U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________
Commission File Number 0-12706
Tubby's, Inc.
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(Exact name of small business issuer as specified in its charter)
New Jersey 22-2166602
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
6029 East Fourteen Mile Road, Sterling Heights, Michigan 48312
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(Address of principal executive officers)
810/978-8829
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(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to filed such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No _____
As of October 9, 1996, there were 25,831,131 shares of common stock
outstanding.
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<PAGE>
TUBBY'S, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets,
August 31, 1996 and November 30, 1995................... 3-4
Consolidated Statements of Operations,
Nine Months Ended August 31, 1996 and 1995.............. 5
Consolidated Statements of Cash Flows,
Nine Months Ended August 31, 1996 and 1995.............. 6
Notes to Consolidated Financial Statements.............. 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 10-16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..... 17
Item 6. Exhibits and Reports on Form 8-K........................ 17
Signatures............................................................. 18
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS (UNAUDITED).
<TABLE>
<CAPTION>
TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, 1996 November 30, 1995
Assets (Unaudited) (Unaudited)
------ --------------- -----------------
<S> <C> <C> <C> <C>
Current Assets:
Cash & Cash Equivalents $ 856,349 $ 951,144
Certificate of Deposit 104,685 100,000
Investments 50,000 154,590
Accounts & Notes Receivable
Accounts Receivable - Trade 260,750 282,183
Notes Receivable - Other 63,448 126,742
Notes Receivable - Related Parties 28,178 21,918
------- -------
352,376 430,843
Less Allowance - Doubtful Accounts 37,839 48,512
------- -------
314,537 382,331
Inventories 24,573 21,102
Prepaid Expenses & Other 219,960 58,876
---------- ----------
Total Current Assets 1,570,104 1,668,043
---------- ----------
Property & Equipment:
Land 253,623 253,623
Buildings & Improvements 576,723 405,358
Equipment 467,241 314,677
Furniture & Fixtures 135,928 118,104
Vehicles 15,009 15,009
---------- ----------
1,448,524 1,106,771
Less Accumulated Depreciation 570,907 526,572
---------- ----------
Net Property & Equipment 877,617 580,199
---------- ----------
Net Assets Held for Disposal 82,275 111,193
---------- ----------
Other Assets:
Intangibles, Less Amortization of
$63,942 ($57,369 in 1995) 326,192 346,675
Notes Receivable, Less Allowance for Doubtful
Accounts of $142,209 ($142,209 in 1995) 471,443 488,318
Notes Receivable, Related parties 30,721 75,429
---------- ----------
Total Other Assets 828,356 910,422
---------- ----------
TOTAL OTHER ASSETS $3,358,352 $3,269,857
========== ==========
<FN>
Note: The balance sheet at November 30, 1995 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
1996 1995
Liabilities & Shareholders' Equity (Unaudited) (Unaudited)
---------------------------------- ----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 130,188 $ 163,472
Accrued Liabilities:
Compensation 27,428 36,127
Other 17,291 7,597
Joint Venture, Boli's 10,000 10,000
Deferred Revenue 47,300 77,000
Long-term Debt & Capital
Lease Due Within One Year 222,690 270,427
---------- ----------
Total Current Liabilities 454,897 564,623
Deferred Revenue 141,200 94,000
Long-term Debt & Capital Leases 239,969 246,206
---------- ----------
Total Liabilities 836,066 904,829
---------- ----------
Shareholders' Equity:
Common Stock, $.001 Par Value, 60,000,000
Shares Authorized, 25,831,131 Issued &
Outstanding (25,381,131 Shares in 1995) 25,832 25,382
Additional Paid-In Capital 3,485,844 3,430,044
Accumulated Deficit (989,390) (1,090,398)
---------- ----------
Total Shareholders' Equity 2,522,286 2,365,028
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,358,352 $3,269,857
========== ==========
