BBQ HOLDINGS, INC. - Annual Report: 2006 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FAMOUS DAVE’S of AMERICA, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-1782300
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code (952) 294-1300

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Exchange Act of 1934 (the Act). Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the Registrant’s Common Stock held by non-affiliates on July 1, 2005 (the last business day of the Registrant’s most recently completed second quarter), based upon the last sale price of the Common Stock as reported on the NASDAQ National Market ^SM on July 1, 2005, was $78,768,109. As of March 13, 2006, 10,606,543 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on May 10, 2006 (the “2006 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K, to the extent described in Part III. The 2006 Proxy Statement will be filed within 120 days after the end of the fiscal year ended January 1, 2006.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			3
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			16
Item 2. Properties			17
Item 3. Legal Proceedings			19
Item 4. Submission of Matters to a Vote of Security Holders			19
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 6. Selected Financial Data			21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			37
Item 8. Financial Statements and Supplementary Data			37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			38
Item 9A. Controls and Procedures			38
Item 9B. Other Information			38
PART III
Item 10. Directors and Executive Officers of the Registrant			39
Item 11. Executive Compensation			39
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			39
Item 13. Certain Relationships and Related Transactions			39
Item 14. Principal Accountant Fees and Services			39
PART IV
Item 15. Exhibits and Financial Statement Schedules			40
SIGNATURES
2005 Stock Incentive Plan
First Amended and Restated Non-Qualified Deferred Compensation Plan
Subsidiaries
Consent of Grant Thornton LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

ITEM 1. BUSINESS

General Development of Business

     Famous Dave’s of America, Inc. (“Famous Dave’s” or the “Company”) was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis, Minnesota in June 1995. As of January 1, 2006, there were 126 Famous Dave’s restaurants operating in 32 states, including 38 company-owned restaurants and 88 franchise-operated restaurants. An additional 196 franchise restaurants were committed to be developed through signed area development agreements at January 1, 2006.

     Until February 26, 2003, Famous Dave’s was a 40% participant in a joint venture to operate themed restaurant concepts based on the entertainment artist Isaac Hayes. Pursuant to an agreement governing the joint venture, the participants formed a Delaware limited liability company named FUMUME, LLC. FUMUME, LLC opened its first location in Chicago, Illinois in June 2001 and opened its second location in Memphis, Tennessee in October 2001. On February 26, 2003, we disposed of our 40% interest in FUMUME, LLC, and as a result, no longer participate in any revenue or expenses of the joint venture, nor do we have any further obligations with regard to the joint venture.

Financial Information about Segments

     Since our inception, our revenue, operating income (losses) and assets have been attributable to the single industry segment of the foodservice industry. Our revenue and operating income (losses) 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 Form 10-K under Item 8, Financial Statements and Supplementary Data.

Narrative Description of Business

     Famous Dave’s restaurants, a majority of which offer full table service, feature hickory smoked off-the-grill meat entrée favorites, served in our restaurants. We seek to differentiate ourselves by providing high-quality food in distinctive and comfortable environments. As of January 1, 2006, 32 of our company-owned restaurants were full-service and 6 were counter-service. In 2006, we plan to open three company-owned restaurants featuring “Smokehouse” prototype design elements including: a designated bar, a signature exterior smokestack, a separate entrance for our category-leading “TO GO” business and a patio. This concept has approximately 6,000 square feet, and has 200 seats with 50 seats in the bar and 50 more seats on the patio. This design will enable us to capitalize on a consistent and readily identifiable look and feel for our future locations.

     In fiscal 2005, our franchisees performed several conversions of existing buildings using the “Smokehouse” design theme, including the first free-standing prototypical building in Manhattan, Kansas. In January of 2006, the first company-owned “Smokehouse” was opened in Chantilly, Virginia. We pride ourselves on the following:

     High Quality Food – Each restaurant features a distinctive selection of authentic hickory-smoked off-the-grill favorites such as flame-grilled St. Louis-style and Baby-back ribs, Texas beef brisket, Georgia chopped pork, country-roasted chicken, and generous signature sandwiches and salads. Enticing side items such as honey-buttered corn bread, potato salad, coleslaw, Shack Fries™ and Wilbur Beans™ accompany the broad entrée selection. Homemade desserts, including Famous Dave’s Bread Pudding and Hot Fudge Kahlua™ Brownies, are a specialty. To complement our smoked meat entrée and appetizer

items and to suit different customer tastes, our barbeque sauces come in five variations: Rich & Sassy^®, Texas Pit™, Georgia Mustard™, Devil’s Spit^® and Sweet and Zesty™. These sauces, in addition to a variety of seasonings, rubs and marinades are also distributed in retail grocery stores throughout the country under licensing agreements. We believe that our high quality food, scratch cooking and smoking 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.

     Distinctive Environment – Décor and Music – Our original décor theme was a nostalgic roadhouse shack (“Shack”), as defined by the abundant use of rustic antiques and items of Americana. 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 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 now evolved our format to that of a full-service “Smokehouse” concept. This design incorporates the best attributes of the past restaurants while providing a consistent brand image. Of our 38 restaurants as of January 1, 2006, 32 were full-service restaurants with 25 having the “Lodge” format, 5 having the “Shack” format, and our Maple Grove, Minnesota restaurant having the new “Smokehouse” concept and one restaurant, located in the Minneapolis market, was a “Blues Club” format. During 2005, we converted our Maple Grove, Minnesota restaurant from a counter-service restaurant to a full-service, “Smokehouse”-concept restaurant. Elements of the “Smokehouse” prototype were added, such as a full bar, a stone fireplace and a more prominent “TO GO” area with improved signage. We also have five counter-service restaurants in the “Shack” format. We will continue to evaluate converting other counter-service restaurants to full-service restaurants where there is determined to be sufficient return on our investment.

     Broad-Based Appeal – We believe that our concept has broad appeal because it attracts customers of all ages, the menu offers a variety of items, and our distinctive sauces allow our guests to customize their experience, appealing to many tastes. We believe that our distinctive concept, combined with our high-quality food, make Famous Dave’s appealing to families, children, teenagers and adults of all ages and socio-economic backgrounds.

Operating Strategy

     Our journey to achieving sustainable profitable growth requires us to deliver 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 2005, we continued our intense focus on operational excellence and integrity, and on creating a consistently great guest experience, both in terms of food and hospitality, across our system. We define operational excellence as an uncompromising attention to the details of our recipes, preparation and cooking procedures, handling procedures, rotation, sanitation, cleanliness and safety. It also means an unyielding commitment to our guests to provide a “famous” experience with every visit through the execution of precision service. In our restaurants, we strive to emphasize value and speed of service by employing a streamlined operating system based on a focused menu and simplified food preparation techniques.

     Our menu focuses on a number of popular smoked, barbeque, meat, entrée items and delicious side dishes which are prepared using easy-to-operate kitchen equipment and processes that use prepared proprietary seasonings, sauces and mixes. This streamlined food preparation system helps lower the cost of operation by requiring fewer staff, lower training costs, and eliminates the need for highly compensated chefs. During 2004, in order to enhance our appeal, expand our audience, and promote our cravable products without discounting, we introduced Limited-Time Offerings (LTO’s) which often provide higher margins than our regular menu items. We believe that constant and exciting new product

introductions, offered for a limited period of time, encourage trial visits, build repeat traffic and increase exposure to our regular menu. In order to increase customer frequency, we have assembled a research and development pipeline designed to generate four to six product introductions annually. As the menu broadens and food preparation techniques become more focused on meals prepared to order, increased training may be necessary in order to prepare our staff for increased levels of guest service.

     In the Spring of 2005, we introduced a limited time offering seafood promotion consisting of a shrimp Po’Boy sandwich, a blackened catfish Po’Boy sandwich and a blackened catfish dinner entrée. Our summer promotion featured the Ultimate BBQ Burger, a grilled burger patty topped with Georgia Chopped Pork, jalapeno bacon, cheddar cheese, and a special bourbon and cola BBQ sauce. During the height of barbeque season, we featured “Getting Your Ribs Naked,” which also allowed us to feature our five signature table sauces so that guests could customize their experience. In the fall, our LTO consisted of a Smokin’ Rib Eye, which represented our first entry into the steak category. For our Spring promotion during the first quarter of 2006, we featured catfish and crawfish in several entrees, sandwich and salad offerings.

     Human Resources and Training – Human Resources and Training decisions are made with consideration to our goals and objectives as well as established values and culture. Success is measured by the ability to “Hire the Fire,” “Train to Fame,” and “Retain the Flame,” while upholding our “Legendary Standards (of operations).” Performance in these key areas is benchmarked through an industry subscription service, the People Report, which assists us in monitoring our “People P&L.” We are pleased with our progress as management and hourly associate turnover has been maintained at or below industry averages at 25% and 93%, respectively.

     We are a performance-based organization committed to recognizing and rewarding performance. Our compensation programs are at or above industry averages for all levels of management. Compensation is very much viewed as part of a total rewards program, and is benchmarked closely against the industry. Our President’s Club rewards General Managers for accomplishments in many areas directly related to great restaurant operations, such as sales growth, operating results, safety programs, retention and increased guest satisfaction scores. During fiscal 2005, over half of our General Managers successfully attained the President’s Club designation. Other compensation programs include health and welfare coverage, 401(k) and non-qualified deferred compensation plans offering a company match, and base pay and incentive programs developed with matching or exceeding industry standards in mind. Support Center associates enjoy a similar total rewards package to our restaurant managers, including an incentive plan that focuses associates’ attention on both company earnings and personal achievement of strategically aligned goals.

     In the Training and Development arena, a number of successful training courses were conducted for both restaurant manager and multi-unit manager levels to create defined career paths. Training courses are offered to both corporate management and Franchise partners. During fiscal 2005, our classes focused on core competencies and opportunities for success. The curriculum included food safety and alcohol awareness; food execution and quality; human resource skills and restaurant supervision. In 2005, we partnered with one of our key vendors to roll out a food safety program that identifies critical food safety issues and prioritizes improvement efforts through on-site assessments, training, and suggested corrective action steps.

     During fiscal 2005, we emphasized the importance of our risk and safety programs. A new safety program was introduced to all corporate restaurants, focusing on education of Associates to reduce workplace risks. Each restaurant has a safety committee which consists of a safety manager and representatives from all areas of the restaurant. The safety committees meet monthly to discuss progress on safety initiatives and safety focus. We also offer this program to franchise operators. Early results of

this program reflected a reduction in common incident types, such as lacerations. Our risk management focus for fiscal 2006 includes greater reduction of frequent incident types and a continued concentration on providing the tools and education required for a safe and successful workplace.

     In 2005, we initiated a partnership with the organization Share our Strength™. This organization is dedicated to wiping out childhood hunger by 2024. We selected this nation-wide organization because it has a direct connection to the food-service industry and is an organization that can make a difference towards feeding hungry children. We have several charitable events planned for fiscal 2006, including the first ever “National Backyard BBQ,” which is discussed in Marketing and Promotion below.

     During fiscal 2006, Human Resources and Training will focus on the selection and retention of top talent through our programs in talent management, succession planning and development, safety and risk-reduction, organizational development and training.

Restaurant Operations

     Our ability to manage multiple restaurants in geographically diverse locations is central to our overall success. At each restaurant, 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 associates and the establishment of, and adherence to, high standards relating to performance, food and beverage preparation, and maintenance of facilities.

     All General Managers must complete a seven-week training program, during which they are instructed in areas such as food quality and preparation, customer service, and employee relations. We have prepared operations manuals relating to food and beverage quality and service standards. New associates participate in training under the close supervision of our management. Each General Manager reports up through an Area Director, who manages from four to nine restaurants, depending on the region. Our Area Directors have all been successful General Managers, either for Famous Dave’s or for other restaurants, and are responsible for ensuring that operational standards are consistently applied in our restaurants as well as communication of company focus and priorities. 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 and time management.

     During fiscal 2005, we eliminated the position of Vice President of Operations, created the position of Director of Operations, and named two individuals to serve in this role. This position allows us to have our operations leadership much closer to the day in and day out business of our restaurants, creating a smaller span of control for each Director of Operations and allows them to apply a much sharper focus to their restaurants’ operations. The Directors of Operations assist in the professional development of our Area Directors and General Mangers as we prepare for future corporate growth, while driving our vision of operational integrity and contributing to the improvement of results achieved at our restaurants including building sales, developing people and growing profits.

     We strive to instill enthusiasm and dedication in our associates and regularly solicit suggestions concerning our operations and endeavors in order to be responsive to their concerns. In addition, we have numerous programs designed to recognize and reward them for outstanding performance. Staffing levels at each restaurant vary according to the time of day and size of the restaurant. However, in general, each restaurant has approximately 40 to 60 associates.

     “TO GO” and Catering — Focus on Convenience – In addition to our lively and entertaining sit-down experience, we provide our guests with maximum convenience by offering expedient take-out service and catering. We believe that Famous Dave’s 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, and the high quality, reasonable cost and avoidance of preparation time make take-out of our product particularly attractive. During fiscal 2005, approximately 32% of our restaurant sales were derived from catering and “TO GO,” and we continue to seek ways to leverage these segments of our business. Our restaurants have been designed specifically to accommodate a significant level of “TO GO” sales, including a separate “TO GO” counter and entrance.

