SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended November 30, 1996
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Commission File Number 0-12706
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TUBBY'S, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2166602
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6029 East Fourteen Mile Road, Sterling Heights, Michigan 48312-5801
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Registrant's telephone number, including area code 810/978-8829
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 Par Value
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(Title of Class)
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 file such reports), and (2) has been subject to
such filing requirements for the past 90 days.Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sale price of the common stock on February
21, 1997, as reported on the NASDAQ SmallCap Market was approximately
$7,196,677. Shares of common stock held by each officer and by each person
who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
Issuer's revenues for its most recent fiscal year: $3,123,216
As of February 14, 1997, there were 25,831,131 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
See Items 9,10,11, and 12 of this Form 10-KSB/A-1
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
Tubby's, Inc., the Registrant, and its subsidiaries, are referred to herein
as the "Company" or "Tubby's."
History
Tubby's was founded in 1968 in Metropolitan Detroit, Michigan. The Company
began by selling submarine sandwiches from a small store. The Company enjoyed
success and growth and in 1977 began the sale of franchises of its submarine
sandwich concept. In 1990, the Company, through a reverse merger, acquired
the rights to the Stuff-Yer-Face Restaurants which operated primarily in New
Jersey.
General Development of Business
During fiscal year 1994, Tubby's concentrated on a "back to basics" approach.
The Company concentrated on restructuring its management team, consolidating
administrative functions, eliminating unprofitable operations, and
development of new Tubby's Sub Shop franchises. The results of this
multi-faceted undertaking began to be realized in 1995. The Company achieved
its initial goals and returned to profitability. In 1996, the Company
continued its "back to basics" approach while beginning its next phase of
strategic development.
With an eye to the future, the Company sold its first Development Agent
Agreement ("DA Agreement") in April, 1996. At the end of 1996, the Company
had sold a total of four DA Agreements.
Stores that are expected to result from the implementation of DA Agreements
are the contractual responsibility of the Development Agents ("DAs"). Tubby's
anticipates that these agreements will be fulfilled on a timely basis as
stipulated in their respective contracts. The following details the Company's
efforts to franchise new stores in fiscal 1996 and anticipated stores in
future years:
This new strategy to sell DA Agreements, in addition to single store Tubby's
Sub Shop franchises, has resulted in the following achievements in 1996:
Four (4) DA Agreements Representing One Hundred (100) Units:
o Twelve (12) store openings anticipated in year one, (three DA
stores are expected to be opened in each of the first and
second quarters of 1997).
o Fifteen (15) store openings anticipated in year two.
o Sixteen (16) store openings anticipated in year three.
o Sixteen (16) store openings anticipated in year four.
o Sixteen (16) store openings anticipated in year five.
o Eleven (11) store openings anticipated in year six.
o Six (6) store openings anticipated in year seven.
o Six (6) store openings anticipated in year eight.
o One (1) store openings anticipated in year nine.
o One (1) store openings anticipated in year ten.
Single Store Agreements:
o Six (6) new franchised stores opened in 1996.
o One (1) company owned store was opened in 1996.
o Four (4) new franchised stores are expected to be opened in the
first quarter of 1997.
o Three (3) new franchised stores are expected to open in the
second quarter 1997.
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Closed and Reacquired Stores:
o One (1) franchisee owned Tubby's Sub Shop was closed in 1996.
o One Company owned Tubby's Express restaurant was closed in 1996.
o Two (2) Tubby's Sub Shops were reacquired by the Company from
franchisees in 1996.
o One (1) Stuff-Yer-Face restaurant was reacquired by the Company
from a franchisee in 1996.
Total Petroleum, Inc., of Denver, Co., a multi-state petroleum retailer, has
chosen to open a franchised Tubby's Sub Shop in a new service station in the
metropolitan Detroit area. The restaurant is opening on February 17, 1997.
Tubby's believes that this first co-branding effort with a major petroleum
retailer will be highly successful and eventually lead to many more Tubby's
Sub Shops being located within Total Petroleum service stations in the
future.
Description of Business
The Company develops, operates, franchises and services a system of
restaurants which prepare and serve a comprehensive menu of submarine
sandwiches and related items. Tubby's submarine sandwiches are all prepared
to order and many of its sandwiches are cooked on a grill. These restaurants
are franchised, owned and operated as company stores, or operated under joint
venture agreements between the Company and local business people. The
restaurants are located in Michigan, Ohio and New Jersey.
The Company also franchises and services a line of restaurants known as
Stuff-Yer-Face. These restaurants are casual, sit-down, full service
restaurants offering a line of "stuffed pizza" products known as "Stromboli."
