EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 2, 2019 (the “Closing Date” or “Closing”), the Company completed its acquisition of North Italia and the remaining FRC business (the “Acquisition”).
The Acquisition was completed for consideration consisting of the following components: $286 million in cash at Closing, which was primarily funded by drawing on the Company’s credit facility; assumption of $10 million in debt previously owed by FRC to the Company; a $12 million indemnity escrow amount specifically related to North Italia due ratably over the next two years; and $45 million of deferred consideration due ratably over the next four years (including a $13 million indemnity escrow amount specifically related to the remaining FRC business). Additionally, included in consideration is the estimated Acquisition-date fair value of contingent consideration which is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event the Company undergoes a change in control or divests any FRC brand (other than North Italia and Flower Child) during the five years after Closing. The Company is also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.
The Company has concluded that the Acquisition represents a single business combination of related businesses under common control within the scope of Accounting Standards Codification Topic 805, “Business Combinations.” The Acquisition date was determined to be the Closing Date, which is the date the Company obtained control by legally transferring the consideration for the remaining ownership interests, acquiring the assets and assuming the liabilities of North Italia and the remaining FRC business.
The following unaudited pro forma condensed consolidated balance sheet gives effect to the Acquisition as if it had occurred on October 1, 2019. The unaudited pro forma condensed consolidated statements of income for the thirty-nine weeks ended October 1, 2019 and the fiscal year ended January 1, 2019 give effect to the Acquisition as if it had occurred on January 2, 2018. The unaudited pro forma condensed consolidated financial statements were based on and should be read in conjunction with (i) the unaudited consolidated financial statements of the Company included in its Quarterly Report on Form 10-Q for the quarterly period ended October 1, 2019; (ii) the unaudited consolidated financial statements of FRC for the thirty-nine weeks ended October 1, 2019; (iii) the audited consolidated financial statements of the Company included in its Annual Report on Form 10-K for the fiscal year ended January 1, 2019; (iv) the audited consolidated financial statements of FRC for the fiscal year ended January 1, 2019; and (v) the notes to the unaudited pro forma condensed consolidated financial statements.
In the opinion of the Company’s management, the unaudited pro forma condensed consolidated financial statements include all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisition and related transactions. The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only and are not necessarily indicative of what our actual results of operations would have been had the Acquisition and related transactions been completed as of the dates indicated or that may be achieved in the future due to a variety of factors, including the fact that the determination of the fair value of assets acquired and liabilities assumed and resulting goodwill in the unaudited pro forma condensed consolidated financial statements is based upon preliminary estimates. Furthermore, the Company expects to apply its own methodologies and judgments in accounting for the assets and liabilities acquired in the Acquisition, which may differ from those reflected in FRC’s historical financial statements and the pro forma condensed consolidated financial statements.
THE CHEESECAKE FACTORY INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
October 1, 2019
(In thousands)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
Company | FRC | Adjustments | Combined | ||||||||||||||
ASSETS | |||||||||||||||||
Current assets: | |||||||||||||||||