     The off-premise portion of our business continues to grow as more consumers and local business people become aware of the portability of our product. The demand for Famous Dave’s catering, which accounted for approximately 9% of our sales for fiscal 2005, continues to increase, as consumers learn just how distinctive, flavorful and easy an event can be when they let Famous Dave’s bring the food. 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. Each restaurant has a dedicated vehicle to fully support our catering initiatives.

     “TO GO,” which accounted for approximately 23% of our restaurant sales for fiscal 2005, also continues to grow as an integral part of our overall business plan, and our new “Smokehouse” restaurants have a separate entrance for “TO GO” customers’ convenience. This program enables Famous Dave’s to capture a greater portion of the growing convenience and flexibility of the “take-out” market and allows consumers to “trade within our brand,” when dining in isn’t always an option. Our efforts are featured in all company-owned and franchise-operated restaurants and feature signage and merchandising both inside and outside the restaurants. From the time a guest drives into the parking lot to the time they leave the restaurant, they will be reminded of Famous Dave’s excellence in delivering the best barbeque “TO GO”.

     Customer Satisfaction – We believe that we achieve a significant level of repeat business by providing high-quality food and efficient friendly service, in an entertaining environment at moderate prices. We strive to maintain quality and consistency in each of our restaurants through the training and supervision of personnel and the establishment of, and adherence to, high standards of personnel performance, food preparation and facility maintenance. We have also built family-friendly strategies into each restaurant’s food, service and design by providing children’s menus, smaller-sized entrees at reduced prices and changing tables in restrooms. We diligently monitor the guest experience through the use of mystery shopper programs and an interactive voice response (IVR) system to ensure that our training and incentive investments are producing desired results. During 2005, we saw continued improvement in guest satisfaction scores through these monitoring programs.

     Value Proposition and Guest Frequency – We offer high quality food and a distinctive atmosphere at competitive prices to encourage frequent patronage. Lunch and dinner entrees range from $5 to $21 resulting in an average check of approximately $13.92 during fiscal 2005. Lunch checks averaged $11.71 during 2005 and dinner checks averaged $15.46 during 2005. We believe that constant and exciting new product introductions, offered for a limited period of time, will help drive new, as well as infrequent guests into our restaurants for additional meal occasions. This has largely been accomplished through the installation of a fully-equipped test kitchen at our new corporate headquarters. This permanent facility allows us to create new menu selections, prepare and test LTO’s and further refine our recipe books and preparation techniques.

Marketing and Promotion

     Famous Dave’s is well on its way to becoming the category-defining brand in barbecue. Specializing in a unique and distinctive brand of grilled, smoked, and southern style food, our menu specialty helps to set the brand apart from the rest of the crowded field in casual dining. During fiscal 2006, we will continue to leverage our brand building position. In 2004, we established a system-wide public relations and marketing fund. All company-owned, and those franchise-operated restaurants with

agreements signed after January 1, 2004, are required to contribute 1.0% of sales to this fund. We also use payments received from certain vendors in the form of rebates as additional funding. During fiscal 2006, we expect to spend approximately 3.5% of net restaurant sales on marketing and advertising, with 1.0% of net restaurant sales dedicated to the development of advertising and promotional materials and programs designed to create brand awareness in the markets within which we operate. BBDO of Minneapolis is our advertising agency of record, and they help drive the concept forward and create a distinctive positioning and consistent creative voice for the brand. In coordination with our marketing department, BBDO is responsible for the advertising, promotion, creative development, branding and media buying for Famous Dave’s. In addition to the traditional marketing and publicity methods embraced in the past, Famous Dave’s will aggressively use local outreach marketing efforts as appropriate in 2006, including television, cable, radio, and outdoor billboards. An example of this will be the first ever “National Backyard BBQ” to be held on May 20, 2006, during National BBQ Month. All of our corporate restaurants and a majority of our franchise restaurants will participate with Backyard BBQs in their local markets.

     We are also creating awareness for the Famous Dave’s brand through partnerships that extend our barbeque sauces, seasonings, rubs and marinades in retail outlets across the United States. This retail distribution allows consumers to enrich their at-home barbeque experiences with Famous Dave’s bold and zesty flavors.

     Advertising isn’t the only vehicle we use to build awareness of the Famous Dave’s brand. In 2005, our “Rib Team” competed in scores of events and festivals nationwide. This team travels the country, participating in contests and festivals to introduce people to our brand of barbeque and build brand awareness in a segment largely defined by independents. Our “Rib Team’s” most notable award in 2005 was the People’s Choice Award at the “Best of the West” barbeque festival in Reno, Nevada, an invitation-only competition that we attended for the first time. We have also received various concept awards of which we are very proud, including Menu Masters – Best New Product Roll-out for our Sassy Chicken Salad, and awards for excellence in television and radio advertising from the Multi-unit Foodservice Operators. We also have received exceptional rankings in the JD Power & Associates 2004 Restaurant Satisfaction Survey: #1 in value; #2 in meal satisfaction; and, #3 in overall dining experience satisfaction within casual dining restaurants in our dominant markets.

     The strategic focus in 2006 for marketing and promotion remains the same – to be the segment-defining brand in BBQ, strengthen our variety of menu offerings while staying “True to the ‘Que,” and continue to strengthen the perception of value in the consumer’s mind.

Growth Strategy

     We believe that the barbeque segment of the casual dining niche of the restaurant industry offers strong growth opportunities, and we see no impediments to our growth on a geographical basis. Our geographical concentration currently consists of 58% Midwest, 22% South, 10% West and 10% Northeast. During fiscal 2006, we plan to open up to three Company-owned restaurants and between 25 to 30 franchise-operated restaurants. The key elements of our long-term growth strategy include the following:

     Company-Owned Restaurant Expansion – We intend to build in our existing markets in high profile, heavy traffic retail locations in order to continue to build brand awareness. Our plan is focused on sustainable, controlled growth, primarily in markets where multiple restaurants can be opened, thereby expanding consumer awareness and creating opportunities for operating, distribution and marketing efficiencies. As previously mentioned, we have created a prototype design, called our “Smokehouse” concept, and we will be using this design with all future restaurants to streamline the development and expansion process. We intend to finance development through the use of cash on hand, cash flow generated from operations, and through availability on our $10.0 million revolving line of credit.

     Franchise-Operated Restaurant Expansion – As of January 1, 2006, we had 196 signed franchise area development commitments that are expected to open over the next six years. We continue to expand our franchisee network throughout the United States. Generally, we find franchise candidates with prior franchise casual-dining restaurant experience in the markets for which they will be granted. The area development agreements generally range from a minimum of five to a maximum of 15 restaurants.

Purchasing

     We strive to obtain consistent quality items at competitive prices from reliable sources. In order to maximize operating efficiencies and to provide the freshest ingredients for our food products, each restaurant’s management team determines the daily quantities of food items needed and orders such quantities to be delivered to their restaurant. The products, produced by major manufacturers designated by us, are shipped directly to the restaurants through foodservice distributors.

     Contract pricing accounts for approximately 86% of all of our total purchases. Contracts for various items are negotiated throughout the year and typically fix prices for twelve months. Of our total purchases, pork is approximately 31.5%, poultry is approximately 10.0% and beef, including hamburger and brisket, is approximately 10.0%. Our pork contract renewal in October resulted in an approximate 4.0% decrease for 2006. In addition, new hamburger contracts negotiated in January 2006 are expected to result in an approximate 3.0% savings in 2006 over 2005 prices. Poultry prices negotiated in December 2005, are expected to remain flat and our brisket contract will be renewed in the Spring. As a result of these newly renewed contracts, we anticipate that food costs, as a percent of net restaurant sales, will be slightly favorable for fiscal 2006 over the prior year.

     We believe we have opportunities to partially offset increases, if any, in commodity pricing through menu engineering such as the use of our LTO’s, which typically carry more margin than many of our core product offerings. Additionally, we believe we have the opportunity to leverage adult beverage sales, and we will continue to evaluate taking price increases at least annually.

     In 2005, our adult beverage sales as a percentage of dine-in sales were approximately 10%, compared to 11% for 2004. Going forward, we will continue to focus on building awareness on adult beverage sales. We have determined that we will have limited ability to grow the bar in the majority of our existing restaurants due to the fact that these restaurants have little to no designated bar, and some only serve beer and wine. We’re encouraged by the prospects of growing this business on a go-forward basis; however, as our recent franchise openings have achieved levels in the mid teens.

     Our food manufacturers produce our products and our distributors warehouse and ship our products. Our primary broad line distributor accounts for approximately 85% of our total purchases. We believe that our relationships with our food manufacturers and distributors are excellent, and anticipate no interruption in the supply of product delivered by any of these companies. In case of a potential supply disruption, however, we believe we have identified alternative methods to ensure that there is no disruption of product flow. We could obtain competitive products and prices on short notice from a number of alternative suppliers. In addition, in an effort to protect us from product disruption, we have identified secondary suppliers for all of our key offerings.

Management Information Systems

     We believe that strong information systems are essential to our current operations and are critical towards enhancing our competitive position in our industry. We have invested significantly in building these capabilities. We have developed restaurant-level management information systems that include a computerized point-of-sale (“POS”) system which facilitates the movement of customer orders between

the customer areas and kitchen operations, processes credit card transactions, processes gift cards, and provides management with revenue and other key operating and financial information. We also use a time management system which tracks the time worked by each employee, allowing management to more effectively manage labor costs through better scheduling of employee work hours. We utilize enterprise management software, which has provided us with centralized control over restaurant database items such as menu changes, tax structure and price changes. We developed reporting that allows us to track the average guest check daily, by restaurant, by server, and by day part. This reporting is utilized by the general managers to determine restaurant-level staffing needs in addition to supporting sales initiatives, intended to increase the average guest check.

     Our unit-level POS, time management and inventory management systems provide data for posting to our general ledger and to other accounting subsystems. Such reporting includes: (i) daily reports of revenue and labor, (ii) weekly reports of selected controllable restaurant expenses, and (iii) detailed monthly reports of revenue and expenses.

     We continue to develop and implement new enhancements to our systems. In fiscal 2005, we focused on improving our network infrastructure, upgrading all of our restaurant POS systems, and implementing a new budget and forecasting tool. In fiscal 2006, we will begin to implement a new labor-scheduling system and back-of-the-house management system to prepare for our next stage of growth. This project will take 12-18 months to fully implement, and is expected to cost approximately $2.0 million. This is a key restaurant management solution that will provide functionality to our restaurants, streamline our operations, improve management information, enhance enterprise reporting and reduce labor and operating expenses.

Trademarks

     Our Company has registered various trademarks and makes use of various unregistered marks, and intends to vigorously defend these marks. “Famous Dave’s” and the Famous Dave’s logo are registered trademarks of Famous Dave’s of America, Inc. There can be no assurance, however, that we will be granted trademark registration for any new applications or for any or all of the proposed uses in our applications. In the event we are granted registration for additional marks, there can be no assurance that we can protect such marks and designs against prior users in areas where we conduct operations. There is also no assurance that we will be able to prevent competitors from using the same or similar marks, concepts or appearance. Nevertheless, 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 have offered franchises of our concept since June 1995 and currently file our franchise circular in all 50 states. 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 Dave’s brand awareness.

     Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her restaurants independently. Various laws limit our ability to influence the day-to-day operation of our franchise restaurants. We cannot assure you that franchisees will be able to successfully operate Famous Dave’s restaurants in a manner consistent with our standards for operational excellence, service and food quality.

     At January 1, 2006, we had 36 franchise partners operating 88 Famous Dave’s franchise restaurants. Signed area development agreements, representing commitments to open an additional 196 franchise restaurants, were in place as of January 1, 2006. There can be no assurance that these franchisees will fulfill their commitments or fulfill them within the anticipated timeframe. We continue to pursue an aggressive franchise program for our restaurants and anticipate that 25 to 30 additional franchise restaurants will open during fiscal 2006.

     As of January 1, 2006, we had franchise-operated restaurants in the following locations:

		Number of Franchise-Operated
State		Restaurants
Alabama			1
Arizona			3
Colorado			1
Georgia			4
Illinois			4
Indiana			2
Iowa			3
Kansas			4
Kentucky			3
Massachusetts			1
Michigan			8
Minnesota			7
Montana			2
Nebraska			4
Nevada			1
New Hampshire			1
New Jersey			6
New York			2
North Dakota			2
Ohio			3
Pennsylvania			3
South Dakota			1
Tennessee			4
Texas			1
Utah			4
Washington			2
West Virginia			1
Wisconsin			10
Total			88

     During 2006, we plan to open restaurants in approximately five additional states including: California, Connecticut, Florida, Maine and Missouri. During January 2006, we opened two restaurants in the state of California.

     Our Franchise Business Consultants are a critical asset to us as well as to our franchise community. Our Franchise Business Consultants manage the relationship between the franchisee and the franchisor and provide an understanding of the roles, responsibilities, differences and accountabilities of that relationship. They are active participants towards enhancing performance, as they partner in strategic and operational planning sessions with our franchise partners and review the individual strategies and tactics for obtaining superior performance for the franchisee. The Franchise Business Consultants share best

practices throughout the system and work to create a one system mentality that benefits everyone. In addition, they ensure compliance with obligations under Uniform Franchise Offering Circulars (UFOC). Franchisees are able to utilize all available assistance but are not required to do so.

