SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: November 25, 1998
(Date of earliest event reported)
NATHAN'S FAMOUS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-3189 11-3166443
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
1400 Old Country Road, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code (516) 338-8500
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
ITEM 7. Financial Statements, Pro Forma Financial
Information and Exhibits
(a) Financial Statements of Business Acquired. The financial statements of
Miami Subs Corporation are attached hereto.
(b) Pro forma Financial Information. The required pro forma financial
information is attached hereto.
(c) Exhibits.
(3) Consent of KPMG Peat Marwick LLP
Independent Auditors' Report
The Board of Directors and Shareholders
Miami Subs Corporation:
We have audited the accompanying consolidated balance sheet of Miami Subs
Corporation and subsidiaries as of May 31, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Miami Subs
Corporation and subsidiaries as of May 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Fort Lauderdale, Florida
July 31, 1998, except as to note 12, which
is as of January 15, 1999
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEET
May 31, 1998
ASSETS
- -------
CURRENT ASSETS
Cash and cash equivalents $ 3,457,000
Notes and accounts receivable - net 1,743,000
Food and supplies inventories 179,000
Other 77,000
-----------
Total Current Assets 5,456,000
Notes receivable 6,076,000
Property and equipment - net 11,612,000
Intangible assets - net 6,718,000
Other 464,000
-----------
TOTAL $30,326,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,276,000
Current portion of notes payable and
capitalized lease obligations 1,092,000
-----------
Total Current Liabilities 5,368,000
Long-term portion of notes payable and
capitalized lease obligations 5,613,000
Deferred franchise fees and other
deferred income 1,577,000
Accrued liabilities and other 1,735,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized
12,500,000 shares 71,000
Additional paid-in capital 24,777,000
Accumulated deficit (7,208,000)
-----------
17,640,000
Note receivable from sale of stock (563,000)
Treasury Stock (1,044,000)
-----------
Total Shareholders' Equity 16,033,000
-----------
TOTAL $30,326,000
===========
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended May 31, 1998
REVENUES
- --------
Restaurant sales $18,088,000
Revenues from franchised restaurants 4,293,000
Net gain from sales of restaurants 25,000
Interest income 678,000
Other revenues 350,000
-----------
Total 23,434,000
-----------
EXPENSES
- --------
Restaurant operating costs (including lease
costs paid to Kavala, Inc. of $175,000) 17,138,000
General, administrative and franchise costs 3,336,000
Depreciation and amortization 1,444,000
Interest expense 780,000
-----------
Total 22,698,000
-----------
Income before income taxes 736,000
Provision for income tax (211,000)
-----------
Net income $ 525,000
===========
Net income per share:
Basic $ .08
======
Diluted $ .08
======
Shares used in computing net income per share:
Basic 6,780,000
=========
Diluted 6,780,000
=========
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Year Ended May 31, 1998
Additional Note
Common Common Paid-In Accumulated Receivable- Treasury
Stock Shares Stock Amount Capital Deficit Stock Sale Stock Total
------------ ------------ ------------ ------------ ------------ --------- -----
Balance at May 31, 1997 7,061,085 $71,000 $24,777,000 $ (7,733,000) $ (563,000) $(1,044,000) $15,508,000
Net income 525,000 525,000
----------- ----------- ----------- ------------ ------------ ------------ -----------
Balance at May 31, 1998 7,061,085 $71,000 $24,777,000 $(7,208,000) $ (563,000) $(1,044,000) $16,033,000
=========== =========== =========== ============ ------------ ------------ -----------
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended May 31, 1998
OPERATING ACTIVITIES:
Net income $ 525,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,010,000
Amortization of intangible assets 434,000
Net gain and franchise fees on sales of
restaurants (25,000)
Changes in assets and liabilities:
Decrease in accounts receivable 21,000
Decrease in food and supplies inventories 13,000
Decrease in other assets 83,000
Decrease in accounts payable and accrued
liabilities (415,000)
Decrease in deferred franchise fees and
other deferred income (441,000)
----------
Net Cash Provided By Operating Activities 1,205,000
----------
INVESTING ACTIVITIES:
Purchase of property and equipment (264,000)
Proceeds from sales of restaurants 20,000
Payments received on notes receivable 845,000
----------
Net Cash Provided By Investing Activities 601,000
----------
FINANCING ACTIVITIES:
Proceeds from borrowings 425,000
Repayment of debt (1,714,000)
----------
Net Cash Used In Financing Activities (1,289,000)