Cash and cash equivalents | $ | 306,252 | $ | 6,894 | $ | (276,168 | ) | (a) | $ | 36,978 | |||||||
Accounts receivable | 16,356 | - | - | 16,356 | |||||||||||||
Income taxes receivable | 8,415 | - | - | 8,415 | |||||||||||||
Other receivables | 31,445 | 3,913 | (1,239 | ) | (b) | 34,119 | |||||||||||
Inventories | 47,778 | 2,569 | - | 50,347 | |||||||||||||
Prepaid expenses | 38,895 | 19,676 | (16,027 | ) | (c) | 42,544 | |||||||||||
Total current assets | 449,141 | 33,052 | (293,434 | ) | 188,759 | ||||||||||||
Property and equipment, net | 759,243 | 91,210 | (7,680 | ) | (d) | 842,773 | |||||||||||
Other assets: | |||||||||||||||||
Intangible assets, net | 20,271 | 1,089 | 277,893 | (e) | 299,253 | ||||||||||||
Goodwill | - | - | 162,461 | (f) | 162,461 | ||||||||||||
Operating lease assets | 984,838 | - | 223,455 | (g) | 1,208,293 | ||||||||||||
Investments in unconsolidated affiliates | 69,328 | - | (69,328 | ) | (h) | - | |||||||||||
Other | 98,949 | 5,842 | (22,500 | ) | (i) | 82,291 | |||||||||||
Total other assets | 1,173,386 | 6,931 | 571,981 | 1,752,298 | |||||||||||||
Total assets | $ | 2,381,770 | $ | 131,193 | $ | 270,867 | $ | 2,783,830 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
Current liabilities: | |||||||||||||||||
Accounts payable | $ | 36,095 | $ | 7,758 | $ | (1,811 | ) | (j) | $ | 42,042 | |||||||
Notes payable, current portion | - | 53,552 | (53,552 | ) | (k) | - | |||||||||||
Gift card liabilities | 135,566 | 5,941 | - | 141,507 | |||||||||||||
Deferred rent, current portion | - | 587 | (587 | ) | (l) | 0 | |||||||||||
Operating lease liabilities | 90,027 | - | 20,417 | (m) | 110,444 | ||||||||||||
Other accrued expenses | 172,098 | 31,902 | 6,496 | (n) | 210,496 | ||||||||||||
Total current liabilities | 433,786 | 99,740 | (29,037 | ) | 504,489 | ||||||||||||
Deferred income taxes | 38,449 | - | 8,600 | (o) | 47,049 | ||||||||||||
Deferred rent liabilites | - | 11,626 | (11,626 | ) | (p) | 0 | |||||||||||
Deemed landlord financing liability | - | 11,819 | (11,819 | ) | (q) | 0 | |||||||||||
Long-term debt | 335,000 | - | - | 335,000 | |||||||||||||
Operating lease liabilities | 959,632 | - | 202,433 | (m) | 1,162,065 | ||||||||||||
Other noncurrent liabilities | 81,087 | 5,162 | 51,348 | (r) | 137,597 | ||||||||||||
Total liabilities | 1,847,954 | 128,347 | 209,899 | 2,186,200 | |||||||||||||
Stockholders' equity: | |||||||||||||||||
Preferred stock | |||||||||||||||||
Common stock | 975 | - | - | 975 | |||||||||||||
Additional paid-in capital | 850,485 | - | - | 850,485 | |||||||||||||
Retained earnings | 1,375,690 | 2,846 | 60,968 | (s) | 1,439,504 | ||||||||||||
Treasury Stock | (1,692,701 | ) | - | - | (1,692,701 | ) | |||||||||||
Other comprehensive income | (633 | ) | - | - | (633 | ) | |||||||||||
Total stockholders' equity | 533,816 | 2,846 | 60,968 | 597,630 | |||||||||||||
Total liabilities and stockholders' equity | $ | 2,381,770 | $ | 131,193 | $ | 270,867 | $ | 2,783,830 |
2
THE CHEESECAKE FACTORY INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Thirty-Nine Weeks Ended October 1, 2019
(In thousands, except per share data)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
Company | FRC | Adjustments | Combined | ||||||||||||||
Revenues | $ | 1,788,662 | $ | 250,209 | $ | - | $ | 2,038,871 | |||||||||
Costs and expenses: | |||||||||||||||||
Cost of sales | 403,566 | 62,034 | - | 465,600 | |||||||||||||
Labor expenses | 648,831 | 91,284 | - | 740,115 | |||||||||||||
Other operating costs and expenses | 451,724 | 61,884 | 3,523 | (t) | 517,131 | ||||||||||||
General and administrative expenses | 116,116 | 32,565 | (9,739 | ) | (u) | 138,942 | |||||||||||
Depreciation and amortization expenses | 64,363 | 14,670 | (4,607 | ) | (v) | 74,426 | |||||||||||
Impairment of assets and lease terminations | - | 15,395 | - | 15,395 | |||||||||||||
Preopening costs | 6,851 | 10,541 | - | 17,392 | |||||||||||||
Total costs and expenses | 1,691,451 | 288,373 | (10,823 | ) | 1,969,001 | ||||||||||||
Income/(loss) from operations | 97,211 | (38,164 | ) | 10,823 | 69,870 | ||||||||||||
