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, 1997
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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 Identification
of incorporation or organization) 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 1, 1997, there were 25,831,131 shares of common stock
outstanding.
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TUBBY'S, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets,
August 31, 1997 and November 30, 1996 3-4
Consolidated Statements of Operations,
Three and Nine Months Ended August 31, 1997 and 1996 5
Consolidated Statements of Cash Flows,
Nine Months Ended August 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS (UNAUDITED).
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<CAPTION>
TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, 1997 November 30, 1996
ASSETS (Unaudited) (Note)
- ------------------------------------------------ --------------- -----------------
<S> <C> <C>
Current Assets
Cash & Cash Equivalents $ 893,261 $ 793,494
Certificate of Deposit 100,000 100,000
Marketable Securities 25,083 25,000
Accounts Receivable - Trade, less
allowance for doubtful accounts of
$20,850 in 1997 and 1996 333,617 245,267
Notes Receivable 67,830 72,091
Inventories 56,325 104,805
Prepaid Expenses & Other 92,474 110,644
---------- ----------
Total Current Assets 1,568,590 1,451,301
Property & Equipment ---------- ----------
Land 325,347 325,347
Buildings & Improvements 727,587 693,347
Equipment 451,053 440,705
Furniture & Fixtures 229,881 217,464
Vehicles 15,009 15,009
---------- ----------
1,748,877 1,691,872
Less: Accumulated Depreciation 743,297 654,255
---------- ----------
Net Property & Equipment 1,005,580 1,037,617
---------- ----------
Other Assets
Goodwill, less amortization of
$110,717 and $68,045 in 1997 and 1996 295,569 338,241
Notes Receivable, less allowance for doubtful
accounts of $5,894 in 1997 and 1996 466,076 505,380
---------- ----------
Total Other Assets 761,645 843,621
---------- ----------
Total Assets $3,335,815 $3,332,539
========== ==========
<FN>
Note: The balance sheet at November 30, 1996 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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TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, 1997 November 30, 1996
LIABILITIES & STOCKHOLDERS' EQUITY (Unaudited) (Note)
- ----------------------------------------------- --------------- -----------------
<S> <C> <C>
Current Liabilities
Accounts Payable $ 158,261 $ 189,929
Accrued Liabilities:
Compensation 30,299 21,075
Other 30,974 13,305
Deferred Revenue 65,119 87,000
Long-Term Debt due within one year 221,263 266,825
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Total Current Liabilities 505,916 578,134
Deferred Revenue 52,367 40,000
Long-Term Debt, less amounts due in one year 145,200 175,770
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Total Liabilities 703,483 793,904
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Stockholders' Equity
Common Stock, $.001 Par Value, 60,000,000
Shares Authorized, 25,831,131 Issued &
Outstanding 25,832 25,832
Additional Paid-In Capital 3,485,844 3,485,844
Retained Earnings (Deficit) (879,344) (973,041)
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Total Stockholders' Equity 2,632,332 2,538,635
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,335,815 $ 3,332,539
=========== ===========
<FN>
Note: The balance sheet at November 30, 1996 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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TUBBY'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
------------------------------ ----------------------------
August 31, August 31, August 31, August 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Food Sales $ 231,289 $ 206,036 $ 731,174 $ 607,995
Franchise Fees:
Monthly 209,875 160,202 576,432 469,984
Initial & Transfer 32,134 41,750 120,884 74,750
Marketing Rights 10,500 -- 25,019 --
Equipment & Restaurant Sales 120,526 320,098 446,218 426,683
Advertising Fees 157,790 152,465 466,470 406,126
Commissions & Other Fees 109,305 92,377 322,023 279,628
------------ ------------ ------------ ------------
Total Revenues 871,419 972,928 2,688,220 2,265,166
Costs & Expenses:
Operating Expenses 578,491 447,762 1,733,156 1,414,063
Cost of Food Sales 157,711 149,865 521,468 434,930
Cost of Equipment &
Restaurant Sales 98,551 264,577 358,601 350,587
------------ ------------ ------------ ------------
Total Costs & Expenses 834,753 862,204 2,613,225 2,199,580
Operating Income (Loss) 36,666 110,724 74,995 65,586
------------ ------------ ------------ ------------
Other Income (Expense):
Interest Expense (3,139) (6,425) (13,623) (18,417)
Gain on Sale of Fixed Assets -- -- -- 8,466
Interest Income 20,626 15,682 64,169 70,113