----------
INCREASE IN CASH 517,000
CASH AT BEGINNING OF PERIOD 2,940,000
----------
CASH AT END OF PERIOD $3,457,000
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $784,000
Loans to franchisees in connection with sales
of restaurants $345,000
Acquisition of restaurants in exchange for
notes receivable $1,814,000
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
MIAMI SUBS CORPORATION (the "Company") operates and franchises quick
service restaurants under the names "Miami Subs" and "Miami Subs Grill". At
May 31, 1998, there were 191 restaurants operating in the Miami Subs
system, of which 17 were operated by the Company and 174 were operated by
franchisees. Eight of the Company operated restaurants and 122 of the
franchised restaurants are located in Florida.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
Financial Statement Estimates
-----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents includes cash on hand and on deposit, highly
liquid instruments with maturities of three months or less, and unexpended
marketing fund contributions of $970,000 at May 31, 1998.
Franchise Operations
--------------------
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing
funds, and in certain cases, revenue from sub-leasing restaurant properties
to franchisees. Initial franchise fees are recognized as income when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which generally occurs when the
franchised restaurant commences operations. Development fees are
non-refundable and the related agreements require the franchisee to open a
specified number of restaurants in the development area within a specified
time period or the agreements may be canceled by the Company. Revenue from
development agreements is deferred and recognized as restaurants in the
development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively cancelled. Royalties, which are based upon a
percentage of the franchisee's gross sales, are recognized as income when
the fees are earned and become receivable and collectible. Revenue from
sub-leasing properties to franchisees is recognized as income as the
revenue is earned and becomes receivable and collectible. Sub-lease rental
income is presented net of associated lease costs in the accompanying
consolidated financial statements.
Marketing contributions are offset against the related costs incurred.
Contributions received in excess of expenditures are classified as current
liabilities in the accompanying consolidated financial statements.
Revenues from franchised restaurants for the year ended May 31, 1998
consist of the following:
Royalties $3,687,000
Franchise and development fees 598,000
Sublease rental income (net) 8,000
----------
Total $4,293,000
==========
Sales of Restaurants
--------------------
Gains on the sale of restaurants are recorded as income when the sales are
consummated and other conditions are met, including adequacy of down payment
and the completion by the Company of its obligations under the contracts.
Until such conditions are met, such gains are included in deferred income.
Losses on the sale of restaurants are recognized at the time of sale.
Food and Supplies Inventories
-----------------------------
Food and supplies inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated depreciation and
amortization. Additions and renewals are charged to the property accounts
and expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation and amortization are expensed on the straight-line
method over the lesser of the lease term (including option periods) or the
estimated useful lives of the assets.
Intangible Assets
-----------------
Costs incurred to acquire the trademark and franchise rights to the Miami
Subs concept and other intangibles, consisting principally of royalty rights
acquired, are amortized over a twenty year period on a straight line basis.
Restaurants acquired are accounted for under the purchase method and
recorded at the estimated fair value of the equipment and building
improvements acquired. The excess of cost over the fair value of the assets
acquired, including goodwill if any, is amortized using the straight-line
method over the remaining term of the underlying property leases, but not in
excess of 20 years. At each balance sheet date, the Company evaluates the
realizability of goodwill based upon expectations of operating income for
each restaurant having a material goodwill balance. Should the Company
determine it probable that future estimated undiscounted related operating
income from any of its acquired restaurants will be less than the carrying
amount of the associated goodwill, an impairment of goodwill would be
recognized, and goodwill would be reduced to the amount estimated to be
recoverable. The Company believes that no material impairment of goodwill
exists at May 31, 1998.