These restaurants create a casual and distinctive atmosphere by emphasizing
the humorous "Stuff-Yer-Face" name and service by friendly waiters and
waitresses. Consistent with the Stuff-Yer-Face name, portions are large.
In 1996, the Company began selling DA Agreements. A DA Agreement confers the
right to qualified persons to operate as an independent agent, on a
non-exclusive basis, to develop and service the Company's franchised stores
in a specific geographical area. The DA agrees that during the term of the
agreement he will diligently perform his obligations on behalf of the Company
to identify and assist prospective franchisees and to perform site
acquisition services and supervision of franchisees operating Tubby's Sub
Shops located in the territory. The DA agrees to comply with the quotas as
set forth in the DA Agreement.
As of November 30, 1996, a total of seventy-four (74) restaurants were in
operation consisting of four (4) Stuff-Yer-Face restaurants (of which one (1)
was owned by the Company), three (3) Tubby's Express restaurants, (of which
one (1) was operated by a joint venture operating agreement), and sixty-seven
(67) Tubby's Sub Shops restaurants, (of which five (5) were owned by the
Company). In the first quarter of 1997, five new franchisee owned Tubby's Sub
Shop restaurants were opened.
This Business section contains forward-looking statements that involve
uncertainties. Actual results could alter materially from those in the
forward-looking statements, due to a number of uncertainties, including but
not limited to, those discussed below and in "Management's Discussion &
Analysis of Financial Condition & Results of Operation."
Products
Tubby's restaurants offer a uniform menu which includes over 20 different
submarine and pita sandwiches cooked to order, French fries, onion chips and
breaded mushrooms, potato chips, soup, and a full line of Pepsi-Cola soft
drinks. Some restaurants also offer a line of premium ice cream that is sold
in cones, desserts and take home packaging.
The Company's submarine sandwiches are all prepared to order and many of the
products, including its line of steak sandwiches, chicken sandwiches etc.,
are cooked when ordered. The Company's
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sandwiches are offered in different sizes from a length of six inches to a
length in excess of five feet. Sandwiches in excess of twelve inches are
generally ordered for parties, picnics and social events. The "party sub" is
offered at all stores on an advance order basis, only. Tubby's menu is
offered for carry out, on-site consumption and, where available, delivery.
The Stuff-Yer-Face (SYF) restaurants offer a menu featuring a specialty
sandwich called a "Stromboli." A Stromboli is a closed sandwich with the
bread freshly baked around a favorite filling selected by the customer
together with cheeses, tomato sauce, onions and peppers. The Stromboli
fillings, which customers may select in any combination, include meatballs,
sausage, pepperoni, veal, steak, chicken and shrimp. The "Vegetaboli (R)" is
a meatless "Boli" with fillings selected by the customer including eggplant,
mushroom, broccoli and spinach. The sandwiches may be prepared in any
combination of meat and vegetables. Management is of the opinion that
wrapping the dough around the fillings improves the taste of the Stromboli
over pizza through a steaming process which occurs inside the Stromboli. The
steaming process permits the vegetables to retain flavor and crispness, meats
to remain tender and juicy, and cheeses and sauce to blend together to create
a fine flavor while also permitting the dough to crisp and brown. "Boli"
sandwiches are served in two sizes: "Large", and a smaller size Boli, the
"Baby Boli (R)."
The Stuff-Yer-Face restaurants also serve hamburgers, steak sandwiches, and
pizzas together with side orders which include, among other things, French
fries, onion rings, and fried mozzarella sticks. The restaurants also serve
"Lite-Stuff"(R), consisting of a variety of fresh salads and club sandwiches.
One location serves alcoholic beverages. Each of the present Stuff-Yer-Face
restaurants are sit-down, full service restaurants utilizing waitress and
waiter service. Beverages and side orders are served while the customer's
order is being prepared. When the order is ready, each customer is served at
his table by the waiter or waitress. Each restaurant also accommodates phone
orders for take out sales.
Franchising
The Company franchises all of its restaurant concepts, including the Tubby's
Sub Shop and Stuff-Yer-Face concepts.
The Company believes that customer satisfaction is critical to the long-term
success of the Company and emphasizes quality, proven, well trained
entrepreneurs in its Franchisee selection process. All potential Franchisees
are carefully screened by top members of the Management team who all
participate in the Franchisee approval process.
Franchises for Tubby's Sub Shops restaurants have been offered since 1977.