Miscellaneous (589) (14) 604 2,210
------------ ------------ ------------ ------------
Total Other Income (Expense) 16,898 9,243 51,150 62,372
Net Income before Federal
Income taxes 53,564 119,967 126,145 127,958
Provision for Federal Income Taxes: 32,447 -- 32,447 --
------------ ------------ ------------ ------------
Net Income $ 21,117 $ 119,967 $ 93,698 $ 127,958
============ ============ ============ ============
Net Income Per Share $ 0.000 $ 0.005 $ 0.004 $ 0.005
============ ============ ============ ============
Common Shares
Outstanding (Average) 25,831,131 25,669,593 25,831,131 25,477,285
============ ============ ============ ============
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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TUBBY'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended August 31,
----------------------------
1997 1996
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 93,698 $ 127,958
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation & Amortization 99,268 71,311
Gain on Sale of Fixed Assets -- (8,466)
Reduction of Goodwill from Utilization of
Net operating Loss Carry Forwards 32,447 --
Increase (Decrease) in Cash Due to Changes In:
Accounts Receivable (88,350) 33,056
Inventories 48,480 (2,370)
Prepaid Expenses & Other 18,170 (161,084)
Accounts Payable (31,668) (33,284)
Accrued Liabilities 26,893 995
Deferred Revenues (9,514) 17,500
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Net Cash Provided (Used) by Operating Activities 189,424 45,616
Cash Flows from Investing Activities:
Sale of Certificate of Deposits & Marketable Securities (83) 99,905
Purchase of Property & Equipment (57,005) (239,334)
Net Proceeds from Sale of Property & Equipment -- 32,250
Payments on Notes Receivable 43,565 (35,508)
--------- ---------
Net Cash (Used In) Provided by Investing Activities (13,523) (142,687)
Cash Flows from Financing Activities:
Payments on Long-term Debt (76,134) (53,974)
Proceeds from Issuance of Capital Stock -- 56,250
--------- ---------
Net Cash (Used In) Provided by Financing Activities (76,134) 2,276
Net Increase (Decrease) in Cash: 99,767 (94,795)
Cash & Equivalents at Beginning of Period 793,494 951,144
--------- ---------
Cash & Equivalents at End of Period $ 893,261 $ 856,349
========= =========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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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, 1997 and August 31, 1996 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, 1996
and the Form 10-KSB as of November 30, 1996.
2. ACCOUNTING FOR INCOME TAXES
The Company has acquired net operating loss carry forwards relating
to the SYF merger of approximately $1,123,855 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. During the nine
months ending August 31, 1997, the Company utilized $126,145 of its
pre-acquisition net operating loss carry forward. This resulted in a
Provision for Federal Income Taxes of $32,447 in the current period
and a corresponding reduction of goodwill.
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
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The Company has classified its marketable debt into held-to-maturity
and available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and
available-for-sale securities are reported at fair market value with
unrealized gains or losses reported as a component of stockholders'
equity. During the nine months ending August 31, 1997, and the year
ending November 30, 1996, there were no realized or unrealized gains
or losses reported as cost approximated fair value.
4. LITIGATION
On August 17, 1995, a civil action was commenced against the Company
in the United States District Court for the Eastern District of
Michigan. 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 originally
under the name "Cafe Express." Plaintiffs' complaint sought
rescission of those transactions and, in connection therewith,
alleged violation 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(cent) 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. 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 the amount of
$105,000 prior to any other distributions that may be made by that
Company. After the close of discovery, the Company filed motions for
summary judgment of plaintiffs' securities fraud claims and to
dismiss plaintiffs' RICO claims, which the Court granted in July of
1996. The Court also granted the Company's motion to dismiss all of
plaintiffs' remaining claims, which asserted claims under state law,
without prejudice. Thereafter, orders were entered granting judgment
in the Company's favor with regard to plaintiffs' securities fraud
claims and dismissing plaintiffs' RICO claims, with prejudice, and
dismissing all of plaintiffs' remaining claims, without prejudice.