Accounting for the Impairment Of Long-Lived Assets
--------------------------------------------------
The Company accounts for the possible impairment of long-lived assets under
the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed Of." Under SFAS No. 121, the Company evaluates whether
events and circumstances have occurred that indicate revision to the
remaining useful life or the remaining balances of long-lived assets,
including intangible assets and goodwill, may be appropriate. When factors
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows expected to result from the use of
such asset and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Company will recognize an impairment loss
equal to the excess of the carrying amount over the fair value of the asset.
Income Taxes
------------
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("Statement 109"). Under Statement 109, deferred tax assets and liabilities
are determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the year
that includes the enactment date.
Employee Stock Options
----------------------
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and accordingly, no compensation cost has been recognized for
stock options issued to employees in the consolidated financial statements.
Net Income Per Share
--------------------
In February 1998, the Company adopted the provisions of SFAS No. 128,
Earnings per Share, which establishes new guidelines for the calculation of
earnings per share. Under SFAS 128, basic earnings per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised. Diluted earnings per share is the same as
basic earnings per share for the period presented since the exercise price
of outstanding options and warrants to purchase common shares was greater
than the average market price of the common shares.
Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The estimated fair value of financial instruments has been determined based
on available information and appropriate valuation methodologies. The
carrying amounts of accounts receivable, accounts payable and accrued
liabilities approximate fair value due to the short-term nature of the
accounts. The fair value of long-term notes receivable and notes payable
approximate the carrying value of such assets and liabilities as of May 31,
1998.
2. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable at May 31, 1998 consist of the following:
Notes receivable $7,112,000
Royalties and other receivables due from
franchisees 666,000
Other 229,000
----------
Total 8,007,000
Less allowance for doubtful accounts (188,000)
----------
7,819,000
Less notes receivable due after one year (6,076,000)
----------
Notes and accounts receivable-current portion $1,743,000
==========
Notes receivable at May 31, 1998, principally result from sales of
restaurant businesses to franchisees and are generally guaranteed by the
purchaser and collateralized by the restaurant businesses and assets sold.
The notes are generally due in monthly installments of principal and
interest, with interest rates ranging principally between 8% and 12%.
3. PROPERTY AND EQUIPMENT
Property and equipment at May 31, 1998 consist of the following:
Land 2,231,000
Buildings and leasehold improvements 7,919,000
Furniture and equipment 5,154,000
Property held under capitalized leases 632,000
Property and equipment at cost 15,936,000
Less accumulated depreciation and amortization (4,324,000)
-----------
Property and equipment - net $11,612,000
===========
4. INTANGIBLE ASSETS
Intangible assets at May 31, 1998 consist of the following:
Trademark and franchise rights $2,774,000
Excess of costs over fair value of net assets
acquired 5,903,000
----------
8,677,000
Less accumulated amortization (1,959,000)
----------
Intangible assets - net $6,718,000
==========
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at May 31, 1998 consist of the
following:
Accounts payable $1,113,000
Accrued wages and related liabilities 459,000
Accrued real estate and sales taxes 564,000
Legal and related 211,000
Marketing fund contributions 970,000
Other 959,000
----------
Total $4,276,000
==========
6. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations at May 31, 1998
is as follows:
Various notes payable to banks at prime plus 1.5% (10.0% at May 31, 1998),
secured by accounts and notes receivable, land, restaurant property and
equipment and due in monthly payments through 2003 $4,420,000
Note payable at 11.5%, secured by five restaurants and equipment, payable in
equal monthly installments through 2001 744,000
8.75%- 11.5% mortgages and notes payable, secured by various restaurant
properties and equipment and due in varying monthly installments through
2003 743,000
103/8% mortgage note payable, secured by corporate office building, due in
monthly payments through 2007 451,000
Note payable at prime plus 2.0% (10.5% at May 31, 1998), secured by leased
restaurant properties and equipment, due in monthly payments through 2001 160,000
Capitalized lease obligations 187,000
----------
Total 6,705,000
Less current portion (1,092,000)
----------
Long-term portion $5,613,000
==========
The above notes are secured by property and equipment with a book value of
approximately $6,700,000 at May 31, 1998, and notes and accounts receivable
of approximately $2,000,000.
