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: September 30, 1999
(Date of earliest event reported)
NATHAN'S FAMOUS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-3189 11-3166443
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
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 of 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.
23 Consent of KPMG LLP
MIAMI SUBS CORPORATION
MAY 31, 1999
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
The Board of Directors and Shareholders
Miami Subs Corporation:
We have audited the accompanying consolidated balance sheets of Miami Subs
Corporation and subsidiaries as of May 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended May 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Miami Subs
Corporation and subsidiaries as of May 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1999 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
Fort Lauderdale, Florida
August 6, 1999
MIAMI SUBS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31 May 31
1999 1998
----------- -----------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents (including unexpended marketing fund
contributions of $1,680,000 and $970,000, respectively) $ 4,775,000 $ 3,457,000
Notes and accounts receivable - net 1,382,000 1,743,000
Food and supplies inventories 173,000 179,000
Other 183,000 77,000
----------- -----------
Total Current Assets 6,513,000 5,456,000
Notes receivable 4,867,000 6,076,000
Property and equipment - net 11,003,000 11,612,000
Intangible assets - net 6,304,000 6,718,000
Other 501,000 464,000
----------- -----------
TOTAL $29,188,000 $30,326,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 5,041,000 $ 4,276,000
Current portion of notes payable and capitalized lease obligations 908,000 1,092,000
----------- -----------
Total Current Liabilities 5,949,000 5,368,000
Long-term portion of notes payable and capitalized lease obligations 4,764,000 5,613,000
Deferred franchise fees and other deferred income 903,000 1,577,000
Accrued liabilities and other 965,000 1,735,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,500,000 shares 71,000 71,000
Additional paid-in capital 24,777,000 24,777,000
Accumulated deficit (6,634,000) (7,208,000)
----------- -----------
18,214,000 17,640,000
Note receivable from sale of stock - (563,000)
Treasury Stock (1,607,000) (1,044,000)
----------- -----------
Total Shareholders' Equity 16,607,000 16,033,000
----------- -----------
TOTAL $29,188,000 $30,326,000
=========== ===========
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
1999 1998 1997
----------- ----------- -----------
REVENUES
- --------
Restaurant sales $18,369,000 $18,088,000 $28,180,000
Revenues from franchised restaurants 4,462,000 4,293,000 4,514,000
Net gain from sales of restaurants 70,000 25,000 868,000
Interest income 584,000 678,000 612,000
Other revenues 374,000 350,000 259,000
----------- ----------- -----------
Total 23,859,000 23,434,000 34,433,000
----------- ----------- -----------
EXPENSES
- --------
Restaurant operating costs 17,042,000 17,138,000 26,042,000
General, administrative and franchise
costs 3,485,000 3,336,000 5,667,000
Depreciation and amortization 1,494,000 1,444,000 1,837,000
Interest expense 611,000 780,000 903,000
Loss on impairment of restaurants 220,000 - 375,000
Merger and related costs 299,000 - -
----------- ----------- -----------
Total 23,151,000 22,698,000 34,824,000
----------- ----------- -----------
Income (loss) before provision for
income taxes 708,000 736,000 (391,000)
Provision for income tax 134,000 211,000 -
----------- ----------- -----------
Net income (loss) $ 574,000 $ 525,000 $ (391,000)
========== =========== ===========
Net income (loss) per share:
Basic $ 0.09 $0.08 $(0.06)
====== ===== ======
Diluted $ 0.09 $0.08 $(0.06)
====== ===== ======
Shares used in computing net income
(loss) per share:
Basic 6,733,000 6,780,000 7,061,000
========== =========== ===========
Diluted 6,733,000 6,780,000 7,061,000
========== =========== ===========
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended May 31, 1999, 1998, and 1997
Additional
Preferred Preferred Common Common Paid-In Accumulated Note Treasury
Stock Shares Stock Amount Stock Shares Stock Amount Capital Deficit Receivable- Stock Total
------------ ------------ ------------ ------------ --------- ----------- ----------- -------- -----
Balance at May 31,1996 251,375 $2,000 6,809,710 $69,000 $24,777,000 $(7,342,000) $(563,000) $16,943,000
Preferred stock
conversions (251,375) (2,000) 251,375 2,000
Acquisition of treasury
stock - at cost $(1,044,000) (1,044,000)
Net Loss (391,000) (391,000)
------- ------ --------- -------- ----------- ----------- --------- ---------- -----------
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
Acquisition of treasury
stock - - - - - - 563,000 (563,000)
Net income 574,000 574,000
------- ------ --------- -------- ----------- ----------- --------- ---------- -----------
Balance at May 31,1999 - - 7,061,085 $71,000 $24,777,000 $(6,634,000) - $(1,607,000) $16,607,000
======= ====== ========= ======== =========== =========== ========= =========== ===========
See accompanying notes to consolidated financial statements.