     We make periodic inspections of our franchise-operated restaurants to ensure that the franchisee is complying with the same quality of service, operational excellence and food specifications that is found at our company-owned restaurants. We generally provide company support as it relates to all aspects of the franchise operations including, store openings, operating performance, and human resource strategic planning.

     Our franchise-related revenue consists of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee consists of a non-refundable payment equal to $10,000 per restaurant upon the signing of the area development agreement. Since the fee to secure the territory is non-refundable, we recognize this fee upon receipt. Our initial franchise fee is typically $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining $35,000 is included in deferred franchise fees and is recognized as revenue, at which time we have substantially performed all of our services. When a franchisee has secured a site, meaning a lease has been executed or a property purchase agreement has been signed, we have no further obligations related to the site selection. 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%. Currently, new franchises pay us a monthly royalty of 5% of their net sales.

     The franchisee’s 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, smallwares, décor and training fees as well as working capital. Beginning in fiscal 2004, all new franchisees were required to contribute 1% of net sales to a national public relations and marketing fund dedicated to building system-wide brand awareness.

Seasonality

     Our restaurants typically generate higher revenue in the second and third quarters of our fiscal year as a result of seasonal traffic increases 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 employee 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 approvals could delay or prevent the opening of a new restaurant, and the suspension of, or inability to renew a license could interrupt operations at an existing restaurant, any of which would adversely affect our operations. Restaurant operating costs are also affected by other government actions that are beyond our control, including increases in the minimum hourly wage requirements, workers compensation insurance rates, health care insurance costs, property and casualty insurance, and unemployment and other taxes. We are also subject to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated 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.

Associates

     As of January 1, 2006, we employed approximately 2,000 associates, of which approximately 255 were full-time. None of our associates are covered by a collective bargaining agreement. We consider our relationships with our associates to be satisfactory.

ITEM 1A. RISK FACTORS

     Famous Dave’s makes written and oral statements from time to time, including statements contained in this Annual Report on Form 10-K regarding its business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities 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 assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. We do not undertake any obligation to update or keep current either (i) any forward-looking statements to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by us or on our behalf.

     In addition to other matters identified or described by us from time to time in filings with the SEC, 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.

Our Future Revenue and Profits Are Dependent on Consumer Preference and Our Ability to Successfully Execute Our Plan.

     Our Company’s future revenue and profits will depend upon various factors, including continued and additional market acceptance of the Famous Dave’s concept, the quality of our restaurant operations, our ability to grow our brand, our ability to successfully expand into new 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 Dave’s restaurants are or will be located, economic conditions affecting disposable consumer income, general economic conditions and the continued popularity of the Famous Dave’s 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.

     It is our plan to open up to three company-owned restaurants and 25-30 franchise-operated restaurants in 2006. There is no guarantee that any of our company-owned or franchise-operated restaurants will open when planned, or at all, due to the risks associated with the development of new restaurants, such as governmental approvals, the availability of sites, and the availability of capital, many of which are beyond our control. There can be no assurance that we will successfully implement our growth plan for our company-owned and franchise-operated restaurants. In addition, we also face all of the risks, expenses and difficulties frequently encountered in the development of an expanding business.

     Competition May Reduce Our Revenue and Operating Income.

     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, and demographic trends. Discretionary spending priorities, traffic patterns, tourist travel, weather conditions, employee availability 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 expect to face competition from steakhouses and other restaurants featuring protein-rich foods. We also compete with other restaurants and retail establishments for quality sites. Competition in the restaurant industry is affected by changes in consumer taste, economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of qualified labor, product availability and local competitive factors.

     Many of our competitors have substantially greater financial, marketing and other resources than we do. Regional and national restaurant companies continue to expand their operations into our current and anticipated market areas. We believe our ability to compete effectively depends on our ongoing ability to promote our brand and offer high quality food and hospitality in a distinctive and comfortable environment. If we are unable to respond to the various competitive factors affecting the restaurant industry, our revenue and operating income will be adversely affected.

     In the Past We Have Experienced Losses and May Not be Profitable.

     We incurred a net loss of approximately $2.9 million for fiscal 2003, or $0.25 per diluted share. Our fiscal 2003 net loss reflects pre-tax charges of approximately $4.2 million, or $0.22 per diluted share, related to impairment and restructuring charges on five restaurant locations, two of which were subsequently sold, two of which were subsequently closed and one of which was fully impaired and continues to operate. In addition, fiscal 2003 results include pre-tax charges of approximately $2.2 million, or $0.11 per diluted share, which reflects losses and divestiture costs related to the Isaac Hayes Blues Clubs.

     Although we reported net income of approximately $4.4 million for fiscal 2005, or $0.39 per diluted share and approximately $3.5 million for fiscal 2004, or $0.29 per diluted share, we cannot assure you that we will generate sufficient revenue or margins, or control operating expenses, to achieve or sustain profitability in future years. In addition, we cannot assure you that we will not take future impairment or restructuring charges on our restaurants.

Our Failure to Execute Our Franchise Program May Negatively Impact Our Revenue.

     Our growth and success depends in part upon increasing the number of our franchised restaurants, through execution of area development agreements with new and existing franchisees in new and existing markets. Our ability to successfully franchise additional 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, 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 successfully operate their restaurants to our standards and promote the Famous Dave’s brand. Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her restaurant independently. Various laws limit our ability to influence the day-to-day operation of our franchise restaurants. We cannot assure you that our franchisees will be able to successfully operate Famous Dave’s restaurants in a manner consistent with our concepts and standards, which could reduce their sales and correspondingly, our franchise royalties, and could adversely affect our operating income and our ability to leverage the Famous Dave’s 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.

The Restaurant Industry is Subject to Extensive Government Regulation That Could Negatively Impact Our Business.

     The restaurant industry is subject to extensive 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, minimum wage requirements, workers compensation and citizenship requirement. To the extent 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.

     Any change in the current status of such regulations, including an increase in employee benefits costs, workers’ compensation insurance rates, or other costs associated with employees, could substantially increase our compliance and labor costs. Because we pay many of our restaurant-level personnel rates based on either the federal or the state minimum wage, increases in the minimum wage would lead to increased labor costs. In addition, our operating results would be adversely affected in the event we fail to maintain our food and liquor licenses. Furthermore, restaurant operating costs are affected by increases in unemployment tax rates, sales taxes and similar costs over which we have no control.

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 operator, 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 of one or more instances of food-borne illness in one of our corporate-owned restaurants, one of our franchise-operated restaurants or in one of our competitor’s restaurants could negatively affect our restaurant sales, force the closure of some of our restaurants and conceivably have a national or international 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 customer traffic as a result of these health concerns or negative publicity could materially harm our business, results of operations and financial condition.

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 13, 2006, we had 10,606,543 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 Board’s 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.

ITEM 2. PROPERTIES

     The development cost of our restaurants varies depending primarily on the size and style of the restaurant, whether the property is purchased or leased, and whether it is a conversion of an existing building or a newly constructed restaurant. Since fiscal 2000, most of our restaurants have been converted from existing restaurant properties. Average approximate size and costs of a converted leased property and a converted purchased property have been approximately 5,900 and 5,100 square feet and $2.1 million and $1.1 million, respectively. We opened no company-owned restaurants in fiscal 2004 or fiscal 2005. Two of the restaurants opened in fiscal 2003 were ground-up construction and one restaurant was a conversion of a previous restaurant concept. Such development costs included land, building construction, fixtures, furniture and equipment, and pre-opening costs. We have developed a prototype, which is the first-ever standard format for us. The prototype is approximately 6,000 square feet in size and will represent a consistent brand image across all markets while still allowing for new construction and the renovation of pre-existing restaurants. We opened our first company-owned restaurant since fiscal 2003 in Chantilly, Virginia in January 2006 using this new prototype, and will open up to two additional company-owned restaurants with ground-up construction during fiscal 2006.

     Our leased restaurant facilities are occupied under agreements with remaining terms ranging from 10 to 35 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. We have three sublease arrangements with franchisees. These leases are our responsibility, but we have offered them to our franchisees on substantially equal terms to the original leases.

     Our executive offices are currently located in approximately 26,000 square feet in Minnetonka, Minnesota, under a lease which commenced in August 2005, and which continues for a term of 97 months, plus two five-year renewal options. The minimum annual rent commitment over the lease term is approximately $4.6 million. We believe that our current restaurant properties will be suitable for our needs and adequate for operations for the foreseeable future. We also believe that our new corporate office leased space is adequate for our operations for the foreseeable future.

     The following table sets forth certain information about our existing company-owned restaurant locations, sorted by opening date, as of January 1, 2006:

				Square				Interior				Owned
		Location		Footage				Seats				or Leased			Date Opened
1		Roseville, MN			4,800				105			Leased		June 1996
2		Calhoun Square (Minneapolis, MN)			10,500				380			Leased		September 1996
3		Maple Grove, MN(3)			6,100				146			Owned	(1)	April 1997
4		Highland Park (St. Paul, MN)			5,200				125			Leased		June 1997
5		Stillwater, MN			5,200				130			Owned	(1)	July 1997
6		Apple Valley, MN			3,800				90			Owned	(1)	July 1997
7		Forest Lake, MN			4,500				100			Leased		October 1997
8		Minnetonka, MN			5,500				140			Owned	(2)	December 1997
9		Plymouth, MN			2,100				20			Owned		December 1997
10		West St. Paul, MN			6,800				140			Leased		January 1998
11		West Des Moines, IA			5,500				150			Leased		April 1998
12		Des Moines, IA			5,800				150			Leased		April 1998
13		Naperville, IL			5,500				170			Leased		April 1998
14		Cedar Falls, IA			5,400				130			Leased		September 1998
15		Bloomington, MN			5,400				140			Leased		October 1998
16		Woodbury, MN			5,900				180			Owned	(2)	October 1998
17		Lincoln, NE			6,300				190			Owned	(2)	December 1999
18		Columbia, MD			7,200				270			Leased		January 2000
19		Annapolis, MD			7,000				210			Leased		January 2000
20		Frederick, MD			5,600				180			Leased		January 2000
21		Woodbridge, VA			5,600				190			Leased		January 2000
22		Vernon Hills, IL			6,600				230			Leased		February 2000
23		Addison, IL			4,600				140			Owned	(2)	March 2000
24		Lombard, IL			7,200				250			Leased		July 2000
25		North Riverside, IL			5,000				160			Leased		August 2000
26		Sterling, VA			5,200				200			Leased		December 2000
27		Carpentersville, IL			6,000				227			Leased		February 2001
28		Streamwood, IL			7,200				260			Leased		March 2001
29		Oakton, VA			4,300				150			Leased		May 2001
30		Laurel, MD			5,200				170			Leased		August 2001
31		Palatine, IL			7,200				260			Leased		August 2001
32		Richmond I (Richmond, VA)			5,200				165			Owned	(2)	December 2001
33		Gaithersburg, MD			4,800				170			Leased		May 2002
34		Richmond II (Richmond, VA)			5,100				165			Owned	(2)	June 2002
35		Orland Park, IL			5,000				165			Leased		June 2002
36		Tulsa, OK			4,900				180			Owned	(2)	September 2002
37		Virginia Commons, VA			5,300				190			Owned	(2)	June 2003
38		Rogers, AR			5,300				190			Owned		June 2003

ITEM 3. LEGAL PROCEEDINGS

     From time-to-time, we are involved in various legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate dispositions of these matters will not have a material adverse effect on our consolidated financial position and results of operations. Currently, there are no significant legal matters pending.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year ended January 1, 2006.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Market Information

     Our common stock has traded on the NASDAQ National Market ^SM under the symbol DAVE since July 24, 1997. Our common stock traded on the NASDAQ Small Cap Market ^SM prior to July 24, 1997 and since November 1996 under the same symbol.

     The following table summarizes the high and low closing sale prices per share of our common stock for the periods indicated, as reported on the NASDAQ National Market ^SM:

		2005								2004
Period		High				Low				High				Low
1st Quarter		$	15.00			$	9.62			$	8.10			$	4.51
2nd Quarter		$	13.96			$	9.43			$	8.22			$	6.50
3rd Quarter		$	13.08			$	9.39			$	7.79			$	6.67
4th Quarter		$	12.27			$	10.26			$	13.28			$	6.90

     Holders

     As of March 14, 2006, we had approximately 407 shareholders of record and an estimated 6,200 beneficial shareholders.

     Dividends

     Our Board of Directors has not declared any dividends on our common stock since our inception, and does not intend to pay out any cash dividends on our common stock in the foreseeable future. We presently intend to retain all earnings, if any, to provide for our growth. The payment of cash dividends in the future, if any, will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, loan agreement restrictions, our financial condition and other factors deemed relevant by our Board of Directors.

