DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
EXHIBIT 99.3
On June 29, 2015, AMC Wings, Inc., a wholly-owned subsidiary of Diversified Restaurant Holdings, Inc. ("DRH" or the "Company"), completed the acquisition of substantially all of the assets of A Sure Wing, LLC, a Missouri limited liability company (“ASW”). The assets acquired consist primarily of 18 existing Buffalo Wild Wings restaurants, including 15 in Missouri and three in Illinois. As consideration for the acquisition of the assets, the Company paid approximately $54.0 million in cash at closing, subject to adjustment for cash on hand, inventory and certain prorated items. Seller reimbursed the Company for one-half of all fees imposed by Buffalo Wild Wings International, Inc. under its franchise agreements for the transfer of these restaurants.
The following unaudited pro forma combined financial statements are based on the historical consolidated information of DRH, which is included in the Company's Annual Report on Form 10-K for year ended December 28, 2014 and Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2015, and the financial information of ASW, which is included in Exhibits 99.1 and 99.2 to this Current Report on Form 8-K/A. The unaudited pro forma combined consolidated balance sheet as of June 28, 2015 has been prepared to illustrate the effects of the acquisition of ASW and the related financing as if they occurred on June 28, 2015. The unaudited pro forma combined statements of operations for the year ended December 28, 2014 and six months ended June 28, 2015 have prepared to illustrate the effects of the acquisition of ASW and the related financing as if they occurred on December 30, 2013.
The consolidated financial statements of ASW are comprised of 18 BWW restaurants that operate in Missouri and Illinois in addition to one corporate administrative entity. Each of the restaurants were open and operated as BWW restaurants for all periods included in the consolidated financial statements except for Lake Ozark, Inc., which opened in April 2014.
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 ASW. The impact of ongoing integration activities and adjustments to the estimated fair value of substantially all of the assets of ASW could cause material differences in the information presented.
The unaudited pro forma financial statements should be read in conjunction with the historical consolidated financial statements of ASW 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 June 28, 2015 and its Annual Report on Form 10-K for the year ended December 28, 2014.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 28, 2015
ASSETS | DRH June 28, 2015 | ASW June 28, 2015 | Pro forma adjustments | Ref. | Pro forma combined | ||||||||||||
Current assets | |||||||||||||||||
Cash and cash equivalents | $ | 17,093,963 | $ | 2,202,440 | $ | (2,202,440 | ) | A | |||||||||
21,750 | D | 17,115,713 | |||||||||||||||
Accounts receivable | 230,237 | 29,084 | (29,084 | ) | A | 230,237 | |||||||||||
Inventory | 1,471,008 | 369,788 | 21,694 | D | 1,862,490 | ||||||||||||
Other current assets | 767,068 | 37,546 | (37,546 | ) | A | 767,068 | |||||||||||
Notes receivable - related party | — | 2,012,258 | (2,012,258 | ) | A | — | |||||||||||
Total current assets | 19,562,276 | 4,651,116 | (4,237,884 | ) | 19,975,508 | ||||||||||||
Deferred income taxes | 5,127,678 | — | — | 5,127,678 | |||||||||||||
Property and equipment, net | 74,013,429 | 9,750,501 | 4,242,499 | D | 88,006,429 | ||||||||||||
Intangible assets, net | 2,951,391 | 159,664 | 457,680 | D | 3,568,735 | ||||||||||||
Goodwill | 10,998,630 | — | 38,748,452 | D | 49,747,082 | ||||||||||||
Other long-term assets | 1,083,875 | 25,310 | (25,310 | ) | A | 1,083,875 | |||||||||||
Total assets | $ | 113,737,279 | $ | 14,586,591 | $ | 39,185,437 | $ | 167,509,307 | |||||||||