<FN>
Note: The balance sheet at November 30, 1995 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
August 31, August 31, August 31, August 31,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Food Sales $206,036 $319,093 $ 607,995 $1,023,200
Franchise Fees:
Monthly 160,202 179,770 469,984 507,825
Initial & Transfer 41,750 8,000 74,750 95,750
Equipment & Restaurant Sales 320,098 122,715 426,683 430,164
Advertising Fees 152,465 158,012 406,126 427,738
Commissions & Other 92,377 75,026 279,628 306,432
---------- ---------- ---------- ----------
Total Revenues 972,928 862,616 2,265,166 2,791,109
Costs & Expenses
Operating Expenses 447,762 484,640 1,414,063 1,541,985
Cost of Food Sales 149,865 238,330 434,930 759,791
Cost of Equipment &
Restaurant Sales 264,577 98,364 350,587 381,168
---------- ---------- ---------- ----------
Total Costs & Expenses 862,204 821,334 2,199,580 2,682,944
Operating Income 110,724 41,282 65,586 108,165
---------- ---------- ---------- ----------
Other Income (Expense)
Provision for Estimated Loss
on Disposal Tubby's Express
Restaurants -- (39,000) -- (89,000)
Interest Expense (6,425) (8,934) (18,417) (30,495)
Gain on Sale of:
Fixed Assets -- -- 8,466 109,178
Interest Income 15,682 22,462 70,113 63,864
Minority Interest -- 1,483 - 51,483
Miscellaneous (14) 625 2,210 10,579
---------- ---------- ---------- ----------
Total Other Income (Expense) 9,243 (23,364) 62,372 115,609
Income Before Income Taxes 119,967 17,918 127,958 223,774
Provision for Income Taxes -- -- -- --
---------- ---------- ---------- ----------
Net Income (Loss) $119,967 $ 17,918 $ 127,958 $ 223,774
========== ========== ========== ==========
Net Income (Loss) Per Share $ 0.0047 $ 0.0007 $ 0.0050 $ 0.0091
========== ========== ========== ==========
Weighted Average Number
of Shares Outstanding 25,669,593 25,381,131 25,477,285 24,701,801
========== ========== ========== ==========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TUBBY'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended August 31,
---------------------
1996 1995
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 127,958 $ 223,774
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating Activities:
Depreciation & Amortization 71,311 80,323
Provision for Estimated Loss on Disposal of
Restaurant -- 89,000
Minority Interest in Net Income (Loss) -- (51,483)
Gain on Sale of Fixed Assets (8,466) (109,178)
Increase (Decrease) in Cash Due to Changes In:
Accounts & Notes Receivable 33,056 (160,860)
Inventories (2,370) 14,910
Prepaid Expenses & Other (161,084) (89,391)
Accounts Payable (33,284) (14,453)
Accrued Liabilities 995 (11,503)
Deferred Revenues 17,500 3,714
---------- ---------
Net Cash Provided (Used) by Operating Activities 45,616 (25,147)
Cash Flows from Investing Activities
Maturity of Certificate of Deposits & Investments 99,905 --
Purchase of Property & Equipment (239,334) (64,590)
Net Proceeds from Sale of Property & Equipment 32,250 213,800
Intangibles -- (13,910)
Other Assets -- (1,019)
Note Receivable Paid (Issued) (35,508) 147,642
---------- ---------
Net Cash Provided (Used) by Investing Activities (142,687) 281,923
Cash Flows from Financing Activities:
Payments on Long-term Debt (53,974) (77,698)
Proceeds from Issuance of Capital Stock 56,250 460,000
--------- ---------
Net Cash Provided by Financing Activities 2,276 382,302
Increase (Decrease) in Cash: (94,795) 639,078
Cash & Equivalents at Beginning of Period 951,144 347,706
--------- ---------
Cash & Equivalents at End of Period $ 856,349 $ 986,784
========= =========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
TUBBY'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements do not include all of the
information and footnotes necessary for the annual presentation of
financial position, results of operation and cash flows in conformity
with generally accepted accounting principles. In the opinion of the
Company, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flow at August 31, 1996 and
August 31, 1995 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto as of November 30, 1995 and
the Form 10-KSB as of November 30, 1995.
