant sales for us and throughout our industry and may continue to result in a
challenging sales environment in the casual dining sector. A decline in economic conditions or negative developments with respect to any of the other factors mentioned above, generally or in particular markets in which we or our franchisees operate,
and our Guests reactions to these trends could result in increased pressure with respect to our pricing, traffic levels, commodity and other costs and the continuation of our innovation and productivity initiatives, which could negatively
impact our business and results of operations. These factors could also cause us or our franchisees to, among other things, reduce the number and frequency of new restaurant openings, impair the assets of or close restaurants as well as delay
remodeling of existing restaurant locations. Further, poor economic conditions may force nearby businesses to shut down, which could cause our restaurant locations to be less attractive.
A failure to maintain continued compliance with the financial covenants of our credit facility may result in termination of the
credit facility and may have a material adverse effect on our ability to accomplish our business objectives.
At April 3, 2016, July 3, 2016, and October 2, 2016, we were not in compliance with financial covenants under our Credit Agreement (the Credit Agreement) with Wells Fargo,
National Association as administrative agent and lender (Wells Fargo).
As a result of breaches of
our financial covenants in the first, second, and third quarters of fiscal 2016 with Wells Fargo, National Association as administrative agent and lender (Wells Fargo), the Company refinanced its Credit Facility with Venture Bank (the
Lender) with three separate loans. The First Loan agreement is a $3.7 million loan and is evidenced by a promissory note (the Loan 1). The Second Loan agreement provides for two separate loans from the Lender to the
borrowers set forth therein in aggregate principal amount of $7.3 million, one in the principal amount of $6.3 million (Loan 2) and other principal amount of $1.0 million (Loan 3). At the end of the fiscal
2016, the Company had additional borrowing capacity with Loan 3.
Depending on the duration of the
Companys recovery, our ability to comply with financial covenants under our credit facility on a continuing basis may be adversely affected. These financial covenants include, among other things, a minimum debt service coverage ratio.
In the event we fail to comply with these or other financial covenants in the future and are unable to obtain
similar amendments or waivers, our lender will have the right to demand repayment of all principal amounts outstanding under the Loan 1, Loan 2, or Loan 3. At January 1, 2017, principal amounts outstanding on Loan 1 was $3.7 million,
principal amounts outstanding on Loan 2 was $6.3 million and there were no principal amounts outstanding for Loan 3. If we were unable to repay outstanding amounts, either using current cash reserves, a replacement facility or another source of
capital, our lender would have the right to foreclose on our real estate and personal property, which serves as collateral for the loans. Replacement financing may be unavailable to us on similar terms or at all. Termination of our existing loans
without adequate replacement, either through a similar facility or other sources of capital, would have a material and adverse impact on our ability to continue our business operations.
Our future revenue, operating income, and cash flows are dependent on consumer preference and our ability to successfully execute
our plan.
Our Companys future revenue and operating income will depend upon various factors,
including continued and additional market acceptance of the Famous Daves brand, the quality of our restaurant operations, our ability to grow
13
our brand, our ability to successfully expand into new and existing markets, our ability to successfully execute our franchise program, our ability to raise additional financing as needed,
discretionary consumer spending, the overall success of the venues where Famous Daves restaurants are or will be located, economic conditions affecting disposable consumer income, general economic conditions and the continued popularity of the
Famous Daves concept. An adverse change in any or all of these conditions would have a negative effect on our operations and the market value of our common stock.
In fiscal 2017, the Company does not anticipate opening a new Company-owned restaurant. There is no guarantee that any of
the Company-owned or franchise-operated restaurants will open when planned, or at all, due to many factors that may affect the development and construction of our restaurants, including landlord delays, weather interference, unforeseen engineering
problems, environmental problems, construction or zoning problems, local government regulations, modifications in design to the size and scope of the project, and other unanticipated increases in costs, any of which could give rise to delays and
cost overruns. There can be no assurance that we will successfully implement our growth plan for our Company-owned and franchise-operated restaurants. In addition, we also face all of the risks, expenses and difficulties frequently encountered in
the development of an expanding business.
Competition may reduce our revenue, operating income, and cash flows.
Competition in the restaurant industry is intense. The restaurant industry is affected by changes in
consumer preferences, as well as by national, regional and local economic conditions, including real estate, and demographic trends, traffic patterns, the cost and availability of qualified labor, and product availability. Discretionary spending
priorities, traffic patterns, tourist travel, weather conditions, and the type, number and location of competing restaurants, among other factors, will also directly affect the performance of our restaurants. Changes in any of these factors in the
markets where we currently operate our restaurants could adversely affect the results of our operations.
Increased competition by existing or future competitors may reduce our sales. Our restaurants compete with
moderately-priced restaurants primarily on the basis of quality of food and service, atmosphere, location and value. In addition to existing barbeque restaurants, we face competition from steakhouses and other restaurants featuring protein-rich
foods. We also compete with other restaurants and retail establishments for quality sites.
Many of our
competitors have substantially greater financial, marketing and other resources than we do. Regional and national restaurant companies continue to expand their operations into our current and anticipated market areas. We believe our ability to
compete effectively depends on our ongoing ability to promote our brand and offer high quality food and hospitality in a distinctive and comfortable environment. If we are unable to respond to, or unable to respond in a timely manner, to the various
competitive factors affecting the restaurant industry, our revenue and operating income could be adversely affected.
Our
failure to execute our franchise program may negatively impact our revenue, operating income and cash flows.
Our growth and success depends in part upon increasing the number of our franchised restaurants, through execution of area development and franchise agreements with new and existing franchisees in new and
existing markets. We are also pursuing a strategic
re-franchising
initiative to transition some of our Company-owned restaurants into franchised locations. Our ability to successfully franchise
additional restaurants and
re-franchise
existing Company-owned restaurants will depend on various factors, including our ability to attract, contract with and retain quality franchisees, the availability of
suitable sites, the negotiation of acceptable leases or purchase terms for new locations, the negotiation of acceptable terms for the
re-franchising
of existing Company-owned restaurants, permitting and
regulatory compliance, the ability to meet construction schedules, the financial and other capabilities of our franchisees, our ability to manage this anticipated expansion, and general economic and business conditions. Many of the foregoing factors
are beyond the control of the Company or our franchisees.
Our growth and success also depends upon the ability
of our franchisees to operate their restaurants successfully to our standards and promote the Famous Daves brand. Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating
standards, each franchisee operates his/her restaurant independently. Various laws limit our ability to influence the
day-to-day
operation of our franchise restaurants.
We cannot assure you that our franchisees will be able to successfully operate Famous Daves restaurants
14
in a manner consistent with our concepts and standards, which could reduce their sales and correspondingly, our franchise royalties, and could adversely affect our operating income and our
ability to leverage the Famous Daves brand. In addition, there can be no assurance that our franchisees will have access to financial resources necessary to open the restaurants required by their respective area development agreements, which
would negatively impact our growth plans.
We may not be successful in maintaining or expanding our international
footprint.
Our current franchise program includes four restaurants in the Commonwealth of Puerto Rico,
one restaurant in Manitoba, Canada, and two restaurants in the United Arab Emirates. Because there are a very limited number of international restaurants, we may not be completely aware of the development efforts involved and barriers to entry into
new foreign markets. As a result, we may incur more expenses than originally anticipated and there is a risk that we may not be successful in expanding internationally. If we are successful in maintaining or expanding our international footprint,
our future results could be materially adversely affected by a variety of uncontrollable and changing factors affecting international operations including, among others, regulatory, social, political, or economic conditions in a specific country or
region, trade protection measures and other regulatory requirements, government spending patterns, and changes in the laws and policies. Furthermore, by maintaining or expanding our international footprint, our brand value could be harmed by factors
outside of our control, including, among other things, difficulties in achieving the consistency of product quality and service compared to our U.S. restaurants and an inability to obtain adequate and reliable supplies of ingredients and products.
The restaurant industry is subject to extensive government regulation that could negatively impact our business.
The restaurant industry is subject to extensive federal, state, and local government regulation by
various government agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various regulations relating to the preparation and sale of food and alcoholic beverages, sanitation, disposal of
refuse and waste products, public health, safety and fire standards, adjustments to tip credits, increases to minimum wage requirements, workers compensation and citizenship requirements. Due to the fact that we offer and sell franchises, we
are also subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on
non-competition
provisions and termination or
non-renewal
of a franchise. We may also be subject in certain states to dram-shop statutes, which provide a
person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. In addition, our operating results would be adversely affected in the event we fail to
maintain our food and liquor licenses.
Any change in the current status of such regulations, including an
increase in team member benefits costs, any and all insurance rates, or other costs associated with team members, could substantially increase our compliance and labor costs. Because we pay many of our restaurant-level team members rates based on
either the federal or the state minimum wage, increases in the minimum wage would lead to increased labor costs. In 2014, the general counsels office of the National Labor Relations Board issued complaints naming the McDonalds
Corporation as a joint employer of workers at its franchisees for alleged violations of the Fair Labor Standards Act. There can be no assurance that other franchisors will not receive similar complaints in the future which may result in legal
proceedings based on the actions of its franchisees. Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for
our restaurants in a particular area or across the United States. Other labor shortages or increased team member turnover could also increase labor costs. Furthermore, restaurant operating costs are affected by increases in unemployment tax rates
and similar costs over which we have no control.
During 2010, the Patient Protection and Affordable Care Act
and the Health Care and Education Reconciliation Act of 2010 were signed into law in the United States. Our restaurants are governed by these laws. This legislation mandates menu labeling of certain nutritional aspects of restaurant menu items such
as caloric, sugar, sodium, and fat content. There is a risk that consumers dining preferences may be impacted by such menu labeling. If we elect to alter our recipes in response to such a change in dining preferences, doing so could increase
our costs and/or change the flavor profile of our menu offerings which could have an adverse impact on our results of operations.
15
We are subject to the risks associated with the food services industry, including the
risk that incidents of food-borne illnesses or food tampering could damage our reputation and reduce our restaurant sales.
Our industry is susceptible to the risk of food-borne illnesses. As with any restaurant operation we cannot guarantee that our internal controls and training will be fully effective in preventing all
food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by third-party food suppliers and distributors outside of our control and/or multiple
locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive
basis. Reports in the media or on social media of one or more instances of food-borne illness in one of our Company-owned restaurants, one of our franchise-operated restaurants or in one of our competitors restaurants could negatively affect
our restaurant sales, force the closure of some of our restaurants and conceivably have a national impact if highly publicized. This risk exists even if it were later determined that the illness had been wrongly attributed to the restaurant.
Furthermore, other illnesses could adversely affect the supply of some of our food products and significantly increase our costs. A decrease in guest traffic as a result of these health concerns or negative publicity could materially harm our
business, results of operations and financial condition.
Our ability to exploit our brand depends on our ability to
protect our intellectual property, and if any third parties make unauthorized use of our intellectual property, our competitive position and business could suffer.
We believe that our trademarks and other intellectual proprietary rights are important to our success and our competitive
position. Accordingly, we have registered various trademarks and make use of various unregistered marks. However, the actions we have taken or may take in the future to establish and protect our trademarks and other intellectual proprietary rights
may be inadequate to prevent others from imitating our products and concept or claiming violations of their trademarks and proprietary rights by us. Although we intend to defend against any improper use of our marks to the fullest extent allowable
by law, litigation related to such defense, regardless of the merit or resolution, may be costly and time consuming and divert the efforts and attention of our management.
Our financial performance is affected by our ability to contract with reliable suppliers at competitive prices.
In order to maximize operating efficiencies, we have entered into arrangements with food manufacturers and distributors
pursuant to which we obtain approximately 85% of the products used by the Company, including, but not limited to, pork, poultry, beef, and seafood. Although we may be able to obtain competitive products and prices from alternative suppliers, an
interruption in the supply of products delivered by our food suppliers could adversely affect our operations in the short term. Due to the rising market price environment, our food costs may increase without the desire and/or ability to pass that
price increase to our customers.