Income/(loss) on investment in unconsolidated affiliates | (13,439 | ) | 3,719 | 13,439 | (w) | 3,719 | |||||||||||
Interest and other income/(expense), net | (17 | ) | (2,706 | ) | (4,267 | ) | (x) | (6,990 | ) | ||||||||
Income/(loss) before income taxes | 83,755 | (37,151 | ) | 19,995 | 66,599 | ||||||||||||
Income tax provision/(benefit) | 5,171 | - | (4,375 | ) | (y) | 796 | |||||||||||
Net income/(loss) | $ | 78,584 | $ | (37,151 | ) | $ | 24,370 | $ | 65,803 | ||||||||
Net income per share: | |||||||||||||||||
Basic | $ | 1.78 | (z) | $ | 1.49 | ||||||||||||
Diluted | $ | 1.76 | (z) | $ | 1.47 | ||||||||||||
Weighted average shares outstanding: | |||||||||||||||||
Basic | 44,034 | (z) | 44,034 | ||||||||||||||
Diluted | 44,643 | (z) | 44,643 |
3
THE CHEESECAKE FACTORY INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Fiscal Year Ended January 1, 2019
(In thousands, except per share data)
Historical | Historical | Pro Forma | Pro Forma | ||||||||||||||
Company | FRC | Adjustments | Combined | ||||||||||||||
Revenues | $ | 2,332,331 | $ | 246,688 | $ | - | $ | 2,579,019 | |||||||||
Costs and expenses: | |||||||||||||||||
Cost of sales | 532,880 | 61,698 | - | 594,578 | |||||||||||||
Labor expenses | 834,134 | 88,237 | - | 922,371 | |||||||||||||
Other operating costs and expenses | 566,825 | 61,696 | - | 628,521 | |||||||||||||
General and administrative expenses | 154,770 | 25,577 | 1,871 | (u) | 182,218 | ||||||||||||
Depreciation and amortization expenses | 95,976 | 12,384 | (2,421 | ) | (v) | 105,939 | |||||||||||
Impairment of assets and lease terminations | 17,861 | - | - | 17,861 | |||||||||||||
Preopening costs | 10,937 | 15,851 | - | 26,788 | |||||||||||||
Total costs and expenses | 2,213,383 | 265,443 | (550 | ) | 2,478,276 | ||||||||||||
Income/(loss) from operations | 118,948 | (18,755 | ) | 550 | 100,743 | ||||||||||||
Income/(loss) on investment in unconsolidated affiliates | (4,754 | ) | (1,729 | ) | 6,470 | (w) | (13 | ) | |||||||||
Interest and other income/(expense), net | (6,783 | ) | (939 | ) | (7,882 | ) | (x) | (15,604 | ) | ||||||||
Income/(loss) before income taxes | 107,411 | (21,423 | ) | (862 | ) | 85,126 | |||||||||||
Income tax provision/(benefit) | 8,376 | - | (5,683 | ) | (y) | 2,693 | |||||||||||
Net income/(loss) | $ | 99,035 | $ | (21,423 | ) | $ | 4,821 | $ | 82,433 | ||||||||
Net income per share: | |||||||||||||||||
Basic | $ | 2.19 | (z) | $ | 1.82 | ||||||||||||
Diluted | $ | 2.14 | (z) | $ | 1.78 | ||||||||||||
Weighted average shares outstanding: | |||||||||||||||||
Basic | 45,263 | (z) | 45,263 | ||||||||||||||
Diluted | 46,215 | (z) | 46,215 |
4
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Preliminary Purchase Price Allocation
On October 2, 2019, the Company completed its acquisition of FRC as described in the introduction above. The following table summarizes the preliminary calculation of consideration transferred and allocation of the purchase price to the net assets acquired (in thousands):
Preliminary purchase consideration: | ||||
Cash at closing | $ | 286,000 | ||
Assumption of debt previously owed by FRC | 10,000 | |||
Deferred payments | 52,720 | |||
Contingent consideration | 15,231 | |||
Preliminary consideration transferred | 363,951 | |||
Fair value of previously-held equity interests | 134,000 | |||
Total | 497,951 | |||
Less net assets acquired: | ||||
Current assets | 17,025 | |||
Property and equipment | 83,530 | |||
Intangible assets | 278,982 | |||
Operating lease assets | 223,455 | |||
Other assets | 5,842 | |||
Current liabilities | (57,085 | ) | ||
Operating lease liabilities | (202,433 | ) | ||
Other noncurrent liabilities | (13,825 | ) | ||
Total net assets acquired | 335,491 | |||
Goodwill | $ | 162,461 |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statements. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from this preliminary allocation and may include changes in fair values of contingent consideration, property and equipment and intangible assets and other changes to assets and liabilities, as well as any corresponding impacts to depreciation or amortization expenses.