2. ACCOUNTING FOR INCOME TAXES
The Company has acquired net operating loss carry forwards relating to
the SYF merger of approximately $1,250,000 which are available to
offset future taxable income. However, to the extent such loss carry
forwards are utilized to reduce future operating income, the related
tax benefit will first be credited to goodwill until fully eliminated
and then to income. Utilization of these losses is limited based on
the taxable income generated by the activity that generated these
losses and expire beginning in 1999.
The Company also has net operating loss carry forwards for tax
purposes of approximately $637,616 relating to losses incurred
subsequent to the SYF acquisition which expires beginning in 2006.
3. INVESTMENTS
Effective December 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Accordingly, the Company has classified
its marketable debt securities into held-to-maturity and
available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-
sale are reported at fair market value with unrealized gains or losses
incurred in stockholders' equity. At August 31, 1996, there were no
unrealized gains or losses reported as cost approximated fair value.
-7-
<PAGE>
The following information pertains to marketable equity and debt
securities at August 31, 1996:
<TABLE>
<CAPTION>
Aggregate Unrealized Aggregate
Fair Gains and Cost
Value Losses Basis
--------- ---------- ---------
<S> <C> <C> <C>
Held to Maturity Securities
(Corporate debt securities
maturing within one year) -- -- --
Available for Sale Securities
(Corporate bond fund) $50,000 -- $50,000
------- -------
Total $50,000 $50,000
======= =======
</TABLE>
4. PROPERTY & EQUIPMENT
In January, 1996, the Company sold one of its stand alone restaurants
for $90,000. The sale consisted of $25,000 cash and a $65,000
promissory note maturing January 15, 2001. A franchise transfer fee of
$6,250 and a gain of $11,707 was recognized on the sale. Revenues from
this restaurant, which was acquired on April 1, 1995, totaled $23,380
in 1996 and $141,923 in 1995.
5. ASSETS HELD FOR DISPOSAL
During the year ended November 30, 1995, the Company provided for the
sale of one its Tubby's Express restaurants and the closing of
another. At that time management provided $111,193 for the expected
losses from operations and on disposal of these locations. In
December, 1995, Management did close one of these restaurants. The
remaining restaurant is expected to be sold in 1996. No loss is
expected from the sale of this store.
The net assets held for disposal of $82,275 and $111,193 respectively
have been separately disclosed in the accompanying balance sheet for
August 31, 1996, and November 30, 1995. The assets consist primarily
of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Property and Equipment $82,275 $140,283
Reserve for Estimated Loss on Disposal -- (29,090)
------- --------
Net Assets Held for Disposal $82,275 $111,193
======= ========
</TABLE>
Revenue from the store closed in December, 1995, totaled $21,236 in
1996 and $198,852 in 1995. Revenue from the remaining open store
totaled $259,837 in 1996 and $348,067 in 1995.
-8-
<PAGE>
6. LITIGATION
Patrick J. McCourt, the Patrick J. McCourt Trust, and McCourt
Corporation, a Michigan corporation v Tubby's, Inc., a New Jersey
corporation, the McTub Company, a Michigan partnership, Robert M.
Paganes, P. Terrance Paganes, J. Thomas Paganes, and Vincent J.
Tatone. Federal Court Case No. 95-CV-73339- DT. On August 17, 1995, a
civil action was commenced in the United States District Court for the
Eastern District of Michigan by the above named Plaintiffs. Patrick J.
McCourt, as Trustee of the Patrick J. McCourt Trust and as President
of McCourt Corporation, purchased restricted shares of Tubby's Common
Stock pursuant to private placements in June, July and November of
1993 and formed the McTub Company, a general partnership, with Tubby's
in August of 1993 for the purpose of owning and operating certain
quick-service restaurants. Plaintiffs' Complaint sought recision of
those transactions and, in connection therewith, alleged violations of
Federal Securities regulations, fraudulent misrepresentation,
violation of the Racketeer Influenced and Corrupt Organizations Act
(RICO), dissolution of partnership and accounting, violation of
Michigan Securities Act and Michigan's Franchise Investment Law.