The Company offers potential Franchisees a choice of a Single-Unit Franchise
Agreement or a DA Agreement. Tubby's management is continuing to concentrate
its resources on the expansion of Tubby's and Stuff-Yer-Face restaurants
through locating qualified DAs and implementing DA Agreements.
A Tubby's Franchisee is responsible to supply sufficient capital for
construction, remodeling and equipment costs required to bring a location to
the standard specifications of a Tubby's store. SubLine Co. ("SubLine"), a
subsidiary of Tubby's, may, at the option of the Franchisee, construct the
restaurant, provide leasehold improvements and supply the necessary
equipment. Alternately, the Franchisee may purchase the required construction
drawings from the Company and do the work himself. Regardless of how
constructed, all restaurants must meet the Company's specifications before
they are allowed to enter the system.
The License Agreement gives the Franchisee the right to use Tubby's
trademarks, service marks and methods of operation to operate a Tubby's
restaurant at a specific location that is approved by Tubby's. The initial
term of a Tubby's Franchise Agreement is ten (10) years with the Franchisee
generally having the option to renew. The initial license fee, which is
payable upon execution of the Franchise Agreement is $15,000 for a
traditional location. For non-traditional sites, such as convenience store
locations, the Franchise fee is $8,000. Persons who commit to the
construction of more than one franchise could have a reduced up-front
franchise fee. The initial franchise fee compensates Tubby's for various
services
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provided by Tubby's to Franchisees, such as management and operations
training, review of restaurant site selection, restaurant design assistance,
specifications and equipment lists, assistance in locating suppliers and
operating assistance during the initial opening of a restaurant. New Tubby's
License Agreements require the Franchisee to pay Tubby's a weekly royalty
equal to the greater of $125 per restaurant or six percent (6%) (as of
January, 1996) of the Franchisee's adjusted gross weekly sales. Previously,
Tubby's Licensing Agreements required the franchisee to pay Tubby's a weekly
royalty equal to the greater of $125 per restaurant or four percent (4%) of
the Franchisee's adjusted gross weekly sales. Most of the already existing
Franchise Agreements require the Franchisee to pay Tubby's a weekly
advertising fee equal to the greater of $100 per restaurant or three and
one-half percent (3 1/2%) of the Franchisee's adjusted gross weekly sales.
Those advertising fees are used to pay for shared production and media
advertising costs and other promotional costs. The Franchise Agreement
further requires the Franchisee, among other things, to comply with Tubby's
standards and procedures of operation along with menu and food quality
specifications, to purchase supplies from Tubby's approved sources, and to
permit inspections and audits by Tubby's.
DA Agreements require franchisees to pay a licensing fee, similar to those
described above, to the Company. Upon receipt of a licensing fee, however,
the Company is required to pay a commission to the DA of 50% of the amount
collected. Similarly, the receipt of royalty payments by the Company from
stores licensed under a DA Agreement also require that a commission be paid
to the DA of 28% of the royalty fee if collected at a rate under 6% of sales
and 40% of the royalty fee if collected at a rate of 6% or higher of sales.
Franchised restaurants are operated in accordance with uniform standards
required of all Franchisees. These standards include such items as selection,
quality, preparation and approval of menu items, signage, decor, equipment,
uniforms, suppliers, hours of operation, cleanliness, appearance, etc. All
standards are developed by the Company and implemented in conjunction with
its Franchisees.
The Company offers ongoing Franchisee support as well as scheduled and
unscheduled site inspections. All services are designed to ensure customer
satisfaction, efficient franchise operation and compliance with the Company's
standards.
In addition to the above standards, the Company also has financial reporting
requirements. These requirements include weekly/monthly sales reporting and
royalty and advertising payments, monthly financial statement submission and
the maintenance of books and records that will allow the Company to audit
those records if it so desires. The Company has the right to terminate a
Franchise Agreement if the Franchisee fails to meet the requirements imposed
by the above standards.
Training
The Company emphasizes Franchisee training as a means of ensuring the quality
and value of the products delivered to its customers, and the profitability
and long-term sales growth to the Company. Training is an essential part of
the Franchisee experience. In order to enter the Tubby's system, a Franchisee
is required to complete an extensive training program as part of the
orientation process.
Tubby's provides a complete course of instructions relating to the
operations, methods, and other related procedures, with emphasis placed on
the preparation and serving of the specialty food items that are
characteristic of its restaurants. Salaries, expenses of travel, food and
lodging for a Franchisee and his/her representative are at the Franchisee's
own expense. The training program consists of a minimum of 150 hours of
in-store operations, under direct supervision of qualified personnel, in
addition to classroom sessions at Tubby's corporate offices.