5
2. Reclassifications
Certain reclassification adjustments have been made to conform FRC’s financial statement presentation to that of the Company’s as indicated in the tables below.
a) | The reclassification adjustments to conform FRC’s balance sheet presentation to that of the Company’s have no impact on net assets and are summarized below: |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET | ||||||||||||
October 1, 2019 | ||||||||||||
(In thousands) | ||||||||||||
Historical FRC | Reclassification to the Company's Presentation | Historical FRC as presented | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 6,894 | $ | - | $ | 6,894 | ||||||
Accounts receivable | - | - | - | |||||||||
Other receivables | 3,913 | - | 3,913 | |||||||||
Inventories | 2,569 | - | 2,569 | |||||||||
Prepaid expenses | 19,546 | 130 | 19,676 | |||||||||
Total current assets | 32,922 | 130 | 33,052 | |||||||||
Property and equipment, net | 91,210 | - | 91,210 | |||||||||
Other assets: | ||||||||||||
Intangible assets, net | - | 1,089 | 1,089 | |||||||||
Deferred compensation plan assets | 5,684 | (5,684 | ) | 0 | ||||||||
Other | 1,125 | 4,717 | 5,842 | |||||||||
Total other assets | 6,809 | 122 | 6,931 | |||||||||
Total assets | $ | 130,941 | $ | 252 | $ | 131,193 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 7,758 | $ | - | $ | 7,758 | ||||||
Notes payable, bank | 9,034 | (9,034 | ) | 0 | ||||||||
Current portion of long-term debt | 19,518 | (19,518 | ) | 0 | ||||||||
Current portion of capital leases | 178 | (178 | ) | (0 | ) | |||||||
Notes payable, related parties | 25,000 | (25,000 | ) | - | ||||||||
Notes payable | - | 53,552 | 53,552 | |||||||||
Gift card liabilities | 5,941 | - | 5,941 | |||||||||
Deferred revenue, current portion | 40 | (40 | ) | - | ||||||||
Deferred rent, current portion | 409 | 178 | 587 | |||||||||
Other accrued expenses | 36,683 | (4,781 | ) | 31,902 | ||||||||
Total current liabilities | 104,561 | (4,821 | ) | 99,740 | ||||||||
Capital leases, net of current portion | 199 | (199 | ) | 0 | ||||||||
Deferred revenue, net of current portion | 90 | (90 | ) | - | ||||||||
Deferred rent liabilities | 11,426 | 200 | 11,626 | |||||||||
Deemed landlord financing liability | 11,819 | - | 11,819 | |||||||||
Other noncurrent liabilities | - | 5,162 | 5,162 | |||||||||
Total liabilities | 128,095 | 252 | 128,347 | |||||||||
Stockholders' equity: | ||||||||||||
Retained earnings | 2,846 | - | 2,846 | |||||||||
Total stockholders' equity | 2,846 | - | 2,846 | |||||||||
Total liabilities and stockholders' equity | $ | 130,941 | $ | 252 | $ | 131,193 |
6
b) | The reclassification adjustments to conform FRC’s statements of income presentation to that of the Company’s have no impact on net income and are summarized below: |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME | ||||||||||||
Thirty-Nine Weeks Ended October 1, 2019 | ||||||||||||
(In thousands) | ||||||||||||
Historical | Reclassification to | Historical | ||||||||||
FRC | the Company's Presentation | FRC as presented | ||||||||||
Revenues | $ | 250,209 | $ | - | $ | 250,209 | ||||||
Costs and expenses: | ||||||||||||
Cost of sales | 62,034 | - | 62,034 | |||||||||
Labor expenses | 114,354 | (23,070 | ) | 91,284 | ||||||||
Other operating costs and expenses | - | 61,884 | 61,884 | |||||||||
General and administrative expenses | 53,067 | (20,502 | ) | 32,565 | ||||||||
Rent expense | 17,821 | (17,821 | ) | - | ||||||||
Depreciation and amortization expenses | 14,623 | 47 | 14,670 | |||||||||
Loss on disposal of assets | 47 | (47 | ) | - | ||||||||
Impairment of assets and lease terminations | 15,395 | - | 15,395 | |||||||||
Preopening costs | 10,159 | 382 | 10,541 | |||||||||
Total costs and expenses | 287,500 | 873 | 288,373 | |||||||||
Income/(loss) from operations | (37,291 | ) | (873 | ) | (38,164 | ) | ||||||
Dead site costs | (28 | ) | 28 | - | ||||||||
Interest income | 11 | (11 | ) | - | ||||||||
Interest expense | (3,462 | ) | 3,462 | - | ||||||||
Management fee income | 60 | (60 | ) | - | ||||||||
Miscellaneous expense | (160 | ) | 160 | - | ||||||||
Income/(loss) on investment in unconsolidated affiliates | 3,719 | - | 3,719 | |||||||||
Interest and other income/(expense), net | - | (2,706 | ) | (2,706 | ) | |||||||