Plaintiffs purchased a total of 1.5 million shares at 25 cents per
share for a total purchase price of $375,000 and Plaintiffs' total
investment in the McTub Company was approximately $400,000. The
Company filed an Answer in which it denied liability to Plaintiffs and
a Counter-Complaint against Plaintiff Patrick J. McCourt for fraud. In
addition, the Company filed a Cross-Claim against the McTub Company
seeking a declaratory judgment that the Company is entitled to a
distribution in an amount equal to the amount of its additional
capital contributions prior to any other partnership distributions
that may be made by that Company. The Company filed a Motion for
Summary Judgment of Plaintiffs' Securities Fraud claims and a Motion
to Dismiss Plaintiffs' RICO claims, and a Motion to Dismiss the
Plaintiffs' state law claims without prejudice. On July 22, 1996, the
Court granted all three motions and granted the Company all of the
relief it requested. The Court ruled that Plaintiff has not sustained
any damages in connection with Plaintiff's purchase of restricted
shares and that Plaintiff waived any right to recision. The Court also
granted the Company's Motion for Summary Judgment for the reason that
Plaintiff did not assert the securities fraud claim within the
statutory limitations period. The Court dismissed Plaintiff's RICO
claims for the reason that Plaintiff's Complaint failed to state any
possible claims under RICO. Finally, the Court dismissed all of
Plaintiff's remaining state law claims without prejudice. The Company
anticipates that Plaintiffs will file a new Complaint in state court
which should only involve claims regarding the McTub Company
partnership. The Company intends to vigorously defend against the
claims and intends to seek dissolution of that partnership.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
Company's Form 10- KSB and audited financial statements and notes thereto for
the fiscal year-ended November 30, 1995.
FINANCIAL CONDITION
Cash and Equivalents, Certificates of Deposit, and Investments decreased by
$194,700 for the nine months ended August 31, 1996, as compared with an
increase of $639,078 for the nine months ended August 31, 1995. The current
period decrease in the Company's cash position resulted from costs related to
the construction in progress of four restaurants (one of which is franchisee
owned, two of which are expected to be sold to franchisees and one other which
will be initially Company owned), the pre-payment of certain expenses, the
purchase of the land and building of an existing franchisee, the purchase of
computer equipment, and the reduction of vendor payables. The Company's cash
position has improved by $180,000 in the third quarter of 1996 as compared to
the second quarter ended May 31, 1996. The anticipated sale of the two
restaurants and construction of one restaurant referred to above in the fourth
quarter of 1996 and first quarter of 1997 will generate approximately $300,000
in cash. The increase in cash position of the prior year resulted from the
cash sale of a Company-owned restaurant, the private placement of restricted
stock, and the results of its operations.
The sale of a company store, the opening of four new franchised restaurants,
and the transfer of four existing franchised restaurants resulted in the
recognition of initial and transfer franchise fees as well as continuing
monthly franchise fees, advertising fees and rental income. The opening of as
many as thirteen additional new locations, (two locations of which are
initially expected to be Company owned and operated) are anticipated by the
end of the first quarter of 1997 and are expected to similarly result in the
recognition of initial franchise fees, continuing monthly franchise fees and
advertising fees. Additionally, with the sale of three Development Agent
agreements, the Company anticipates the opening of nine additional locations
in the Cleveland, Ohio, Phoenix, Arizona, and Detroit, Michigan, markets
within the next twelve months. The Company earned a $120,000 third quarter
profit, and expects the fourth quarter to also be profitable. The anticipated
opening and sale of the thirteen restaurants referred to above as well as the
potential opening of restaurants associated with the Development Agent
agreements should enable the Company to achieve its second consecutive
profitable year and a profitable first quarter of 1997.