LIABILITIES AND EQUITY | |||||||||||||||||
Current liabilities | |||||||||||||||||
Accounts payable | $ | 4,778,862 | $ | 824,742 | $ | (824,742 | ) | A | |||||||||
63,231 | D | 4,842,093 | |||||||||||||||
Accrued compensation | 2,349,796 | 32,104 | (32,104 | ) | A | 2,349,796 | |||||||||||
Other accrued liabilities | 3,589,091 | 145,906 | (145,906 | ) | A | 3,589,091 | |||||||||||
Current portion of long-term debt | 10,959,938 | 945,798 | (945,798 | ) | A | ||||||||||||
4,470,832 | C | 15,430,770 | |||||||||||||||
Current portion of deferred rent | 190,474 | 485,786 | (485,786 | ) | A | 190,474 | |||||||||||
Total current liabilities | 21,868,161 | 2,434,336 | 2,099,727 | 26,402,224 | |||||||||||||
Deferred rent, less current portion | 3,255,952 | 4,252,845 | (4,252,845 | ) | A | 3,255,952 | |||||||||||
Unfavorable operating leases | 656,242 | — | 58,797 | D | 715,039 | ||||||||||||
Other long-term liabilities | 3,601,321 | — | — | 3,601,321 | |||||||||||||
Long-term debt, less current portion | 54,359,780 | 6,638,245 | (6,638,245 | ) | A | ||||||||||||
— | — | 49,179,168 | C | 103,538,948 | |||||||||||||
Total liabilities | 83,741,456 | 13,325,426 | 40,446,602 | 137,513,484 | |||||||||||||
Equity | |||||||||||||||||
Common stock | 2,580 | — | — | 2,580 | |||||||||||||
Additional paid-in capital | 35,772,674 | — | — | 35,772,674 | |||||||||||||
Accumulated other comprehensive loss | (384,325 | ) | — | — | (384,325 | ) | |||||||||||
Retained earnings (accumulated deficit) | (5,395,106 | ) | 1,261,165 | (1,261,165 | ) | B | (5,395,106 | ) | |||||||||
Total equity | 29,995,823 | 1,261,165 | (1,261,165 | ) | 29,995,823 | ||||||||||||
Total liabilities and equity | $ | 113,737,279 | $ | 14,586,591 | $ | 39,185,437 | $ | 167,509,307 |
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 28, 2014
DRH December 28, 2014 | ASW December 28, 2014 | Pro forma adjustments | Ref. | Pro forma combined | |||||||||||||
Revenue | $ | 128,413,448 | $ | 39,808,207 | $ | — | $ | 168,221,655 | |||||||||
Operating expenses | |||||||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |||||||||||||||||
Food, beverage, and packaging costs | 37,058,821 | 10,889,490 | — | 47,948,311 | |||||||||||||
Compensation costs | 33,337,000 | 9,758,484 | — | 43,095,484 | |||||||||||||
Occupancy costs | 7,205,420 | 2,886,671 | 2,677 | E | 10,094,768 | ||||||||||||
Other operating costs | 27,214,208 | 7,440,186 | — | 34,654,394 | |||||||||||||
General and administrative expenses | 8,786,520 | 2,048,936 | (61,851 | ) | I | ||||||||||||
(867,304 | ) | J | 9,906,301 | ||||||||||||||
Pre-opening costs | 3,473,664 | — | — | 3,473,664 | |||||||||||||
Depreciation and amortization | 10,956,951 | 2,301,599 | 489,553 | F | 13,748,103 | ||||||||||||
Loss on asset disposals | 1,023,144 | 21,767 | — | 1,044,911 | |||||||||||||
Total operating expenses | 129,055,728 | 35,347,133 | (436,925 | ) | 163,965,936 | ||||||||||||
Operating income (loss) | (642,280 | ) | 4,461,074 | 436,925 | 4,255,719 | ||||||||||||
Interest expense | (2,274,041 | ) | (491,295 | ) | 491,295 | G | |||||||||||
(1,904,072 | ) | G | (4,178,113 | ) | |||||||||||||
Other income (expense), net | (58,912 | ) | 76,248 | — | 17,336 | ||||||||||||
Income (loss) before income taxes | (2,975,233 | ) | 4,046,027 | (975,852 | ) | 94,942 | |||||||||||
Income tax expense (benefit) | (1,706,736 | ) | 73,243 | 1,043,860 | H | (589,633 | ) | ||||||||||
Net income (loss) | $ | (1,268,497 | ) | $ | 3,972,784 | $ | (2,019,712 | ) | $ | 684,575 | |||||||
Basic earnings per share | $ | (0.05 | ) | $ | — | $ | — | $ | 0.03 | ||||||||
Fully diluted earnings per share | $ | (0.05 | ) | $ | — | $ | — | $ | 0.03 | ||||||||
Weighted average number of common shares outstanding | |||||||||||||||||
Basic | 26,092,919 | — | — | 26,092,919 | |||||||||||||
Diluted | 26,092,919 | — | — | 26,193,996 |
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 2015