After successfully completing the training program, Tubby's provides
assistance to new franchisees by providing a member of Tubby's staff to the
Franchisee's location for at least three (3) days out of the first nine (9)
weeks of operation.
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Tubby's does not charge a fee for the training described above. However, it
is only obligated to provide such training for a Franchisee's first location.
Additional training is available at a fee, as is assistance at a subsequent
location.
Tubby's commitment to training is not limited to the initial training
provided at the time a Franchisee enters the system. The Company offers
training and education to its Franchisees on an ongoing basis. This training
includes restaurant operation, management training, equipment training and
marketing assistance. The Company emphasizes continued training as part of
its Franchisee support program.
Supplies
The Company does not own and operate a subsidiary that sells food and
proprietary items to its Franchisees. Rather, the Company maintains an
approved supplier list and the Franchisees are free to select the approved
supplier of their choice. In order to become an approved supplier, a company
must pass stringent requirements that are designed to provide consistent high
quality products to the Tubby's customer.
The Franchisees are also required to purchase fixtures and equipment meeting
Tubby's specifications from suppliers that are approved by Tubby's. The
approval of suppliers is based upon the quality of the items they supply and
their conformity with specifications established by Tubby's.
SubLine is an approved supplier of certain equipment that has been specially
manufactured for use in Tubby's restaurants. SubLine also acts as a broker
for several approved suppliers of machinery, equipment and food products that
are sold to Tubby's Franchisees and others. Although Tubby's Franchisees are
not required to purchase any equipment from SubLine or utilize SubLine's
brokerage services, Tubby's believes that many of them do so because the
costs of utilizing SubLine's services are often less than the prices charged
by other sources. One reason why SubLine is able to offer competitive prices
is that, when it acts as a broker, it can often obtain volume discounts for
the items that are sold to Tubby's Franchisees. SubLine will make a profit on
equipment it purchases and resells. It does not make a profit in connection
with the assistance it offers regarding leasehold improvements.
Advertising
Tubby's Franchisees are generally required to pay advertising fees equal to
the greater of $100 per week or 3 1/2% of total weekly adjusted gross sales
of that Franchisee's restaurant. Those funds are administered by Tubby's Sub
Shop Advertising Co., a subsidiary of the Company, and are used to pay for
shared production and media advertising costs as well as other promotional
costs. Marketing and promotion is voted on by an advertising council. This
council is made up of Franchisees and employees of the Company and works with
the Company in setting advertising programs and the timing of those programs.
The Company has historically emphasized local print media, direct mail,
television and radio as its form of advertising. Such advertising is
generally cost prohibitive for an individual Franchisee, but can be cost
effective when included with other Franchisees. All funds received for
advertising are spent for advertising purposes only, except for a portion
which is retained by the Company to cover administrative costs.
The Company has one full time employee devoted exclusively to the process of
marketing and advertising for its Franchisees on both an individual and on a
system wide basis. As a result of the efforts of this person, and the efforts
of the Advertising Council, the Company has expanded and refined its
marketing efforts and in 1997 will continue its advertising campaign.
Company Stores
The acquisition of additional Company restaurants is an integral part of the
Company's operating strategy. The Company owned and operated seven Company
restaurants as of November 30, 1996.
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Five of the Company restaurants operate as Tubby's Sub Shops, one restaurant
operates as a Stuff-Yer-Face, and one restaurant operates as a Tubby's
Express (which is operated under a joint venture operating agreement). In
December, 1995, Management closed an unprofitable company-owned Tubby's
Express store.
Expansion Progress and Restaurant Development
Expansion is an important part of Tubby's growth plans. The Company carefully
studies possible locations and evaluates those potential sites based on a
variety of criteria including traffic patterns, population, availability of
drive-thru permits and other relevant criteria. The following table shows a
summary of the Company's franchise activity and Company store activity over
the last five years:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
Tubby's/Tubby's Express/SYF Restaurants 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Opened 7 10 7 5 4
Closed 2 3 1 4 8
Ending Number 1 74 69 62 56 55
<FN>
1 Company owned Tubby's Sub Shops include five (5) in 1996, two (2)
in 1995/94, and three (3) in 1993/92. Tubby's Express stores
include three (3), one (1)of which is operated under a joint
venture operating agreement in 1996, four (4), one of which was
operated under a joint venture operating agreement in 1995, six
(6), five of which were operated under a joint venture operating
agreement, in 1994, and (4) in 1993. SYF restaurants include four
in 1996, (one of which is Company owned), four(4) in 1995, and
three (3) in 1994, 1993 and 1992.