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<PAGE>
In the three months ended August 31, 1996, a former employee exercised stock
options representing 450,000 shares at $.125 each for a total of $56,250.
After the issuance of these shares the issued and outstanding shares of the
Company increased to 25,831,131.
Results of operations for the three months ended August 31, 1996 as compared
with the three months ended August 31, 1995.
The Company incurred Operating Income of $110,724 and Net Income of $119,967
for the three months ending August 31, 1996. For the three months ending
August 31, 1995, the Company incurred Operating Income of $41,282 and Net
Income of $17.918 The Company believes that the current quarter's results were
depressed by legal fees of $27,500 resulting from the current litigation (see
Note 6 of the Consolidated Financial Statements), franchise development
expenses of $11,000 resulting from ongoing efforts to establish Development
Agent agreements in new regions of the country, and the $9,000 commission paid
resulting from the sale of a new franchised restaurant.
Revenues for the three months ended August 31, 1996, increased $110,312 or
12.8% to $972,928 as compared to the same period in 1995. This increase was
largely attributable to a $197,383 or 160.9% increase in Equipment &
Restaurant Sales. Initial Franchise Fees improved by $33,750 or 422%. The
increases in these two categories resulted, in part, from new store openings
that were delayed from the second quarter to the third quarter of 1996.
Commissions & Other increased $17,351 or 23.1%. The Company expects that a
significant increase in Initial & Transfer Franchise Fees as well as Equipment
& Restaurant Sales will result from the anticipated opening and sale of as
many as thirteen new Tubby's Sub Shops in the next two quarters.
The decline in Food Sales of $113,057 or 35.4% resulted from the 1995 closing
of one and sale of two unprofitable Tubby's Express restaurants and the sale
of two Company owned restaurants in 1995 and 1996. Revenues resulting from
these restaurants for the three months ending August 31, 1995, totaled
$154,463. The Company opened a new Tubby's Sub Shop in March, 1996. This
restaurant was sold to a franchisee in August, 1996. Food Sales derived from
this restaurant for the three months ended August 31, 1996, totaled $45,568.
At that time, the Company recognized an Initial Franchise Fee of $15,000 and
Equipment & Restaurant Sales of $101,925. The Company will also realize
ongoing monthly franchise and advertising fees.
The decline in Franchise Fees Monthly of $19,568 or 10.9% and Advertising Fees
of $5,547 or 3.51% resulted from reduced estimates of fees expected from new
and existing Tubby's Sub Shops. The Company's subsidiary that provides
advertising and promotional services for the benefit of the franchised and
Company owned restaurants incurred Operating Income of $68,827 for the three
months ending August 31, 1996, effectively increasing operating income and net
income by a similar amount. The Company anticipates that a portion of this
income will be expended for increased advertising and promotional efforts in
the fourth quarter of 1996. It is normally the intention of The Company to
fully expend funds for advertising and promotional efforts
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<PAGE>
to the extent obtained from franchisee and company owned stores. The effect of
this Operating Income of $68,827 was an increase in Consolidated Operating
Income from $41,897 to $110,724 and Consolidated Net Income of $51,140 to
$119,967.
Costs & Expenses for the three months ending August 31, 1996, increased by
$40,870 or 5%. This increase was attributable to a $166,213 or 169% increase
in Cost Of Equipment & Restaurant Sales and is proportionate to the increase
in Equipment & Restaurant Sales referred to above. Cost Of Food Sales declined
by $88,465 or 37.1% which is proportionate to the decline in Food Sales as
referred to above. Operating Expenses decreased $36,878 or 7.6% reflecting
reduced advertising and promotional expenditures of approximately $69,000
offset by increased legal fees of $27,000 (see Note 6 of the Consolidated
Financial Statements) and franchise development expenses of $11,000.
Interest Expense decreased by $2,509 or 28.1% from 1995 to 1996 reflecting the
continued reduction of long term debt, lower interest rates, and the efforts
of management to avoid additional debt.
