EX-99.2 3 ex99-2.htm EXHIBIT 99.2 ex99-2.htm
EXHIBIT 99.2
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma financial statements combine the historical consolidated balance sheets and statements of operations of Diversified Restaurant Holdings, Inc. (“DRH” or the “Company”) and the combined balance sheet of Brewsters, Inc., Buffaloville, Inc., Cal City Wings, Inc., Crown Wings, Inc., Lansing Wings Inc., Lincoln Park Wings, Inc., Hammond Wings, Inc., Valpo Wings, Inc., and Homewood Wings, Inc. (collectively, the “Acquired Entities”) giving effect to the acquisition by DRH of substantially all assets  of the Acquired Entities on September 25, 2012 using the purchase method of accounting.

DRH and the Acquired Entities both follow a calendar accounting period; however, DRH utilizes a 52- or 53-week accounting period that ends on a Sunday and the Acquired Entities' accounting periods end on the last day of the calendar quarter or year end.  Accordingly, the unaudited pro forma condensed combined balance sheet as of September 23, 2012 is presented to give effect to the acquisition on that date and combines the September 23, 2012 historical balance sheet of DRH and the September 30, 2012 historical balance sheet of the Acquired Entities.  The unaudited pro forma condensed combined statement of operations for the year ended December 25, 2011 combines the historical statement of operations of DRH for the year ended December 25, 2011 and the historical statement of operations of the Acquired Entities for the year ended December 31, 2011.  The unaudited pro forma condensed combined statement of operations for the nine months ended September 23, 2012 combines the historical statement of operations of DRH for the nine months ended September 23, 2012 and the historical statement of operations of the Acquired Entities for the nine months ended September 30, 2012.  The unaudited pro forma condensed combined statements of operations give effect to the acquisition as if it occurred on December 27, 2010 (the first day of DRH's fiscal calendar).
 
The historical unaudited statement of operations of the Acquired Entities for the nine months ended September 30, 2012 does not include transactions resulting from the acquisition by DRH on September 23, 2012, but includes only the results of operations of the Acquired Entities through September 30, 2012. In addition, the amounts in the historical unaudited statement of operations of DRH for the nine months ended September 23, 2012 have been reclassified from the amounts previously reported in DRH’s Quarterly Report on Form 10-Q for the same period.
 
The unaudited pro forma financial statements are presented for illustrative purposes only and are not intended to represent or be indicative of the consolidated results of operations or the consolidated financial position of DRH that would have been reported had the acquisition been consummated as of the dates presented, and should not be viewed to be representative of future operating results or the financial position of DRH. The unaudited pro forma financial statements do not reflect any adjustments to conform accounting policies, other than those mentioned in the notes thereto, or to reflect any cost synergies anticipated as a result of the acquisition, or any future acquisition related expenses.

Certain adjustments made to the unaudited pro forma financial statements have been prepared based on preliminary estimates of the fair values of the net assets from the Acquired Entities. The impact of ongoing integration activities and adjustments to the estimated fair value of substantially all of the assets of the Acquired Entities could cause material differences in the information presented.

The unaudited pro forma financial statements should be read in conjunction with the historical combined financial statements of the Acquired Entities included in this Current Report on Form 8-K/A and the consolidated financial statements of DRH included in its Quarterly Report on Form 10-Q for the period ended September 23, 2012 and its Annual Report on Form 10-K for the year ended December 25, 2011.

Preliminary Purchase Price Allocation

On September 25, 2012, the Company completed the acquisition of substantially all of the assets of the Acquired Entities for approximately $14.7 million. The Company financed this acquisition with a Senior Secured Credit Facility from RBS Citizens, N.A., borrowing approximately $14.7 million. The allocation of the purchase price for acquisition requires extensive use of accounting estimates and judgments to allocate the purchase price to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The purchase price for the Company’s acquisition of the Acquired Entities’ tangible and intangible assets and the assumption of certain liabilities is based on preliminary estimates of fair values at the acquisition date. The Company believes the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The fair value estimates for the purchase price allocation for the Company’s acquisition are preliminary and will change as additional information becomes available and the Company’s fair value estimates are finalized.