Income/(loss) before income taxes | (37,151 | ) | - | (37,151 | ) | |||||||
Income tax provision | - | - | - | |||||||||
Net income/(loss) | $ | (37,151 | ) | $ | - | $ | (37,151 | ) |
7 |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Fiscal Year Ended January 1, 2019
(In thousands)
Historical | Reclassification to | Historical | ||||||||||
FRC | the Company's Presentation | FRC as presented | ||||||||||
Revenues | $ | 246,688 | $ | - | $ | 246,688 | ||||||
Costs and expenses: | ||||||||||||
Cost of sales | 61,698 | - | 61,698 | |||||||||
Labor expenses | 107,114 | (18,877 | ) | 88,237 | ||||||||
Other operating costs and expenses | - | 61,696 | 61,696 | |||||||||
General and administrative expenses | 52,937 | (27,360 | ) | 25,577 | ||||||||
Rent expense | 16,839 | (16,839 | ) | - | ||||||||
Depreciation and amortization expenses | 12,223 | 161 | 12,384 | |||||||||
Loss on disposal of assets | 161 | (161 | ) | - | ||||||||
Impairment of assets and lease terminations | - | - | - | |||||||||
Preopening costs | 14,094 | 1,757 | 15,851 | |||||||||
Total costs and expenses | 265,066 | 377 | 265,443 | |||||||||
Income/(loss) from operations | (18,378 | ) | (377 | ) | (18,756 | ) | ||||||
Dead site costs | (265 | ) | 265 | - | ||||||||
Loss from other equity method investee | (38 | ) | 38 | - | ||||||||
Income from cost method investee | 13 | (13 | ) | - | ||||||||
Interest income | 43 | (43 | ) | - | ||||||||
Interest expense | (2,016 | ) | 2,016 | - | ||||||||
Management fee income | 1,255 | (1,255 | ) | - | ||||||||
Miscellaneous expense | (308 | ) | 308 | - | ||||||||
Income/(loss) on investment in unconsolidated affiliates | (1,729 | ) | - | (1,729 | ) | |||||||
Interest and other income/(expense), net | - | (939 | ) | (939 | ) | |||||||
Income/(loss) before income taxes | (21,423 | ) | - | (21,423 | ) | |||||||
Income tax provision | - | - | - | |||||||||
Net income/(loss) | $ | (21,423 | ) | $ | - | $ | (21,423 | ) |
3. Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet
a) | Cash and cash equivalents – The reduction in cash and cash equivalents represents $286.0 million of cash consideration paid at Closing and transaction costs which were either included in accounts payable or incurred between the Closing Date and the date of this filing of $2.8 million, partially offset by the repayment at Closing of $12.5 million in loans extended by the Company to FRC prior to the Acquisition. |
b) | Other receivables – The decrease in other receivables reflects elimination of the Company’s receivable balance for items paid by the Company on behalf of FRC prior to the Acquisition. |
c) | Prepaid expenses – The decrease in prepaid expenses reflects a reduction in FRC prepaid rent as if Accounting Standards Codification Topic 842, Leases (“ASC 842”) had been adopted as of January 2, 2019 to align with the Company’s adoption date. |
d) | Property and equipment, net – The reduction in property and equipment, net represents the change from FRC’s historical net book value to the preliminary estimated fair value of property and equipment acquired, including the impact of ASC 842 adoption as of January 2, 2019 as follows (in thousands): |
8 |
Asset Class | Useful Life | Historical Book Value | Reclassification to Company's Presentation | ASC 842 Adoption | Pro Forma Adjustments | Preliminary Estimated Fair Value | ||||||||||||||||
Leasehold improvements | 10-30 years | $ | 70,218 | $ | 9,410 | $ | (26,742 | ) | $ | (22,788 | ) | $ | 30,098 | |||||||||
Furnishings, fixtures and equipment | 3-15 years | 64,640 | (12,205 | ) | - | (6,561 | ) | 45,874 | ||||||||||||||
Computer software and equipment | 5 years | - | 2,795 | (138 | ) | (1,762 | ) | 895 | ||||||||||||||
Construction in progress | 6,625 | - | - | 38 | 6,663 | |||||||||||||||||
Property and equipment, total | 141,483 | - | (26,880 | ) | (31,073 | ) | 83,530 | |||||||||||||||
Less: Accumulated depreciation | (50,273 | ) | - | 5,498 | 44,775 | - | ||||||||||||||||
Property and equipment, net | $ | 91,210 | $ | - | $ | (21,382 | ) | $ | 13,702 | $ | 83,530 |
e) | Intangible assets, net – The increase in intangible assets, net represents the change from FRC’s historical net book value to preliminary estimated fair value as follows (in thousands): |