DRH June 28, 2015 | ASW June 28, 2015 | Pro forma adjustments | Ref. | Pro forma combined | |||||||||||||
Revenue | $ | 76,312,170 | $ | 20,995,948 | $ | — | $ | 97,308,118 | |||||||||
Operating expenses | |||||||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |||||||||||||||||
Food, beverage, and packaging costs | 22,009,173 | 5,939,531 | — | 27,948,704 | |||||||||||||
Compensation costs | 19,908,963 | 5,011,365 | — | 24,920,328 | |||||||||||||
Occupancy costs | 4,804,817 | 1,786,664 | 1,339 | E | 6,592,820 | ||||||||||||
Other operating costs | 15,772,029 | 3,758,523 | — | 19,530,552 | |||||||||||||
General and administrative expenses | 8,171,850 | 1,158,231 | (37,122 | ) | I | ||||||||||||
(434,844 | ) | J | 8,858,115 | ||||||||||||||
Pre-opening costs | 1,669,890 | — | — | 1,669,890 | |||||||||||||
Depreciation and amortization | 6,408,023 | 1,185,235 | 239,517 | F | 7,832,775 | ||||||||||||
Impairment and loss on asset disposals | 2,468,467 | — | — | 2,468,467 | |||||||||||||
Total operating expenses | 81,213,212 | 18,839,549 | (231,110 | ) | 99,821,651 | ||||||||||||
Operating income (loss) | (4,901,042 | ) | 2,156,399 | 231,110 | (2,513,533 | ) | |||||||||||
Interest expense | (991,258 | ) | (233,335 | ) | 233,335 | G | |||||||||||
(890,171 | ) | G | (1,881,429 | ) | |||||||||||||
Other income, net | 744,261 | 54,964 | — | 799,225 | |||||||||||||
Income (loss) before income taxes | (5,148,039 | ) | 1,978,028 | (425,726 | ) | (3,595,737 | ) | ||||||||||
Income tax expense (benefit) | (2,092,338 | ) | 82,550 | 527,783 | H | (1,482,005 | ) | ||||||||||
Net income (loss) | $ | (3,055,701 | ) | $ | 1,895,478 | $ | (953,509 | ) | $ | (2,113,732 | ) | ||||||
Basic earnings per share | $ | (0.12 | ) | $ | — | $ | — | $ | (0.08 | ) | |||||||
Fully diluted earnings per share | $ | (0.12 | ) | $ | — | $ | — | $ | (0.08 | ) | |||||||
Weighted average number of common shares outstanding | |||||||||||||||||
Basic | 26,150,518 | — | — | 26,150,518 | |||||||||||||
Diluted | 26,150,518 | — | — | 26,150,518 |
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 2015
1. PURCHASE PRICE ALLOCATION
On June 29, 2015, the Company completed the acquisition of substantially all of the assets of the ASW for approximately $54.0 million. The Company financed this acquisition with a Senior Secured Credit Facility with Citizens Bank, N.A. ("Citizens") as administrative agent for the Lender party thereto. 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 ASW's 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, however, fair value estimates 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 | $ | 413,231 | |
Fixed assets | 13,993,000 | ||
Intangible assets | 505,000 | ||
Goodwill | 38,748,452 | ||
Favorable lease | 112,344 | ||
Unfavorable lease liability | (58,797 | ) | |
Net cash paid for acquisition | $ | 53,713,230 |
2. PRO FORMA ADJUSTMENTS
A | Adjustment to eliminate ASW's assets not acquired and ASW's liabilities not assumed. |
B | Adjustment to eliminate the historical members' equity of ASW. |
C | Adjustment to record new debt in conjunction with the acquisition of ASW by DRH. |
D | Adjustment to record the purchase price allocation at June 29, 2015. |
E | Adjustment to record the straight-line amortization of favorable and 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 3.7% for the pro forma periods). |
H | Adjustment to reflect federal income tax expense at DRH's statutory rate of 34% related to a) the pro forma adjustments and b) ASW's pre-tax results that historically had not been subject to corporate taxation. |
I | Eliminate ASW's administrative fees for entity not acquired by DRH. |
J | Eliminate ASW's ownership's guarantee payments for service. DRH will not retain this obligation and will perform these services after the acquisition. |
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