MIAMI SUBS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
------------------
1999 1998 1997
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income (loss) $574,000 $525,000 $ (391,000)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,055,000 1,010,000 1,382,000
Amortization of intangible assets 439,000 434,000 455,000
Net gain and franchise fees on sales of restaurants (95,000) (25,000) (1,268,000)
Charge associated with note receivable - - 257,000
Loss on impairment of restaurants 220,000 - 375,000
Provision for doubtful accounts 114,000 - 150,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 86,000 21,000 (284,000)
Decrease in food and supplies inventories 6,000 13,000 189,000
(Increase) decrease in other current assets (106,000) - 141,000
(Increase) decrease in other assets (62,000) 83,000 101,000
Increase (decrease) in accounts payable and accrued liabilities 792,000 (415,000) (1,425,000)
Decrease in deferred franchise fees and other deferred income (306,000) (441,000) (44,000)
---------- ---------- ----------
Net Cash Provided By (Used In) Operating Activities 2,717,000 1,205,000 (362,000)
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of restaurants, property, and equipment (941,000) (264,000) (794,000)
Proceeds from sales of restaurants 80,000 20,000 1,487,000
Payments received on notes receivable 560,000 845,000 997,000
---------- ---------- ----------
Net Cash (Used In) Provided By Investing Activities (301,000) 601,000 1,690,000
---------- ---------- ----------
FINANCING ACTIVITIES:
Repayment of debt (1,098,000) (1,714,000) (1,491,000)
Proceeds from borrowings - 425,000 -
---------- ---------- ----------
Net Cash Used In Financing Activities (1,098,000) (1,289,000) (1,491,000)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH 1,318,000 517,000 (163,000)
Cash at beginning of period 3,457,000 2,940,000 3,103,000
---------- ---------- ----------
Cash at end of period $4,775,000 $3,457,000 $2,940,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $615,000 $784,000 $904,000
Loans to franchises in connection with sales of restaurants $1,015,000 $345,000 $6,207,000
Debt assumed in acquisition of restaurant $65,000 - $184,000
Acquisition of restaurants in exchange for notes receivable $1,331,000 $1,814,000 $180,000
Acquisition of treasury stock in exchange for note receivable $563,000 - $1,044,000
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, 1999, there were 182 restaurants operating in the Miami Subs
system, of which 15 were operated by the Company and 167 were operated by
franchisees. Ten of the Company operated restaurants and 114 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 $1,680,000 and $970,000 at May 31, 1999 and
1998, respectively.
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 canceled. 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 consist of the following:
Year Ended May 31,
------------------
1999 1998 1997
---------- ---------- ----------
Royalties $4,098,000 $3,687,000 $3,680,000
Franchise and development fees 414,000 598,000 707,000
Sublease rental income (expense) - net (50,000) 8,000 127,000
---------- ---------- ----------
Total $4,462,000 $4,293,000 $4,514,000
========== ========== ==========
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 or the estimated useful lives of
the assets. Property and equipment at May 31, 1999 includes the carrying
value of restaurants totaling $2,321,000 which are operated by third party
franchisees pursuant to management agreements with the Company. The
management agreement grants to the franchisee the option to acquire the
restaurant and its assets generally within a period of one year or less.