At May 31, 1998, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31,
2003, are $1,092,000, $857,000, $3,076,000, $151,000 and $530,000,
respectively, and $999,000 thereafter.
Total interest costs incurred for the year ended May 31, 1998, was $780,000.
7. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
Deferred franchise fees and other deferred income at May 31, 1998 consist of
the following:
Development fees $ 390,000
Franchise fees 135,000
Deferred gains and vendor rebates 1,052,000
----------
Total $1,577,000
==========
8. INCOME TAXES
The primary components that comprise the deferred tax assets and liabilities
at May 31, 1998 are as follows:
Deferred tax assets:
Accounts and notes receivable $ 68,000
Other liabilities and reserves 796,000
Deferred income and franchise deposits 142,000
Other 75,000
Net operating loss and other carry-forwards 2,604,000
-----------
Total deferred tax assets 3,685,000
-----------
Deferred tax liabilities:
Property and equipment 466,000
Intangible assets 217,000
Other 241,000
-----------
Total deferred tax liabilities 924,000
-----------
Subtotal 2,761,000
Less valuation allowance (2,761,000)
-----------
Net deferred tax assets $ -
===========
The net change in the valuation allowance for the year ended May 31, 1998
was a decrease of $494,000.
At May 31, 1998, the Company had no deferred tax assets or liabilities
reflected on its consolidated financial statements since net deferred tax
assets are offset by a valuation allowance. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the level of
historical operating results, scheduled reversal of deferred tax
liabilities, and projected future taxable income in making this assessment.
The difference between the actual tax provision and the tax provision by
applying the statutory federal income tax rate at May 31, 1998 is
attributable to the following:
Statutory federal income tax rate 34.0%
Intangible costs amortized 4.9
Other 1.8
Operating losses utilized (14.8)
-----
Effective income tax rate 25.9%
=====
At May 31, 1998, the Company's tax returns reflect net operating loss
carry-forwards of approximately $6.4 million which are available to reduce
future taxable income through 2012 (subject to limitations imposed under the
Internal Revenue Code regarding changes in ownership which limits
utilization of $2.8 million of the carry-forwards on an annual basis to
approximately $340,000). The Company also has general business credit
carry-forwards of approximately $274,000 which can be used to offset tax
liabilities through 2010. The Company's federal income tax returns for
fiscal years 1991 through 1996, inclusive, have been examined by the
Internal Revenue Service, and the IRS has issued reports for such years
reflecting substantial adjustments to previously filed tax returns. The
Company has appealed many of the proposed adjustments. If the Company is not
successful in its appeal, the Company's net operating loss carryovers would
be substantially absorbed by the proposed adjustments and significant
amounts of additional taxes, interest, and penalties would be due. The
Company believes that the accruals that it has provided in connection with
this matter are adequate.
9. COMMITMENTS AND CONTINGENCIES
The Company is the prime lessee under various land and building leases for
restaurants operated by the Company and its franchisees. The leases
generally have initial terms ranging from five to 20 years and usually
provide for renewal options ranging from five to 20 years. Most of the
leases contain escalation clauses and common area maintenance charges
(including taxes and insurance). Certain of the leases require additional
(contingent) rental payments if sales volumes at the related restaurants
exceed specified limits. Base rent expense for Company operated restaurants
for the year ended May 31, 1998 was approximately $1,561,000. Additional
(contingent) rental payments were approximately $44,000 in 1998.
The Company also owns or leases sites which it leases or subleases to
franchisees. The Company remains liable for all lease costs when properties
are subleased to franchisees. In addition, the Company guarantees the lease
payments of certain franchised locations, aggregating approximately $173,000
for each of the next two years, and approximately $60,000 per year
thereafter through 2014.
The Company also subleases non-Miami Subs locations to third parties. Such
subleases provide for minimum annual rental payments by the Company
aggregating approximately $205,000 and expire on various dates through 2004
exclusive of renewal options.