Plaintiffs then commenced an action in the Circuit Court for the
County of Oakland (the "Oakland County Action"). In the Oakland
County Action, plaintiffs assert the same allegations of "fraud"
that were asserted and dismissed in the federal action but are only
seeking rescission of the
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McTub Partnership Agreement and/or money damages in connection with
the formation of that partnership. This case does not involve any
"securities" claims regarding the shares of common stock purchased
by McCourt. The Company filed an answer denying liability, a
counter-complaint in which it asserts a claim for fraud against
McCourt, and a cross-claim against the McTub Company seeking certain
declaratory relief in connection with loans to the partnership that
were procured by its partners. Also, the Company filed an action in
the Circuit Court for the County of Macomb, in which it asserted a
claim for dissolution of the partnership (the "Macomb County
Action"). That action was transferred to the Circuit Court for the
County of Oakland and consolidated with the Oakland County Action.
Both actions are scheduled for trial in December of 1997. The
Company is unable at this time to estimate the probability of a
successful conclusion to the litigation or to estimate the possible
loss to the Company if it is not successful.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
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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, 1996.
FINANCIAL CONDITION
Cash and Equivalents, Certificates of Deposit, and Marketable Securities
increased by $99,850 for the nine months ended August 31, 1997, as compared
with a decrease of $194,700 for the nine months ended August 31, 1996. The
current period increase in the Company's cash position resulted primarily
from its Net Income before Federal Income Taxes of $126,145, Depreciation and
Amortization of $99,268, and a $48,480 decrease in Inventory resulting from a
reduction of new restaurant construction-in-progress offset by a $88,350
increase in Accounts Receivable, a $31,668 reduction of Accounts Payable and
Purchases Of Property & Equipment of $57,005. The decrease in cash position
of the prior year resulted from costs related to the construction in progress
of four restaurants, the purchase of the land and building of an existing
franchisee, the purchase of property & equipment, the pre-payment of certain
expenses, and the reduction of vendor payables.
The Company opened five new franchised Tubby's Sub Shops in each of the first
three quarters of 1997. In addition, the Company anticipates an additional
three new franchisee-owned locations will open by the end of its fourth
quarter in 1997. New Development Agent agreements were also sold for certain
counties and other areas in the state of Michigan, certain counties in the
states of Illinois and Missouri, the state of Texas, and the provinces of
Alberta and British Columbia, and Essex County, Ontario Canada. Additional
new Development Agent agreements are expected by the end of 1997 with related
new restaurant openings in 1998. Restaurants opened pursuant to Development
Agent agreements generally require that Initial and Monthly Franchise Fees be
shared with the respective development agent and, as a result, less income is
recognized by the Company. Though the Company believes that planned new
restaurants will open as anticipated, the responsibility to open and operate
these locations by franchisees, who are unrelated to the Company, is
ultimately not in the control of the Company. Unforeseen obstacles may either
delay, alter or permanently prevent planned openings of franchisee-owned
restaurants and
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accordingly may delay, alter or prevent Tubby's, Inc. from achieving it's
anticipated goals for future growth of the Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AS COMPARED
WITH THE THREE MONTHS ENDED AUGUST 31, 1996.
Revenues for the three months ended August 31, 1997, decreased $101,509 or
10.4% to $871,419 as compared to the same period in 1996. The stronger 1996
sales were largely attributable to Equipment & Restaurants Sales and Initial
Franchise Fees resulting from the opening of three restaurants that were
delayed from the second quarter of 1996 and the transfer fees collected from
the sale of three existing restaurants.
The Company incurred Operating Income of $36,666 and Net Income of $21,117
for the three months ending August 31, 1997. For the three months ending
August 31, 1996, the Company incurred Operating Income of $110,724 and a Net
Income of $119,967. The current quarter's results were depressed by a
non-cash Provision for Federal Income Taxes of $32,447, and shareholder
relations expense of $36,675 resulting from costs relating to the prior
year-end printing and distribution of year-end shareholder publications and
increased efforts to enhance shareholder value, and a $10,248 loss resulting
from the operation of Company-owned restaurants.