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 reliability 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, 1999 and 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. The Company recognized an impairment loss of $220,000 in 1999 and
$375,000 in 1997 to write-down the basis of certain restaurants operated by
the Company.
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 is recognized for stock
options issued to employees in the consolidated financial statements.
Net Income (Loss) Per Share
---------------------------
Basic and diluted earnings per share are calculated in accordance with the
provisions of SFAS No. 128, "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.
Options and warrants to purchase 1,084,554 shares of common stock at a
weighted-average exercise price of $4.44 per share were outstanding at May
31, 1999, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average
market price of the common shares.
Earnings per share amounts have been adjusted for all years presented to
reflect a one-for-four reverse split of the Company's common stock
effective January 1999.
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,
1999.
Segment Information
-------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations
and major customers. The Company adopted SFAS No. 131 effective May 31,
1999. Management operates the business of the Company as a single segment.
As a result, no additional disclosure was required.
Reclassification
----------------
Certain 1998 and 1997 balances have been reclassified to conform to the
1999 presentation.
2. MERGER
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 Miami
Subs for shares of Nathan's common stock plus warrants to acquire
additional shares of Nathan's common stock. Consummation of the merger is
subject to approval by a majority of the shareholders of both Miami Subs
and Nathan's and satisfaction of other customary closing conditions. Costs
incurred through May 31, 1999 in connection with the merger amounted to
$299,000 which have been expensed in the accompanying 1999 Statement of
Operations. In November 1998, Nathan's acquired in a private transaction
approximately 30% of the outstanding common stock of the Company.
3. NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
1999 1998
---------- ----------
Notes receivable from franchises $5,762,000 $7,112,000
Royalties and other receivables due from franchisees 429,000 666,000
Other 243,000 229,000
---------- ----------
Total 6,434,000 8,007,000
Less allowance for doubtful accounts (185,000) (188,000)
---------- ----------
6,249,000 7,819,000
Less notes receivable due after one year (4,867,000) (6,076,000)
---------- ----------
Notes and accounts receivable-current portion $1,382,000 $1,743,000
========== ==========
Notes receivable at May 31, 1999 and 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%.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999 1998
----------- -----------
Land $ 2,231,000 $ 2,231,000
Buildings and leasehold improvements 7,546,000 7,919,000
Furniture and equipment 5,953,000 5,154,000
Property held under capitalized leases 632,000 632,000
----------- -----------
Property and equipment at cost 16,362,000 15,936,000
Less accumulated depreciation and amortization (5,359,000 (4,324,000)
----------- -----------
Property and equipment - net $11,003,000 $11,612,000
=========== ===========
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
1999 1998
----------- -----------
Trademark and franchise rights $ 2,797,000 $ 2,774,000
Excess of costs over fair value of net assets
acquired and other intangibles 5,903,000 5,903,000
----------- -----------
8,700,000 8,677,000
Less accumulated amortization (2,396,000) (1,959,000)
----------- -----------
Intangible assets - net $ 6,304,000 $ 6,718,000
=========== ===========
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
1999 1998
----------- -----------
Accounts payable $ 1,165,000 $ 1,113,000
Accrued wages and related liabilities 535,000 459,000
Accrued real estate and sales taxes 480,000 564,000
Accrued legal fees and litigation 281,000 211,000
Marketing fund contributions 1,680,000 970,000
Other 900,000 959,000
----------- -----------
Total $ 5,041,000 $ 4,276,000
=========== ===========
7. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
1999 1998
----------- -----------
Various notes payable to banks at prime plus 1.5%
(9.25% at May 31, 1999), secured by accounts and
notes receivable, land, restaurant property and
equipment and due in monthly payments through 2004 $ 3,863,000 $ 4,420,000
Note payable at 11.5%, secured by five restaurants
and equipment, payable in equal monthly installments
through 2001 500,000 744,000
8.75% - 11.5% mortgages and notes payable, secured
by various restaurant properties and equipment and
due in varying monthly installments through 2004 694,000 743,000
10 3/8% mortgage note payable, secured by corporate
office building, due in monthly payments through 2007 417,000 451,000
Note payable at prime plus 2.0% (9.75% at May 31, 1999),
secured by leased restaurant properties and equipment,
due in monthly payments through 2001 113,000 160,000
Capitalized lease obligations 85,000 187,000
----------- -----------
Total 5,672,000 6,705,000
Less current portion (908,000) (1,092,000)
----------- -----------
Long-term portion $ 4,764,000 $ 5,613,000
=========== ===========
The above notes are secured by property and equipment with a book value of
approximately $6,038,000 at May 31, 1999, and notes and accounts receivable
of approximately $2,000,000.