The Company's future minimum rental commitments and sublease rental income
as of May 31, 1998 for all noncancellable capital and operating leases are
as follows:
Capital Operating Sublease
Fiscal Year Leases Leases Rental Income
- ----------- ------- --------- -------------
1999 $113,000 $ 5,276,000 $ 3,808,000
2000 12,000 5,164,000 3,674,000
2001 12,000 4,999,000 3,485,000
2002 12,000 4,774,000 3,319,000
2003 12,000 4,232,000 2,944,000
Thereafter 81,000 24,623,000 22,392,000
-------- ----------- -----------
Total 242,000 $49,068,000 $39,622,000
=========== ===========
Less amount representing interest (55,000)
Present value of future minimum --------
lease payments $187,000
========
The Company guarantees certain equipment financing for franchisees with a
third party lender. The Company's maximum obligation for all loans funded
by the lender as of May 31, 1998, was approximately $1,263,000.
Litigation
---------
In January, 1992, the Company filed a Petition for Declaratory Judgment
against a third party seeking to dissolve an alleged joint venture between
the Company and the third party. The third party opposed the dissolution,
counterclaimed, and sought damages arising from amounts expended in
developing new locations and lost profits from the termination of the joint
venture. A bench trial was completed in April 1995, and the court
subsequently awarded the defendant damages in the amount of $241,000 plus
costs and attorney fees. The case was appealed by both the Company and the
third party, and in November 1996, the appeal was argued before the Supreme
Court of New Hampshire. In December 1997, the Supreme Court ruled in favor
of the Company, vacated the damage award, reversed the award of attorney
fees, and remanded to a trial court for a determination of damages for the
alleged breach of fiduciary duty to the partnership. In May 1998, the trial
court awarded the third party compensatory damages in the amount of
$200,000, which is being appealed by the Company. The Company is fully
accrued for this matter at May 31, 1998.
In connection with the above case and the favorable resolution of other
legal matters, in 1998 the Company reduced its legal accrual by $219,000.
The Company and its subsidiaries are parties to various other legal actions
arising in the ordinary course of business. The Company is vigorously
contesting these actions and currently believes that the outcome of such
cases will not have a material adverse effect on the Company.
10. STOCK OPTION PLAN AND WARRANTS
The Company's stock option plan provides for the granting of non-qualified
stock options for the purchase of up to 1,875,000 shares of common stock of
the Company by directors, officers, employees and consultants. Under the
terms of the plan, options may be granted for a term of up to 10 years at a
price not less than the market value of the common stock on the date of
grant.
The following is a summary of stock option activity under the plan during
the year ended May 31, 1998:
Shares Under Weighted Average
Option Price Per Share
------------ ----------------
Balance at May 31, 1997 1,104,175 $11.96
Granted and repriced 487,500 3.00
Exercised - -
Cancelled (962,250) $12.48
--------- ------
Balance at May 31, 1998 629,425 $4.24
========= ======
Options exercisable at May 31, 1998 629,425 $4.24
========= ======
During 1998, 341,500 outstanding stock options at an average exercise price
of $8.80 per share were amended to reduce the exercise price to $3.00 per
share, representing the market value of the common stock at the time of the
amendment.
The Company accounts for employee stock options in accordance with the
intrinsic value method prescribed in APB No. 25. Accordingly, no
compensation cost is recognized at the time stock options are granted. Had
employee compensation expense been determined based on the fair value at the
grant date for options granted during the year ended May 31, 1998 consistent
with the provisions of SFAS No. 123, net income (loss) would have been
$(57,000), and basic and diluted net income (loss) per share would have been
$ .00. The fair market value of each option grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected option term of 10 years; expected volatility of 58.2%
in 1998; risk free interest rate of 6.75%; and zero dividend yield.
At May 31, 1998, 102,400 options and 25,000 warrants are outstanding at
average exercise prices of $8.64 and $24.00 per share, respectively.