Interest Income for the three months ending August 31, 1996, decreased by
$6,780 or 28.1% reflecting a current period adjustment to the investment
earnings derived from idle funds invested for the nine month of 1996. For the
nine months ending August 31, 1996, Interest Income has increased $6,249 or
9.8%.
For the three months ended May 31, 1995, the Company provided an additional
$50,000 for the Estimated Loss On Disposal of its Tubby's Express Restaurants.
There was no additional provision in the three months ending August 31, 1996.
In April, 1996, the Company sold a Development Agent agreement for the
Cleveland, Ohio region. This agreement calls for the agent to develop five
Tubby's Sub Shops in the first year of the agreement and a total of fifty (50)
Tubby's Sub Shops in the Cleveland market over a period of eight years. As
each restaurant opens, the Company will realize reduced initial franchise fees
and ongoing monthly franchise and advertising fees. Originally scheduled to
begin in August, 1996, the Development Agent has been granted a postponement
until January, 1997, of the requirement to pay the Company for marketing
rights.
In June, 1996, the Company sold a Development Agent agreement for the State of
Arizona. This agreement calls for the agent to develop three Tubby's Sub Shops
by September 1, 1997, and a total of twenty-five (25) Tubby's Sub Shops in the
Arizona market over a period of six years. As each restaurant opens, the
Company will realize marketing rights, reduced initial franchise fees and
ongoing monthly franchise and advertising fees.
In September, 1996, the Company sold a Development Agent agreement for the
City of Detroit, Michigan. This agreement calls for the agent to develop three
Tubby's Sub Shops by September 1, 1997, and a total of twenty-seven (27)
Tubby's Sub Shops in the
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<PAGE>
Detroit market over a period of three years. As each restaurant opens, the
Company will realize reduced initial franchise fees and ongoing monthly
franchise and advertising fees.
Results of operations for the nine months ended August 31, 1996 as compared
with the nine months ended August 31, 1995.
The Company incurred Operating Income of $65,586 and Net Income of $127,958
for the nine months ending August 31, 1996. For the nine months ending August
31, 1995, the Company incurred Operating Income of $108,165 and Net Income of
$223,774. The Company believes that this year's results were depressed by
legal fees of $39,260 resulting from the current litigation (see Note 6 of the
Consolidated Financial Statements), franchise development expenses of $44,496
resulting from ongoing efforts to establish Development Agent agreements in
new regions of the country and Commissions of $14,000 resulting from the sale
of two new franchised restaurants. The 1996 Net Income reflects a gain of
$8,466 resulting from sale of a Company owned restaurant while the 1995 Net
Income also reflects a gain of $109,178 resulting from the sale of a Company
owned restaurant.
Revenues for the nine months ended August 31, 1996, decreased by 18.8% or
$525,943. The decrease in Revenue was largely attributable to a $415,205 or
40.6% decline in Food Sales. The decline in Food Sales resulted from the 1995
closing of one and sale of two unprofitable Tubby's Express restaurants and
the sale of two Company owned restaurants in 1995 and 1996. Revenues resulting
from these restaurants for the nine months ending August 31, 1995, totaled
$545,357. The Company opened a new Tubby's Sub Shop in March, 1996. This
restaurant was sold to a franchisee in August, 1996. Food Sales derived from
this restaurant while the restaurant was Company owned totaled $92,524. At
that time of sale, the Company recognized an Initial Franchise Fee of $15,000
and Equipment & Restaurant Sales of $101,925. The Company will also realize
ongoing monthly franchise and advertising fees.
The decline in Franchise Fees Monthly of $37,841 or 7.5% and Advertising Fees
of $21,612 or 5.1% resulted from reduced estimates of fees expected from new
and existing Tubby's Sub Shops. Initial & Transfer Franchise Fees reflect the
opening of seven restaurants in 1995, and the opening of four restaurants and
transfer of four restaurants in 1996. Equipment & Restaurant Sales declined by
$3,481 or 0.8%. The Company expects that a significant increase in Initial &
Transfer Franchise Fees as well as Equipment & Restaurant Sales will result
from the anticipated opening and sale of as many as thirteen new Tubby's Sub
Shops by the end of the first quarter of 1997.