The following table summarizes the estimated fair values of net assets acquired and liabilities assumed:

Working capital
   $ 240,000  
Fixed assets
     5,664,000  
Intangible assets
     929,000  
Goodwill
     8,672,952  
Other long-term assets     10,933  
Deferred rent
     (217,885 )
Unfavorable lease liability
     (559,000 )
Net cash paid for acquisition
   $ 14,740,000  
 
 
1
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) 

 
   
DRH
(September 23, 2012)
    
Acquired Entities
(September 30, 2012)
    
Pro Forma
Adjustments
  
Reference
  
Pro Forma
Combined
  
ASSETS
                          
Current assets
                          
Cash and cash equivalents
   $
3,070,082
     $
157,867
     $
-
       $
3,227,949
  
Accounts receivable - other
    
448,008
      
217,093
      
(217,093
)
A
    
-
  
     
-
      
-
      
201,441
  
D
    
649,449
  
Inventory
    
598,540
      
118,415
      
-
        
716,955
  
Prepaid assets
    
171,894
      
41,361
      
-
        
213,255
  
Total current assets
    
4,288,524
      
534,736
      
(15,652
)
      
4,807,608
  
                                   
Deferred income taxes
    
172,770
      
-
      
-
        
172,770
  
Property and equipment, net - restricted assets of VIE
    
1,435,277
      
-
      
-
        
1,435,277
  
Property and equipment, net
    
26,289,136
      
4,283,572
      
1,380,428
  
D
    
31,953,136
  
Intangible assets, net
    
1,101,777
      
849,744
      
79,256
  
D
    
2,030,777
  
Goodwill
    
-
      
-
      
8,672,952
  
D 
    
8,672,952
  
Other long-term assets
    
81,350
      
27,933
      
(17,000)
  
A 
    
92,283
  
                                   
Total assets
   $ 
33,368,834
     $ 
5,695,985
     $ 
10,099,984
       $ 
49,164,803
  
                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
                                  
                                   
Current liabilities
                                  
Accounts payable
   $ 
2,841,875
     $ 
396,315
     $ 
(117,231
)
A
   $ 
3,120,959
  
Accrued compensation
    
1,127,665
      
161,885
      
(161,885)
  
A
    
1,127,665
  
Other accrued liabilities
    
543,758
      
170,070
      
(170,070)
  
A
    
543,758
  
Current portion of long-term debt
    
2,434,048
      
2,239,584
      
(2,239,584
)
A
    
2,434,048
  
Current portion of deferred rent
    
174,906
      
-
      
-
        
174,906
  
Total current liabilities
    
7,122,252
      
2,967,854
      
(2,688,770
)
      
7,401,336
  
                                   
Deferred rent, less current portion
    
2,140,463
      
217,885
      
-
        
2,358,348
  
Other liabilities
    
392,263
      
-
      
559,000
  
D
    
951,263
  
Long-term debt, less current portion
    
21,044,556
      
2,384,783
      
(2,384,783
)
A
    
-
  
     
-
      
-
      
14,740,000
  
C 
    
35,784,556
  
Total liabilities
    
30,699,534
      
5,570,522
      
10,225,447
        
46,495,503
  
                                   
Commitments and contingencies
                              
 
  
     
 
      
 
      
 
            
Stockholders' equity
                                  
Common stock
    
1,888
      
647,000
      
(647,000
)
B
    
1,888
  
Treasury stock
    
-
      
(769,186
)
    
769,186
  
B
    
-
  
Additional paid-in capital
    
2,936,504
      
2,870,241
      
(2,870,241
)
B
    
2,936,504
  
Accumulated other comprehensive loss
    
(258,893
)
    
-
      
-
  
 
    