11. RELATED PARTY TRANSACTIONS
At May 31, 1998, the Company leased six restaurant properties from Kavala,
Inc., a private company owned by the Company's then chairman of the board
and chief executive officer, Gus Boulis. Rent expense for all leases between
the Company and Kavala was $424,000 in 1998. Future minimum rental
commitments due to Kavala at May 31, 1998 under existing leases was
approximately $414,000 for each of the next four years, $337,000 for 2003,
and $1,938,000 for all remaining years thereafter. The Company believes that
rents charged under these leases are not materially different from the rents
that would have been incurred or obtained from leasing arrangements with
unaffiliated parties or on a stand alone basis.
In February 1998, the Company entered into a management agreement with
Boulis providing for the Company to manage an existing Miami Subs Grill
restaurant owned by Boulis for a fee of 5.0% of the restaurant's gross
restaurant sales. The agreement was terminated in June 1998 upon the sale of
the restaurant to a third party franchisee.
Mr. Bartsocas, who was an officer of the Company at May 31, 1998, was also
an officer and director of Subies Enterprises, Inc. ("Subies"), a franchisee
of the Company. Under an agreement which was entered into in 1991 between
the Company and Subies, Subies paid a franchise fee of $5,000 for each of
five restaurants developed by Subies, and Subies was exempt from paying
royalty fees on the restaurants as long as the restaurants were owned by
Subies. Three of the restaurants were subsequently sold to independent
franchisees.
Mr. Donald L. Perlyn, who has been an officer of the Company since 1990 and
a director since 1997, was appointed president and chief operating officer
of the Company in July 1998. Mr. Perlyn is also an officer and principal of
DEMAC Restaurant Corp. which owns and operates a Miami Subs Grill
restaurant in Florida. In connection with his appointment in July, Mr.
Perlyn agreed to sell to the Company the Miami Subs restaurant owned by
DEMAC for approximately $260,000. Mr. Perlyn was also indebted to the
Company in the amount of $85,000 at May 31, 1998. The loan incurs interest
at an interest rate of prime plus 1.5%, and is due in full in June 1999.
In November 1997, an existing Miami Subs Grill restaurant owned by the
Company was reopened as a co- branded unit with Arthur Treacher's, Inc.
("Treacher's"). Treacher's is operating and managing the restaurant pursuant
to an agreement with the Company. Under the terms of the agreement, the
Company and Treacher's share in the operating profits of the restaurant, and
Treacher's has an option to acquire the restaurant from the Company. Mr.
Bruce Galloway is a member of the board of directors of the Company and is
Chairman of the Board of Treacher's.
In March 1995, the Company's former chairman of the board and president
exercised options to acquire 112,500 shares of common stock of the Company.
As payment for the stock, the Company received a non-interest bearing note
in the amount of $563,000 which is collateralized by the stock and due in
full in January 1999.
12. SUBSEQUENT EVENTS
On December 29, 1998, the Company's Board of Directors unanimously adopted a
resolution to amend the Company's Articles of Incorporation to effect, as of
the close of business on January 7, 1999, a one-for-four reverse stock split
of the Company's common stock, pursuant to which each four shares of common
stock were converted into one share of common stock. All amounts in the
accompanying consolidated financial statements have been adjusted to reflect
the reverse stock split. Prior to the reverse stock split, basic and diluted
net income per share for the year ended May 31, 1998 was $ .02, which was
based on average shares outstanding of 27,119,000.
On January 15, 1999, the Company and Nathan's Famous, Inc. ("Nathan's")
entered into a definitive merger agreement pursuant to which Nathan's has
proposed to acquire all of the outstanding shares of common stock of the
Company for shares of Nathan's common stock. The proposed merger is subject
to certain conditions, including completion of due diligence, receipt of a
fairness opinion, and approval by a majority of the shareholders of both
Nathan's and Miami Subs. In November 1998, Nathan's acquired, in a private
transaction, approximatley 30% of the outstanding common stock of the
Company.
