-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sfi+QQ9le6hNavOZ4+90KiBc39+ywncxFBh6IFIXMOt1RixD8jIZFSVHH0jTTK79 C+IRPXvxXWLEiM9EV/yYqg== 0000069733-99-000008.txt : 19990208 0000069733-99-000008.hdr.sgml : 19990208 ACCESSION NUMBER: 0000069733-99-000008 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981125 ITEM INFORMATION: FILED AS OF DATE: 19990205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATHANS FAMOUS INC CENTRAL INDEX KEY: 0000069733 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 113166443 STATE OF INCORPORATION: DE FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-03189 FILM NUMBER: 99522449 BUSINESS ADDRESS: STREET 1: 1400 OLD COUNTRY RD CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5163388500 MAIL ADDRESS: STREET 1: 1400 OLD COUNTRY RD STREET 2: STE 400 CITY: WESTBURY STATE: NY ZIP: 11590 8-K/A 1 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 EX-3 2 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 -----END PRIVACY-ENHANCED MESSAGE-----