Commissions & Other Fees decreased by $26,804 or 8.8% in 1996 as compared to
1995. This declines resulted primarily from timing differences in the
recognition of vendor rebates. It is anticipated that this revenue decline
will be recovered over the remaining three months of 1996.
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<PAGE>
Total Costs & Expenses declined $483,364 or 18% in the nine months ended
August 31, 1996, as compared to the similar period in 1995. Of this amount,
the proportionate decline of $324,861 or 42.8% in Cost Of Food Sales was
attributable to the decline in Food Sales as referred to above. Operating
Expenses decreased $127,922 or 8.3% reflecting reduced advertising and
promotional expenditures of approximately $200,000 and expense reductions
attributable to the closing or sale of the Company owned restaurants referred
to above offset by increases in legal fees of $40,000 (see Note 7 of the
Consolidated Financial Statements), and franchise development expenses of
$44,500. The Company's subsidiary that provides advertising and promotional
services for the benefit of franchised and Company owned restaurants incurred
Operating Income of $87,000, for the nine months ended August 31, 1996,
effectively increasing operating income and net income by a similar amount.
The Company anticipates that a portion of this income will be expended for
increased advertising and promotional efforts in the fourth quarter of 1996.
It is normally the intention of The Company to fully expend funds for
advertising and promotional efforts to the extent obtained from franchisee and
company owned stores. The effect of this $87,000 Operating Income in 1996 was
an increase in Operating Income from a Operating Loss of $21,414 to an
Operating Income of $65,586 and Net Income of $40,958 to $127,958.
Interest Expense decreased by $12,078 or 39.6% from 1995 to 1996 reflecting
the continued reduction of long term debt, lower interest rates, and the
efforts of management to avoid additional debt.
Interest Income increased in 1996 by $6,249 or 9.8% to $70,113 as a result of
the investment earnings derived from idle funds invested for the full nine
month period in 1996 rather then a shorter period in 1995.
In the first quarter of 1996, the $11,105 Gain On Sale Of Fixed Assets
resulted from a $14,346 gain on the sale of a Company owned restaurant that
was acquired in April, 1995, and an additional loss of $3,241 resulting from
the closure of a Company owned Tubby's Express restaurant in December, 1995,
(see Note 4 of the Consolidated Financial Statements). In the second quarter
of 1996, an additional charge of $2,639 reduced the $14,346 gain referred to
above to gain of $11,707 and the overall gain to $8,466. In 1995, a gain of
$109,178 was realized also from the sale of a Company owned restaurant.
For the nine months ended August 31, 1995, the Company provided an additional
$89,000 for the Estimated Loss On Disposal of its Tubby's Express Restaurants.
There was no additional provision in the nine months ending August 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Equivalents, Certificates of Deposit, and Investments declined by
$194,700 in the nine months ending August 31, 1996. The declined was primarily
attributable to several factors; the most significant being construction in
progress of four new Tubby's
-14-
<PAGE>
Sub Shops for about $96,000 and the purchase of the land and building of an
existing Tubby's Sub Shop restaurant for $194,000. The anticipated sale of
these four restaurants in the fourth quarter of 1996 and first quarter of
1997, will generate in excess of $300,000 in cash. The increase in cash
position of the prior year resulted from the cash sale of a Company owned
restaurant, the private placement of restricted stock, and the results of its
operations.
In September, 1996, the Company reacquired for $107,500 the Tubby's Sub Shop
location of a franchisee who was in default. The Company believes that this
location will be critical in the development of the area where it is located.