Historical Book Value | Pro Forma Adjustments | Preliminary Estimated Fair Value | ||||||||||
Intellectual property - North Italia | $ | - | $ | 117,000 | $ | 117,000 | ||||||
Intellectual property - Flower Child | - | 72,000 | 72,000 | |||||||||
Intellectual property - Other FRC | 84,000 | 84,000 | ||||||||||
Other | 1,089 | 4,893 | 5,982 | |||||||||
Total intangible assets, net | $ | 1,089 | $ | 277,893 | $ | 278,982 |
The acquired intellectual property was preliminarily deemed to be indefinite-lived and, therefore, would not be subject to amortization. The final determination of intangible asset lives could materially impact the valuations and resulting amortization expense.
f) | Goodwill – The goodwill balance presented is a preliminary estimate resulting from the excess of consideration transferred and the estimated fair value of the Company’s previously-held equity interest in FRC over the estimated net fair value of the assets acquired and liabilities assumed in the Acquisition. |
g) | Operating lease assets – The increase in operating lease assets represents the $224.5 million impact from ASC 842 adoption by FRC as of January 2, 2019, partially offset by an estimated $1.1 million impact of below-market leases. |
h) | Investments in unconsolidated affiliates – The decrease in investments in unconsolidated affiliates reflects elimination of the Company’s previously-held equity interest in FRC. |
i) | Other assets – The decrease in other assets represents the repayment at Closing of $12.5 million of loans extended by the Company to FRC prior to the Acquisition and assumption at Closing of $10.0 million of loans extended by the Company to FRC prior to the Acquisition. |
j) | Accounts payable – The reduction in accounts payable reflects transaction costs included in accounts payable at Closing. |
k) | Notes payable, current portion – The reduction in notes payable, current portion represents elimination of historical FRC balances that were contractually excluded from the Acquisition. |
l) | Deferred rent – The elimination of deferred rent reflects the impact of ASC 842 adoption by FRC as of January 2, 2019. |
9 |
m) | Operating lease liabilities – The increase in operating lease liabilities represents the impact of ASC 842 adoption by FRC as of January 2, 2019. |
n) | Other accrued expenses – The increase in other accrued expenses is primarily due to the addition of $16.7 million for the fair market value of the current portion of deferred purchase price payments, partially offset by elimination of $8.3 million of transaction-related costs accrued by FRC, including $7.0 million of closing bonuses funded by sellers’ proceeds to be paid by FRC after the Closing (determined to be part of the transaction in accordance with ASC Topic 805, Business Combinations), a $1.2 million impact from ASC 842 adoption by FRC as of January 2, 2019 and elimination of FRC’s $1.2 million payable balance to the Company for items paid by the Company on behalf of FRC prior to the Acquisition. |
o) | Deferred income taxes – The increase in deferred income taxes reflects the estimated impact of the fair value adjustments discussed above and is based on a tax rate of 24.6%, reflecting the rate expected to be in effect at the time the deferred items reverse. |
p) | Deferred rent liabilities – The elimination of the deferred rent liabilities balance reflects the impact of ASC 842 adoption by FRC as of January 2, 2019. |
q) | Deemed landlord financing liability – The elimination of the deemed landlord financing balance reflects the impact of ASC 842 adoption by FRC as of January 2, 2019. |
r) | Other noncurrent liabilities – The increase in other noncurrent liabilities represents the fair market value of the long-term portion of deferred purchase price payments and contingent consideration. |
s) | Retained earnings – The increase in retained earnings represents a $64.7 million gain on remeasurement of the Company’s previously-held equity interest in FRC immediately before the Acquisition date to estimated fair value, partially offset by the elimination of FRC’s historical equity balance of $2.8 million and transaction costs incurred between the Closing Date and the date of this filing totaling $0.9 million. |