At May 31, 1999, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years ending May 31,
2004, are $908,000, $1,611,000, $316,000, $696,000, and $323,000,
respectively, and $1,818,000 thereafter.
8. DEFERRED FRANCHISE FEES AND OTHER DEFERRED INCOME
Deferred franchise fees and other deferred income consist of the following:
1999 1998
----------- -----------
Development fees $ 298,000 $ 390,000
Franchise fees 102,000 135,000
Deferred gains and vendor rebates 503,000 1,052,000
----------- -----------
Total $ 903,000 $1,577,000
=========== ===========
9. INCOME TAXES
The primary components that comprise the deferred tax assets and
liabilities are as follows:
1999 1998
----------- -----------
Deferred tax assets:
Accounts and notes receivable $ 67,000 $ 68,000
Other liabilities and reserves 671,000 796,000
Deferred income and franchise deposits 108,000 142,000
Other 72,000 75,000
Net operating loss and other carry-forwards 2,289,000 2,604,000
Less valuation allowance (2,118,000) (2,761,000)
----------- -----------
Net deferred tax assets 1,089,000 924,000
=========== ===========
Deferred tax liabilities:
Property and equipment 545,000 466,000
Intangible assets 247,000 217,000
Other 297,000 241,000
----------- -----------
Total deferred tax liabilities 1,089,000 924,000
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
The net change in the valuation allowance for the year ended May 31, 1999
was a decrease of $643,000.
At May 31, 1999 and 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
reliability 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 is attributable to the
following:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% (34.0)%
Intangible costs amortized 5.4 4.9 12.5
Merger costs 14.4 - -
Charge associated with note receivable - - 22.3
Other 11.2 3.4 3.8
Change in valuation allowance (46.1) (16.4) (4.6)
---- ---- ----
Effective income tax rate 18.9% 25.9% - %
========================= ==== ==== ====
At May 31, 1999, the Company's tax returns reflect net operating loss
carry-forwards of approximately $5.5 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. The reports of the examining agent issued in
connection with these examinations indicate that additional taxes and
penalties totaling approximately $2.4 million are due for such years. The
Company is appealing substantially all of the proposed adjustments. Due to
net operating losses anticipated to be lost in connection with the
examination, the Company has accrued $345,000 for this matter and believes
that such accruals are adequate.
10. 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 years ended May 31, 1999, 1998, and 1997, was approximately
$1,667,000, $1,561,000, and $2,214,000, respectively. Additional
(contingent) rental payments were approximately $43,000, $44,000, and
$54,000, respectively, in 1999, 1998, and 1997.
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 two franchised locations, aggregating approximately $82,000
through June 2000.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company
aggregating approximately $118,000 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, 1999 for all noncancellable capital and operating leases are
as follows:
Capital Operating Sublease
Fiscal Year Leases Leases Rental Income
----------- ----------- ----------- -------------
2000 $ 89,000 $ 5,354,000 $3,214,000
2001 12,000 5,180,000 3,045,000
2002 12,000 4,690,000 2,626,000
2003 12,000 3,981,000 2,218,000
2004 12,000 3,222,000 2,002,000
Thereafter 69,000 19,299,000 11,614,000
--------- ----------- -----------
Total 206,000 $41,726,000 $24,719,000
=========== ===========
Less amount representing interest (46,000)
---------
Present value of future minimum lease payment $160,000
=========
The Company guarantees certain equipment financing for franchisees with a
third party lender. The Company's maximum obligation for loans funded by
the lender as of May 31, 1999, was approximately $1.2 million.
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, 1999.