Also in January 1999, the Company was served with a class action law suit
which was filed against the Company, its directors and Nathan's in a Florida
state court by a shareholder of the Company. The suit alleges that the
proposed merger between the Company and Nathan's is unfair to the Company's
shareholders and constitutes a breach by the defendants of their fiduciary
duties to the shareholders of the Company. The plaintiff seeks among other
things (i) class action status, (ii) preliminary and permanent injunctive
relief against consummation of the proposed merger and (iii) unspecified
damages to be awarded to the shareholders of the Company. The Company
believes that the suit is without merit and intends to defend against it
vigorously.
NATHAN'S FAMOUS, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 27, 1998
(In thousands, except share amounts)
Nathan's
Famous Pro Forma
Inc. Adjustments Pro Forma
-------- ----------- ---------
Current assets:
Cash and marketable securities $ 490 $ 490
Marketable investment securities 9,261 (4,260)(a) 5,001
Franchise and other receivables, net 1,798 1,798
Inventory 328 328
Prepaid expenses and other current assets 226 226
Deferred income taxes 566 566
------- ------- -------
Total current assets 12,669 (4,260) 8,409
Property and equipment, net 6,562 6,562
Intangible assets, net 11,076 11,076
Investment in affiliate --- 4,260(a) 4,260
Other assets, net 194 194
------- ------- -------
$30,501 $ -0- $30,501
======= ======= =======
Current liabilities:
Accounts Payable $ 887 $ 887
Accrued expenses and other current
liabilities 4,168 4,168
Deferred franchise fees 315 315
Current installment of obligations under capital
leases 13 13
------- -------- -------
Total current liabilities 5,383 -0- 5,383
------- -------- -------
Obligations under capital leases, net of current
installments 3 3
Other liabilities 181 181
------- -------- -------
Total liabilities 5,567 -0- 5,567
------- -------- -------
Stockholders' equity:
Common stock, $.01 par value - 20,000,000 shares
Authorized, 4,722,216 issued and outstanding 47 47
Additional paid-in-capital 32,412 32,412
Accumulated deficit (7,525) (7,525)
------- -------- -------
Total stockholders' equity 24,934 -0- 24,934
------- -------- -------
$30,501 -0- $30,501
------- -------- =======
The accompanying notes are an integral part
of these unaudited pro forma financial statements.
NATHAN'S FAMOUS, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE TWENTY-SIX WEEKS ENDED SEPTEMBER 27, 1998 (In thousands,
except share amounts)
Nathan's
Famous Pro Forma
Inc. Adjustments Pro Forma
-------- ----------- ---------
Sales $13,357 $13,357
Franchise fees and royalties 1,674 1,674
License royalties 837 837
Equity in income of affiliate -0- 156 (b) 156
Investment and other income 119 (107)(c) 12
------- ------ -------
Total revenues 15,987 49 16,036
Costs and expenses
Cost of sales 8,147 8,147
Restaurant operating expenses 2,908 2,908
Depreciation and amortization 522 522
Amortization of intangible assets 192 192
General and administrative 2,466 2,466
Interest expense 1 1
------- ------ -------
Total costs and expenses 14,236 -0- 14,236
------- ------ -------
Earnings before income taxes 1,751 49 1,800
Provision for income taxes 426 -0- 426
------- ------ -------
Net earnings $ 1,325 $ 49 $ 1,374
======= ====== =======
PER SHARE DATA
Net earnings per share
Basic $ 0.28 $ 0.29
======= =======
Diluted $ 0.28 $ 0.29
======= =======
Shares used in computing net income
Basic 4,722 4,722
======= =======
Diluted 4,754 4,754
======= =======
The accompanying notes are an integral
part of these unaudited pro forma
financial statements.