The Provision for Federal Income Taxes of $32,447 reflects the expense for
the nine months of the current year and is results from by the utilization of
net operating loss carry forwards, (see Note 2 of the Consolidated Financial
Statements). Losses incurred from the operation of Company-owned restaurants
decreased from $33,318 for the three months ending May 31, 1997 to a $10,248
loss for the current quarter. The decrease in losses from the operation of
Company-owned restaurants is attributable to increased food sales of existing
stores and the sale of a store in June of 1997 to a Tubby's Sub Shop
franchisee. With the sale of another company-owned restaurant in September of
1997, losses resulting from the operation of company-owned restaurants are
expected to decline further or be eliminated.
Food Sales for the quarter ending August 31, 1997, increased $25,253 or
12.26% as compared to the same period of 1996. Food Sales in 1996 resulted
from two Company-owned restaurants that were open for the entire three months
and one restaurant that was sold to a franchisee before the end of the
quarter. Food Sales for the same period in 1997 resulted from four
Company-owned restaurants that were open for the entire three months and one
restaurant that was sold to a franchisee before the end of the quarter. An
additional Company-owned restaurant was sold to a franchisee after the end of
the quarter.
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Monthly Franchise Fees for the three months ending August 31, 1997, increased
by 31% or $49,673 as compared to the same period of 1996. This increase
reflects the income derived from the increased franchisee food sales
resulting from the advertising efforts of the Company and the additional
monthly fees derived from its new franchisees. As successful new franchised
Tubby's Sub Shops are opened, Monthly Franchise Fees are expected to
increase, accordingly.
The Initial & Transfer Franchise Fees for the three months ending August 31,
1997, declined 23% when compared to the same period of 1996. The Initial &
Transfer Franchise Fees in 1997 of $32,134 are attributable to the transfer
of one franchised sub shop at $6,250, the opening of four franchised sub
shops at reduced fees totaling $17,884 pursuant to Development Agent
agreements, and the opening of one sub shop at the full convenience store
location fee of $8,000. The Initial & Transfer Franchise Fees from the same
period of 1996 resulted from the $18,750 fee from the transfer of three sub
shops, and $23,000 of initial fees resulting from the opening of two new sub
shops.
Marketing Rights fees of $10,500 are derived from Development Agent
agreements and are paid by the respective agent for the privilege of
marketing Tubby's Sub Shop franchises in a specific geographic region.
Marketing Rights fees vary by geographic area and are generally due to
Tubby's, Inc. as additional sub shops are franchised and opened in each
respective region. There were no Marketing Rights income in the prior year.
Equipment & Restaurant income of $120,526 in 1997 represent sales of
equipment to four new and several existing franchisees. The decrease in
Equipment & Restaurant income in 1997 as compared to 1996 is attributable to
the tendency of the Company in 1997 to not provide turnkey restaurants to new
franchisees. Rather, many franchisees, particularly those located in other
regions, contract their leasehold improvements construction with contractors
in their specific geographic location and may acquire equipment from other
vendors as well. The Company generally does not profit from the leasehold
improvements that it contracts for the benefit of its franchisees. As a
result, decreased Equipment & Restaurant Sales resulting from franchisee's
contracting their leasehold improvements will not correspondingly decrease
the profit that the Company would normally realize from the sale of
equipment. Equipment acquired from other vendors instead of from the Company
will decrease the profit Tubby's would otherwise realize upon the opening of
new sub shops.
The increase in Monthly Advertising Fees to $157,790 for the three months
ending August 31, 1997, reflect the successful advertising efforts of the
Company and the additional monthly fees derived from its new Detroit area
franchisees. As
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successful new franchised Tubby's Sub Shops are opened in the Detroit area,
Monthly Franchise Fees are expected to increase. Advertising Fees collected
from Tubby's franchisees are used to offset the related advertising costs. As
such, revenue from Advertising Fees is recognized only to the extent that
equivalent or greater expenses are incurred. Advertising Fees of $22,119 are
classified as Deferred Revenue as of August 31, 1997.