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.
In January 1999, the Company was served with a class action lawsuit which
was filed against the Company, its directors, and Nathan's Famous, Inc. in
a Florida state court by a shareholder of the Company. The suit alleges
that the proposed merger between the Company and Nathan's, as contemplated
by the companies non-binding letter of intent, 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. In March 1999,
the court granted the plaintiff leave to amend the complaint and on April
8, 1999, the plaintiff filed an amended complaint. Miami Subs filed a
motion to dismiss the complaint on April 13, 1999 while Nathan's filed a
motion to dismiss on April 29, 1999. On May 21, 1999, the court considered
these motions to dismiss, but has yet to make a ruling. All discovery has
been stayed pending the court's ruling. The Company believes that the suit
is without merit and intends to defend against it vigorously.
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.
11. 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 have been granted for a term of 10 years at a
price not less than the market value of the common stock on the date of
grant. The options vest at the date of grant or at varying rates over a two
or three year period from the date of grant.
The following is a summary of stock option activity under the plan during
each of the last three years:
Shares Under Weighted Average
Option Price Per Share
------------ ----------------
Balance at May 31, 1996 1,443,025 $11.16
Granted 23,500 3.40
Canceled (362,350) 8.44
--------- ------
Balance at May 31, 1997 1,104,175 11.96
Granted and repriced 487,500 3.00
Canceled (962,250) 12.48
--------- ------
Balance at May 31, 1998 629,425 $4.24
Granted 344,104 2.07
Canceled (16,375) 3.00
--------- ------
Balanced at May 31, 1999 957,154 $ 3.49
========= ======
Options exercisable at May 31, 1999 957,154 $ 3.49
========= ======
At May 31, 1999, the weighted average remaining contract life of all
outstanding options under the plan was 6.29 years and the range of exercise
prices was $2.07 - $10.76.
The weighted average fair value of options granted during 1999, 1998, and
1997 was $1.48, $1.72, and $1.91, respectively.
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 in each of the last three years
consistent with the provisions of SFAS No. 123, net income (loss) would
have been $162,000, $(57,000), and $(334,000), and basic and diluted net
income (loss) per share would have been $ .02, $( .01), and $( .05),
respectively. 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 1999 and 27.1% in 1998 and 1997; risk free interest rate of
6.25% in 1999 and 6.75% in 1998 and 1997; and zero dividend yield.
At May 31, 1999, 102,400 options and 25,000 warrants are outstanding
outside of the Company's stock option plan at average exercise prices of
$8.64 and $24.00 per share, respectively.
12. RELATED PARTY TRANSACTIONS
At May 31, 1999, the Company leased five restaurant properties from Kavala,
Inc., a private company owned by the Company's former chairman of the board
and chief executive officer, Gus Boulis. Rent expense for all leases
between the Company and Kavala was $381,000 in 1999, $424,000 in 1998, and
$412,000 in 1997. Future minimum rental commitments due to Kavala at May
31, 1999 under these existing leases was approximately $1.5 million. In
fiscal year 1997, the Company leased a then vacant, non-Miami Subs property
to a company owned by Boulis. 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 November 1998, Boulis resigned all
positions with the Company.
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, a former officer of the Company, is 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.
Two of the five restaurants developed by Subies have been sold to
independent franchisees as of May 31, 1999.
Mr. Donald L. Perlyn has been an officer of the Company since 1990, a
director since 1997, and president and chief operating officer of the
Company since July 1998. Mr. Perlyn is also an officer and principal of
DEMAC Restaurant Corp. which owned and operated a Miami Subs Grill
restaurant in Florida. In connection with his appointment as president in
July 1998, Miami Subs acquired the restaurant from DEMAC for existing
indebtedness on the restaurant totaling approximately $270,000 which was
paid by the Company.. In December 1998, the Company canceled a loan to Mr.
Perlyn in the principal amount of approximately $85,000. The loan had
accrued interest at a rate of prime plus 1.5% and was due in full in June
1999.