NATHAN'S FAMOUS, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE FIFTY-TWO WEEKS ENDED MARCH 29, 1998
(In thousands, except share amounts)
Nathan's
Famous Pro Forma
Inc. Adjustments Pro Forma
-------- ------------ ---------
Sales $23,530 $23,530
Franchise fees and royalties 3,062 3,062
License royalties 1,495 1,495
Equity in income of affiliate -0- 157 (b) 157
Investment and other income 790 (215)(c) 575
-------- ----- -------
Total revenues 28,877 (58) 28,819
Costs and expenses
Cost of sales 14,468 14,468
Restaurant operating expenses 6,411 6,411
Depreciation and amortization 1,035 1,035
Amortization of intangible assets 384 384
General and administrative 4,755 4,755
Interest expense 6 6
-------- ----- -------
Total costs and expenses 27,059 -0- 27,059
-------- ----- -------
Earnings before income taxes 1,818 (58) 1,760
Provision for income taxes 290 -0- 290
-------- ----- -------
1,818 290
-------
Net earnings $ 1,528 $ (58) $ 1,470
======== ===== =======
PER SHARE DATA
Net earnings per share
Basic $ 0.32 $ 0.31
======= =======
Diluted $ 0.32 $ 0.31
======= =======
Shares used in computing net income
Basic 4,722 4,722
======= =======
Diluted 4,749 4,749
======= =======
The accompanying notes are an integral
part of these unaudited pro forma
financial statements.
NATHAN'S FAMOUS, INC
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
On November 25, 1998, Nathan's Famous, Inc. ("Nathan's") acquired 8,121,000
shares of Miami Subs Corporation ("MSC") in a private purchase transaction from
Gus Boulis in consideration of the sum of $4.2 million in cash. The 8,121,000
shares are approximately 30% of the issued and outstanding shares of MSC. This
transaction will be accounted for under the equity method of accounting for
investments. Additionally, Nathan's has executed a merger agreement with MSC
whereby Nathan's would acquire the remaining outstanding shares of MSC in
exchange for approximately 2.4 million shares of Nathan's Common Stock and
approximately 600,000 warrants.
The unaudited pro forma balance sheet combines the unaudited consolidated
balance sheet of Nathan's as of September 27, 1998 as if the purchase had
occurred on that date. The unaudited pro forma income statement for the year
ended March 29, 1998 combines Nathan's results of operations for the year ended
March 29, 1998 with Nathan's share of MSC's results of operations for the year
ended May 31, 1998, assuming that the transaction occurred at the beginning of
Nathan's fiscal year. The pro forma income statement for the six months ended
September 27, 1998 combines Nathan's unaudited results of operations for the six
months ended September 27, 1998 with Nathan's share of the unaudited results of
operations of MSC for the six months ended November 30, 1998, assuming that the
transaction occurred at the beginning of Nathan's fiscal year.
The unaudited pro forma financial statements should be read in conjunction with
Nathan's consolidated financial statements and notes thereto, and the financial
statements and notes thereto of MSC. The pro forma adjustments are based upon
the historical financial position and results of operations for the periods
presented. The pro forma financial data does not purport to represent what
Nathan's consolidated financial position or results of operations would actually
have been if the investment in MSC had occurred at the dates indicated; or to
project Nathan's financial position or results of operations for any future
period. The pro forma combined results may not be comparable to or indicative of
future performance.
2. UNAUDITED PRO FORMA ADJUSTMENTS:
-------------------------------
Descriptions of the adjustments included in the unaudited pro forma financial
statements are as follows:
(a) Reflects $4.2 million in cash consideration paid upon closing to acquire
approximately 30% of the outstanding common stock and $60,000 in estimated
direct costs.
(b) Reflects Nathan's equity in MSC's net income.
(c) Reflects adjustment to reduce the tax exempt interest income earned on the
marketable investments used to purchase the MSC common stock.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nathan's Famous, Inc.
By: /s/ Wayne Norbitz
----------------------------------------
Wayne Norbitz
President and Chief Operating Officer
Date: February 5, 1999
Independent Auditors' Consent
The Board of Directors
Miami Subs Corporation:
We consent to the inclusion of our report dated July 31, 1998, except as to note
12, which is as of January 15, 1999, with respect to the consolidated balance
sheet of Miami Subs Corporation and subsidiaries as of May 31, 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended, which report appears in the Form 8-K/A of Nathan's
Famous, Inc. and subsidiaries dated November 25, 1998.
/S/ KPMG LLP
Fort Lauderdale
February 1, 1999