The increase in Commissions & Other Fees to $109,305 represents increase
rental income of $2,350 per month derived from a Company-owned but franchisee
operated Tubby's Sub Shop which was rented in August of 1996 and increased
estimates of vendor rebates.
The 29.2% increase in Operating Expenses for the three months ending August
31, 1997, of $130,729 is largely comprised of a $20,019 increase in spending
for franchise development, a $60,175 increase in spending for advertising
related expenses, a $26,790 increase in investor relations expense and a
$24,865 increase in Tubby's administrative payroll as compared to the same
period in 1996. Cost of Food Sales for the three months ending August 31,
1997, decreased from 72.7% of Food Sales in 1996 to 68.2% of Food Sales in
the current period. Cost of Equipment & Restaurant Sales for the three months
ending August 31, 1997, decreased from 82.7% of Equipment & Restaurant Sales
to 81.8% when compared to the prior year.
Interest Expense decline by 51.1% for the current period when compared to the
same period in 1996 reflecting the decreased debt of Tubby's. Interest Income
for the three months ending August 31, 1997, increased to $20,626 from
$15,682 of the similar period in 1996. The increase in Interest Income is
due, in part, to the Company's decreased investment in franchise
construction.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 1997 AS COMPARED
WITH THE NINE MONTHS ENDED AUGUST 31, 1996.
The Company incurred Operating Income of $74,995 and Net Income before
Federal Income Taxes of $126,145 for the nine months ending August 31, 1997.
For the nine months ending August 31, 1996, the Company incurred Operating
Income of $65,586 and Net Income of $127,958. The Company incurred Net Income
after Federal Income Taxes of $93,698 for the nine months ending August 31,
1997 with a $32,447 Provision for Federal Income taxes, (see Note 2 of the
Consolidated Financial Statements). There was no Provision for Federal Income
Taxes required in 1996.
The Company believes that this year's results were depressed by Franchise
Development Expense of $128,029 for the nine months ending August 31, 1997,
as compared to $44,496 for the same period of 1996, losses of $78,022
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associated with the operation of its Company-owned restaurants this year as
compared to losses of $1,577 from the prior year, increases in administrative
payroll of $52,941 in 1997, and Depreciation in 1997 of $98,884 as compared
to 1996 depreciation of $71,311. Franchise Development Expense results from
the Company's increased efforts directed at expansion outside the Detroit
area. These current year expenses are expected to result in increase revenue
and profit in future periods as additional Tubby's Sub Shops are opened in
regions outside the Detroit area. Losses associated with the operation of
Company-owned restaurants are expected to be eliminated in the fourth quarter
of 1997. Two Company-owned restaurants were sold in June and September of
1997, respectively. Current year losses attributable to these two restaurants
totaled $67,333. The increase in administrative payroll results from the
addition of two individuals that handle the marketing and purchasing
functions. Depreciation increased by $27,572 resulting from the acquisition
of a Tubby's Sub Shop building from a delinquent franchisee in July, 1996,
and the modernization of the Company's management information systems. The
previous years' results were also depressed by legal fees of $70,672
resulting from the continuing litigation (see Note 4 of the Consolidated
Financial Statements).
Total Revenues for the nine months ending August 31, 1997, increased by 18.7%
to $2,688,220. This broad based increase when compared to the same time
period of 1996 resulted from a $123,179 or 20.3% increase in Food Sales, a
$106,448 or 22.6% increase in Monthly Franchise Fees, a $46,134 or 61.7%
increase in Initial & Transfer Franchise Fees, Marketing Rights of $25,019, a
$19,535 or 4.6% increase in Equipment & Restaurant Sales, a $60,344 or 14.9%
increase in Advertising Fees, and a $42,395 or 15.2% increase in Commissions
& Fees. Advertising Fees collected from Tubby's franchisees are used to
offset the related advertising costs. Revenue from Advertising Fees is
recognized only to the extent that equivalent or greater expenses are
incurred. Advertising Fees of $22,119 are classified as Deferred Revenue as
of August 31, 1997.