     Securities Authorized for Issuance under Equity Compensation Plans

     The Company maintains the 1995 Stock Option and Compensation Plan (the “Management Plan”), the 1997 Employee Stock Option Plan (the “Employee Plan”), the 1998 Director Stock Option Plan (the “Director Plan”) and the 2005 Stock Incentive Plan (the “2005 Plan”). We have also granted stock incentives outside of these equity compensation plans in limited situations. The Management Plan is designed to furnish a variety of economic incentives designed to attract, retain and motivate employees (including officers) of, and consultants to, the Company. However, no further grants of incentive may be made under the Management Plan after December 29, 2005 because the terms of the Management Plan prohibit such grants after the tenth anniversary of the date the Management Plan was approved by the Company’s Board of Directors. Nonetheless, the Management Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated. The purpose of the Employee Plan is to attract, retain and motivate employees of the Company (not including officers and directors of the Company) by furnishing opportunities to purchase or receive shares of the Company’s Common Stock. The purpose of the Director Plan is to encourage share ownership by Company directors who are not employees of the Company in order to promote long-term shareholder value through

continuing ownership of the Company’s Common Stock. The purpose of the 2005 Plan, which was approved by the Company’s shareholders at the May 2005 annual shareholders meeting, is to increase shareholder value and to advance the interests of the Company by furnishing a variety of economic incentives designed to attract, retain and motivate employees (including officers), certain key consultants and directors of the Company.

     The Management Plan, the Director Plan and the 2005 Plan have each been approved by the Company’s shareholders. The Employee Plan has not been submitted for approval to the Company’s shareholders. The following table sets forth certain information as of January 1, 2006 with respect to the Management Plan, the Employee Plan, the Director Plan and the 2005 Plan.

										Number of Securities
										Remaining Available for
						Weighted-				Future Issuance Under
		Number of Securities				Average				Equity Compensation
		to be Issued Upon				Exercise Price of				Plans (Excluding
		Exercise of				Outstanding				Securities Reflected in
		Outstanding Options				Options				Column (A))
Plan Category		(A)				(B)				(C)
Equity compensation plans approved by security holders:
1995 Stock Option and Compensation Plan			411,048			$	4.88				191,486	(1)
1998 Director Stock Option Plan			209,667			$	5.90				2,833
2005 Stock Incentive Plan			10,000			$	10.98				440,000	(1)
TOTAL			630,715			$	5.32				634,319
Equity compensation plans not approved by stockholders:
1997 Employee Stock Option Plan			269,486			$	2.07				135,805	(1)
TOTAL			900,201			$	5.14				770,124

ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented below should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Form 10-K, and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

     The selected financial data as of and for the fiscal years ended January 1, 2006 (fiscal year 2005), January 2, 2005 (fiscal year 2004), December 28, 2003 (fiscal year 2003) and December 29, 2002 (fiscal year 2002) have been derived from our consolidated financial statements as audited by Grant Thornton LLP, independent registered public accounting firm. The selected financial data for the fiscal year ended December 30, 2001 (fiscal year 2001) has been derived from our consolidated financial statements as audited by Virchow, Krause & Company, LLP, independent registered public accounting firm.

FINANCIAL HIGHLIGHTS
FISCAL YEAR		2005				2004 (1)				2003				2002				2001
($’s in 000’s, except per share data, and average weekly sales )
STATEMENT OF OPERATIONS DATA
Revenue		$	102,354			$	99,325			$	97,740			$	90,820			$	87,673
Asset impairment and restructuring charges (2)		$	—			$	—			$	(4,238	)		$	—			$	—
Income (loss) from operations		$	8,682			$	7,365			$	(193	)		$	4,470			$	6,209
Equity in loss of unconsolidated affiliate (3)		$	—			$	—			$	(2,155	)		$	(5,994	)		$	(1,029	)
Income tax (provision) benefit		$	(2,700	)		$	(1,900	)		$	1,778			$	1,211			$	4,010
Net income (loss)		$	4,391			$	3,498			$	(2,898	)		$	(928	)		$	8,118
Basic net income (loss) per common share		$	0.41			$	0.29			$	(0.25	)		$	(0.08	)		$	0.81
Diluted net income (loss) per common share		$	0.39			$	0.29			$	(0.25	)		$	(0.08	)		$	0.75
BALANCE SHEET DATA (at year end)
Cash and cash equivalents		$	4,410			$	11,170			$	9,964			$	9,473			$	7,398
Total assets		$	67,598			$	71,913			$	73,767			$	74,817			$	70,440
Long-term debt less current maturities (4)		$	15,930			$	16,453			$	16,954			$	17,354			$	14,579
Total shareholders’ equity		$	37,179			$	43,343			$	46,872			$	47,292			$	46,689
OTHER DATA
Number of restaurants open at year end:
Company-owned restaurants			38				38				38				40				37
Franchise-operated restaurants			88				66				54				33				19
Total restaurants			126				104				92				73				56
Comparable store sales increase (decrease) (5)			2.1	%			1.1	%(6)			(3.0	)%			(0.3	)%			2.9	%
Average weekly sales:
Company-owned restaurants		$	45,072			$	44,164			$	42,491			$	45,783			$	46,429
Franchise-operated restaurants		$	55,011			$	51,538			$	47,400			$	46,642			$	45,190

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

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

Overview

     Famous Dave’s of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of January 1, 2006, there were 126 Famous Dave’s restaurants operating in 32 states, including 38 company-owned restaurants and 88 franchise-operated restaurants. An additional 196 franchise restaurants were committed to be developed through signed area development agreements at January 1, 2006.

     Fiscal Year – Our fiscal year ends on the Sunday closest to December 31^st. Our fiscal year is generally 52 weeks; however it periodically consists of 53 weeks. Fiscal 2005, which ended on January 1, 2006, consisted of 52 weeks. Fiscal 2004, which ended on January 2, 2005, consisted of 53 weeks. Fiscal year ended December 28, 2003 (fiscal year 2003) consisted of 52 weeks.

     Basis of Presentation – The financial results presented and discussed herein reflect our results and the results of our wholly-owned and majority-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Until February 26, 2003, we were a 40% participant in a joint venture to operate themed restaurant concepts based on the entertainment artist Isaac Hayes. On February 26, 2003, we disposed of our 40% interest, and as a result, we are no longer participating in any revenue or expenses of the joint venture and we do not have any further obligations with regard to the joint venture. Our financial results for fiscal 2003 reflect our equity in the losses of this unconsolidated affiliate up until February 26, 2003, in addition to the transaction costs related to the divestiture.

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

accounting policies reflect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Our Company’s significant accounting policies are described in Note One to the consolidated financial statements included herein for the year ended January 1, 2006.

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

     Recognition of Franchise-Related Revenue – Initial franchise revenue is recognized when we have performed substantially all of our obligations as franchisor. Franchise royalties are recognized when earned as promulgated by Statement of Financial Accounting Standards (SFAS) No. 45, “Accounting for Franchise Fee Revenue”.

     Our franchise revenue consists of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee consists of a non-refundable payment to secure the territory equal to $10,000 per restaurant upon the signing of the area development agreement. Since the fee is non-refundable to secure the territory, we recognize this fee upon receipt. Our initial franchise fee is typically $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred, as related to the sale of the franchise. The remaining $35,000 is included in deferred franchise fees and is recognized as revenue, when a franchisee has secured a site, meaning a lease has been executed or a property purchase agreement has been signed, at which time we have substantially performed all of our services and we have no further obligations related to the site selection. 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%. Currently, new franchises pay us a royalty of 5% of their net sales.

     Franchise-related revenue for fiscal 2005 was approximately $12.0 million, a 28.6% increase compared to franchise-related revenue of approximately $9.3 million for the same period in fiscal 2004, primarily reflecting increased royalties. Royalties, which are based on a percent of franchise-operated restaurant net sales, increased 41.5%, reflecting the annualization of franchise restaurants that opened in fiscal 2004 in addition to the franchise-operated restaurants that opened during fiscal 2005. During fiscal 2005, 24 franchised-operated restaurants opened, and 2 closed. There were 88 franchise-operated restaurants open at January 1, 2006, compared to 66 at January 2, 2005. An additional 25-30 franchise restaurants are anticipated to open throughout fiscal 2006.

     Asset Impairment and Restructuring Charges – In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to 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 as determined by the undiscounted future net cash flows, is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. Our January 1, 2006 and

January 2, 2005 consolidated balance sheets reflect approximately $1.3 million of assets held for sale, representing the land and building for a location that was closed in December 2003. We had several offers for this location during fiscal 2005 that were not consummated, but we believe the land and building are properly valued. During fiscal 2005 and fiscal 2004, there were no impairment or restructuring charges recorded. In fiscal 2003, we recorded impairment and restructuring charges of approximately $4.2 million related to five company-owned restaurants, two of which were subsequently closed, two of which were subsequently sold to franchisees, and one that was fully impaired, but still operating.

     Deferred Tax Asset – Deferred taxes recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws. Realization of net operating loss carry forwards and other deferred tax temporary differences are contingent on future taxable earnings. During fiscal 2005, our deferred tax asset was reviewed for expected utilization using a “more likely than not” approach as required by SFAS No. 109, “Accounting for Income Taxes”, by assessing the available positive and negative evidence surrounding its recoverability. We believe that the realization of the deferred tax asset is more likely than not based on the fact that the Company generated taxable income in fiscal 2005 and 2004 and based on the expectation that we will generate the necessary taxable income in future years.

     Lease Accounting – In accordance with SFAS No. 13 “Accounting for Leases”, we recognize lease expense for our operating leases over the entire lease term including lease renewal options and build-out periods where the renewal is certain and the build-out period takes place prior to the restaurant opening or lease commencement date. We account for construction allowances by recording a receivable when its collectibility is considered certain, depreciating the leasehold improvements over the lesser of their useful lives or the full term of the lease, including renewal options and build-out periods, amortizing the construction allowance as a credit to rent expense over the full term of the lease, including renewal options and build-out periods, and relieving the receivable once the cash is obtained from the landlord for the construction allowance.

Results of Operations

     Revenue – Our revenue consists of restaurant sales, franchise-related revenue, and licensing and other revenue. Our franchise-related revenue is comprised of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee to secure the territory consists of a non-refundable payment equal to $10,000 per restaurant upon the signing of the area development agreement. Since the fee is non-refundable, we recognize this fee upon receipt. Our initial franchise fee is typically $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and the expenses incurred, as related to the sale. The remaining $35,000 is recognized upon either the signing of a lease or the signing of a property purchase agreement, and at which time we have substantially performed all of our services. Franchise royalties are equal to a percentage of net franchise-operated restaurant sales, currently at 4% to 5%. Licensing revenue includes royalties from a retail line of business, including sauces, seasonings, rubs and marinades. Other revenue includes opening assistance and training we provide to our franchise partners. Costs and expenses associated with these services are included in general and administrative expense. Comparable sales represent net sales for restaurants open year-round for 18 months or more.

     Costs and Expenses – Restaurant costs and expenses include food and beverage costs, operating payroll and employee benefits, occupancy costs, repair and maintenance costs, supplies, advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are corporate and restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three

months of operation. As restaurant management and staff gain experience following a restaurant’s opening, labor scheduling, food cost management and operating expense control are improved to levels similar to those at our more established restaurants.

     General and Administrative Expenses – General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, employee benefits, legal fees, accounting fees, consulting fees, travel, rent and general insurance are major items in this category. We also provide franchise services, the revenue of which are included in other revenue and the expenses of which are included in general and administrative costs.

     The following table presents items in our Consolidated Statements of Operations as a percentage of total revenue or net restaurant sales, as indicated, for the following fiscal years ⁽¹⁾:

		2005				2004				2003
Restaurant sales, net			87.2	%			89.8	%			93.6	%
Other revenue			12.8				10.2				6.4
Total revenue			100.0				100.0				100.0
Restaurant costs and expenses:
Food and beverage costs (2)			30.6				31.4				30.6
Labor and benefits (2)			29.3				29.7				30.1
Operating expenses (2)			25.0				24.7				25.6
Depreciation and amortization (restaurant level) (2)			4.4				4.7				5.1
Pre-opening expenses (2)			0.1				—				0.6
Asset impairment and restructuring charges (2)			—				—				4.6
Total costs and expenses (2)			89.4				90.5				96.6
Income from restaurant operations (2)			10.6				9.5				3.4
General and administrative (3)			13.1				11.0				9.6
Depreciation and amortization (corporate) (3)			0.4				0.4				0.2
Income (loss) from operations (3)			8.5	%			7.4	%			(0.2	)%

Fiscal Year 2005 Compared to Fiscal Year 2004

     Total Revenue – Total revenue of approximately $102.4 million for fiscal 2005 increased approximately $3.1 million or 3.0% over total revenue of approximately $99.3 million for fiscal 2004. Fiscal 2005 consisted of 52 weeks as compared to 53 weeks for fiscal 2004. Revenue for the 53^rd week in fiscal 2004 was approximately $1.9 million, including restaurant sales and franchise royalties.

     Restaurant Sales – Restaurant sales were approximately $89.2 million for fiscal year 2005 and fiscal year 2004. The 53^rd week of fiscal 2004 contributed approximately $1.7 million in sales. Fiscal 2005 sales results reflect the two-week closure of our Maple Grove, Minnesota location during the third quarter of 2005 for its conversion from counter-service to full-service, which negatively impacted fiscal 2005 sales by approximately $100,000. These were offset by increased comparable sales growth, primarily from an increase in our catering and “TO GO” business, and the impact of weighted-average price increases during fiscal 2005 equal to less than 2.0%. Our category leadership in off-premise sales continues to strengthen, as catering and “TO GO” accounted for approximately 32.0% of sales in 2005, compared with approximately 30.0% of sales in fiscal 2004.