In addition to four restaurants referred to above, as many as nine new Tubby's
Sub Shops are expected to open by the end of the first quarter of 1997. Of
these thirteen new Tubby's Sub Shops scheduled to be opened by February 28,
1997, the Company anticipates that eleven restaurants will be franchisee owned
and operated. It is expected that the two remaining restaurants will be
initially Company owned and operated.
In April, 1996, the Company sold a Development Agent agreement for the
Cleveland, Ohio region. This agreement calls for the agent to develop five
Tubby's Sub Shops in the first year of the agreement and a total of fifty (50)
Tubby's Sub Shops in the Cleveland market over a period of eight years. As
each restaurant opens, the Company will realize reduced initial franchise fees
and ongoing monthly franchise and advertising fees. Originally scheduled to
begin in August, 1996, the Development Agent has been granted a postponement
until January, 1997, of the requirement to pay the Company for marketing
rights.
In June, 1996, the Company sold a Development Agent agreement for the State of
Arizona. This agreement calls for the agent to develop three Tubby's Sub Shops
by September 1, 1997, and a total of twenty-five (25) Tubby's Sub Shops in the
Arizona market over a period of six years. As each restaurant opens, the
Company will realize marketing rights, reduced initial franchise fees and
ongoing monthly franchise and advertising fees.
In September, 1996, the Company sold a Development Agent agreement for the
City of Detroit, Michigan. This agreement calls for the agent to develop three
Tubby's Sub Shops by September 1, 1997, and a total of twenty-seven (27)
Tubby's Sub Shops in the Detroit market over a period of three years. As each
restaurant opens, the Company will realize reduced initial franchise fees and
ongoing monthly franchise and advertising fees.
In the three months ending August 31, 1996, a former employee exercised stocks
option representing 450,000 shares at $.125 each for a total of $56,250. After
the issuance of these shares the issued and outstanding shares of the Company
increased to 25,831,131.
-15-
<PAGE>
In December, 1995, the Company initiated a $250,000 revolving line of credit
with a local financial institution. This line of credit can be drawn upon as
needed to meet future cash requirements. As of October 10, 1996, the entire
line of credit was available to the Company.
The Company is responsible for supervising construction and equipment
installation for some new locations. As part of that process, the Company will
contract for the purchase of equipment and execute construction contracts.
Although the Company is reimbursed entirely for its costs, it often must
prepay some costs. As of August 31, 1996, the Company had as many as seven new
locations scheduled to open by November 30, 1996. The Company is responsible
for the construction and equipment installation of these locations, five of
which will be owned and operated by franchisees. The Company anticipates the
construction of the two Company owned Tubby's Sub Shops will cost about
$190,000. The Company anticipates that these locations will eventually be sold
to franchisees though it has sufficient working capital to internally finance
these projects.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits submitted with this report.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
by the Registrant during the nine months ended August 31,
1996.
-17-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TUBBY'S, INC.
/s/ Robert M. Paganes
--------------------------------------
By: Robert M. Paganes
President, Chief Executive Officer
Dated: October 11, 1996
/s/ Melvyn Erdos
--------------------------------------
By: Melvyn Erdos
Treasurer, Chief Financial Officer
Dated: October 11, 1996
-18-
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> $ 961,034
<SECURITIES> 50,000
<RECEIVABLES> 996,749
<ALLOWANCES> 180,040
<INVENTORY> 24,573
<CURRENT-ASSETS> 1,570,104
<PP&E> 1,530,799
<DEPRECIATION> 570,907
<TOTAL-ASSETS> 3,358,352
<CURRENT-LIABILITIES> 454,897
<BONDS> 0
<COMMON> 25,832
0
0
<OTHER-SE> 2,496,454
<TOTAL-LIABILITY-AND-EQUITY> 3,358,352
<SALES> 1,034,678
<TOTAL-REVENUES> 2,345,955
<CGS> 785,517
<TOTAL-COSTS> 1,432,480
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,417
<INCOME-PRETAX> 127,958
<INCOME-TAX> 0
<INCOME-CONTINUING> 127,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,958
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