Although we do contract for utilities in all available states, the costs of
these energy-related items will fluctuate due to factors that may not be predictable, such as the economy, current political/international relations and weather conditions. Because we cannot control these types of factors, there is a risk that
prices of energy/utility items will increase beyond our current projections and adversely affect our operations.
We
could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect our customers credit card information or our employees personal data.
We rely heavily on information technology to conduct our business, and any material failure or interruption of service
could adversely affect our operations. Furthermore, we accept credit and debit card payments in our restaurants. Recently, retailers have experienced actual or potential security breaches in which credit and debit card information may have been
compromised, including several highly-publicized incidents. Although we take it very seriously and expend resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to
operations or unauthorized disclosure of confidential information. If our guests consumer data or our team members personal data are compromised, our operations could be adversely affected, our reputation could be harmed, and we could be
subjected to litigation or the imposition of penalties and other remedial costs. In addition, as a franchisor, we are subject to additional reputation risk associated with data breaches that could occur at one of our franchise locations that could
potentially harm the Famous Daves brand reputation.
16
Failure to achieve our projected cost savings from our efficiency initiatives could
adversely affect our results of operations and eliminate potential funding for growth opportunities.
In recent years as well as in the future, we have identified strategies and taken steps to reduce operating costs and free
up resources to reinvest in our business. These strategies include supply chain efficiencies, reducing food waste, implementing labor scheduling tools and various information systems projects. We continue to evaluate and implement further
cost-saving initiatives. However, the ability to reduce our operating costs through these initiatives is subject to risks and uncertainties, such as our ability to obtain improved supply pricing and the reliability of any new suppliers or
technology, and we cannot assure that these activities, or any other activities that we may undertake in the future, will achieve the desired cost savings and efficiencies. Failure to achieve such desired savings could adversely affect our results
of operations and financial condition and curtail investment in growth opportunities.
Litigation could have a material
adverse impact on our business and our financial performance.
We are subject to lawsuits,
administrative proceedings and claims that arise in the regular course of business. These matters typically involve claims by consumers, employees and others regarding issues such as food borne illness, food safety, premises liability, dram
shop statute liability, compliance with wage and hour requirements, work-related injuries, promotional advertising, discrimination, harassment, disability and other operational issues common to the foodservice industry, as well as contract
disputes and intellectual property infringement matters. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse
effect on our financial position and results of operations.
Significant adverse weather conditions and other disasters
or unforeseen events could negatively impact our results of operations.
Adverse weather conditions and
natural disasters and other unforeseen events, such as winter storms, severe temperatures, thunderstorms, floods, hurricanes and earthquakes, terror attacks, war and widespread/pandemic illness, and the effects of such events on economic conditions
and consumer spending patterns, could negatively impact our results of operations. Temporary and prolonged restaurant closures may occur and consumer traffic may decline due to the actual or perceived effects from these events. For example, severe
winter weather conditions have impacted our traffic and results of operations in the past.
We evaluate restaurant sites
and long-lived assets for impairment and expenses recognized as a result of any impairment would negatively affect our financial condition and consolidated results of operations.
During fiscal 2016, we recognized asset impairment, lease termination and other closing costs of $4.8 million, which
included approximately $4.4 million in asset impairment charges associated with 11 restaurants which were slow to respond to several initiatives to turnaround operating performance. As a result, we determined that the estimated fair value of
these assets was less than the net book value and recognized an impairment charge to reduce the related assets to the estimated fair value. As we continue to evaluate the restaurant portfolio we anticipate addressing the ongoing operation of the 11
locations impaired over the next 3 years by way of lease restructuring, lease assignment, subleasing, or subsequent closure at the end of their natural lease term. Additionally, a lease termination reserve costs associated with a letter of credit
provided to a landlord of a previously closed restaurant and costs associated with a software implementation project that was discontinued.
We evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a
restaurant-by-restaurant
basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site
exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount rate and other factors. If these
estimates change in the future, we may be required to take additional impairment charges for the related assets, which would negatively affect our financial condition and consolidated results of operations. Considerable management judgment is
necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates.
17
Pursuant to its authority to designate and issue shares of our stock as it deems
appropriate, our board of directors may assign rights and privileges to currently undesignated shares which could adversely affect the rights of existing shareholders.
Our authorized capital consists of 100,000,000 shares of capital stock. Our Board of Directors, without any action by the
shareholders, may designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and
voting rights. As of March 7, 2017, we had 6,957,628 shares of common stock outstanding.
The rights of
holders of preferred stock and other classes of common stock that may be issued could be superior to the rights granted to the current holders of our common stock. Our Boards ability to designate and issue such undesignated shares could impede
or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
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. We have engaged a design firm to redesign and reimage the traditional full-service prototype and develop plans for three additional service style models including counter-service, line-service and hybrid
flex-service models. The three-additional service-style models will allow us to access new markets or strategically locate restaurants in existing markets where a full-service restaurant is not sustainable. The surrounding trade area will determine
which service style is appropriate. These new prototypes can be built as free standing buildings, as end caps of a building or as
in-line
locations. Additionally, we offer lower cost conversion packages
that provide our franchisees with the flexibility to build in cost effective formats, such as opportunities to convert existing restaurants into a Famous Daves restaurant.
In fiscal 2016, we did not open any new Company-owned locations and refranchised seven Company-owned restaurants in the
Chicago-area (located in Addison, Algonquin, Bolingbrook, Evergreen Park, North Riverside, Orland Park, and Oswego, Illinois). In fiscal 2015, we did not open any new Company-owned locations, closed one location and refranchised five additional
company-owned restaurants. In fiscal 2014, we did not open any new Company owned locations and closed four locations. Due to the flexibility and scalability of our concept, there are a variety of development opportunities available now and in the
future. In fiscal 2017, we do not expect to open a Company-owned restaurant.
Our leased restaurant facilities
are occupied under agreements with remaining terms ranging from 4 months to 31 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 Minnesota executive offices are currently
located in approximately 28,600 square feet in Minnetonka, Minnesota. Our executive office lease expires November 2018, with two five-year renewal options. The minimum annual rent commitment remaining over the lease term, including renewal options,
is approximately $3.8 million. During fiscal 2015, we sublet approximately 10,340 square feet to two subtenants. During 2015, our
8,400-square
foot office in Lombard, IL was closed and sublet to another
tenant. This office lease expires October 2022. The minimum annual rent commitment remaining over the lease term is approximately $715,000.
18
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 1, 2017, sorted by opening date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Square
Footage
|
|
|
Interior
Seats
|
|
|
Owned
or
Leased
|
|
|
Date
Opened/Acquired
|
1
|
|
Roseville, MN
(3)
|
|
|
4,800
|
|
|
|
105
|
|
|
|
Leased
|
|
|
June 1996
|
2
|
|
Calhoun Square (Minneapolis, MN)
|
|
|
10,500
|
|
|
|
380
|
|
|
|
Leased
|
|
|
September 1996
|
3
|
|
Maple Grove, MN
|
|
|
6,100
|
|
|
|
146
|
|
|
|
Leased
|
(1)
|
|
April 1997
|
4
|
|
Highland Park (St. Paul, MN)
(3)
|
|
|
5,200
|
|
|
|
125
|
|
|
|
Leased
|
|
|
June 1997
|
5
|
|
Stillwater, MN
|
|
|
5,200
|
|
|
|
130
|
|
|
|
Leased
|
(1)
|
|
July 1997
|
6
|
|
Apple Valley, MN
(3)
|
|
|
3,800
|
|
|
|
90
|
|
|
|
Leased
|
(1)
|
|
July 1997
|
7
|
|
Forest Lake, MN
(3)
|
|
|
4,500
|
|
|
|
100
|
|
|
|
Leased
|
|
|
October 1997
|
8
|
|
Minnetonka, MN
|
|
|
5,500
|
|
|
|
140
|
|
|
|
Owned
|
(2)
|
|
December 1997
|
9
|
|
Plymouth, MN
(3)
|
|
|
2,100
|
|
|
|
49
|
|
|
|
Owned
|
(2)
|
|
December 1997
|
10
|
|
West Des Moines, IA
|
|
|
5,700
|
|
|
|
150
|
|
|
|
Leased
|
|
|
April 1998
|
11
|
|
Des Moines, IA
|
|
|
5,800
|
|
|
|
150
|
|
|
|
Leased
|
|
|
April 1998
|
12
|
|
Bloomington, MN
|
|
|
5,400
|
|
|
|
140
|
|
|
|
Leased
|
|
|
October 1998
|
13
|
|
Woodbury, MN
|
|
|
5,900
|
|
|
|
180
|
|
|
|
Owned
|
(2)
|
|
October 1998
|
14
|
|
Columbia, MD
|
|
|
7,200
|
|
|
|
270
|
|
|
|
Leased
|
|
|
January 2000
|
15
|
|
Annapolis, MD
|
|
|
6,800
|
|
|
|
219
|
|
|
|
Leased
|
|
|
January 2000
|
16
|
|
Frederick, MD
|
|
|
5,600
|
|
|
|
180
|
|
|
|
Leased
|
|
|
January 2000
|
17
|
|
Woodbridge, VA
|
|
|
6,000
|
|
|
|
219
|
|
|
|
Leased
|
|
|
January 2000
|
18
|
|
Sterling, VA
|
|
|
5,800
|
|
|
|
200
|
|
|
|
Leased
|
|
|
December 2000
|
19
|
|
Oakton, VA
|
|
|
4,400
|
|
|
|
184
|
|
|
|
Leased
|
|
|
May 2001
|
20
|
|
Laurel, MD
|
|
|
5,200
|
|
|
|
165
|
|
|
|
Leased
|
|
|
August 2001
|
21
|
|
Chantilly, VA
|
|
|
6,400
|
|
|
|
205
|
|
|
|
Leased
|
|
|
January 2006
|
22
|
|
Waldorf, MD
|
|
|
6,600
|
|
|
|
200
|
|
|
|
Leased
|
|
|
June 2006
|
23
|
|
Coon Rapids, MN
|
|
|
6,300
|
|
|
|
160
|
|
|
|
Owned
|
(2)
|
|
December 2006
|
24
|
|
Fredericksburg, VA
|
|
|
6,500
|
|
|
|
219
|
|
|
|
Leased
|
|
|
September 2007
|
25
|
|
Owings Mills, MD
|
|
|
6,700
|
|
|
|
219
|
|
|
|
Leased
|
|
|
November 2007
|
26
|
|
Alexandria, VA
|
|
|
6,600
|
|
|
|
219
|
|
|
|
Leased
|
|
|
February 2008
|
27
|
|
Brick, NJ
|
|
|
5,200
|
|
|
|
181
|
|
|
|
Leased
|
|
|
March 2010
|
28
|
|
Mays Landing, NJ
|
|
|
6,400
|
|
|
|
237
|
|
|
|
Leased
|
|
|
March 2010
|
29
|
|
Westbury, NY
|
|
|
6,400
|
|
|
|
276
|
|
|
|
Leased
|
|
|
March 2010
|
30
|
|
New Brunswick, NJ
|
|
|
7,200
|
|
|
|
255
|
|
|
|
Leased
|
|
|
March 2010
|
31
|
|
Mountainside, NJ
|
|
|
8,800
|
|
|
|
253
|
|
|
|
Leased
|
|
|
March 2010
|
32
|
|
Metuchen, NJ
|
|
|
6,200
|
|
|
|
176
|
|
|
|
Leased
|
|
|
March 2010
|
33
|
|
Bel Air, MD
|
|
|
6,360
|
|
|
|
199
|
|
|
|
Leased
|
|
|
August 2010
|
34
|
|
Falls Church, VA
|
|
|
5,430
|
|
|
|
169
|
|
|
|
Leased
|
|
|
August 2011
|
35
|
|
Gainesville, VA
|
|
|
6,000
|
|
|
|
215
|
|
|
|
Leased
|
|
|
June 2012
|
36
|
|
Germantown, MD
|
|
|
5,000
|
|
|
|
160
|
|
|
|
Leased
|
|
|
September 2013
|
37
|
|
Timonium, MD
|
|
|
5,600
|
|
|
|
187
|
|
|
|
Leased
|
|
|
November 2013
|
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.
|
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 except as described below.