     Franchise-Related Revenue – Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees. Franchise-related revenue for fiscal 2005 was approximately $12.0 million, a 28.6% increase when compared to franchise-related revenue of approximately $9.3 million for the same period in 2004, primarily reflecting increased royalties. Royalties, which are based on a percent of franchise-operated restaurants net sales, increased 41.5% reflecting the annualization of franchise restaurants that opened in fiscal 2004 in addition to the net 22 new franchise restaurants opened during fiscal 2005. Fiscal 2005 included 3,851 franchise operating weeks, compared to 2,931 franchise operating weeks in 2004, representing an increase of approximately 31.4%. There were 88 franchise-operated restaurants open at January 1, 2006, compared to 66 at January 2, 2005.

     Licensing and Other Revenue – Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. Other revenue includes opening assistance and training we provide to our franchise partners. For fiscal year 2005, the licensing royalty income was approximately $285,000 compared to approximately $248,000 for fiscal year 2004. During fiscal 2006, we expect to see licensing revenue increase moderately compared to 2005 levels. Other revenue for fiscal 2005 was $820,000, compared to $571,000 in 2004. The amount of other revenue has grown based on the level of opening assistance we provided during 2005 for the opening of new franchise restaurants. The amount of other revenue is expected to grow based on the level of opening assistance we expect to provide during the 25-30 franchise openings planned for 2006.

     Same Store Net Sales – It is our policy to include in our same store net sales base, restaurants that are open year round and have been open for at least 18 months. At the end of fiscal 2005 and fiscal 2004, there were 38 restaurants included in this base. Same store net sales for fiscal 2005 increased approximately 2.1%, compared to fiscal 2004’s increase of approximately 1.1% as calculated assuming fiscal 2004 was a 52-week year. We believe that the increase in same store net sales reflects the combination of our advertising initiatives, the success of our LTO’s, weighted average price increases of less than 2.0% and a focus on operational excellence and execution in our restaurants. Same store net sales for franchise-operated restaurants for fiscal 2005 decreased approximately 1.6%, compared to a decrease of approximately 1.9% for the prior year comparable period. For 2005 and 2004, there were 52 and 34 restaurants, respectively, included in franchise-operated comparable sales.

     Average Weekly Net Sales – The following table shows company-owned and franchise-operated average weekly net sales for fiscal 2005 and fiscal 2004:

		Twelve Months Ended
		January 1,				January 2,
		2006				2005
Company-Owned		$	45,072			$	44,164
Full-Service		$	46,114			$	45,253
Counter-Service		$	40,431			$	39,342
Franchise-Operated		$	55,011			$	51,538

     Food and Beverage Costs – Food and beverage costs for fiscal 2005 were approximately $27.3 million or 30.6% of net restaurant sales compared to approximately $28.0 million or 31.4% of net restaurant sales for fiscal 2004. Results reflect the impact of weighted-average price increases of less than 2.0% implemented during fiscal 2005, in addition to our ability to leverage our menu and offset higher food costs through usage of our LTO’s. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants are approximately 10.0%. Building the bar continues to be a focus for us, however, we have determined that we are limited in our ability to “grow the bar” in the majority of our locations due to the fact that these locations have little to no designated bar, and some restaurants only have beer and wine. We’re encouraged by the prospects of growing this business on a go-forward basis, however, because our recent franchise openings have achieved rates in the mid-teens for their adult beverage sales as a percentage of dine-in sales. Approximately 86% of our purchases are on contract. Our annual pork contract renewal in October 2005 resulted in an approximate 4.0% price decrease for 2006, our poultry contract pricing remained relatively flat to prior year and our brisket contract gets renewed in the Spring.

     We anticipate that food costs, as a percent of net restaurant sales, will be slightly favorable for 2006 over the prior year. We believe that we have an opportunity to mitigate the negative impact, if any, that any food contract pricing may have on our margin through menu engineering such as with the use of our LTO’s which typically carry more margin than many of our core product offerings. We will continue to take price increases as appropriate, and leverage adult beverage sales, which typically have higher margin.

     Labor and Benefits – Labor and benefits at the restaurant level were approximately $26.2 million or 29.3% of net restaurant sales in fiscal 2005 compared to approximately $26.5 million or 29.7% of net restaurant sales in fiscal 2004. The decrease in labor and benefits reflects favorable medical claims experience and labor productivity, partially off-set by a higher level of bonus payout at the restaurant level. Full-service restaurants that operate in states without a “tip credit” (such as Minnesota) experience a higher wage rate for dining room labor than do restaurants located in states where a tip credit is available to reduce wages paid to food servers. The migration toward full-service dining in the majority of our restaurants is part of our strategy for increasing unit-level revenue, but may result in higher labor costs. During fiscal 2006, we are expecting labor and benefits as a percentage of net restaurant sales to remain relatively flat to fiscal 2005.

     Operating Expenses – Operating expenses for fiscal 2005 were approximately $22.3 million or 25.0% of net restaurant sales, compared to approximately $22.0 million or 24.7% of net restaurant sales for fiscal 2004. The increase in fiscal 2005 restaurant level operating expenses as a percentage of restaurant sales is primarily due to increased supplies expense from catering and “TO GO” sales, increased utilities costs, as well as increased advertising costs. During fiscal 2006, operating expenses as a percentage of net restaurant sales are expected to increase slightly from the percentage in fiscal 2005, primarily due to higher utility costs, higher advertising costs, and higher supplies’ costs related to increases in catering and “TO GO,” partially offset by further leveraging of fixed costs.

     Depreciation and Amortization – Depreciation and amortization for fiscal 2005 was approximately $4.4 million, or 4.3% of total revenue, compared to approximately $4.5 million, or 4.6% of total revenue for fiscal 2004. The decrease in depreciation and amortization expense as a percent of total revenue in 2005 compared to 2004 is primarily due to better leveraging of these costs. During fiscal 2006, depreciation and amortization is expected to increase from fiscal 2005 levels due to approximately $12.0 million in expected capital expenditures for asset additions for new company-owned restaurants and other infrastructure projects.

     Asset Impairment and Restructuring Charges – During fiscal 2005 and 2004, we did not record any asset impairment or restructuring charges. As of January 1, 2006 and January 2, 2005, we had approximately $1.3 million of assets held for sale on our consolidated balance sheets representing the land and building on one of the restaurants in Texas for which an impairment was recorded and the restaurant was subsequently closed.

     Pre-opening Expenses – We had approximately $96,000 in pre-opening expenses for fiscal 2005 related primarily to our Chantilly, Virginia restaurant, which opened January 11, 2006, and our Maple Grove, Minnesota restaurant conversion. We did not incur any pre-opening expenses during fiscal 2004. We plan to open up to three company-owned restaurants during fiscal 2006 with pre-opening costs estimated at approximately $175,000 per restaurant.

     General and Administrative Expenses – General and administrative expenses totaled approximately $13.4 million or 13.1% of total revenue in fiscal 2005 compared to approximately $10.9 million or 11.0% of total revenue in fiscal 2004. In fiscal 2005, general and administrative expenses included $566,000 in stock-based compensation expense and $820,000 in franchise service expense. In fiscal 2004, general and administrative expenses included $211,000 in stock-based compensation expense and $571,000 in franchise service expense. Excluding stock-based compensation expense and the impact of our franchise services, which is offset in other revenue, the percentage was 11.9% for 2005 and 10.3% for the comparable period in 2004. The remaining increase in the percentages primarily reflects planned investments in infrastructure in anticipation of our growth. During 2006, we expect general and administrative expenses to remain relatively flat as a percentage of total revenue, resulting from the increased cost related to a third year in our performance share program, options expense related to the adoption of SFAS No. 123R, Share-Based Payment, in the first quarter of fiscal 2006 and the services we expect to provide to the 25-30 expected 2006 franchise-operated restaurant openings.

     Interest Expense – Interest expense totaled approximately $1.9 million or 1.9% of total revenue for fiscal 2005, essentially equal to fiscal 2004’s interest expense in terms of dollars and as a percentage of total revenue. This line item represents interest expense from capital lease obligations, notes payable, financing lease obligations and a company match for deferrals made under our non-qualified deferred compensation plan. For fiscal 2006, we expect interest expense to remain relatively flat to fiscal 2005 levels.

     Interest Income – Interest income was approximately $270,000 and $326,000 for fiscal 2005 and fiscal 2004, respectively. Interest income reflects interest received on short-term cash and cash equivalent balances. Fiscal 2005 interest income was lower than fiscal 2004 due to lower cash balances. We expect fiscal 2006 interest income to remain relatively flat to fiscal 2005 levels.

     Other Income (Expense), Net – During fiscal 2005, we realized other income, net, of approximately $71,000, which compares to other expense, net, of approximately $392,000 in fiscal 2004. Other income in fiscal 2005 primarily reflects a gain on the condemnation of a small percentage of land at one of our company-owned restaurants. The other expense in 2004 is due to a write-off of a restaurant’s remaining assets subsequent to the sale to a franchise.

     (Provision) Benefit from Income Taxes – We recorded a provision for income taxes during fiscal 2005 of approximately $2.7 million which compares to a provision of approximately $1.9 million in 2004. We utilized approximately $8.0 million of federal and state net operating loss carry forwards in fiscal 2005 as compared to approximately $5.0 million in fiscal 2004. At January 1, 2006, we had a remaining deferred tax asset of approximately $5.8 million. Realization of the net operating loss carry forwards and other deferred tax timing differences is contingent on future taxable earnings. Our deferred tax asset was reviewed for expected utilization using a “more likely than not” approach as required by SFAS No. 109, “Accounting for Income Taxes”, by assessing the available positive and negative evidence surrounding the recoverability of the deferred tax asset. We believe that the realization of the deferred tax asset is more likely than not based on the fact that we generated taxable income in fiscal 2005 and 2004 and based on the expectation that our Company will generate the necessary taxable income in future years. Utilization of federal net operating losses will be achieved through offsetting tax liabilities generated through earnings, increased by payments of current taxes to state authorities. We estimate a tax provision of 37% for fiscal 2006.

     Basic and Diluted Net Income Per Common Share – Net income for fiscal 2005 was approximately $4.4 million or $0.41 per basic common share on approximately 10,825,000 weighted average basic shares outstanding compared to a net income of approximately $3.5 million or $0.29 per basic common share on approximately 11,858,000 weighted average basic shares outstanding for fiscal 2004.

     Diluted net income per common share for fiscal 2005 was $0.39 per common share on approximately 11,173,000 weighted average diluted shares outstanding compared to $0.29 per common share on approximately 12,222,000 weighted average diluted shares outstanding for fiscal 2004.

Fiscal Year 2004 Compared to Fiscal Year 2003

     Total Revenue – Total revenue of approximately $99.3 million for fiscal 2004 increased approximately $1.6 million or 1.6% over revenue of approximately $97.7 million for fiscal 2003. Fiscal 2004 consisted of 53 weeks as compared to 52 weeks for fiscal 2003. Revenue for the 53^rd week in fiscal 2004 was approximately $1.9 million, including restaurant sales and franchise royalties.

     Restaurant Sales – Restaurant sales decreased by approximately $2.3 million or 2.5% to approximately $89.2 million for fiscal year 2004 from approximately $91.5 million for fiscal year 2003. The decrease in sales was due primarily to the sale of three Georgia restaurants to a franchisee and the closure of two Texas restaurants that generated approximately $6.6 million in restaurant sales in fiscal 2003. Without these restaurants in the fiscal 2003 base, sales would have been 7.4% higher in 2004 compared to 2003. The decrease in sales for fiscal 2004, related to these five restaurants, was partially offset by approximately $1.7 million in sales attributed to the 53^rd week.

     Franchise-Related Revenue – Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees. Franchise-related revenue for fiscal 2004 was approximately $9.3 million, a 63.5% increase when compared to franchise-related revenue of approximately $5.7 million for the same period in 2003, primarily reflecting increased royalties. Royalties, which are based on a percent of franchise-operated restaurants net sales, increased 61.0% reflecting the annualization of franchise restaurants that opened in fiscal 2003 in addition to the net 12 new franchise restaurants during fiscal 2004. There were 66 franchise-operated restaurants open at January 2, 2005, compared to 54 at December 28, 2003.

     Licensing and Other Revenue – Licensing revenue includes royalties from a retail line of business, including sauces, seasonings, rubs and marinades. Other revenue includes opening assistance and training we provide to our franchise partners. For fiscal year 2004, the licensing royalty income was approximately $248,000 compared to approximately $209,000 for fiscal year 2003.

     Same Store Net Sales – It is our policy to include in our same store net sales base, restaurants that are open year round and have been open for at least 18 months. At the end of fiscal 2004, there were 36 restaurants included in this base. Same store net sales for fiscal 2004 increased approximately 1.1%, compared to fiscal 2003’s decrease of approximately 3.0% and were calculated assuming fiscal 2004 was a 52-week year. We believe that the increase in same store net sales reflects the combination of our advertising initiatives, the success of our limited time offerings, a price increase of approximately 2.0% and a focus on operational excellence and execution in our restaurants.

     Average Weekly Net Sales – The following table shows company-owned and franchise-operated average weekly net sales for fiscal 2004 and fiscal 2003:

		Twelve Months Ended
		January 2,				December 28,
		2005				2003
Company-Owned		$	44,164			$	42,491
Full-Service		$	45,253			$	43,671
Counter-Service		$	39,342			$	37,060
Franchise-Operated		$	51,538			$	47,400

     Food and Beverage Costs – Food and beverage costs for fiscal 2004 were approximately $28.0 million or 31.4% of net restaurant sales, essentially flat compared to approximately $28.0 million or 30.6% of net restaurant sales for fiscal 2003. This is primarily the result of higher commodity costs, basically offset by the menu price increase implemented at the beginning of the third quarter. Approximately 85% of our purchases are on contract and overall, contracts negotiated for 2005 resulted in less favorable pricing. Our pork contract renewal resulted in an 11% contracted price increase, our poultry contract, resulted in an 8% price increase and our brisket contract resulted in a 7% increase.