Mr. Bruce Galloway, a member of the board of directors of Miami Subs, is
the chairman of the board of Arthur Treacher's, Inc. In 1998, Miami Subs
and Arthur Treacher's entered into a co-branding test agreement which
provided for a test of the sale of Arthur Treacher's products in certain
existing Miami Subs restaurants. In August 1998, Miami Subs and Arthur
Treacher's entered into an agreement which provides for the sale of Arthur
Treacher's products in all existing Miami Subs restaurants pursuant to the
terms of the agreement. In April 1999, the agreement was amended to grant
Miami Subs the exclusive right to co-brand the Arthur Treacher's concept
and products in the United States and to include future developed Miami
Subs restaurants and other fast food restaurants. At May 31, 1999, seven
Company-operated restaurants and 38 franchised restaurants were selling
Arthur Treacher's products.
In January 1999, a Company-operated restaurant began selling Nathan's
all-beef frankfurters and fresh, crinkle-cut french fries on a test basis.
A franchise agreement was executed in February 1999.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation
On November 25, 1998, Nathans acquired 8,121,000 shares of Miami Subs in a
private purchase transaction from Gus Boulis in consideration of the sum of
$4.2 million in cash. After giving effect to the 1-for-4 reverse stock
split Nathans owns 2,030,250 shares. These shares represent approximately
30% of the issued and outstanding shares of Miami Subs. This transaction
was accounted for under the equity method of accounting for investments. On
January 15, 1999, Nathans entered into the merger agreement with Miami Subs
pursuant to which Nathans was to acquire the remaining outstanding shares
of Miami Subs in exchange for approximately 2,319,000 shares of Nathans
common stock and approximately 580,000 warrants. On September 28, 1999, the
merger was approved by the stockholders of Nathans and on September 30,
1999, the merger was approved by the shareholders of Miami Subs.
Accordingly, the merger was consummated on September 30, 1999 and Nathans
acquired in a merger transaction the approximately 70% of Miami Subs that
it did not already own for 2,18,179 shares of Nathans common stock and
579,636 Nathans common stock purchase warrants. As a result of the merger,
Miami Subs became a wholly-owned subsidiary of Nathans.
The unaudited pro forma balance sheet combines the audited consolidated
balance sheet of Miami Subs as of May 31, 1999 with the unaudited
consolidated balance sheet of Nathans as of June 27, 1999 as if the
purchase had occurred on June 27, 1999. The unaudited pro forma income
statement for the year ended March 28, 1999 combines Nathans' results of
operations for the year ended March 28, 1999 with Miami Subs' results of
operations for the year ended May 31, 1999, assuming that the transaction
occurred at the beginning of Nathans' fiscal period. The unaudited pro
forma income statement for the thirteen weeks ended June 27, 1999 combines
Nathan's results of operations for the thirteen weeks ended June 27, 1999
with Miami Subs' results of operations for the quarter ended May 31, 1999
assuming that the transaction occurred at the beginning of Nathans' fiscal
period.
Separate pro forma statements of operations have been presented for the
following circumstances: (1) Nathans 30% acquisition of the then
outstanding Miami Subs common stock and (2) the proposed acquisition of the
remaining 70% outstanding shares of Miami Subs.
Nathans is evaluating whether to continue the strategy of providing
financing to Miami Subs franchisees and may offer financial incentives to
motivate franchisees to repay their notes before maturity. In this regard,
any changes in Nathans' business strategy going forward may result in some
asset amounts being realized at amounts that may be materially less than
the carrying amounts already reflected in the accompanying Miami Subs
balance sheet and a portion may be a non-recurring charge to the income
statement.
The unaudited pro forma financial statements should be read in conjunction
with Nathans' consolidated financial statements and related notes, and the
financial statements and related notes of Miami Subs. 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 Nathans' consolidated financial position or
results of operations would actually have been if the investment in Miami
Subs had occurred at the dates indicated, or to project Nathans 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. The pro forma adjustments are based upon available information
and upon assumptions that Nathans' believes are reasonable under the
circumstances; however, the actual recording of the merger will be based on
ultimate appraisals, evaluations and estimates of fair market values.