Famous Daves of America, Inc. (Famous Daves) filed a complaint on July 14, 2015,
against a group of former franchisees in California seeking injunctive relief and damages for: (1) Federal Trademark Infringement; (2) Federal Trademark Dilution; (3) Federal Unfair Competition; (4) Federal Trade Dress Dilution;
(5) Trademark Infringement under California Business and Professions Code § 14200; (6) Trademark Dilution under California Business and Professions Code §14200; (7) Common Law Trademark Infringement; (8) Unfair Competition under
California Business and Professions Code § 17200; (9) False Advertising; (10) Breach of Contract; (11) Breach of Implied Covenant of Good Faith and Fair Dealing; and (12) Intentional Interference with Contract. The claims stem
from the former franchisees breaches of their franchise agreements, including the failure to pay franchise fees and their continued operation of five restaurants utilizing Famous Daves intellectual property without authorization. After
two defendants in the case, Kurt Schneiter and M Mart 1, filed a demurrer to the Complaint, Famous Daves filed an Amended Complaint on October 9, 2015, reasserting the same claims. The case is captioned Famous Daves of
19
America, Inc., v. SR El Centro FD, Inc., et al., Case No. BC589329, and is currently pending before the Honorable Elihu M. Berle in the Superior Court of Los Angeles. By court order, dated
June 6, 2016, Famous Daves successfully obtained a preliminary injunction, enjoining the former franchisee defendants from using Famous Daves intellectual property, including its trademarks and restaurant system. The
preliminary injunction is currently the subject of a pending interlocutory appeal which Famous Daves intends to oppose vigorously.
On July 28, 2015, these franchisees (the Plaintiffs) filed a complaint against Famous Daves in the South Judicial District of the Superior Court of the County of Los
Angeles. On March 10, 2016, Plaintiffs
re-filed
this Complaint as a First Amended Cross-Complaint [Famous Daves of America, Inc. v. SR El Centro, Inc., et al., Superior Court of the State of
California, County of Los Angeles, Central Division, Case No. BC589329] alleging that Famous Daves breached the Franchise Agreements for these restaurants by failing to provide certain marketing support and access to customer contact data,
vendors, internet reporting and support to Plaintiffs, and failing to provide operations and preferred practices training to Plaintiffs designated representative. Plaintiffs further allege that such conduct by Famous Daves is a
breach of the covenant of good faith and fair dealing. Plaintiffs also allege that Famous Daves aided and abetted John and Allan Gantes in breach of their fiduciary duty to Plaintiffs. Plaintiffs are seeking compensatory damages in
amount not less than $20 million, punitive damages, costs and attorneys fees. Famous Daves denies the allegations and intends to vigorously defend against them. The foregoing litigation is pending and in the early stages
of discovery. No trial date has been set.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not Applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
We, Famous Daves of America, Inc. (Famous Daves or the
Company), were incorporated in Minnesota on March 14, 1994. We develop, own, operate and franchise restaurants under the name Famous Daves. As of January 1, 2017, there were 176 Famous Daves restaurants
operating in 32 states, the Commonwealth of Puerto Rico, Canada, and the United Arab Emirates, including 37 Company-owned restaurants and 139 franchise-operated restaurants. An additional 62 franchise restaurants were committed to be developed
through signed area development agreements as of January 1, 2017.
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 team member 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 (GAAP) 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 years presentation of discontinued operations, deferred taxes and deferred financing costs.
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, the Commonwealth of Puerto Rico, Canada, and the United Arab Emirates, and operate within the
single industry segment of foodservice. We make operating decisions on behalf of the Famous Daves 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. As a result, we have concluded that we have a single reporting segment.
Fiscal year
Our fiscal year ends on the Sunday nearest December 31 of each year. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal years
ended January 1, 2017 (fiscal 2016), and December 28, 2014 (fiscal 2014) consisted of 52 weeks while the fiscal year ended January 3, 2016 (fiscal 2015), consisted of 53 weeks. The fiscal year ending December 31, 2017 (fiscal
2017) will consist of 52 weeks.
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 1, 2017 and January 3, 2016. 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.
F-6
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted cash and marketing fund
We have a
system-wide marketing fund. Company-owned restaurants and 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 efforts throughout the system. These restaurants were required to contribute 1.0% of net sales to this fund during fiscal 2016 and fiscal 2015. In fiscal 2017, the contribution will remain at 1.0%
of net sales. The assets held by this fund are considered restricted and are in an interest-bearing account. 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 1, 2017 and January 3, 2016, we had approximately $946,000 and $1.1 million in this fund, respectively.
In conjunction with the Companys Credit Agreement, we have deposited 105% and 100% of the face amount of the undrawn
letters of credit in a cash collateral account with Wells Fargo, National Association and Venture Bank. We had approximately $768,000 in restricted cash as of January 1, 2017, related to these undrawn letters of credit. We were not required to
deposit funds in the cash collateral account as of January 3, 2016.
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. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based
primarily on past and current payment trends, as well as other variables, including annual financial information, which the franchisees are required to submit to us. Any changes to the reserve are recorded in general and administrative
expenses. The allowance for uncollectible accounts was approximately $270,000 and $246,000, at January 1, 2017 and January 3, 2016, respectively. In fiscal 2016, the increase in the allowance for doubtful accounts was primarily due to
delays in collections associated with certain franchises. Accounts receivable are written off when they become uncollectible, and payments subsequently received on such receivables are credited to allowance for doubtful accounts. Accounts receivable
balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of provided allowances are determined uncollectible, they are
charged to expense in the period that determination is made. Outstanding past due accounts receivable are subject to a monthly interest charge on unpaid balances which is recorded as interest income in our consolidated statements of operations.
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, with the exception of restaurant signage which, is included in furniture, fixtures, and equipment and is depreciated over 10 to 15 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.
Liquor
licenses
The Company has transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses. These licenses were capitalized as indefinite-lived intangible assets and are included in intangible assets, net
in our consolidated balance sheets (see Note 3). We review annually the liquor licenses for impairment. Additionally, the costs of obtaining
non-transferable
liquor licenses that are directly issued by local
government agencies for nominal fees are expensed as incurred. Annual liquor license renewal fees are expensed over the renewal term.
F-7
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt issuance costs
Debt issuance costs are amortized to
interest expense over the term of the related financing. The carrying value of our deferred debt issuance costs, which are netted against the related debt on the consolidated balance sheets, is approximately $257,000, and $112,000, net of
accumulated amortization of $345,000 and $453,000, as of January 1, 2017 and January 3, 2016, respectively.
Construction overhead and capitalized interest
We capitalize construction overhead costs until the time a building is turned over to operations, which is approximately two weeks prior to
opening. In fiscal 2016 and 2015 we did not capitalize any construction overhead costs while in 2014 we capitalized construction overhead costs of approximately $48,000. These reflect two remodel projects that occurred in fiscal 2014. In fiscal 2016
and 2015 there were no new restaurant openings or remodel projects. In fiscal 2016 and 2015 we did not capitalize any interest costs, while in fiscal 2014 we capitalized interest costs of approximately $7,000. 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 $2.0 million, $2.5 million, and $3.0 million for fiscal years 2016, 2015, and 2014, 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 based on actual labor rates per person including benefits, for all time spent on the implementation of software and are
depreciated over 5 years. In fiscal 2016 and 2015 we did not capitalize any software implementation costs, while in 2014 we capitalized software implementation costs of $102,000.
Research and development costs
Research and development costs represent salaries and expenses of personnel
engaged in the creation of new menu and promotional offerings, recipe enhancements and documentation activities. Research and development costs were approximately $510,000, $668,000, and $468,000, for fiscal years 2016, 2015, and 2014, 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.
Pre-opening
rent during the
build-out
period is included in
pre-opening
expense. In fiscal 2016 we had no
pre-opening
expenses. In 2015 and 2014, we had
pre-opening
expenses of approximately $1,000, and $7,000 respectively. The low levels of
pre-opening
expenses in the recent years are a result of no new Company-owned restaurants opening during fiscal years 2016, 2015 or 2014.
Lease accounting
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 collectability is considered to be probable, and relieve 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, equipment and leasehold improvements, impairment charges, and exit and disposal costs
We evaluate restaurant sites (asset groups) and long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be
F-8
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 site is determined to be impaired, the loss is measured as the amount by which the carrying amount of
the restaurant site 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 recognize 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.
Exit or disposal activities,
including restaurant closures, include the cost of disposing of the assets and 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 recognize a liability for the fair value of a required asset
retirement obligation (ARO) when such obligation is incurred. Our AROs are primarily associated with leasehold improvements which, at the end of a lease, we are 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 $119,000 and $111,000 at January 1, 2017 and January 3, 2016, 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. This breakage rate is based on a
percentage of sales when the likelihood of the redemption of the gift card becomes remote.
Interest income
We recognize interest income when earned.
Net (loss) income per common
share
Basic net (loss) income per common share (EPS) is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net (loss) income divided by the sum
of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options and restricted stock units, when dilutive.
F-9
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a reconciliation of basic and diluted net (loss) income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net (loss) income per common share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations, net of taxes
|
|
$
|
(2,942
|
)
|
|
$
|
1,079
|
|
|
$
|
2,255
|
|
Net income (loss) from discontinued operations, net of taxes
|
|
|
511
|
|
|
|
(5,463
|
)
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(2,431
|
)
|
|
|
(4,384
|
)
|
|
|
2,897
|
|
Weighted average shares outstanding
|
|
|
6,950
|
|
|
|
6,992
|
|
|
|
7,199
|
|
Net (loss) income from continuing operations per common share basic
|
|
$
|
(0.42
|
)
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations per common share basic
|
|
$
|
0.07
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share basic
|
|
$
|
(0.35
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations, net of taxes
|
|
$
|
(2,942
|
)
|
|
$
|
1,079
|
|
|
$
|
2,255
|
|
Net income (loss) from discontinued operations, net of taxes
|
|
|
511
|
|
|
|
(5,463
|
)
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(2,431
|
)
|
|
|
(4,384
|
)
|
|
|
2,897
|
|
Weighted average shares outstanding
|
|
|
6,950
|
|
|
|
6,992
|
|
|
|
7,199
|
|
Dilutive impact of common stock equivalents outstanding
|
|
|
|
|
|
|
21
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding
|
|
|
6,950
|
|
|
|
7,013
|
|
|
|
7,226
|
|
Net (loss) income from continuing operations per common share diluted
|
|
$
|
(0.42
|
)
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations per common share diluted
|
|
$
|
0.07
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were approximately 683,000, 507,000 and 118,000 options outstanding as of
January 1, 2017, January 3, 2016 and December 28, 2014, respectively that were not included in the computation of diluted EPS because they were anti-dilutive.
Stock-based compensation
We recognize compensation cost for share-based awards granted to team members and
Board members based on their fair values at the time of grant over the requisite service period. Stock options granted to
non-employees
are marked to market when they vest. 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).
Cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation
cost (excess tax benefits) is classified as cash flows from financing activities. During fiscal years 2016, 2015 and 2014, 416,250, 464,774 and 190,500 stock options were granted, respectively. During fiscal 2016, 171,690 stock options were
forfeited.
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.
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 excluded from revenue. We have detailed below our revenue recognition policies for
franchise and licensing agreements.
F-10
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchise arrangements
Initial franchise fee revenue is
recognized when we have performed substantially all of our obligations as franchisor. Franchise royalties are recognized when earned.
Our franchise-related revenue is comprised of three separate and distinct earnings processes: area development fees, initial franchise fees and continuing royalty payments. Currently, our area development
fee for domestic growth consists of a
one-time,
non-refundable
payment of approximately $10,000 per restaurant in consideration for the services we perform in
preparation of executing each area development agreement. For our foreign area development agreements the one time,
non-refundable
payment is negotiated on a per development basis and is determined based on
the costs incurred to sell that development agreement. Substantially all of these services, which include, but are not limited to, conducting market and trade area analysis, a meeting with Famous Daves Executive Team, and performing a
potential franchise background investigation, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Currently, our
initial,
non-refundable,
franchise fee for domestic growth is $45,000 per restaurant, of which approximately $5,000 is recognized immediately when a franchise agreement is signed, reflecting expenses incurred
related to the sale. The remaining
non-refundable
fee is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs
upon the franchise entering into a lease agreement for the restaurant(s). Finally, franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new
franchises pay us a monthly royalty of 5% of their net sales.