The $123,179 increase in Food Sales was attributable to two Tubby's Sub Shops
that were reacquired from delinquent franchisees and a newly opened
Company-owned restaurant all occurring during the fourth quarter of 1996. In
June of 1997, one of the reacquired restaurants was leased to a new
franchisee for $500 per month accompanied with a $3,000 deposit. The monthly
payments and the deposit will be applied to the purchase price of the
restaurant should the franchisee exercise his option to purchase the
restaurant during the twenty-four month period of the agreement. If the
franchisee fails to exercise the option to acquire the restaurant; all funds
received from him will be kept by Tubby's, Inc., and recognized as income.
Until such time as when the disposition of the restaurant is determined, the
Company will incur monthly depreciation charges of approximately $1,480 which
will be partially offset by income resulting from monthly franchise fees. The
Tubby's Sub Shop that was opened in
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the fourth quarter of 1996 was sold to a franchisee in September of 1997. As
a result of the sale of the two Tubby's Sub Shops, Food Sales are expected to
decline in the fourth quarter of 1997. Food Sales of these two restaurants
prior to their sale totaled $150,714 in 1997.
The increase in Monthly Franchise Fees to $576,432 for the nine months ending
August 31, 1997, reflects income derived from the increased franchisee food
sales resulting from the advertising efforts of the Company and the
additional monthly fees derived from its new franchisees. As new and
successful franchised Tubby's Sub Shops are opened, Monthly Franchise Fees
are expected to increase.
The Initial & Transfer Franchise Fees for the nine months ending August 31,
1997, of $120,884 were attributable to the transfer of two franchised sub
shops at $6,250 each, the opening of eight franchised sub shops at reduced
fees totaling $35,334 pursuant to Development Agent agreements, and the
opening of seven sub shops at full fees totaling $73,000. The Initial &
Transfer Franchise Fees from the same period of 1996 resulted from the $6,250
transfer fee of each of three sub shops, $43,500 of initial fees resulting
from the opening of five new sub shops.
Marketing Rights fees of $25,019 are derived from Development Agent
agreements and are paid by the respective agent for the privilege of
marketing Tubby's Sub Shop franchises in a specific geographic region.
Marketing Rights fees vary by geographic area and are generally due to
Tubby's, Inc. as additional sub shops are franchised and opened in each
respective region. There were no Marketing Rights income in the prior year.
Equipment & Restaurant of $446,218 represent sales of equipment to fourteen
new and several existing franchisees. The increase in Equipment & Restaurant
sales in 1997 as compared to 1996 is attributable to the increase pace of new
Tubby's Sub Shop openings occurring this year in conjunction with the
changing nature of the sales. The change in the nature of Equipment &
Restaurant income in 1997 as compared to 1996 is attributable to the tendency
of the Company in 1997 to not provide turnkey restaurants to new franchisees
as it had in prior years. Rather, many franchisees, particularly those
located in other regions, contract their leasehold improvements construction
with contractors in their specific geographic location and may also acquire
equipment from other vendors, as well. The Company generally does not profit
from the leasehold improvements that it contracts for the benefit of its
franchisees. As a result, decreased Equipment & Restaurant Sales resulting
from franchisee's contracting their leasehold improvements will not
correspondingly decrease the profit that the Company would normally realize
from the sale of equipment for a new restaurant. However, equipment acquired
from other vendors instead of from the Company will decrease the profit
Tubby's would otherwise realize. With the
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<PAGE>
planned opening of the three additional franchisee-owned sub shops as
referred to above, Equipment & Restaurant sales are expected to decline
through the last three months of 1997.
The increase in Monthly Advertising Fees to $466,470 for the nine months
ending August 31, 1997, reflect income derived from the increased franchisee
food sales resulting from the advertising efforts of the Company and the
additional monthly fees derived from its new franchisees in the Detroit area.
Advertising Fees collected from Tubby's franchisees are used to offset the
related advertising costs. As such, revenue from Advertising Fees is
recognized only to the extent that equivalent or greater expenses are
incurred. Advertising Fees of $22,119 are classified as Deferred Revenue as
of August 31, 1997. As new and successful franchised Tubby's Sub Shops are
opened, Monthly Advertising Fees are expected to increase.