     Labor and Benefits – Labor and benefits at the restaurant level were approximately $26.5 million or 29.7% of net restaurant sales in fiscal 2004 compared to approximately $27.6 million or 30.1% of net restaurant sales in fiscal 2003. The decrease in labor and benefits reflects favorable workers compensation claims experience and labor productivity, partially off-set by a higher level of bonus payout at the restaurant level. Full-service restaurants that operate in states without a “tip credit” (such as Minnesota) experience a higher wage rate for dining room labor than do restaurants located in states where a tip credit is available to reduce wages paid to food servers. The migration toward full-service dining in the majority of our restaurants is part of our strategy for increasing unit-level revenue, but may result in higher labor costs.

     Operating Expenses – Operating expenses for fiscal 2004 were approximately $22.0 million or 24.7% of net restaurant sales, compared to approximately $23.4 million or 25.6% of net restaurant sales for fiscal 2003. The decrease in operating expenses reflects the reduction in company-owned restaurants compared to 2003. In addition, repair and maintenance costs for fiscal year 2004 were $1.9 million compared to $2.2 million for fiscal 2003, reflecting a significant investment in the prior year toward neglected restaurants.

     Depreciation and Amortization – Depreciation and amortization for fiscal 2004 was approximately $4.5 million, or 4.6% of total revenue, compared to approximately $4.8 million, or 5.0% of total revenue for fiscal 2003. The decrease in depreciation and amortization primarily reflects fewer company-owned restaurants in 2004.

     General and Administrative Expenses – General and administrative expenses totaled approximately $11.0 million or 11.0% of total revenue in fiscal 2004 compared to approximately $9.3 million or 9.6% of total revenue in fiscal 2003. The increase in general and administrative expenses reflects increased legal, consulting and audit fees related to Sarbanes-Oxley 404 compliance, and higher corporate bonus and expenses related to our compensation programs. It also includes increased payroll as we continue to build our infrastructure.

     Pre-opening Expenses – We had no pre-opening expenses for fiscal 2004, compared to approximately $543,000 or 0.6% of net restaurant sales for fiscal 2003.

     Asset Impairment and Restructuring Charges – During fiscal 2004, we recorded no asset impairment and restructuring charges compared to the recording of approximately $4.2 million of charges on five locations in 2003. As of January 2, 2005, we had approximately $1.3 million of assets held for sale on our consolidated balance sheet representing the land and building on one of the restaurants in Texas for which an impairment was recorded and the restaurant was subsequently closed.

     Interest Expense – Interest expense totaled approximately $1.9 million or 1.9% of total revenue for fiscal 2004 compared to approximately $1.9 million or 1.9% of total revenue for fiscal 2003. This line item represents interest expense from capital lease obligations, notes payable and financing lease obligations. The increase in interest expense from fiscal 2003 to fiscal 2004 is primarily the result of no capitalization of interest related to construction costs, due to no restaurant openings during fiscal 2004.

     Interest Income – Interest income was approximately $326,000 and $215,000 for fiscal 2004 and fiscal 2003, respectively. Interest income reflects interest received on short-term cash and cash equivalent balances.

     Other Expense, Net – Other expense, net of approximately $392,000 primarily reflects the write-off of a restaurant’s remaining assets subsequent to the sale to a franchise. This compares to approximately $667,000 in fiscal 2003 for losses related to expenses on an unopened site and early extinguishments of debt associated with the early payoff of a note, partially offset by gains attributable to the sale of three units in Georgia to a franchisee.

     Equity in Loss from Unconsolidated Affiliate – Until February 26, 2003, we were a 40% participant in a joint venture to operate themed restaurant concepts based on the entertainment artist Isaac Hayes. Pursuant to an agreement governing the joint venture, the participants in the joint venture formed a Delaware limited liability company named FUMUME, LLC. On February 26, 2003, we disposed of our 40% interest in FUMUME, LLC. The equity in loss from unconsolidated affiliate was approximately $2.2 million for fiscal 2003, reflecting losses in the Isaac Hayes Blues Clubs, in addition to transaction costs associated with our divestiture of those clubs. We are no longer participating in any revenue or expenses of the joint venture and we do not have any further obligations with regard to the joint venture.

     (Provision) Benefit from Income Taxes – Our Company recorded a provision for income taxes during fiscal 2004 of approximately $1.9 million which compares to a benefit of approximately $1.8 million in fiscal 2003. We utilized approximately $5.0 million of federal and state net operating loss carry forwards in fiscal 2004 as compared to none in fiscal 2003. At January 2, 2005, we had a remaining deferred tax asset of approximately $7.8 million. Realization of the net operating loss carry forwards and other deferred tax timing differences is contingent on future taxable earnings. Our deferred tax asset was reviewed for expected utilization using a “more likely than not” approach as required by SFAS No. 109,

“Accounting for Income Taxes”, by assessing the available positive and negative evidence surrounding the recoverability of the deferred tax asset. Utilization of federal net operating losses will be achieved through offsetting tax liabilities generated through earnings. This will be offset by payments of current taxes to state authorities.

     Basic and Diluted Net Income (Loss) Per Common Share – Net income for fiscal 2004 was approximately $3.5 million or $0.29 per basic common share on approximately 11,858,000 weighted average basic shares outstanding compared to a net loss of approximately $2.9 million or $0.25 per basic common share on approximately 11,772,000 weighted average basic shares outstanding for fiscal 2003.

     Diluted net income per common share for fiscal 2004 was $0.29 per common share on approximately 12,222,000 weighted average diluted shares outstanding compared to a loss of $0.25 per common share on approximately 11,772,000 weighted average diluted shares outstanding for fiscal 2003.

Recently Issued Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (FASB) issued statement SFAS No. 123R, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95. This statement requires companies to recognize compensation cost for share-based awards, including options, granted to employees based on their fair values at the time of grant and would eliminate the use of accounting for employee options under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that amends the compliance dates for SFAS No. 123R, and we are required to implement this standard effective with the beginning of our 2006 fiscal year.

     SFAS No. 123R permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date; (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. We have determined that we will adopt the “modified prospective” method under SFAS No. 123R. While SFAS No. 123R permits entities to continue use of the Black-Scholes option pricing model, SFAS No. 123R also permits the use of a “binomial model.” We currently expect that we will continue to utilize the Black-Scholes option pricing model upon the adoption of SFAS No. 123R. Had we adopted SFAS No. 123R in prior periods based on our use of the Black-Scholes option pricing model, the impact of that standard would have approximated the impact of SFAS No. 123R as described in footnote 1 in the disclosure of pro forma net income (loss) and pro forma Basic and Diluted EPS.

      In October 2005, the FASB issued Staff Position 13-1, Accounting for Rental Costs Incurred During a Construction Period. Generally, the staff position requires companies to expense rental costs incurred during a construction period. As permitted under existing Generally Accepted Accounting Principles, we elected to capitalize rental costs during construction of our Chantilly, Virginia corporate restaurant through December 31, 2005. We capitalized approximately $50,000 in rent expense in the fourth quarter of fiscal 2005 associated with our Chantilly, Virginia company-owned restaurant while it was under construction. The Company is required to adopt FASB Staff Position 13-1 on January 2, 2006. We estimate that the impact of the adoption of the staff position will be approximately $130,000 in additional pre-opening rent expense during fiscal 2006. The amount may vary

based on lease terms, restaurant openings and length of construction period. Effective January 2, 2006, in accordance with Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” we will expense rental costs incurred during a construction period.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in accounting estimate effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for us on January 2, 2006. We do not believe that the adoption of the provision of SFAS No. 154 will have a material impact on our consolidated financial statements.

Financial Condition, Liquidity and Capital Resources

     As of January 1, 2006, our Company held cash and cash equivalents of approximately $4.4 million compared to approximately $11.2 million as of January 2, 2005. This decrease reflects the use of approximately $11.5 million for the repurchase of common stock, partially offset by cash generated from operations.

     Our quick ratio, which measures our immediate short-term liquidity, was 0.76 at January 1, 2006 compared to 1.56 at January 2, 2005. The quick ratio is computed by adding unrestricted cash and cash equivalents with accounts receivable, net and dividing by total current liabilities less restricted marketing fund liabilities. The change in our quick ratio was primarily due to cash used during the first half of 2005 for the repurchase of common stock.

     Net cash provided by operations for each of the last three fiscal years was approximately $10.4 million in fiscal 2005, $11.4 million in fiscal 2004 and $6.2 million in fiscal 2003. Cash generated in fiscal 2005 was primarily from net income of approximately $4.4 million, the utilization of our deferred tax asset of approximately $2.0 million, depreciation and amortization of approximately $4.4 million, an increase in deferred compensation of approximately $603,000, an increase in deferred rent of approximately $813,000 due to our new corporate office and Chantilly, Virginia, an increase in other current liabilities of approximately $771,000, and an increase in accrued compensation and benefits of approximately $201,000. These increases were partially offset by an approximate $1.2 million increase in restricted cash, which includes amounts related to our national advertising fund, and approximately $528,000 related to our self-funded benefit plans, an increase in accounts receivable of approximately $1.1 million due to a net 22 more franchisees since last year-end, a net increase in prepaids and other current assets of approximately $444,000, and a decrease in accounts payable of approximately $328,000.

     Cash provided by operations in 2004 was approximately $11.4 million and is primarily the result of an increase of approximately $2.1 million in accounts payable, utilization of our deferred tax asset of approximately $1.4 million, net income from operations of approximately $3.5 million, depreciation and amortization of approximately $4.6 million, an increase in deferred compensation of approximately $235,000, an increase in deferred rent of approximately $474,000 and an increase in accrued compensation and benefits of approximately $501,000. These increases were partially offset by a decrease of approximately $1.1 million in other current liabilities, an approximate $628,000 increase in accounts receivable due to franchise growth, an increase of approximately $566,000 in prepaid and other current assets, and an increase of approximately $39,000 in restricted cash.

     Net cash provided by operations in fiscal 2003 was primarily from asset impairment charges of approximately $3.7 million, equity in loss of unconsolidated affiliate of approximately $2.2 million, depreciation and amortization of approximately $4.9 million, an increase to deferred rent of approximately $568,000, a decrease in prepaid expenses and other assets of approximately $547,000, and an increase in other current liabilities of approximately $1.2 million. This was partially offset by a net loss of approximately $2.9 million, tax benefit of approximately $2.2 million, a decrease in accounts payable of approximately $1.6 million, and an increase in accounts receivable of approximately $648,000.

     Net cash used for investing activities for each of the last three fiscal years was approximately $5.7 million in fiscal 2005, $2.2 million in fiscal 2004 and $5.3 million in fiscal 2003. In fiscal 2005, we used approximately $6.8 million for capital expenditures related to the construction of our new Chantilly, Virginia restaurant, the purchase of our Plymouth, Minnesota restaurant, the purchase of land for a restaurant in Coon Rapids, Minnesota, a new test kitchen, training center and office space, and POS and other computer equipment for use in the restaurants and at our corporate office. This was partially offset by proceeds for sale of assets of approximately $636,000 and payments received on notes receivable of approximately $457,000. In fiscal 2004, we used approximately $2.4 million for capital expenditures related to new catering vehicles, kitchen equipment, development of our site-model tool, and POS and other computer equipment for use in the restaurants and at our corporate office. This was partially offset by payments received on notes receivable of approximately $218,000. In fiscal 2003, we used cash of approximately $4.0 million for capital expenditures on the construction of three new company-owned restaurants and to upgrade existing facilities and approximately $2.1 million to fund losses and exit from our 40% FUMUME, LLC, joint-venture partnership. The use of cash was partially offset by cash proceeds from the sale of assets of approximately $685,000 and payments on notes receivable of approximately $139,000. In fiscal 2006, we expect capital expenditures to be approximately $12.0 million, which will consist of three new ground-up corporate restaurants, a new labor-scheduling and back-of-the-house management system, potential reimages and remodels of existing restaurants and normal capital expenditures for existing restaurants.

     Net cash used for financing activities was approximately $11.5 million in fiscal 2005, $7.9 million in fiscal 2004 and $323,000 in fiscal 2003. During fiscal 2005, we completed our 1.0 million share authorization and bought back the remaining 954,900 shares of our common stock and paid approximately $11.5 million, excluding commissions. Other uses of cash for fiscal 2005 included payments on long-term debt and capital lease obligations of approximately $606,000 and payments of approximately $85,000 for debt issuance costs related to our credit line. This was partially offset by approximately $730,000 in proceeds from the exercise of stock options. During fiscal 2004, we bought back approximately 1.0 million shares of our common stock and paid approximately $7.5 million, excluding commissions. In addition, the Board of Directors authorized a second share repurchase program in November 2004, and we bought back 44,100 shares in the last two months of the fiscal year for approximately $400,000. Other uses of cash for fiscal 2004 included payments of long-term debt and capital leases of approximately $726,000. Other sources of cash for fiscal 2004 included proceeds received from the exercise of stock options and warrants of approximately $770,000. During fiscal 2003, payments on long-term debt and capital lease obligations of approximately $2.3 million were the primary uses of cash partially offset by proceeds from stock option exercises of approximately $2.0 million.