Licensing and other revenue
We
have a licensing agreement for our retail products, the current term of which expires in April 2020 with renewal options of five years, subject to the licensees attainment of identified minimum product sales levels. Licensing revenue is
recorded based on royalties earned by us in accordance with our agreement. Licensing revenue for fiscal years 2016, 2015, and 2014 was approximately $981,000, $940,000, and $878,000, respectively.
Periodically, we provide additional services, beyond the general franchise agreement, to our franchise operations, such
as new restaurant training, information technology setup 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 2016, 2015, and 2014 was approximately $22,000, $14,000, and $76,000, respectively. These year over year changes are a result of fewer
franchise-operated restaurant openings as well as a level of assistance we provided during those openings.
Recent Accounting Guidance
Recently adopted accounting guidance
In January 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU)
No. 2015-01,
Income StatementExtraordinary and Unusual Items. This update eliminates from Generally Accepted Accounting Principles (GAAP) the concept of
extraordinary items. ASU
2015-01
is effective for the first interim period within fiscal years beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. The Company adopted this ASU in the first quarter of 2016, but it
had no impact on the consolidated financial statements.
In April 2015, the FASB issued guidance on the
financial statement presentation of debt issuance costs. This guidance requires debt issuance costs to be presented in the balance sheet as a reduction of the related debt liability rather than as an asset. The standard will become effective for
annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. The standard requires companies to apply the guidance retrospectively to all prior periods. The
Company adopted this at fiscal
year-end
of 2016 but it did not have a material impact on its consolidated financial statements.
F-11
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2015, the FASB issued ASU
2015-17, Income
Taxes: Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The
ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for all entities. The Company adopted this at fiscal
year-end
of 2016 but it did not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09, CompensationStock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU
2016-09
simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on
the statement of cash flows. For public entities, ASU
2016-09
is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this at
fiscal
year-end
of 2016 but it did not have a material impact on its consolidated financial statements.
Recent accounting guidance not yet adopted
In May 2014, the FASB issued ASU No.
2014-09, Revenue
from Contracts with Customers. The FASB issued ASU
No. 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016, ASU
2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016, ASU
2016-11,
Revenue
Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09
and
2014-16
Pursuant to Staff
Announcements at the March 3, 2016 EITF Meeting in May 2016 and ASU
2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May
2016. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU
2014-09
until annual and interim periods beginning on or after December 15, 2017. It will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard permits
the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company has not yet selected a transition method and is currently evaluating the impact these standards will have on its consolidated
financial statements and related disclosures.
In February 2016, the FASB issued ASU
2016-02, Leases
(Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU
2016-02
requires lessees to recognize a lease
liability and a
right-of-use
asset for all leases. Lessor accounting remains largely unchanged. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. ASU
2016-02
requires a modified retrospective approach for all leases existing at, or entered
into after the date of initial adoption, with an option to elect to use certain transition relief. As shown in Note 8, there are $114.4 million in future minimum rental payments for operating leases that are not currently on our
balance sheet; therefore, we expect this will have a material impact on our consolidated balance sheets and related disclosures.
In August 2016, the FASB issued ASU
2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU
2016-15
addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flow, and other Topics. ASU
2016-15
is effective for annual
reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
F-12
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) INVENTORIES
Inventories consisted approximately of the following at:
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
January 3,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Small wares and supplies
|
|
$
|
730
|
|
|
$
|
1,251
|
|
Food and beverage
|
|
|
711
|
|
|
|
761
|
|
Retail goods
|
|
|
58
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,499
|
|
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
(3) INTANGIBLE ASSETS
The Company has intangible assets that consist of liquor licenses and lease interest assets. The liquor licenses are indefinite lived assets (see Note 1) and are not subject to amortization. The lease
interest assets are amortized, to occupancy costs, on a straight-line basis over the remaining term of each respective lease. Amortization for each of the next five years is expected to be approximately $36,500.
A summary of intangible assets for the years ended January 1, 2017 and January 3, 2016, respectively, is
presented in a table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
estimated
useful life
(years)
|
|
|
Original
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Less
Current
Portion
(3)
|
|
|
Non-
Current
Portion
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease interest assets
|
|
|
23.1
|
|
|
$
|
1,417
|
|
|
$
|
(326
|
)
(1)
|
|
$
|
(249
|
)
|
|
$
|
842
|
|
|
$
|
(37
|
)
|
|
$
|
805
|
|
Liquor licenses
|
|
|
|
|
|
|
1,810
|
|
|
|
(50
|
)
(2)
|
|
|
|
|
|
|
1,760
|
|
|
|
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,227
|
|
|
$
|
(376
|
)
|
|
$
|
(249
|
)
|
|
$
|
2,602
|
|
|
$
|
(37
|
)
|
|
$
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
estimated
useful life
(years)
|
|
|
Original
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Less
Current
Portion
(1)
|
|
|
Non-
Current
Portion
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease interest assets
|
|
|
24.1
|
|
|
$
|
1,417
|
|
|
$
|
|
|
|
$
|
(277
|
)
|
|
$
|
1,140
|
|
|
$
|
(48
|
)
|
|
|
1,092
|
|
Liquor licenses
|
|
|
|
|
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
1,810
|
|
|
|
|
|
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,227
|
|
|
$
|
|
|
|
$
|
(277
|
)
|
|
$
|
2,950
|
|
|
$
|
(48
|
)
|
|
|
2,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
)
|
Recorded in connection with the restaurant optimization. See Note 16.
|
(2
)
|
Based upon a quantitative analysis of this intangible asset, we determined that the fair value of one liquor license was less than its carrying
value.
|
(3
)
|
The current portion of lease interest assets are recorded in prepaid expenses and other current assets.
|
F-13
FAMOUS DAVES 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:
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
January 3,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Land, buildings, and improvements
|
|
$
|
50,851
|
|
|
$
|
50,713
|
|
Furniture, fixtures, and equipment
|
|
|
35,609
|
|
|
|
34,866
|
|
Décor
|
|
|
1,553
|
|
|
|
1,553
|
|
Construction in progress
|
|
|
181
|
|
|
|
471
|
|
Accumulated depreciation and amortization
|
|
|
(62,282
|
)
|
|
|
(55,112
|
)
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
$
|
25,912
|
|
|
$
|
32,491
|
|
|
|
|
|
|
|
|
|
|
(5) OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
January 3,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Gift cards payable
|
|
$
|
1,448
|
|
|
$
|
1,616
|
|
Other liabilities
|
|
|
1,140
|
|
|
|
902
|
|
Sales tax payable
|
|
|
454
|
|
|
|
674
|
|
Accrued real estate tax
|
|
|
79
|
|
|
|
|
|
Deferred franchise fees
|
|
|
16
|
|
|
|
134
|
|
Accrued property and equipment purchases
|
|
|
3
|
|
|
|
40
|
|
Income taxes payable
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,140
|
|
|
$
|
3,406
|
|
|
|
|
|
|
|
|
|
|
(6) OTHER LIABILITIES
Other liabilities consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
January 3,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred rent
|
|
$
|
7,802
|
|
|
$
|
7,191
|
|
Other liabilities
|
|
|
358
|
|
|
|
455
|
|
Asset retirement obligations
|
|
|
119
|
|
|
|
111
|
|
Long term lease reserve
|
|
|
145
|
|
|
|
258
|
|
Long term deferred compensation
|
|
|
142
|
|
|
|
258
|
|
Income taxes payable
|
|
|
139
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,705
|
|
|
$
|
8,285
|
|
|
|
|
|
|
|
|
|
|
(7) CREDIT FACILITY AND DEBT COVENANTS, AND FINANCING LEASE OBLIGATIONS
On December 2, 2016 (the Effective Date), Famous Daves of America, Inc. (the Company)
entered into a Loan Agreement (the First Loan Agreement) among the Company and Minwood Partners, Inc., as borrowers, and
F-14
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Venture Bank, as lender (the Lender). Also on the Effective Date, the Company entered into a loan agreement providing among the Company, as lead borrower, certain of its affiliates
also as borrowers, and the Lender for two additional loans (the Second Loan Agreement).
The First
Loan Agreement provides for a loan from the Lender to the borrowers set forth therein in the principal amount of $3.7 million and is evidenced by a promissory note (the First Note) executed and delivered by the borrowers to the
Lender on the Effective Date. The First Note has a maturity date of December 2, 2026 and shall be paid in monthly installments of principal and interest based on a twenty-year amortization period. Interest per annum shall be at a rate of 4.25%
for years 1 through 5 and for years 6 through the end of the term LIBOR rate plus 375 basis points, subject to adjustment at the discretion of the Lender, as further set forth therein. The First Note may be prepaid, subject to certain prepayment
premiums, provided, however, that during any calendar year the borrowers may prepay principal of up to 20% of the original principal amount without paying a prepayment premium.
Proceeds from the First Loan Agreement were used to repay the Companys debt to Wells Fargo Bank, National
Association and to pay certain other costs approved by the Lender.
The First Loan Agreement is secured by a
mortgage and security agreement and fixture financing statement (the First Mortgage) granting to the Lender a security interest in and title to certain real property in the state of Minnesota and as more fully described therein.
The First Loan Agreement contains customary representations and warranties and financial and other covenants
and conditions, including, among other things, minimum debt service coverage ratio and a post-closing covenant to obtain certain letters of credit. The First Loan Agreement also places certain restrictions on, among other things, the borrowers
ability to incur additional indebtedness, to create liens or other encumbrances, to use funds for purposes other than as stated therein, to sell or otherwise dispose of assets and to expand on or erect any new material improvements, as such term is
defined therein.
In addition, the First Loan Agreement contains events of default (subject to certain
materiality thresholds and grace periods), including, without limitation, payment defaults; breaches of covenants; breaches of representations and warranties; failure to perform remediation of any environmental matters on the mortgaged property, as
set forth in the First Mortgage; failure to perform or observe the covenants, conditions or terms of the First Loan Agreement and related agreements; certain bankruptcy events of the borrowers and failure to timely provide financial statements.
The Second Loan Agreement provides for two separate loans from the Lender to the borrowers set forth therein
in the aggregate principal amount of $7.3 million, one in the principal amount of $6.3 million (Loan 2) and the other in the principal amount of $1.0 million (Loan 3). Loan 2 is evidenced by a promissory note
in the principal amount of $6.3 million (the Second Note). The Second Note has a maturity date of December 2, 2023 and shall be paid in monthly installments of principal and interest based on a seven-year amortization period.
Interest per annum shall be at a rate equal to the LIBOR rate plus 325 basis points (each of such terms as defined in the Second Note), subject to adjustment at the discretion of the Lender and as further set forth therein. The Second Note may be
prepaid at any time without incurring a prepayment premium.
Loan 3 is evidenced by a promissory note in the
principal amount of $1.0 million (the Third Note). The Third Note has a maturity date of December 2, 2019 and shall first be paid in monthly installments of the interest then accrued on the principal balance and then in full on
the maturity date. Interest per annum shall be at a rate equal to the LIBOR rate plus 325 basis points (each of such terms as defined in the Third Note), subject to adjustment at the discretion of the Lender, as further set forth therein. The Third
Note may be prepaid at any time without incurring a prepayment premium.
Proceeds from the Second Loan
Agreement were used to repay the Companys debt to Wells Fargo Bank, National Association, with the remainder to be used as a line of credit as working capital for borrowers business and pay certain other costs approved by the Lender.