The increase in Commissions & Other Fees to $322,023 represents increase
rental income of $2,350 per month derived from of a Company-owned but
franchisee operated Tubby's Sub Shop and increased estimates of vendor
rebates.
The 22.6% increase in Operating Expenses for the nine months ending August
31, 1997, of $319,093 is largely comprised of a $83,533 increase in spending
for franchise development, a $133,210 increase in spending for advertising
related expenses, a $52,491 increase in administrative payroll, a $27,572
increase in depreciation expense and a $35,122 increase in Investor Relations
expense as compared to the same period in 1996. As a percentage of Total
Revenues, Operating Expenses increased from 62.4% to 64.5% for the nine
months ending August 31, 1997, as compared to the same nine months in 1996.
Cost of Food Sales for the nine months ending August 31, 1997, remained
relatively unchanged as a percentage of Food Sales when compared to the same
time period in 1996. Cost of Equipment & Restaurant Sales for the nine months
ending August 31, 1997, decreased to 80.4% from 82.2% for the same period in
1996.
Interest Expense decreased by $4,794 or 26% in 1997 as compared to the same
period in 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 nine months ending August 31, 1997, declined to
$64,169 from $70,113 of the similar period in 1996. The decline in Interest
Income is due in part to generally lower interest rates available for short
term corporate investments and the Company's increased investment in
Company-owned restaurants. One Company-owned restaurant, which was purchased
in July, 1996, is leased and operated by a franchisee as of August 1, 1996.
Lease
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<PAGE>
income from this location of $2,350 per month is included in Commissions &
Other Fees.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Equivalents, Certificates of Deposit, and Marketable Securities
increased by $99,850 for the nine months ended August 31, 1997, as compared
with a decrease of $194,700 for the nine months ended August 31, 1996. The
current period increase in the Company's cash position resulted primarily
from its Net Income of $93,698, Depreciation and Amortization of $99,268, a
$32,447 non-cash Provision for Federal Income Taxes and a $48,480 decrease in
Inventory resulting from a reduction in new restaurant
construction-in-progress offset by a $88,350 increase in Accounts Receivable,
a $31,668 decrease in Accounts Payable and Purchases of New Equipment of
$57,005. The decrease in cash position of the prior year resulted from an
increase in new restaurant construction at that time, the prepayment of
franchise development expenses, the purchase of new equipment and the
reduction of vendor payables.
The Company opened five new franchised Tubby's Sub Shops in each of the first
three quarters of 1997. In addition, the Company anticipates an additional
three new franchisee-owned locations will open by the end of its fourth
quarter of 1997. At the end of the fourth quarter on November 30th, the
Company anticipates that a total of ninety restaurants will be open. New
Development Agent agreements were also sold for certain counties and other
areas in the state of Michigan, certain counties in the states of Illinois
and Missouri, the state of Texas, and the provinces of Alberta and British
Columbia, and Essex County, Ontario Canada. Additional new Development Agent
agreements are expected by the end of 1997 with related new restaurant
openings in 1998. Restaurants opened pursuant to Development Agent agreements
generally require that Initial and Monthly Franchise Fees be shared with the
respective development agent and, as a result, less income is recognized by
the Company. Though the Company believes that planned new restaurants will
open as anticipated, the responsibility to open and operate these locations
by franchisees, who are unrelated to the Company, is ultimately not in the
control of the Company. Unforeseen obstacles may either delay, alter or
permanently prevent planned openings of franchisee-owned restaurants and
accordingly may delay, alter or prevent Tubby's, Inc. from achieving it's
anticipated goals for future growth of 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, 1997, the Company has three
new locations
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<PAGE>
scheduled to open by November 30, 1997. The Company may be responsible for
the construction and equipment installation of these locations, all of which
will be owned and operated by franchisees. The Company anticipates that it
has sufficient working capital to internally finance these projects.
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<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, 1997.
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<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: July 10, 1997
/s/ Melvyn Erdos
---------------------------------------
By: Melvyn Erdos
Treasurer, Chief Financial Officer
Dated: July 10, 1997
-20-
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