     On January 28, 2005 we entered into a five-year credit agreement with Wells Fargo Bank, National Association, as administrative agent and lender, which provides us with a revolving credit facility of $10.0 million. Principal amounts outstanding under the facility bear interest either at an adjusted Eurodollar rate plus 3.50% or Wells Fargo’s prime rate (7.25% as of January 1, 2006) plus 2.0%. Unused portions of the facility are subject to an unused facility fee equal to 0.5% of the unused portion. We had no borrowings under this agreement as of January 1, 2006.

     The credit agreement is available for general working capital purposes and for the repurchase of shares under a board-approved share repurchase program. Under the credit agreement, we granted Wells Fargo a security interest in all of our current and future personal property.

     The credit agreement contains customary affirmative and negative covenants including limitations with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Company among others. The credit agreement also includes various financial covenants. We were in compliance with all covenants under this credit facility agreement as of January 1, 2006.

     We anticipate that all restaurant development and expansion will be funded primarily through currently held cash and cash equivalents, cash flow generated from operations, and from sources such as our credit facility. We moved into new corporate office headquarters in Minnetonka, Minnesota on July 25, 2005. Capital expenditures of approximately $739,000 were spent on the new facility, including the construction of a new state-of-the-art test kitchen and training facility in the lower-level of the office facility. The lease, which commenced in August 2005, is for approximately 26,000 rentable square feet and is for a term of 97 months, plus two five-year renewal options. The minimum rent commitment over the lease term is approximately $4.6 million. We expect capital expenditures of approximately $12.0 million in 2006 for the construction of three ground-up new restaurants, corporate infrastructure, and normal capital items for existing restaurants.

     In addition to commitments we have related to our lease obligations, we also have required payments on our outstanding debt. The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:

Payments Due by Period

(in thousands)

Contractual Obligations		Total				2006				2007				2008				2009				2010				Thereafter
Long Term Debt		$	11,852			$	422			$	467			$	511			$	564			$	569			$	9,319
Financing Leases			4,500				—				—				—				—				—				4,500
Capital and Operating Leases			64,876				3,643				3,707				3,646				3,653				3,690				46,537
Less: Sublease rental income			(8,812	)			(403	)			(403	)			(440	)			(441	)			(441	)			(6,684	)
Total		$	72,416			$	3,662			$	3,771			$	3,717			$	3,776			$	3,818			$	53,672

     See Notes 8, 9 and 10 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for details of our contractual obligations.

     Under the agreements governing our long-term debt obligations, we are subject to two main financial covenants. We must maintain a 1.5 to 1.0 fixed charge coverage ratio and a 3.5 to 1.0 leverage ratio during each fiscal year. As of January 1, 2006 and January 2, 2005, we were in compliance with all of its covenants.

Off-Balance Sheet Arrangements

     Our Company does not have any off-balance sheet arrangements.

Income Taxes

     At January 1, 2006, we had federal and state net operating loss carry forwards (“NOL’s”) for tax reporting purposes of approximately $9.2 million and $8.6 million, respectively, which if not used will begin to expire in 2019. These will be adjusted when we file our 2005 income tax returns in 2006. In addition, we had tax credit carry forwards of approximately $2.3 million, which if not used, will begin to expire in 2009. Future changes in ownership, if any, may place limitations on the use of these NOL’s.

Inflation

     The primary inflationary factors affecting our operations include food, beverage, and labor costs. In addition, our leases require us to pay taxes, maintenance, repairs and utilities and these costs are subject to inflationary increases. We are also subject to interest rate changes based on market conditions.

     We believe that relatively low inflation rates have contributed to relatively stable costs. There is no assurance, however, that low inflation rates will continue.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our Company’s financial instruments include cash and cash equivalents and long-term debt. Our Company includes as cash and cash equivalents investments with original maturities of three months or less when purchased and which are readily convertible into known amounts of cash. Our Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. We have no derivative financial instruments or derivative commodity instruments in our cash and cash equivalents. The total outstanding long-term debt of our Company as of January 1, 2006 was approximately $16.4 million, including financing lease obligations. Of the outstanding long-term debt, approximately $1.3 million consists of a variable interest rate while the remainder was subject to a fixed interest rate. On January 28, 2005 we entered into a five-year credit agreement with Wells Fargo Bank, National Association, as administrative agent and lender, which provides us with a revolving credit facility of $10.0 million. Principal amounts outstanding under the facility will bear interest either at an adjusted Eurodollar rate plus 3.50% or Wells Fargo’s prime rate (7.25% as of January 1, 2006) plus 2.00%. Unused portions of the facility will be subject to an unused facility fee equal to 0.5% of the unused portion. We do not see the variable interest rate long-term debt as a significant interest rate risk. Some of the food products purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control. To control this risk in part, we have fixed-priced purchase commitments for food from vendors. In addition, we believe that substantially all of our food is available from several sources, which helps to control food commodity risks. We believe we have the ability to increase menu prices, or vary the menu options offered, if needed, in response to a food product price increase.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of Famous Dave’s of America, Inc. are included herein, beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of January 1, 2006. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of January 1, 2006, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, Grant Thornton LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein.

     There were no changes in our internal controls over financial reporting during our most recently-completed fiscal quarter, and year ended January 1, 2006 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Famous Dave’s of America have been detected.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information in response to this Item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-K. The Company has adopted a Code of Ethics applicable to its CEO, CFO and Controller. The Code of Ethics is available on our website at www.famousdaves.com and a copy is available free of charge to anyone requesting it.

ITEM 11. EXECUTIVE COMPENSATION

     Information in response to this Item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED    STOCKHOLDER MATTERS

     Information in response to this Item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information in response to this Item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item appears in our definitive proxy statement for our 2005 annual meeting of shareholders under the captions “Fees Billed to Company by Its Independent Registered Public Accounting Firm” and “Pre-approval Policy,” which information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Form 10-K:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets – January 1, 2006 and January 2, 2005

Consolidated Statements of Operations – Years ended January 1, 2006, January 2, 2005 and December 28, 2003

Consolidated Statements of Shareholders’ Equity – Years ended January 1, 2006, January 2, 2005 and December 28, 2003

Consolidated Statements of Cash Flows – Years ended January 1, 2006, January 2, 2005 and December 28, 2003

Notes to Consolidated Financial Statements

Financial Statement Schedule:

Schedule II. Schedule of Valuation and Qualifying Accounts

Exhibits:

See “exhibit index” on the page following the consolidated financial statements and related footnotes

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Famous Dave’s of America, Inc.

We have audited the accompanying consolidated balance sheets of Famous Dave’s of America, Inc. and subsidiaries (the Company) as of January 1, 2006 and January 2, 2005, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended January 1, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Famous Dave’s of America, Inc. and subsidiaries as of January 1, 2006 and January 2, 2005 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 1, 2006 in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the internal control over financial reporting of Famous Dave’s of America, Inc. as of January 1, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
March 10, 2006

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Famous Dave’s of America, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Famous Dave’s of America, Inc. (the “Company”) maintained effective internal control over financial reporting as of January 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the internal control over financial reporting of Famous Dave’s of America, Inc. based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Famous Dave’s of America, Inc. maintained effective internal control over financial reporting as of January 1, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also, in our opinion, Famous Dave’s of America, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Famous Dave’s of America, Inc. and subsidiaries as of January 1, 2006, and January 2, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 1, 2006 and our report dated March 10, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
March 10, 2006

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

		January 1,				January 2,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	4,410			$	11,170
Restricted cash			1,221				39
Accounts receivable, net			2,843				2,289
Inventories			1,588				1,523
Deferred tax asset			3,120				3,342
Prepaid expenses and other current assets			2,312				1,403
Total current assets			15,494				19,766
Property, equipment and leasehold improvements, net			46,872				44,664
Other assets:
Notes receivable, less current portion			1,719				2,156
Deferred tax asset, less current portion			2,632				4,458
Other assets			881				869
		$	67,598			$	71,913
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Line of credit		$	—			$	—
Current portion of long-term debt			422				424
Current portion of capital leases			16				97
Accounts payable			3,811				4,138
Accrued compensation and benefits			2,436				1,914
Other current liabilities			3,410				2,244
Total current liabilities			10,095				8,817
Long-term liabilities:
Long-term debt and capital leases, less current portion			11,430				11,953
Financing leases			4,500				4,500
Other liabilities			4,394				3,300
Total liabilities			30,419				28,570
Shareholders’ equity:
Common stock, $.01 par value, 100,000,000 shares authorized, 10,599,000 and 11,340,000 shares issued and outstanding at January 1, 2006 and January 2, 2005, respectively			106				113
Additional paid-in capital			39,126				49,674
Accumulated deficit			(2,053	)			(6,444	)
Total shareholders’ equity			37,179				43,343
		$	67,598			$	71,913

See accompanying notes to consolidated financial statements.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

		January 1,				January 2,				December 28,
		2006				2005				2003
		(52 weeks)				(53 weeks)				(52 weeks)
Revenue:
Restaurant sales, net		$	89,248			$	89,176			$	91,500
Franchise royalty revenue			10,406				7,353				4,567
Franchise fee revenue			1,595				1,977				1,139
Licensing and other revenue			1,105				819				534
Total revenue			102,354				99,325				97,740
Costs and expenses:
Food and beverage costs			27,297				27,995				28,014
Labor and benefits			26,151				26,472				27,586
Operating expenses			22,339				22,005				23,376
Depreciation and amortization			4,359				4,549				4,840
General and administrative			13,430				10,939				9,336
Pre-opening expenses			96				—				543
Asset impairment and restructuring charges			—				—				4,238
Total costs and expenses			93,672				91,960				97,933
Income (loss) from operations			8,682				7,365				(193	)
Other expense:
Interest expense			(1,932	)			(1,901	)			(1,876	)
Interest income			270				326				215
Other income (expense), net			71				(392	)			(667	)
Equity in loss of unconsolidated affiliate			—				—				(2,155	)
Total other expense			(1,591	)			(1,967	)			(4,483	)
Income (loss) before income taxes			7,091				5,398				(4,676	)
Income tax (provision) benefit			(2,700	)			(1,900	)			1,778
Net income (loss)		$	4,391			$	3,498			$	(2,898	)
Basic net income (loss) per common share		$	0.41			$	0.29			$	(0.25	)
Diluted net income (loss) per common share		$	0.39			$	0.29			$	(0.25	)
Weighted average common shares outstanding-basic			10,825,000				11,858,000				11,772,000
Weighted average common shares outstanding-diluted			11,173,000				12,222,000				11,772,000

See accompanying notes to consolidated financial statements.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

										Additional
		Common Stock								Paid-In				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance – December 29, 2002			11,388			$	114			$	54,222			$	(7,044	)		$	47,292
Exercise of stock options			770				8				2,027				—				2,035
Tax benefit for stock options exercised			—				—				443				—				443
Net loss			—				—				—				(2,898	)			(2,898	)
Balance – December 28, 2003			12,158				122				56,692				(9,942	)			46,872
Exercise of stock options			217				2				708				—				710
Tax benefit for stock options exercised			—				—				303				—				303
Exercise of warrants			10				—				60				—				60
Purchased rights to exercisable warrants			—				—				(197	)			—				(197	)
Repurchase of common stock and common stock warrants			(1,045	)			(11	)			(7,892	)			—				(7,903	)
Net income			—				—				—				3,498				3,498
Balance – January 2, 2005			11,340				113				49,674				(6,444	)			43,343
Exercise of stock options			214				2				728				—				730
Tax benefit for stock options exercised			—				—				244				—				244
Repurchase of common stock			(955	)			(9	)			(11,520	)			—				(11,529	)
Net income			—				—				—				4,391				4,391
Balance – January 1, 2006			10,599			$	106			$	39,126			$	(2,053	)		$	37,179

See accompanying notes to consolidated financial statements.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
JANUARY 1, 2006, JANUARY 2, 2005 AND DECEMBER 28, 2003
(in thousands)

		January 1,				January 2,				December 28,
		2006				2005				2003
		(52 weeks)				(53 weeks)				(52 weeks)
Cash flows from operating activities:
Net income (loss)		$	4,391			$	3,498			$	(2,898	)
Adjustments to reconcile net income (loss) to cash flows provided by operations:
Depreciation and amortization			4,359				4,549				4,840
Amortization of deferred financing costs			70				38				67
(Gain) loss on disposal of property			(53	)			383				(112	)
Deferred income taxes			2,048				1,423				(2,209	)
Tax benefit of stock options exercised			244				303				443
Deferred rent			813				474				568
Deferred compensation			603				235				94
Equity in loss of unconsolidated affiliate			—				—				2,155
Asset impairment charges			—				—				3,687
Changes in operating assets and liabilities:
Restricted cash			(1,182	)			(39	)			—
Accounts receivable, net			(1,062	)			(628	)			(648	)
Inventories			(65	)			76				(42	)
Prepaid expenses and other current assets			(444	)			(566	)			547
Deposits			25				63				60
Accounts payable			(328	)			2,103				(1,635	)
Accrued compensation and benefits			201				501				68
Other current liabilities			771				(1,056	)			1,167
Cash flows provided by operations			10,391				11,357				6,152
Cash flows from investing activities:
Purchases of property, equipment and leasehold improvements			(6,754	)			(2,449	)			(4,037	)
Proceeds from sale of land and building			636				—				685
Payments received on notes receivable			457				218				139
Investment and repayments of advances in unconsolidated affiliate			—				—				(2,125	)
Cash flows used for investing activities			(5,661	)			(2,231	)			(5,338	)
Cash flows from financing activities:
Payments for debt issuance costs			(85	)			(8	)			(9	)
Payments on long-term debt and capital lease obligations			(606	)			(726	)			(2,349	)
Proceeds from exercise of stock options and warrants			730				770				2,035
Repurchase of common stock and common stock warrants			(11,529	)			(7,956	)			—
Cash flows used for financing activities			(11,490	)			(7,920	)			(323	)
(Decrease) increase in cash and cash equivalents			(6,760	)			1,206				491
Cash and cash equivalents, beginning of year			11,170				9,964				9,473
Cash and cash equivalents, end of year		$	4,410			$	11,170			$	9,964

See accompanying notes to consolidated financial statements.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

     Nature of business – We, Famous Dave’s of America, Inc. (“Famous Dave’s” or the “Company”), were incorporated in Minnesota on March 14, 1994. We develop, own, operate and franchise restaurants under the name “Famous Dave’s”. As of January 1, 2006, there were 126 restaurants operating in 32 states, including 38 company-owned restaurants and 88 franchise-operated restaurants. An additional 196 franchise restaurants were committed to be developed through signed area development agreements at January 1, 2006.

     Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. Any inter-company transactions and balances have been eliminated in consolidation.

     Management’s use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

     Reclassifications – Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

     Financial instruments – Due to their short-term nature, the carrying value of our current financial assets and liabilities approximates their fair value. The fair value of long-term debt approximates the carrying amount based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk.

     Segment reporting – We have company-owned and franchise-operated restaurants in the United States, and operate within the single industry segment of food service. Because we manage company-owned and franchise-operated restaurants in a similar manner and allocate resources to each based upon their relative size to the company we have aggregated our operating segments into a single reporting segment.

     Fiscal year – Our fiscal year ends on the Sunday nearest December 31st of each year. Our fiscal year is generally 52 weeks; however it periodically consists of 53 weeks. The fiscal year ended January 1, 2006 (fiscal 2005) was 52 weeks, while fiscal year ending January 2, 2005 (fiscal 2004) was 53 weeks, and fiscal year ending December 28, 2003 (fiscal 2003) was 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 $100,000, while the remaining balances are uninsured at January 1, 2006. 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.

     Accounts receivable – We provide an allowance for uncollectible accounts on accounts receivable. The allowance for uncollectible accounts was approximately $36,770 and $9,600 at January 1, 2006 and January 2, 2005, respectively. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of the provided allowance are determined uncollectible, they are charged to expense in the year that determination is made. Accounts receivable are written off when

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Account receivable balances written off have not exceeded allowances provided.

     Inventories – Inventories consist principally of food, beverages, retail goods, smallwares and supplies, and are recorded at the lower of cost (first-in, first-out) or market.

     Property, equipment and leasehold improvements – Property, equipment and leasehold improvements are capitalized at a level of $250 or greater and are recorded at cost. Improvements of $250 or greater are capitalized while repair and maintenance costs are charged to operations when incurred. Furniture, fixtures, equipment and antiques are depreciated or amortized using the straight-line method over estimated useful lives ranging from 3-7 years, while buildings are depreciated over 30 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term, including renewal options, or the estimated useful life of the assets. Décor used in the restaurants is recorded at cost and is not depreciated since it has a perpetual life.

     Debt issuance costs – Debt issuance costs are amortized to interest expense over the term of the related financing on a straight-line basis, which approximates the interest method.

     Construction overhead and capitalized interest – We capitalize construction overhead costs at the time a building is turned over to operations, which is approximately two weeks prior to opening. We capitalized construction overhead costs of approximately $45,000 in fiscal 2005. There was no capitalization of construction overhead in fiscal 2004. There was no capitalized interest in 2005 or 2004, respectively. Interest costs capitalized during the construction period of restaurants for fiscal 2003 was approximately $122,000.

     Advertising costs – Advertising costs are charged to expense as incurred. Advertising costs were approximately $3.0 million, $2.7 million and $2.4 million for fiscal years 2005, 2004 and 2003, respectively, and are included in operating expenses in the consolidated statements of operations.

     Research and development costs – Research and development costs represent salaries and expenses of personnel engaged in the creation of new menu and Limited-Time Offering (LTO) items, recipe enhancements and documentation activities. Research and development costs were approximately $265,000, $210,000 and $114,000 for fiscal years 2005, 2004 and 2003, respectively.

     Pre-opening expenses – All start-up and pre-opening costs are expensed as incurred. We had pre- opening expenses of approximately $96,000 in fiscal 2005 related to our conversion of a counter-service restaurant to a full-service restaurant and two new corporate restaurants preparing to open in 2006.

     Lease Accounting – In accordance with Statement of Financial Accounting Standards (SFAS) No. 13 “Accounting for Leases,” we recognize lease expense for our operating leases over the entire lease term including lease renewal options and build-out periods where the renewal is certain and the build-out period takes place prior to the restaurant opening or lease commencement date. We account for construction allowances by recording a receivable when its collectibility is considered certain, depreciating the leasehold improvements over the lesser of their useful lives or the full term of the lease, including renewal options and build-out periods, amortizing the construction allowance as a credit to rent expense over the full term of the lease, including renewal options and build-out periods, and relieving the receivable once the cash is obtained from the landlord for the construction allowance.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

     Recoverability of property, equipment and leasehold improvements – In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. Fair value as determined by the discounted future net cash flows, is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Our January 1, 2006 and January 2, 2005 consolidated balance sheets reflect approximately $1.3 million of assets held for sale, which includes the land and building for one location that was closed during 2003. Based on recent broker activity and a recent offer, we believe the assets held for sale are fairly stated at $1.3 million as of January 1, 2006. Our intention is to sell this property within the next 12 months. During fiscal 2003, we recorded impairment charges of approximately $4.2 million on five under-performing restaurants, two of which were subsequently closed, two of which were subsequently sold, and one that was fully impaired, but still operating. There were no impairment charges recorded during fiscal 2005 or 2004.

     Restricted Cash – Restricted cash as of January 1, 2006 and January 2, 2005 consists of the remaining balance of cash payments received from franchise-operated and company-owned restaurants for the Public Relations and Marketing Development Fund. In addition, in 2005, restricted cash includes funding related to a letter of credit as required by our self-funded insurance programs. The letter of credit was established as of July 1, 2005, and is funded by a restricted interest-bearing cash account in the amount of approximately $528,000.

     Public Relations and Marketing Development Fund – Beginning in fiscal 2004, we established a system-wide public relations and marketing fund. Company-owned restaurants, in addition to franchise-operated restaurants whose franchise agreements were signed after January 1, 2004, are required to contribute a percentage of net sales, currently 1.0%, to the fund that is used for public relations and marketing development efforts throughout the system. Additionally, certain payments received from various vendors are deposited into the public relations and marketing fund. The assets held by this fund are considered restricted. Accordingly, we reflected the cash related to this fund in restricted cash and the liability is included in accounts payable on our consolidated balance sheets as of January 1, 2006 and January 2, 2005. As of January 1, 2006 and January 2, 2005, we had approximately $693,000 and $39,000 in this fund, respectively.

     Gift Cards – We record a liability in the period in which a gift card is issued and proceeds are received. As gift cards are redeemed, this liability is reduced and revenue is recognized. We recognize gift card slippage income based on a historical percentage breakage rate when the likelihood of the redemption of the card becomes remote.

     Interest income – We recognize interest income as earned.

     Net income (loss) per common share – Basic net income (loss) per common share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income (loss) divided by the sum of the weighted

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

average number of shares of common stock outstanding plus all additional common stock equivalents relating to stock options and warrants when dilutive.

     Following is a reconciliation of basic and diluted net income (loss) per common share:

		Fiscal Year
(in thousands, except per share data)		2005				2004				2003
Net income (loss) per common share – basic:
Net income (loss)		$	4,391			$	3,498			$	(2,898	)
Weighted average shares outstanding			10,825				11,858				11,772
Net income (loss) per common share – basic		$	0.41			$	0.29			$	(0.25	)
Net income (loss) per common share – diluted:
Net income (loss)		$	4,391			$	3,498			$	(2,898	)
Weighted average shares outstanding			10,825				11,858				11,772
Dilutive impact of common stock equivalents outstanding			348				364				—
Adjusted weighted average shares outstanding			11,173				12,222				11,772
Net income (loss) per common share – diluted		$	0.39			$	0.29			$	(0.25	)

     All options outstanding as of January 1, 2006 were used in the computation of diluted earnings per common share for fiscal year 2005.

     Options to purchase approximately 40,000 shares of common stock with a weighted average exercise price of $8.02 were excluded from the fiscal 2004 diluted EPS computation because the exercise price exceeded the average market price of the common shares during the period.

     Options to purchase approximately 1.2 million shares of common stock with a weighted average exercise price of $3.94 were excluded from the fiscal 2003 diluted EPS computation because they were anti-dilutive due to a net loss.

     Stock-based compensation – In accordance with Accounting Principles Board (APB) Opinion No. 25, we use the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of Famous Dave’s common stock at the date of grant over the amount the recipient must pay for the stock. Our policy is to grant stock options at the quoted market price at the date of grant. No compensation expense has been recognized for stock options issued in fiscal years 2005, 2004 or 2003. The following table illustrates the effect on net income (loss) and net income (loss) per common share if we had applied the fair value recognition provisions of SFAS No. 123R, “Accounting for Stock-Based Compensation”, to employee stock-option compensation.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(1)

NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

		Fiscal Year
(in thousands, except per sare data)		2005				2004				2003
Net income (loss) as reported		$	4,391			$	3,498			$	(2,898	)
Less: Compensation expense determined under the fair value method, net of tax			(425	)			(816	)			(1,057	)
Pro forma net income (loss)		$	3,966			$	2,682			$	(3,955	)
Net income (loss) per common share:
Basic EPS as reported		$	0.41			$	0.29			$	(0.25	)
Basic EPS pro forma		$	0.37			$	0.23			$	(0.34	)
Diluted EPS as reported		$	0.39			$	0.29			$	(0.25	)
Diluted EPS pro forma		$	0.36			$	0.22			$	(0.34	)

     In determining the compensation cost of the options granted during fiscal years 2005, 2004 and 2003, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

		Fiscal Year
		2005				2004				2003
Risk free interest rate			4.1	%			4.4	%			4.2	%
Expected life of options		6.4 years				10 years				10 years
Expected volatility			65.7	%			56.7	%			102.3	%
Dividend yield			0.0	%			0.0	%			0.0	%

     In December 2004, the Financial Accounting Standards Board (FASB) issued statement SFAS No. 123R, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95. This statement requires companies to recognize compensation cost for share-based awards, including options, granted to employees based on their fair values at the time of grant and would eliminate the use of accounting for employee options under APB Opinion No. 25, Accounting for Stock Issued to Employees. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a rule that amends the compliance dates for SFAS No. 123R, and we are required to implement this standard effective with the beginning of our 2006 fiscal year.

     SFAS No. 123R permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date; (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No.

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

123R for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. We have determined that we will adopt the “modified prospective” method under SFAS No. 123R. While SFAS No. 123R permits entities to continue use of the Black-Scholes option pricing model, SFAS No. 123R also permits the use of a “binomial model.” We currently expect that we will continue to utilize the Black-Scholes option pricing model upon the adoption of SFAS No. 123R. Had we adopted SFAS No. 123R in prior periods based on our use of the Black-Scholes option pricing model, the impact of that standard would have approximated the impact of SFAS No. 123R as described above in the disclosure of pro forma net income (loss) and pro forma basic and diluted EPS.

     During fiscal 2004, the Compensation Committee determined that all stock incentive awards for employees of the Company, including officers, commencing in 2005, would take the form of performance shares. These performance shares will take the place of the Company’s historical practice of issuing stock options as a form of stock incentive.

     In accordance with APB Opinion No. 25, we recorded compensation expense related to performance shares each quarter based on the difference between the current market price of our common stock as of period end and the original grant price. This adjustment was recorded each quarter throughout fiscal 2005 and fiscal 2004. Our deferred stock unit plan requires liability treatment and, as such, has been, and will continue to be, accounted for under variable accounting where each period presented will be adjusted based on the current market price of our common stock. Due to the implementation of SFAS No. 123R, beginning in fiscal 2006, all options and performance shares will have fixed accounting treatment based on the market price on the date of grant and will be recorded as compensation expense, and reflected within general and administrative expenses in our consolidated statement of operations.

     The table below illustrates the anticipated pre-tax impact for fiscal 2006 as a result of the adoption of SFAS No. 123R, for our current commitment for outstanding stock options and performance shares. These amounts were valued using the Black-Scholes option pricing model.

Pro forma Compensation Expense

						Performance
(in thousands)		Options				Shares				Total
Q1 2006		$	153			$	213			$	366
Q2 2006			129				213				342
Q3 2006			88				213				301
Q4 2006			74				213				287
		$	444			$	852			$	1,296