F-15
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan 2 is secured by a mortgage dated as of the Effective Date (the
Second Mortgage) which is subordinate to the First Mortgage, a security interest in substantially all of the personal property of the borrowers pursuant to a security agreement dated as of the Effective Date (the Security
Agreement) and a pledge of certain certificates of deposit pursuant to a pledge agreement also dated as of the Effective Date (the Pledge Agreement). Loan 3 is secured by a security interest on substantially all of the personal
property of the borrowers pursuant to the Security Agreement and a pledge of certain certificates of deposit pursuant to the Pledge Agreement.
The Second Loan Agreement contains customary representations and warranties and financial and other covenants and conditions, including, among other things, minimum debt service coverage ratio and a
post-closing covenant to obtain certain letters of credit. The Second Loan Agreement also places certain restrictions on, among other things, the borrowers ability to incur additional indebtedness, to use funds for purposes other than as
stated therein, to create liens or other encumbrances, to sell or otherwise dispose of assets and to expand on or erect any new material improvements, as such term is defined therein.
In addition, the Second Loan Agreement contains events of default (subject to certain materiality thresholds and grace
periods), including, without limitation, payment defaults; breaches of covenants; breaches of representations and warranties; failure to perform remediation of any environmental matters on the mortgaged property, as set forth in the Second Mortgage;
failure to perform or observe the covenants, conditions or terms of the Second Loan Agreement and related agreements; certain bankruptcy events of the borrowers and failure to timely provide financial statements. If an event of default were to
occur, the Lender has the right to call the debt prior to expiration.
On December 2, 2016, the Company
refinanced approximately $9.9 million from borrowings under the First Loan Agreement and Second Loan Agreement to fund repayment of certain outstanding amounts under the Third Amended and Restated Credit Agreement dated as of May 8, 2015,
as amended (the Credit Agreement) by and among the Company and its subsidiaries and Wells Fargo Bank, National Association, as administrative agent on behalf of the Lenders under the Credit Agreement. For a period of up to 45 days
following December 2, 2016, one letter of credit in the amount of $625,000 and a related cash collateral pledge remained outstanding under the Credit Agreement. Other than this letter of credit and related pledge, as well as certain breakage
and treasury service management fees, the Companys obligations under the Credit Agreement were terminated on December 2, 2016. At January 1, 2017, the Company had $1.0 million of additional borrowing capacity in Loan 3.
The weighted average interest rate of the First, Second and Third notes for the fiscal year ended
January 1, 2017 was 4.0%. The weighted average interest rate of the Term Loans for fiscal years ended January 1, 2017 and January 3, 2016 was 3.69% and 2.66%, respectively.
As of January 1, 2017, we were in compliance with all of our covenants.
If, in the event of a default, the Lender were to call the debt prior to expiration, the Company believes there are
multiple options available to obtain other sources of financing. Although possibly at different terms, the Company believes there would be other lenders available and willing to finance a new credit facility. However, if replacement financing
were unavailable to us, termination of the Facility without adequate replacement would have a material and adverse impact on our ability to continue our business operations.
We expect to use any borrowings under the Credit Agreement for general working capital purchases as needed.
F-16
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted approximately of the following at:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
Notes Payable Wells Fargo minimum monthly installments of $150 until December 31, 2018, followed by a balloon
payment of approximately $6,750 plus interest.
|
|
$
|
|
|
|
$
|
12,000
|
|
First Note Venture Bank monthly installments of principal and interest until December 2, 2026
|
|
|
3,700
|
|
|
|
|
|
Second Note Venture Bank monthly payments of principal and interest until December 2, 2023
|
|
|
6,300
|
|
|
|
|
|
Less: deferred financing fees
|
|
|
(234
|
)
|
|
|
(80
|
)
|
Less: current maturities
|
|
|
(917
|
)
|
|
|
(1,800
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt net of current maturities
|
|
$
|
8,849
|
|
|
$
|
10,120
|
|
|
|
|
|
|
|
|
|
|
Required principal payments on long-term debt are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
Fiscal Year
|
|
|
|
|
2017
|
|
$
|
917
|
|
2018
|
|
|
954
|
|
2019
|
|
|
993
|
|
2020
|
|
|
1,120
|
|
2021
|
|
|
988
|
|
Thereafter
|
|
|
5,028
|
|
|
|
|
|
|
Total
|
|
$
|
10,000
|
|
|
|
|
|
|
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 $56,627 (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 20
th
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 in the agreement, 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 are being depreciated over a 20 year term. In addition, as the monthly
lease payments are made, the obligation will be reduced by the 20 year amortization table.
F-17
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financing lease obligations consisted of the following at:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
January 1,
|
|
|
January 3,
|
|
|
2017
|
|
|
2016
|
|
Financing lease Spirit Financial monthly installments of
$54-$59
including an interest rate of 9.63%, due in March 2019.
|
|
$
|
2,757
|
|
|
$
|
3,150
|
|
Less: deferred financing fees
|
|
|
(23
|
)
|
|
|
(33
|
)
|
Less: current maturities
|
|
|
(454
|
)
|
|
|
(393
|
)
|
|
|
|
|
|
|
|
|
|
Long-term financing lease net of current maturities
|
|
$
|
2,280
|
|
|
$
|
2,724
|
|
|
|
|
|
|
|
|
|
|
Required future minimum payments under our financing leases are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
Fiscal Year
|
|
|
|
|
2017
|
|
$
|
700
|
|
2018
|
|
|
707
|
|
2019
|
|
|
1,838
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
3,245
|
|
Imputed interest component of minimum payments
|
|
|
(488
|
)
|
|
|
|
|
|
Total financing lease payable
|
|
$
|
2,757
|
|
|
|
|
|
|
(8) OPERATING LEASE OBLIGATIONS
We have various operating leases for existing and future restaurants and corporate office space with remaining lease terms
ranging from 4 months to 31 years, including lease renewal options. Of the total operating leases, 13 require percentage rent between 3% and 8% of annual gross sales, typically above a natural breakeven point, in addition to the base rent. All of
these leases contain provisions for payments of real estate taxes, insurance and common area maintenance costs. Total occupancy lease costs for fiscal years 2016, 2015 and 2014, including rent, common area maintenance costs, real estate taxes and
percentage rent, were approximately $7.5 million, $7.6 million and $8.6 million, respectively. Cash rent expense was approximately $5.0 million, $5.8 million, and $6.1 million, for fiscal years 2016, 2015, and 2014,
respectively. Percentage rent was approximately $18,000, $10,000, and $6,000 for fiscal years 2016, 2015, and 2014, respectively.
The Company sublet its Chicago field office in 2015 in addition to 10,340 square feet of its corporate office space. In 2016, 2015, and 2014, the Company recognized $386,000, $104,000, and $0,
respectively, of sublease income which partially offset its total rent expense.
F-18
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments (including reasonably assured renewal
options) existing at January 1, 2017 were:
|
|
|
|
|
(in thousands)
|
|
|
|
Fiscal Year
|
|
|
|
|
2017
|
|
$
|
5,765
|
|
2018
|
|
|
5,776
|
|
2019
|
|
|
5,856
|
|
2020
|
|
|
5,949
|
|
2021
|
|
|
5,849
|
|
Thereafter
|
|
|
85,249
|
|
|
|
|
|
|
Total operating lease obligations
|
|
|
114,444
|
|
Sublease income
|
|
|
(15,565
|
)
|
|
|
|
|
|
Total
|
|
$
|
98,879
|
|
|
|
|
|
|
(9) PERFORMANCE SHARES, STOCK OPTIONS, OTHER FORMS OF COMPENSATION, AND COMMON SHARE REPURCHASES
Stock-based Compensation
Effective May 5, 2015, we adopted a 2015 Equity Plan (the 2015 Plan), pursuant to which we may grant stock options, stock appreciation rights, restricted stock, restricted stock units,
performance shares, performance stock units and other stock and cash awards to eligible participants. We also maintain an Amended and Restated 2005 Stock Incentive Plan (the 2005 Plan). Together, the 2015 Plan and 2005 Plan are referred
to herein as the Plans. Under the 2015 Plan, an aggregate of 34,050 shares of our Companys common stock remained unreserved and available for issuance at January 1, 2017. The 2005 Plan prohibits the granting of incentives
after May 12, 2015. Nonetheless, the 2005 Stock Incentive Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated.
F-19
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognized stock-based compensation expense in our consolidated
statements of operations for the fiscal years ended 2016, 2015, and 2014, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
January 1,
|
|
|
January 3,
|
|
|
December 28,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2014
|
|
Performance Share Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Program
(1)(3)
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
2012 Program
(1)(4)
|
|
|
|
|
|
|
|
|
|
|
(761
|
)
|
2013 Program
(2)(5)(6)(7)(8)
|
|
|
|
|
|
|
(169
|
)
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares and Performance Stock Units
|
|
$
|
|
|
|
$
|
(169
|
)
|
|
$
|
(1,228
|
)
|
Stock Options
(10)(11)(12)
|
|
|
311
|
|
|
|
459
|
|
|
|
371
|
|
Restricted Stock and Restricted Stock Units
(8)
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
Director Shares
(9)(12)
|
|
|
28
|
|
|
|
60
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
339
|
|
|
$
|
350
|
|
|
$
|
(883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The 2011 and 2012 Programs consisted entirely of performance shares.
|
(2)
|
The 2013 Program consisted of performance shares and performance stock units.
|
(3)
|
Includes a $55,000 recapture of stock-based compensation due to employee departures for the year ended December 28, 2014.
|
(4)
|
Includes a $761,000 recapture of stock-based compensation due to employee departures and the failure to achieve performance targets for the year
ended December 28, 2014.
|
(5)
|
Includes the recapture of stock-based compensation related to performance shares of approximately $458,000 and performance stock units of
approximately $135,000 due to the employee departures for the year ended December 28, 2014.
|
(6)
|
Includes the recapture of stock-based compensation for performance shares of approximately $131,000 and performance stock units of approximately
$38,000 due to the failure to achieve threshold performance levels for the program as of January 3, 2016.
|
(7)
|
Includes a
mark-to-market
adjustment for performance stock units of
approximately $22,000 for the year ended December 28, 2014.
|
(8)
|
Includes a $128,000 recapture of stock-based compensation due to the departure of our former CEO for the year ended December 28, 2014.
|
(9)
|
Includes a $20,000 recapture of stock-based compensation due to the departure of our former CEO for the year ended December 28, 2014.
|
(10)
|
Includes a $105,000 recapture of stock-based compensation due to employee departures for the year ended January 3, 2016.
|
(11)
|
Includes a $126,000 recapture of stock-based compensation due to the departure of our former CFO for the year ended January 1, 2017.
|
(12)
|
Includes a $27,000 recapture of stock-based compensation due to the departure of our former CEO for the year ended January 1, 2017.
|
Performance Shares and Performance Stock Units
No shares were issued during fiscal 2016 or 2015 related to performance share programs. During the first quarter of fiscal
2014, we issued 86,519 shares upon satisfaction of conditions under the 2011 performance share program, representing the achievement of approximately 86.7% of the target payout for this program. Recipients elected to forfeit 30,518 of those
shares to satisfy tax withholding obligations, resulting in a net issuance of 56,001 shares.
The Compensation
Committee did not implement performance share programs for fiscal 2014, 2015 or 2016.
We recognize
compensation cost for performance share awards and incentive stock option awards over the requisite service period (i.e. fixed treatment) based on their fair value, which is the closing stock price at the date of grant. Participants in each
performance share program are entitled to receive a number of shares of our common stock (Performance Shares) based upon the extent to which we achieve the cumulative total of the earnings per share or Adjusted EBITDA goals established
by our Compensation Committee for each fiscal year within a three-year performance period (the Cumulative Adjusted EBITDA Goal). Receipt of any performance shares is contingent upon us achieving a specified minimum percentage of the
Cumulative Adjusted EBITDA Goal (as applicable).
We recognize compensation cost for performance stock unit
awards over the requisite service period based on their initial fair value, which is the closing stock price at the date of grant. This award is adjusted to fair value based on the closing stock price at the end of each fiscal quarter. Recipients of
performance stock unit awards are entitled to receive a cash payout based on a number of our stock units awarded (Performance Stock Unit) to the extent we achieve the Cumulative Adjusted EBITDA Goal, and the market value of our common
stock.