(258,893
)
Retained earnings (accumulated deficit)
    
(450,724
)
    
(2,622,592
)
    
2,622,592
  
B
    
(450,724
)
Total DRH stockholders' equity
    
2,228,775
      
125,463
      
(125,463
)
      
2,228,775
  
                               
 
  
Noncontrolling interest in VIE
    
440,525
      
-
      
-
        
440,525
  
                               
 
  
Total stockholders' equity
    
2,669,300
      
125,463
      
(125,463
)
      
2,669,300
  
                               
 
  
Total liabilities and stockholders' equity
   $
33,368,834
     $
5,695,985
     $
10,099,984
       $
49,164,803
  
 
The accompanying notes are an integral part of these proforma condensed combined financial statements.
 
 
2
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) 
 
 
   
DRH
(Nine Months Ended September 23, 2012)
    
Acquired Entities
(Nine Months Ended
September 30 2012)
    
Pro Forma
Adjustments
  
Reference
  
Pro Forma
Combined
  
                           
Revenue
                          
Food and beverage sales
   $
51,315,764
     $
13,038,143
   $ 
-
       $
64,353,907
  
Franchise royalties and fees
    
7,537
      
-
    
-
        
7,537
  
Total revenue
    
51,323,301
      
13,038,143
      
-
        
64,361,444
  
                                   
Operating expenses
                                  
Food and beverage costs
    
15,904,293
      
4,738,947
      
-
       
20,643,240
  
Compensation costs
    
12,840,361
      
3,206,567
      
-
       
16,046,928
  
General and administrative and other expenses
    
14,526,563
      
3,466,100
      
-
       
17,992,663
  
Pre-opening costs
    
547,876
      
-
      
-
        
547,876
  
Occupancy
    
2,787,327
      
1,033,652
      
(29,813
)
E
    
3,791,166
  
Depreciation and amortization
    
2,930,606
      
842,180
      
160,438
  
F
    
3,933,224
  
Loss on disposal of property and equipment
    
29,977
      
-
        -        
29,977
  
Total operating expenses
    
49,567,003
      
13,287,446
      
130,625
        
62,985,074
  
                                   
Operating profit (loss)
    
1,756,298
      
(249,303
)
    
(130,625
)
      
1,376,370
  
                                   
Change in fair value of derivative instruments
    
(43,361
)
    
-
      
-
        
(43,361
)
Interest expense
    
(843,563
)
    
(220,479
)
    
220,479
  
G
    
-
  
       -        -      
(262,786
)
G
    
(1,106,349
)
Other income (expense), net
    
362,160
      
(60,228
)
    
-
        
301,932
  
                                   
Income (loss) before income taxes
    
1,231,534
      
(530,010
)
    
(172,932
)
      
528,592
  
                                   
Income tax provision
    
333,387
      
-
      
(274,147
)
H
    
59,240
  
                                   
Net income (loss)
    
898,147
      
(530,010
)
    
101,215
        
469,352
  
                                   
Less: (Income) attributable to noncontrolling interest
    
(95,040
)
    
-
      
-
        
(95,040
 )
                                   
Net income (loss) attributable to DRH
   $
803,107
     $
(530,010
)
   $
101,215
       $ 
374,312
  
                                   
                                   
Basic earnings per share
   $
0.04
                       $
0.02
  
Fully diluted earnings per share
   $
0.04
                       $
0.02
  
                                   
Weighted average number of common shares outstanding
                            
Basic
    
18,948,624
                        
18,948,624
  
Diluted
    
19,088,856
                        
19,088,856
  
 
The accompanying notes are an integral part of these proforma condensed combined financial statements.
 