Nathans does not expect the actual recording of the merger to vary
materially from the pro forma financial statements.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 27, 1999
(In thousands, except per share amounts)
ASSETS
Pro Forma
Nathans Miami Subs Adjustments Pro Forma
------- ---------- ----------- ---------
Current assets:
Cash and cash equivalents $1,600 $4,775 ($716) (a) $5,659
Marketable investment securities 3,296 3,296
Franchise and other receivables, net 1,808 1,382 3,190
Inventory 422 173 595
Prepaid expenses and other current assets 267 183 450
Deferred income taxes 622 622
------ ------ ------ ------
Total current assets 8,015 6,513 (716) 13,812
Notes receivable - 4,867 4,867
Property and equipment, net 6,166 11,003 17,169
Intangible assets, net 12,634 6,304 (3,159) (d) 15,779
Investment in affiliate 4,461 (4,461) (e) -
Deferred income taxes 892 892
Other assets, net 190 501 691
------ ------ ------ ------
24,343 22,675 (7,620) 39,398
$32,358 $29,188 ($8,336) $53,210
======= ======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $5,211 $5,041 $10,252
Deferred franchise fees 136 136
Current maturities of notes payable
and obligations under capital leases - 908 908
------ ------ ------ ------
Total current liabilities 5,347 5,949 - 11,296
Obligations under notes payable and
capital leases, net of current maturities - 4,764 4,764
Deferred franchise fees and other deferred revenue - 903 903
Other liabilities 194 965 1,159
------ ------ ------ ------
Total liabilities 5,541 12,581 - 18,122
Stockholders' equity:
Common stock 47 71 23 (b) 70
(71)(c)
Additional paid-in capital 32,423 24,777 7,699 (b) 40,671
(24,777)(c)
549 (d)
Accumulated deficit (5,653) (6,634) 6,634 (c) (5,653)
Treasury stock (1,607) 1,607 (c) 0
------ ------ ------ ------
Total stockholders' equity 26,817 16,607 (8,336) 35,088
$32,358 $29,188 ($8,336) $53,210
======= ======= ====== =======
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THIRTEEN WEEKS ENDED JUNE 27, 1999 (In thousands, except
per share amounts)
Pro Forma Pro Forma
Nathans Adjustments Nathans Miami Subs Adjustments Pro forma
------- ----------- ------- ---------- ----------- ---------
Sales $6,608 $6,608 $4,653 $11,261
Franchise fees and royalties 963 963 1,186 2,149
License royalties 406 406 0 406
Investment and other income 97 97 227 10 (c) 334
------ --- ------ ------ --- -------
Total revenues 8,074 0 8,074 6,066 10 14,150
Costs and expenses
Cost of sales 4,080 4,080 3,057 7,137
Restaurant operating expenses 1,529 1,529 1,105 2,634
Depreciation and amortization 259 259 290 549
Amortization of intangibles 113 113 111 (40)(d) 184
General and administrative 1,283 1,283 1,035 17 (e) 2,335
Interest expense - 0 132 - 132
Loss on impairment of assets - 0 220 220
Merger costs - 0 155 155 (f) 0
------ --- ------ ------ --- -------
Total costs and expenses 7,264 0 7,264 6,105 (178) 13,191
------ --- ------ ------ --- -------
Earnings before tax 810 0 810 (39) 188 959
Income taxes 341 0 341 (8) 0 333
------ --- ------ ------ --- -------
Net income $ 469 $0 $ 469 ($31) $188 $ 626
====== === ====== ====== ==== =======
PER SHARE INFORMATION
Net earnings per share
Basic $0.10 $0.09
===== =====
Diluted $0.10 $0.09
===== =====
Shares used in computing net income
Basic 4,722 7,041
===== =====
Diluted 4,744 7,063
===== =====
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FIFTY-TWO WEEKS ENDED MARCH 28, 1999 (In thousands,
except per share amounts)
Pro Forma Pro Forma
Nathans Adjustments Nathans Miami Subs Adjustments Pro forma
-------- ----------- ------- ---------- ----------- ----------
Sales $24,511 $24,511 $18,369 $42,880
Franchise fees and royalties 3,230 3,230 4,462 7,692
License royalties 1,415 1,415 0 1,415
Equity in income of affiliate 26 146 (a) 172 0 (172)(c) 0
Investment and other income 400 (140)(b) 260 1,028 1,288
------ --- ------- ------- --- -------
Total revenues 29,582 6 29,588 23,859 (172) 53,275