F-20
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At January 1, 2017, no performance share programs were in progress.
Board of Directors
Compensation
We recognized Board of Directors compensation expense in our consolidated statements of operations for the fiscal
years ended January 1, 2017, January 3, 2016, and December 28, 2014, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock-based compensation
|
|
$
|
28
|
|
|
$
|
60
|
|
|
$
|
47
|
|
Stock option compensation
|
|
|
90
|
|
|
|
69
|
|
|
|
155
|
|
Cash compensation
|
|
|
95
|
|
|
|
201
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Board of Directors compensation
|
|
$
|
213
|
|
|
$
|
330
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The compensation expense for stock option grants is recognized under general and administrative expense in our
consolidated statements of operations through the applicable service period
Other options granted to certain
non-executive
officer employees vest in equal annual installments over a period of four years and expire five years from the grant date. Compensation expense equal to the grant date fair value is generally
recognized for these awards over the vesting period.
Options granted to certain
non-employees
in exchange for future services vest in monthly installments over a period of approximately two years and expire five years from the grant date. Expense is recognized over the vesting period,
with previously unvested options being marked to market at the date of vesting.
The fair value of each stock
option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. Due to a lack of recent historical share option exercise experience, the Company uses a simplified method for estimating
the expected life, as outlined in Accounting Standards Codification 718, calculated using the following formula: (vesting term + original contract term)/2. Expected volatilities are based on the movement of the Companys common stock over the
most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods equal to the expected life of the option is based on the U.S. maturities over the expected life at the time of grant.
F-21
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding our Companys stock options is summarized
below:
|
|
|
|
|
|
|
|
|
(number of options in thousands)
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 29, 2013
|
|
|
48
|
|
|
$
|
7.77
|
|
Granted
|
|
|
191
|
|
|
|
28.11
|
|
Exercised
(1)
|
|
|
(43
|
)
|
|
|
7.40
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 28, 2014
|
|
|
196
|
|
|
|
27.67
|
|
Granted
|
|
|
465
|
|
|
|
15.75
|
|
Canceled, forfeited or expired
|
|
|
(154
|
)
|
|
|
28.07
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 3, 2016
|
|
|
507
|
|
|
|
16.66
|
|
Granted
|
|
|
416
|
|
|
|
5.55
|
|
Exercised
|
|
|
(6
|
)
|
|
|
5.90
|
|
Canceled, forfeited or expired
|
|
|
(231
|
)
|
|
|
19.44
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2017
|
|
|
686
|
|
|
$
|
9.15
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at December 28, 2014
|
|
|
18
|
|
|
$
|
17.39
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at January 3, 2016
|
|
|
77
|
|
|
$
|
21.48
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at January 1, 2017
|
|
|
259
|
|
|
$
|
10.87
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2014, option holders elected to forfeit approximately 18,000 shares to satisfy the strike price and tax withholding obligations, resulting in a
net issuance of approximately 25,000 shares.
|
The following are weighted-average values
and assumptions for valuing grants made during fiscal 2016:
|
|
|
|
|
Weighted-average fair value of options granted during the year
|
|
$
|
1.97
|
|
Expected life (in years)
|
|
|
5.2
|
|
Expected stock volatility
|
|
|
39.98
|
%
|
Risk-free interest rate
|
|
|
1.2
|
%
|
As of January 1, 2017, there was $1.0 million of total unrecognized
compensation cost related to stock option arrangements granted under the Companys stock option plan. The cost is expected to be recognized over a weighted average period of 3.0 years.
F-22
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at January 1, 2017:
(number outstanding and number exercisable in thousands)
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Exercisable
|
Exercise prices
|
|
Number
outstanding
|
|
Weighted-
average
remaining
contractual life
in years
|
|
Weighted-
average exercise
price
|
|
Number
exercisable
|
|
Weighted-
average
exercise price
|
$4.55 - $9.99
|
|
417
|
|
7.3
|
|
$5.61
|
|
91
|
|
$5.85
|
$10.00 - $19.99
|
|
243
|
|
2.8
|
|
$12.90
|
|
158
|
|
$12.55
|
$20.00 - $31.66
|
|
26
|
|
7.6
|
|
$30.95
|
|
10
|
|
$31.18
|
|
|
|
|
|
|
|
|
|
|
|
$4.55 - $31.66
|
|
686
|
|
5.7
|
|
$9.15
|
|
259
|
|
$10.87
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options (the amount by which the market price of the
stock on the date of exercise exceeds the exercise price of the option) exercised during fiscal 2016 was approximately $3,900. As of January 1, 2017, the aggregate intrinsic value of options outstanding and exercisable was approximately $1,200.
Restricted Stock Units
Employees forfeited 8,622 and 24,685 shares of restricted stock units during fiscal 2015 and 2014, at a price of $25.05
and $26.59 per share, respectively, to cover withholding taxes that were due from the employees at the time that the applicable forfeiture restrictions lapsed.
No restricted stock units were outstanding as of January 1, 2017.
Common Share Repurchases
On May 1, 2012, our Board of
Directors approved 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. The program was completed during fiscal 2015.
Over the course of the program, we repurchased all of the 1.0 million shares in this authorization for approximately $18.6 million at an average market price per share of $18.57, excluding commissions.
(10) RETIREMENT SAVINGS PLANS
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. In fiscal 2016, 2015, and 2014
we matched 25.0%, of the employees contribution up to 4.0% of their earnings. Team member contributions were approximately $338,000, $399,000, and $518,000, for fiscal 2016, 2015, and 2014, respectively. The employer match was $54,000,
$58,000, and $87,000 for fiscal 2016, 2015, and 2014, respectively. There were no discretionary contributions to the plan in fiscal years 2016, 2015 or 2014.
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 team members 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
F-23
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016, 2015, and 2014, we matched 25.0% of the first 4.0% contributed and paid a declared interest rate of 6.0% on balances outstanding. The Board of Directors administers the Plan and may change
the rate or any other aspects of the Plan at any time.
Deferral periods are limited to 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 an election for extension 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, participants entitled to future payments under the Plan would have no greater rights than that of an unsecured general creditor of the Company and the Plan confers no legal rights for interest or claim on any specific 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 fiscal years ended January 1, 2017, January 3, 2016 and December 28,
2014, eligible participants contributed approximately $35,000, $64,000 and $99,000 to the Plan and the Company provided matching funds and interest of approximately $18,000, $35,000 and $58,000, net of distributions of approximately $238,000,
$368,000 and $418,000, respectively. The distributions were due to executive departures and required distributions in accordance with our Plan. The outstanding deferred compensation balance at January 1, 2017 and January 3, 2016, was
approximately $179,000 and $365,000 respectively.
(11) DISCONTINUED OPERATIONS
On December 14, 2015, Famous Daves of America, Inc. and certain of its subsidiaries (collectively, the
Company) entered into an Asset Purchase Agreement and related Real Estate Purchase Agreement (the Purchase Agreements) with Windy City Restaurant Holdings LLC and its affiliate (together, the Purchaser) pursuant
to which the Company agreed to sell the assets comprising its seven Chicago, Illinois area Company-owned restaurants located in Addison, Algonquin, Bolingbrook, Evergreen Park, North Riverside, Orland Park and Oswego (collectively, Purchased
Restaurants) to the Purchaser. As consideration for the Purchased Restaurants, which included the real property on which the Company operates the Purchased Restaurant located in Addison, Illinois, the Purchaser paid the Company
$1.15 million, plus $315,000 for the purchase of inventory on hand on the closing date, and assumed specified liabilities of the Company. Included among the assumed liabilities were the Companys existing leases for the Purchased
Restaurants located in Bolingbrook, North Riverside and Orland Park, Illinois. This transaction closed on March 1, 2016.
Under the Purchase Agreements, the Purchaser also agreed to enter into (i) sublease agreements for the real property on which Purchased Restaurants are located in Algonquin, Evergreen Park and
Oswego, Illinois, (ii) franchise agreements for each Purchased Restaurant, and (iii) an Area Development Agreement pursuant to which the Purchaser agreed to use commercially reasonable efforts to develop ten additional Famous Daves
restaurants in the Chicago metropolitan area market. The Company agreed to waive its standard initial franchise fee for the Purchased Restaurants and the Companys standard franchise royalty rates were reduced as they relate to certain of the
Purchased Restaurants for a limited period of time. The Purchaser has further agreed to invest no less than $500,000 in refreshing and improving the Purchased Restaurants pursuant to an agreed upon work schedule no later than one year following the
closing. To the extent Purchaser fails to invest such amount within the prescribed timeframe, it will remit the difference to the Company. Subsequent to January 1, 2017, the Purchaser closed the Evergreen Park restaurant. See Note 20.
In accordance with the Purchase Agreements, the Purchaser deposited earnest money in the amount of $140,000
with a third party title company. The earnest money was delivered to the Company and applied against the purchase price at closing.
F-24
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with this agreement, the Company recorded an
$8.8 million impairment charge. Subsequent to the close of this transaction, the Company recaptured approximately $1.3 million in deferred rent credits. The net assets and liabilities of the Purchased Restaurants that were
associated with this transaction are included in assets and liabilities held for sale on the accompanying consolidated balance sheets at January 3, 2016. No related assets or liabilities remain at January 1, 2017. The carrying value of the
assets and liabilities included in the asset sale was as follows (in thousands):
|
|
|
|
|
(in thousands)
|
|
January 3,
2016
|
|
Accounts receivable, net
|
|
$
|
65
|
|
Inventories
|
|
|
344
|
|
Prepaid expenses and other current assets
|
|
|
30
|
|
|
|
|
|
|
Total current assets
|
|
|
439
|
|
Property, equipment and leasehold improvements, net
|
|
|
991
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,430
|
|
|
|
|
|
|
Accounts payable
|
|
|
10
|
|
Accrued compensation and benefits
|
|
|
96
|
|
Other current liabilities
|
|
|
389
|
|
|
|
|
|
|
Total current liabilities
|
|
|
495
|
|
Other liabilities
|
|
|
1,252
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,747
|
|
|
|
|
|
|
The operating results of the Purchased Restaurants for the fiscal years ended
January 1, 2017, January 3, 2016 and December 28, 2014 are summarized below. These results include costs directly attributable to the components of the business which were divested. Interest expense of approximately $32,000,
$28,000 and $27,000 was allocated to discontinued operations for the fiscal years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively, based upon the portion of the borrowing base associated with the
discontinued operations. Income tax expense (benefit) of approximately $442,000, $(3.3 million) and $367,000 for the fiscal years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively have also been
allocated to discontinued operations. These adjustments have been made for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
2,365
|
|
|
$
|
17,002
|
|
|
$
|
17,493
|
|
Income (loss) from operations
|
|
$
|
985
|
|
|
$
|
(8,763
|
)
|
|
$
|
1,036
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
511
|
|
|
$
|
(5,463
|
)
|
|
$
|
642
|
|
F-25
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INCOME TAXES
For financial reporting purposes, income before taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
(5,264
|
)
|
|
$
|
901
|
|
|
$
|
2,764
|
|
Foreign
|
|
|
322
|
|
|
|
226
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,942
|
)
|
|
$
|
1,127
|
|
|
$
|
2,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the income tax (expense) benefit for the last three fiscal
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(629
|
)
|
|
$
|
(767
|
)
|
|
$
|
(1,264
|
)
|
State
|
|
|
112
|
|
|
|
(45
|
)
|
|
|
(263
|
)
|
Foreign
|
|
|
(99
|
)
|
|
|
(87
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(616
|
)
|
|
|
(899
|
)
|
|
|
(1,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,428
|
|
|
|
514
|
|
|
|
879
|
|
State
|
|
|
188
|
|
|
|
337
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,616
|
|
|
|
851
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
2,000
|
|
|
$
|
(48
|
)
|
|
$
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For financial reporting purposes, total income tax benefit (expense) includes the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Continuing operations
|
|
$
|
2,000
|
|
|
$
|
(48
|
)
|
|
$
|
(732
|
)
|
Discontinued operations
|
|
|
(442
|
)
|
|
|
3,328
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
1,558
|
|
|
$
|
3,280
|
|
|
$
|
(1,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of uncertain tax positions taken or expected to be taken on income tax returns
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.