 
3
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) 
 
 
   
DRH
(Year Ended
December 25,
2011)
    
Acquired Entities
(Year Ended
December 31,
2011)
      
Pro Forma
Adjustments
    
Reference
  
Pro Forma
Combined
  
                               
Revenue
                              
Food and beverage sales
   $ 
60,657,475
     $ 
16,429,418
     $ 
-
         $ 
77,086,893
  
Franchise royalties and fees
    
50,000
      
-
      
-
          
50,000
  
Total revenue
    
60,707,475
      
16,429,418
        
-
          
77,136,893
  
                                       
Operating expenses
                                      
Food and beverage costs
    
17,486,880
      
5,312,932
        
-
         
22,799,812
  
Compensation costs
    
17,696,246
      
4,224,328
        
-
         
21,920,574
  
General and administrative and other expenses
    
14,327,158
      
4,095,200
        
-
         
18,422,358
  
Pre-opening costs
    
714,330
      
-
        
-
         
714,330
  
Occupancy
    
3,371,873
      
1,387,913
        
(37,267
)
 E
 
    
4,722,519
  
Depreciation and amortization
    
3,479,360
      
1,127,606
        
213,918
   F
 
    
4,820,884
  
Loss on disposal of property and equipment
    
31,465
      
130,378
        
-
          
161,843
  
Total operating expenses
    
57,107,312
      
16,278,357
        
176,651
          
73,562,320
  
                                       
Operating profit (loss)
    
3,600,163
      
151,061
        
(176,651
)
        
3,574,573
  
                                       
Change in fair value of derivative instruments
    
(246,818
)
    
-
        
-
         
(246,818
)
Interest expense
    
(1,137,725
)
    
(313,253
)
      
313,253
   G      
-
  
     
-
      
-
        
(376,386
)
 G      
(1,514,111
)
Other income (expense), net
    
366,497
      
38,304
 
      
-
          
404,801
  
                                       
Income (loss) before income taxes
    
2,582,117
      
(123,888
)
      
(239,784
)
        
2,218,445
  
                                       
Income tax provision
    
586,086
      
-
        
(141,832
)
H      
444,254
  
                                       
Net income (loss)
    
1,996,031
      
(123,888
)
      
(97,952
)
        
1,774,191
  
                                       
Less: (Income) loss attributable to noncontrolling interest
    
(153,845
)
     -         -          
(153,845
)
                                       
Net income (loss) attributable to DRH
   $
1,842,186
     $
(123,888
)
   $  
(97,952
)
       $
1,620,346
  
                                       
                                       
Basic earnings per share
   $ 
0.10
                           $ 
0.09
  
Fully diluted earnings per share
   $ 
0.10
                           $ 
0.09
  
                                       
Weighted average number of common shares outstanding
                        
Basic
    
18,902,782
                            
18,902,782
  
Diluted
    
19,055,500
                            
19,055,500
  
 
The accompanying notes are an integral part of these proforma condensed combined financial statements.
 
 
4
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMETS (UNAUDITED) 


 
Note 1: Pro Forma Adjustments
 
 
A
Adjustment to eliminate Acquired Entities' assets not acquired and Acquired Entities’ liabilities not assumed.
   
B
Adjustment to eliminate the historical stockholders' equity of the Acquired Entities.
   
C
Adjustment to record new debt in conjunction with the acquisition of the Acquired Entities by DRH.
   
D
Adjustment to record the purchase price allocation at September 23, 2012.
   
E
Adjustment to record the straight-line amortization of unfavorable lease obligations in connection with the purchase price allocation.
   
F
Adjustment to record the impact of additional depreciation and amortization expense on the increased basis of property and equipment and intangible assets in connection with the purchase price allocation.
   
G
Adjustment to a) eliminate historical interest expense on debt that was not assumed by DRH and b) record the impact of interest expense relating to the new debt issued in connection with DRH's acquisition, which bears interest at LIBOR plus a Lease Adjusted Leverage Ratio margin (effective rate of 2.97% for the pro forma periods).
   
H
Adjustment to reflect federal and state income tax expense at DRH's statutory rate of 39% related to a) the pro forma adjustments and b) the Acquired Entities' pre-tax results that historically had not been subject to corporate taxation.