Costs and expenses
Cost of sales 15,367 15,367 12,280 27,647
Restaurant operating expenses 5,780 5,780 4,762 10,542
Depreciation and amortization 1,065 1,065 1,055 2,120
Amortization of intangibles 384 384 439 (159)(d) 664
General and administrative 4,722 4,722 3,485 67 (e) 8,274
Interest expense 1 1 611 612
Other income and expense, net (47) (47) 0 (47)
Loss of impairment of assets 0 0 220 220
Merger Costs 0 0 299 (299)(f) 0
------ --- ------- ------- --- -------
Total costs and expenses 27,272 0 27,272 23,151 (391) 50,032
------ --- ------- ------- --- -------
Earnings before tax 2,310 6 2,316 708 219 3,243
Income tax provision (benefit) (418) 0 (418) 134 0 (284)
------ --- ------- ------- --- -------
Net income $2,728 $6 $2,734 $574 ($219) $3,527
====== === ======= ======= ==== =======
PER SHARE INFORMATION
Net earnings per share
Basic $0.58 $0.50
===== =====
Diluted $0.57 $0.50
===== =====
Shares used in computing net income
Basic 4,722 7,041
===== =====
Diluted 4,753 7,072
===== =====
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
---------------------------------------------
The following pro forma adjustments have been made to the Nathans pro forma
combining balance sheet to:
(a) Reflect the estimate of total expenses to be incurred in connection with
the merger.
(b) Reflect the issuance of approximately 2,319,000 shares of Nathans common
stock and approximately 580,000 of Nathans common stock purchase warrants.
The issuance of common stock assumes a $3.1875 per share price and the
warrants are valued at $.57 each.
(c) Reflect the elimination of Miami Subs common stock, additional paid in
capital, accumulated deficit, and treasury stock.
(d) Represent the difference of the purchase price, including related costs,
and the fair value of the net assets acquired. Included in the purchase
price is the fair value of Nathans stock options issued in exchange for the
vested Miami Subs stock options of approximately $549,000. The fair value
of net assets acquired exceeded the purchase price and was recorded as a
reduction to Miami Subs' intangible assets.
(e) Represent the elimination of Nathans 30% investment in Miami Subs.
2. UNAUDITED PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS:
----------------------------------------------------
The following pro forma adjustments have been made to Nathans pro forma
combining statements of income:
Acquisition of 30% interest in Miami Subs
- -----------------------------------------
(a) Reflects Nathans 30% equity in Miami Subs' net income.
(b) Reflects adjustment to reduce the tax exempt interest income earned on the
marketable investment securities used to purchase 30% of Miami Subs common
stock.
Acquisition of remaining 70% of Miami Subs
- ------------------------------------------
(c) Represents the elimination of Nathans 30% pro forma share of equity in
Miami Subs' net income.
(d) Reflects amortization adjustment arising from the difference between the
purchase price, including related costs, and the fair value of net assets
acquired.
(e) Reflects the additional costs of employment contracts entered into in
connection with the merger over historical compensation costs of those
individuals.
(f) Represents the reversal of merger costs incurred by Miami Subs.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
NATHAN'S FAMOUS, INC.
By: /s/ Ronald DeVos
-----------------------
Ronald DeVos, Secretary
Dated: December 3, 1999
Independent Auditors' Consent
The Board of Directors
Miami Subs Corporation:
We consent to the inclusion of our report dated August 6, 1999 with respect to
the consolidated balance sheets of Miami Subs Corporation and subsidiaries as of
May 31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended May 31, 1999, which report appears in the Form 8-K/A of Nathan's
Famous, Inc.
dated September 30, 1999.
/s/KPMG LLP
Fort Lauderdale
December 2, 1999