F-26
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively, is presented in the table below:
|
|
|
|
|
(in thousands)
|
|
|
|
Balance at December 29, 2013
|
|
$
|
45
|
|
Increases attributable to tax positions taken during prior periods
|
|
|
69
|
|
Audit settlements
|
|
|
(19
|
)
|
Decreases due to lapses of statutes of limitations
|
|
|
(14
|
)
|
|
|
|
|
|
Balance at December 28, 2014
|
|
|
81
|
|
Decreases due to lapses of statutes of limitations
|
|
|
(34
|
)
|
|
|
|
|
|
Balance at January 3, 2016
|
|
|
47
|
|
Increases attributable to tax positions taken during prior periods
|
|
|
142
|
|
Audit settlements
|
|
|
(41
|
)
|
Decreases due to lapses of statutes of limitations
|
|
|
(33
|
)
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
115
|
|
|
|
|
|
|
At January 1, 2017, January 3, 2016 and December 28, 2014, there are
$115,000, $47,000, and $81,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal years 2016, 2015, and 2014, we recognized interest and
penalties of $20,000, $(2,000), and $(7,000), respectively. Excluded from the above reconciliation were $25,000, $5,000 and $7,000, of accrued interest and penalties, net of tax benefit, for fiscal 2016, 2015, and 2014, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The
preparation of these income tax returns requires the Company to interpret and apply relevant federal and state income tax laws. It is common for federal and state taxing authorities to periodically examine filed tax returns. During these
examinations, it is possible for taxing authorities to interpret facts or tax law differently than the Company. As a result, the Company may be required to adjust tax liabilities affecting its effective tax rate. Tax years 2013 and forward remain
subject to federal examination. Tax years 2012 and forward remain subject to state examination.
It is possible
that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months. These changes may be the result of new audits or the expiration of statutes of limitations and could range up to $138,000 based on
current estimates.
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 2016 and 2015, our deferred tax asset was reviewed for expected utilization using a more likely than not approach as required by assessing the available positive and negative evidence
surrounding its recoverability.
At January 1, 2017, it is more likely than not that all deferred tax
assets attributable to temporary differences taken on federal and state tax returns will be realized based on our consolidated taxable income for fiscal 2016 and fiscal 2015 as well as the expectation that reversing deferred tax assets will be
offset by reversing deferred tax liabilities and certain tax planning strategies. However, there is a portion of deferred tax assets attributable to temporary differences taken on stand-alone state returns and stand-alone state net operating losses
and credit carry forwards that are unlikely to be realized due to insufficient future earnings. For these deferred tax assets, the Company has created a valuation allowance listed in the table below. The 2016 net change in valuation allowance
is an increase to the valuation allowance in the amount of $531,000.
F-27
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
3,184
|
|
|
$
|
3,379
|
|
State net operating loss carry-forwards
|
|
|
2,325
|
|
|
|
1,779
|
|
Financing lease obligation
|
|
|
1,028
|
|
|
|
1,170
|
|
Tax credit carryover
|
|
|
910
|
|
|
|
376
|
|
Accrued expenses
|
|
|
585
|
|
|
|
284
|
|
Stock-based compensation
|
|
|
472
|
|
|
|
344
|
|
Deferred revenue
|
|
|
452
|
|
|
|
476
|
|
Lease reserve
|
|
|
222
|
|
|
|
223
|
|
Accrued and deferred compensation
|
|
|
67
|
|
|
|
151
|
|
Contribution carryover
|
|
|
18
|
|
|
|
|
|
Inventories
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
9,272
|
|
|
$
|
8,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Property and equipment basis difference
|
|
$
|
(1,671
|
)
|
|
$
|
(952
|
)
|
Inventories
|
|
|
(295
|
)
|
|
|
(562
|
)
|
Prepaid expenses
|
|
|
(269
|
)
|
|
|
(236
|
)
|
Intangible property basis difference
|
|
|
(56
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
$
|
(2,291
|
)
|
|
$
|
(1,884
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
6,981
|
|
|
|
6,308
|
|
Valuation allowance
|
|
|
(2,348
|
)
|
|
|
(1,817
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset
|
|
$
|
4,633
|
|
|
$
|
4,491
|
|
|
|
|
|
|
|
|
|
|
In 2016, we had cumulative net operating loss carry-forwards for tax reporting purposes
of approximately $43.4 million for state purposes, which if not used, will begin to expire in fiscal 2018.
We made federal income tax payments, net of federal refunds, of $210,000, $166,000, and $369,000 in 2016, 2015 and 2014,
respectively. State and foreign income taxes paid by the Company, net of refunds, totaled $180,000, $232,000, and $231,000 in 2016, 2015 and 2014, respectively.
F-28
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation between the statutory rate and the effective tax rate is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of valuation allowance and federal benefit
|
|
|
5.8
|
|
|
|
5.4
|
|
|
|
3.2
|
|
Foreign taxes
|
|
|
(2.0
|
)
|
|
|
7.7
|
|
|
|
3.7
|
|
Tax effect of permanent differences meals and entertainment
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
1.5
|
|
Tax effect of permanent differences tip credit
|
|
|
(3.4
|
)
|
|
|
17.2
|
|
|
|
8.1
|
|
Tax effect of permanent differences other
|
|
|
0.3
|
|
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
Tax effect of general business credits
|
|
|
8.9
|
|
|
|
(50.7
|
)
|
|
|
(23.8
|
)
|
Tax effect of foreign tax credit
|
|
|
2.0
|
|
|
|
(7.7
|
)
|
|
|
(3.7
|
)
|
Uncertain tax positions
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.9
|
)
|
|
|
(2.4
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
(1)
|
|
|
40.5
|
%
|
|
|
4.3
|
%
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The decrease in the 2015 effective tax rate is primarily due to the small amount of 2015
pre-tax
book
income.
|
(13) SUPPLEMENTAL CASH FLOWS INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash paid for interest, net of capitalized interest
|
|
$
|
729
|
|
|
$
|
975
|
|
|
$
|
790
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
390
|
|
|
$
|
398
|
|
|
$
|
600
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of additional
paid-in-capital
to
payroll taxes payable for performance shares issued
|
|
$
|
|
|
|
$
|
215
|
|
|
$
|
1,520
|
|
Accrued property and equipment purchases
|
|
$
|
37
|
|
|
$
|
10
|
|
|
$
|
(32
|
)
|
Refinancing of debt
|
|
$
|
9,897
|
|
|
$
|
|
|
|
$
|
|
|
F-29
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) SELECTED QUARTERLY DATA (UNAUDITED)
The following represents selected quarterly financial information for fiscal years 2016 and 2015
(in thousands, except
per-share
data)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
23,540
|
|
|
$
|
28,264
|
|
|
$
|
28,044
|
|
|
$
|
32,714
|
|
|
$
|
25,510
|
|
|
$
|
27,881
|
|
|
$
|
22,085
|
|
|
$
|
25,367
|
|
Income (loss) from operations
|
|
$
|
395
|
|
|
$
|
302
|
|
|
$
|
334
|
|
|
$
|
981
|
|
|
$
|
(3,749
|
)
|
|
$
|
1,307
|
|
|
$
|
(1,070
|
)
|
|
$
|
(447
|
)
|
Net income (loss) from continuing operations
|
|
$
|
(69
|
)
|
|
$
|
108
|
|
|
$
|
113
|
|
|
$
|
547
|
|
|
$
|
(2,378
|
)
|
|
$
|
731
|
|
|
$
|
(826
|
)
|
|
$
|
(307
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
681
|
|
|
$
|
89
|
|
|
$
|
27
|
|
|
$
|
107
|
|
|
$
|
(81
|
)
|
|
$
|
(23
|
)
|
|
$
|
(116
|
)
|
|
$
|
(5,636
|
)
|
Basic net income (loss) from continuing operations per common share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
Basic net income (loss) from discontinued operations per common share
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.81
|
)
|
Diluted net income (loss) from continuing operations per diluted share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
Diluted net income (loss) from discontinued operations per diluted share
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.81
|
)
|
(15) 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.
Famous Daves of America, Inc. (Famous Daves) filed a complaint on July 14, 2015, against a
group of former franchisees in California seeking injunctive relief and damages for: (1) Federal Trademark Infringement; (2) Federal Trademark Dilution; (3) Federal Unfair Competition; (4) Federal Trade Dress Dilution;
(5) Trademark Infringement under California Business and Professions Code § 14200; (6) Trademark Dilution under California Business and Professions Code §14200; (7) Common Law Trademark Infringement; (8) Unfair Competition under
California Business and Professions Code § 17200; (9) False Advertising; (10) Breach of Contract; (11) Breach of Implied Covenant of Good Faith and Fair Dealing; and (12) Intentional Interference with Contract. The claims stem
from the former franchisees breaches of their franchise agreements, including the failure to pay franchise fees and their continued operation of five restaurants utilizing Famous Daves intellectual property without authorization. After
two defendants in the case, Kurt Schneiter and M Mart 1, filed a demurrer to the Complaint, Famous Daves filed an Amended Complaint on October 9, 2015, reasserting the same claims. The case is captioned Famous Daves of America,
Inc., v. SR El Centro FD, Inc., et al., Case No. BC589329, and is currently pending before the Honorable Elihu M. Berle in the Superior Court of Los Angeles. By court order, dated June 6, 2016, Famous Daves successfully obtained a
preliminary injunction, enjoining the former franchisee defendants from using Famous Daves intellectual property, including its trademarks and restaurant system. The preliminary injunction is currently the subject of a pending
interlocutory appeal which Famous Daves intends to oppose vigorously.
F-30
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 28, 2015, these franchisees (the Plaintiffs)
filed a complaint against Famous Daves in the South Judicial District of the Superior Court of the County of Los Angeles. On March 10, 2016, Plaintiffs
re-filed
this Complaint as a First
Amended Cross-Complaint [Famous Daves of America, Inc. v. SR El Centro, Inc., et al., Superior Court of the State of California, County of Los Angeles, Central Division, Case No. BC589329] alleging that Famous Daves breached the
Franchise Agreements for these restaurants by failing to provide certain marketing support and access to customer contact data, vendors, internet reporting and support to Plaintiffs, and failing to provide operations and preferred practices training
to Plaintiffs designated representative. Plaintiffs further allege that such conduct by Famous Daves is a breach of the covenant of good faith and fair dealing. Plaintiffs also allege that Famous Daves aided and abetted
John and Allan Gantes in breach of their fiduciary duty to Plaintiffs. Plaintiffs are seeking compensatory damages in amount not less than $20 million, punitive damages, costs and attorneys fees. Famous Daves denies the
allegations and intends to vigorously defend against them. The foregoing litigation is pending and in the early stages of discovery. No trial date has been set.
(16) ASSET IMPAIRMENT AND ESTIMATED LEASE TERMINATION AND OTHER CLOSING COSTS
In accordance with FASB Accounting Standards Codification 360 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 restaurants assets exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease
terms, discount rate, anticipated sale prices 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. The following is a summary of impairment costs for fiscal 2016, fiscal 2015, and fiscal 2014. These costs are included in asset impairment and estimated
lease termination and other closing costs in the Consolidated Statements of Operations.