4. Adjustments to the Unaudited Pro Forma Condensed Consolidated Statements of Income
t) | Other operating expenses – The increase in other operating expenses primarily represents additional rent expense related to the impact of ASC 842 adoption by FRC as of January 2, 2019. |
u) | General and administrative expenses – The adjustment to general and administrative expenses relates to the following items (in thousands): |
Thirty-Nine Weeks Ended October 1, 2019 | Fiscal Year Ended January 1, 2019 | |||||||
Elimination of nonrecurring transaction costs(1) | $ | (10,784 | ) | $ | - | |||
Contingent consideration expense | 1,307 | 1,743 | ||||||
Other | (262 | ) | 128 | |||||
Total | $ | (9,739 | ) | $ | 1,871 |
(1) $2.4 million incurred by the Company and $8.4 million incurred by FRC, including $7.0 million of closing bonuses funded by sellers’ proceeds to be paid by FRC after the Closing (determined to be part of the transaction in accordance with ASC Topic 805, Business Combinations)
v) | Depreciation and amortization expenses – The decrease in depreciation and amortization expenses relates to the following items (in thousands): |
10 |
Thirty-Nine Weeks Ended October 1, 2019 | Fiscal Year Ended January 1, 2019 | |||||||
Elimination of depreciation expense on assets that were contractually excluded from the acquisition | $ | (2,849 | ) | $ | (2,031 | ) | ||
Adoption of ASC 842 by FRC as of January 2, 2019 | (1,466 | ) | - | |||||
Fair market value adjustments to property and equipment and amortizable intangible assets | (292 | ) | (390 | ) | ||||
Total | $ | (4,607 | ) | $ | (2,421 | ) |
A 10% change in the valuation of property and equipment and amortizable intangible assets would cause a corresponding increase or decrease in annual depreciation and amortization expense of approximately $1.1 million, assuming an overall weighted-average useful life of 12 years.
w) | Income/(loss) on investment in unconsolidated affiliates – The adjustment to income/(loss) on investment in unconsolidated affiliates represents elimination of the Company’s loss on its previously-held equity interest in FRC. |
x) | Interest and other income/(expense) – The Company borrowed $280 million under its credit facility during the third quarter of fiscal 2019 in preparation for funding the Acquisition on October 2, 2019. The increase in interest and other income/(expense) represents interest incurred on this debt at 3.5%, the Company’s effective borrowing rate as of the date of this filing, totaling $7.4 million and $9.9 million for the thirty-nine weeks ended October 1, 2019 and the fiscal year ended January 1, 2019, respectively. This increase is partially offset by the elimination of historical FRC interest expense totaling $3.1 million and $2.0 million for the thirty-nine weeks ended October 1, 2019 and the fiscal year ended January 1, 2019, respectively. |
As interest on the Company’s credit facility is variable, financing costs are sensitive to changes in interest rates. For each 0.125% change in interest rates, annual interest expense would fluctuate by approximately $0.4 million. For each $25 million change in the principal amount of indebtedness, annual interest expense would fluctuate by approximately $0.9 million.
y) | Income tax provision – The increase to the income tax provision represents the estimated impact of the pro forma adjustments and additional estimated federal income tax assuming FRC was a taxable entity using a statutory rate of 25.5%. The Company’s effective tax rate could be materially different from the rate presented in this unaudited pro forma condensed financial information. |
z) | Net income per share – The unaudited pro forma basic and diluted net income per share amounts are based on the historical basic and diluted weighted average shares outstanding of the Company (in thousands, except per share data): |
11 |
Thirty-Nine Weeks Ended October 1, 2019 | Fiscal Year Ended January 1, 2019 | |||||||
Pro forma net income | $ | 65,803 | $ | 82,433 | ||||
Basic weighted average shares outstanding | 44,034 | 45,263 | ||||||
Diluted weighted average shares outstanding | 44,643 | 46,215 | ||||||
Basic net income per share | $ | 1.49 | $ | 1.82 | ||||
Diluted net income per share | $ | 1.47 | $ | 1.78 |
12 |