F-31
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(dollars in thousands)
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
|
December 28,
2014
|
|
Asset Impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant optimization
|
|
$
|
4,376
|
|
|
$
|
|
|
|
$
|
|
|
Software
(1)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
Mays Landing, NJ
|
|
|
50
|
|
|
|
|
|
|
|
766
|
|
Smithtown, NY
(2)
|
|
|
|
|
|
|
935
|
|
|
|
|
|
Richmond, VA area
|
|
|
|
|
|
|
|
|
|
|
2,285
|
|
Two Minneapolis, MN area restaurants
|
|
|
|
|
|
|
|
|
|
|
544
|
|
Décor
|
|
|
|
|
|
|
|
|
|
|
342
|
|
Des Moines, IA
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,582
|
|
|
$
|
935
|
|
|
$
|
4,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant closure expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Smithtown, NY
(3)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
Other
(6)
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
N. Riverside, IL
(4)
|
|
|
|
|
|
|
368
|
|
|
|
|
|
Richmond, VA area
|
|
|
|
|
|
|
143
|
|
|
|
54
|
|
N. Riverside, IL
(5)
|
|
|
|
|
|
|
122
|
|
|
|
|
|
Eden Prairie, MN
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
Salisbury, MD
|
|
|
|
|
|
|
|
|
|
|
206
|
|
Décor Warehouse
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restaurant closure expenses
|
|
$
|
206
|
|
|
$
|
585
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for impairment and restaurant closings
|
|
$
|
4,788
|
|
|
$
|
1,520
|
|
|
$
|
4,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Asset impairment calculated at July 3, 2016 related to a software implementation project that was discontinued.
|
(2)
|
Asset impairment calculated at June 28, 2015 based upon expected sale of Smithtown restaurant.
|
(3)
|
Lease termination reserve associated with a letter of credit provided to a landlord for a previously closed restaurant.
|
(4)
|
Lease termination costs associated with the cancellation of a potential new restaurant location.
|
(5)
|
Write off of development costs associated with the cancellation of a potential new restaurant location.
|
(6)
|
Includes $191,000 in costs
written-off
associated with closing the Lombard, Illinois field office partially
offset by an $86,000 recapture of deferred rent credits.
|
Restaurant Optimization
-
During fiscal 2016, the Company recorded approximately $4.4 million in asset impairment charges associated with 11 restaurants which were slow to respond to several initiatives to turnaround operating performance. As a result, the Company
determined that the estimated fair value of the assets was less than the net book value and recognized an impairment charge to reduce the related assets to their estimated fair value. As the Company continues to evaluate the restaurant
portfolio we anticipate addressing the ongoing operation of the 11 locations impaired over the next three years by way of lease restructuring, lease assignment or subsequent closure at the end of their natural lease term.
Richmond, VA Area Restaurant Closures -
On December 29, 2014, the Company announced the closure of its three
underperforming Company-owned restaurants located in and around Richmond, Virginia. The associated impairment charges primarily related to the
write-off
of the book value of the related property, plant and
equipment, net of estimated proceeds from the sale of these assets (primarily derived from the sale of real property). Loss before taxes associated with these operations for the fiscal year ended December 28, 2014 totaled approximately
$187,000.
F-32
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 28, 2014 the restaurants were valued at the estimated
proceeds from the sale and were recorded as assets held for sale in the consolidated balance sheets. Two of these properties were sold during the third quarter of fiscal 2015 and the first quarter of fiscal 2016, respectively. On January 3,
2016, the remaining propertys fair value was reclassified to property, equipment and leasehold improvements, net because it was probable that the assets would not be sold in the next two months.
Below reflects the change in our reserve for lease termination costs for fiscal 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at
Beginning
of Period
|
|
|
Additions
Charged to
Costs and
Expenses
|
|
|
Deductions
Credits to
Costs and
Expenses
and Other
Accounts
|
|
|
Balance at
End of
Period
|
|
Year ended January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for lease termination costs
|
|
$
|
489.9
|
|
|
|
89.1
|
|
|
|
(104.4
|
)
|
|
$
|
474.6
|
|
|
|
|
|
|
Year ended January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for lease termination costs
|
|
$
|
16.0
|
|
|
|
543.2
|
|
|
|
(69.3
|
)
|
|
$
|
489.9
|
|
|
|
|
|
|
Year ended December 28, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for lease termination costs
|
|
$
|
|
|
|
|
116.0
|
|
|
|
(100.0
|
)
|
|
$
|
16.0
|
|
These amounts were recorded in other current liabilities or other liabilities depending
on when we expected the amounts to be paid.
(17) FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement framework establishes a three-tier hierarchy. The three levels, in order of priority, are as follows:
|
|
|
Level 1:
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 1 measurements are determined by observable inputs which
include data sources and market prices available and visible outside of the entity.
|
|
|
Level 2:
|
|
Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly.
|
|
|
Level 3:
|
|
Inputs that are used to estimate the fair value of the asset or liability. Level 3 measurements are determined by unobservable inputs, which include data and analyses
developed within the entity to assess the fair value.
|
F-33
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For assets and liabilities falling within Level 3 of the fair value
hierarchy, a change in the input assumptions used could result in a change in the estimated fair value of the asset or liability. Transfers in and out of levels will be based on our judgment of the availability of unadjusted quoted prices in active
markets, other observable inputs, and
non-observable
inputs.
The
carrying amounts of cash and cash equivalents reported in the consolidated balance sheets approximates fair value based on current interest rates and short-term maturities. The carrying amount of accounts receivable approximates fair value due to
the short-term nature of accounts receivable. We believe that the carrying amount of long-term debt approximates fair value due to the variable interest rates charged on long-term debt or as a result of the proximity of the refinancing to the end of
the fiscal year.
The following table (in thousands) summarizes the assets held for sale and property and
equipment, net, measured at fair value in our consolidated balance sheet as of January 1, 2017 and January 3, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Balance at January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held for Sale
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
1
|
|
Property and Equipment, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,742
|
|
|
$
|
1,742
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held for Sale
|
|
$
|
|
|
|
$
|
1,431
|
|
|
$
|
780
|
|
|
$
|
2,211
|
|
Property and Equipment, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
507
|
|
|
$
|
507
|
|
Assets held for sale are recorded at fair value, which was valued based upon a real
estate brokers estimate of value for the properties (Level 3) or negotiated sale price (Level 2). Property and Equipment, net, recorded at fair upon brokers estimate of value or estimated discounted future cash flows (Level 3). These
assets have been adjusted to net realizable value based upon the decision to dispose of the property. The Company completed its sale of assets held for sale recorded in Level 3 during fiscal 2016. The fair value of amounts disclosed as property
and equipment, net, reported in the table above within Level 3 changed during fiscal 2016 as a result of the Companys impairment analysis surrounding certain of its property and equipment assets.
(18) VARIABLE INTEREST ENTITIES
A variable interest holder is considered to be the primary beneficiary of a variable interest entity (VIE) if it has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Once an entity is determined to be a variable interest entity (VIE),
the primary beneficiary is required to consolidate the entity. The Company has an installment agreement with one of its franchisees as the result of refranchising its Lincoln, Nebraska restaurant. This franchisee is a VIE, however, the owners of the
franchise operations are the primary beneficiaries of the entities, not the Company. Therefore, the franchise operations are not required to be consolidated in the Companys consolidated financial statements.
F-34
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 11, 2015, the Company consummated the sale of its
Greenwood, Indiana and Florence, Kentucky restaurants. In conjunction with that agreement, the Company entered into lease assignment agreements with the respective purchasers and landlords, releasing the Company of its obligations except in the
event of default by the purchasers. As of January 1, 2017, the amount of the future lease payments for which the Company would be liable in the event of a default are approximately $352,000. An accrual related to any future obligation was not
considered necessary at January 1, 2017 as the Company has determined the fair value of this guarantee was zero as there was no indication that the purchasers would not be able to pay the required lease payments. While this franchise meets the
definition of a VIE, the owners of the franchise operations are the primary beneficiaries of the entities, not the Company. Therefore, the franchise operations are not required to be consolidated in the Companys consolidated financial
statements.
On March 1, 2016, the Company consummated the sale of its Chicago-area restaurants. In
conjunction with that agreement, the Company entered into lease assignment agreements with the respective purchasers and three of the landlords, releasing the Company of its obligations except in the event of default by the purchasers. As of
January 1, 2017, the amount of the future lease payments for which the company would be liable in the event of a default are approximately $1.9 million. An accrual related to any future obligation was not considered necessary at
January 1, 2017 as the Company has determined the fair value of this guarantee was zero as there was no indication that the purchasers would not be able to pay the required lease payments. Subsequent to the balance sheet date, the purchaser
closed one of the seven restaurants, on which the Company has an outstanding lease obligation. See Note 20. While this franchise meets the definition of a VIE, the owners of the franchise operations are the primary beneficiaries of the entities, not
the Company. Therefore, the franchise operations are not required to be consolidated in the Companys consolidated financial statements. See Note 20 for additional information.
(19) RELATED PARTY TRANSACTIONS
Michael Lister serves as
our Chief Executive Officer, Chief Operating Officer and a director of the Company. Prior to joining the management team of the Company in October of 2016, Mr. Lister managed Famous Five, a corporation that owns five franchised Famous
Daves Restaurants. Famous Five paid an aggregate of approximately $496,000, $523,000 and $505,000 in franchise royalties and contributions to the Companys system-wide Public Relations and Marketing Development Fund for fiscal 2016, 2015
and 2014, respectively. Approximately $49,000 and $61,000 associated with royalties and contributions to the Companys system-wide Public Relations and Marketing Development Fund is due from Famous Five and included in accounts receivable as of
January 1, 2017 and January 3, 2016, respectively.
Anand D. Gala
currently serves as a
director of the Company and has been nominated for
re-election
at the Annual Meeting. Mr. Gala is the Founder, President and Chief Executive Officer of Gala Holdings International, a diversified holding
company that conducts consulting, restaurant development and management operations.
As a Company franchisee, Gala Holdings International paid approximately $2.1 million in franchise royalties and contributions to the Companys
system-wide Public Relations and Marketing Development Fund for fiscal 2016 and 2015, respectively, and $1.9 million for fiscal 2014. Approximately $369,000 and $241,000 associated with royalties and contributions to the Companys
system-wide Public Relations and Marketing Development Fund is due from Mr. Galas companies and included in accounts receivable as of January 1, 2017 and January 3, 2016, respectively. Additionally, Mr. Galas brother
owns Altametrics, LLC, a software company to which we paid a total of approximately $127,000 during fiscal 2016.
Adam J. Wright served as our Chief Executive Officer and a director of the Company until October of 2016.
Mr. Wrights brother, Michael B. Wright, owns and controls Famous Products, Inc., a corporation that licenses a line of retail products from the Company, including sauces, rubs, marinades and seasonings, pursuant to a licensing agreement
with a current term that expires in April 2020 and is subject to renewal options of five years, contingent upon the licensees attainment of identified minimum product sales levels. The Company received licensing revenue from Famous Products,
Inc. under the agreement of approximately $981,000, $940,000 and $878,000 for fiscal years 2016, 2015 and 2014, respectively. Michael B. Wright also owns DTSG, Inc., a corporation that owns or controls five
F-35
FAMOUS DAVES OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
franchised Famous Daves restaurants. DTSG, Inc. paid an aggregate of approximately $636,000, $678,000 and $710,000 in franchise royalties and contributions to the Companys system-wide
Public Relations and Marketing Development Fund for fiscal years 2016, 2015 and 2014, respectively. Approximately $62,000 and $73,000 associated with royalties and contributions to the Companys system-wide Public Relations and Marketing
Development Fund is due from DTSG, Inc. and included in accounts receivable as of January 1, 2017 and January 3, 2016, respectively.
(20) SUBSEQUENT EVENTS
The Company evaluated for the occurrence of subsequent events through the issuance date of the Companys financial statements. No other recognized or
non-recognized
subsequent events occurred that require recognition or disclosure in the consolidated financial statements except as noted below.
On January 8, 2017 the Company closed its Stillwater, Minnesota restaurant. This restaurant was written down to
anticipated net realizable value during the third quarter of 2016.
On February 19, 2017 a franchisee
closed the Evergreen Park, Illinois restaurant. As this is a location for which we have an ongoing lease for an additional six years with a sublease to the franchisee, there is a risk that the franchisee will provide notice to the Company, making
the Company responsible for the remaining approximately $700,000 of related lease payments. If this occurs, it is unclear whether a new sub lessee would be identified by the Company. We recorded a lease reserve of approximately $487,000 in February
2017 related to this closure.
On February 19, 2017 the Company closed its Falls Church, Virginia
restaurant. This restaurant was written down to anticipated net realizable value during the third quarter of 2016.
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