</TABLE>
Stores that are expected to result from the implementation of DA Agreements
are the contractual responsibility of the respective DAs. Tubby's anticipates
that these agreements will be fulfilled on a timely basis as stipulated in
their respective contracts. The following details the Company's efforts to
franchise new stores in fiscal 1996 and anticipated stores in future years:
One(1) Area Development Agreement (ADA) Representing Six (6) Units:
o One (1) store opened in 1996.
o One (1) store anticipated to open in 1997.
o One (1) store anticipated to open in 1998.
o One (1) store anticipated to open in 1999.
o Two (2) stores are anticipated to open after 1999.
Single Store Agreements:
o Six (6) new franchised stores opened in 1996.
o One (1) new Company owned store opened in 1996.
o Four(4) new franchised stores expected to open in the first
quarter 1997.
o Three (3) new franchised stores expected to open in the second
quarter 1997.
Four (4) DA Agreements Representing One Hundred (100) Units:
o Twelve (12) store openings anticipated in year one (three (3)
store openings in each of the first and second quarters of
1997).
o Fifteen (15) store openings anticipated in year two.
o Sixteen (16) store openings anticipated in year three.
o Sixteen (16) store openings anticipated in year four.
o Sixteen (16) store openings anticipated in year five.
o Eleven (11) store openings anticipated in year six.
o Six (6) store openings anticipated in year seven.
o Six (6) store openings anticipated in year eight.
o One (1) store openings anticipated in year nine.
o One (1) store openings anticipated in year ten.
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Competition
The restaurant business is highly competitive and is often affected by
changes in taste and eating habits of the public, by local and national
economic conditions affecting spending habits and by population and traffic
patterns. Tubby's believes that the quality and price of food products
offered are the principal means of competition in the restaurant industry.
Also of importance are site location, quality and speed of service,
advertising and attractiveness of facilities.
Tubby's competes with restaurant chains and other restaurants serving a
variety of quick service products. Some of Tubby's competitors operate more
restaurants and have greater financial resources, greater name recognition
and more experienced operational organizations than Tubby's. In an effort to
obtain greater name recognition in new markets outside of the metropolitan
Detroit area, the Company has participated in numerous national industry
trade shows. Additionally, the Company now places advertisements in leading
industry publications as well as on the Internet. Although Tubby's believes
it can operate favorably, it may be at a competitive disadvantage with
respect to chains with greater name recognition and marketing capability.
Furthermore, competition for management, other key operating personnel and
restaurant sites could increase as Tubby's operations expand and as the
general economy improves.
As a result of the standards Tubby's has set for its franchisees, it competes
with other franchisors for high quality, well capitalized franchisees.
Tubby's management considers the amount of the initial investment required of
the franchisee, the perceived potential for business success, return on
investment, assistance provided by the franchisor and the franchisor's name
recognition and reputation to be the most significant competitive factors in
franchising. The Company believes that the present economy will intensify
this competition.
Trademarks and Service Marks
The Company has registered trademark and service marks including "Tubby's",
"Boli's" and the "Stuff-Yer-Face" names and logos. These trademarks and
service marks, as well as others, are registered with the United States
Patent and Trademark Office and are of material importance to the Company.
Seasonal Operation
Although weather can be a factor in the sales of the Company's products, the
Company does not consider this business to be seasonal.
Regulation
The Company is subject to Federal Trade Commission regulations and several
state laws which regulate the offer, sale and licensing process of
Franchisors. In addition to the FTC, most states have laws which regulate and
control the Franchisor/Franchisee relationships.
Many states also have laws regulating franchise operations, including
registration and disclosure requirements in the offer and sale of franchises
and the application of statutory standards regulating franchise
relationships. Tubby's believes it is operating in substantial compliance
with applicable laws and regulations governing its operations.
Each of the restaurants operated by Tubby's Franchisees is subject to
licensing and regulation by the health, sanitation, safety, fire department
and in the case of Stuff-Yer-Face Franchisees serving alcoholic beverages,
the alcoholic beverage control agencies in the state or municipality where
located. Difficulties or failures in obtaining the required licensing or
approval could result in delays or cancellations in the opening of new
restaurants.
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Federal and state environmental regulations have not had a material effect on
the operations of Tubby's or its Franchisees, but more stringent and varied
requirements of local governmental bodies with respect to zoning, land use
and environmental factors could delay construction of new restaurants.
Tubby's and its Franchisees are also subject to the Fair Labor Standards Act,
which governs such matters as minimum wage, overtime and other working
conditions. A significant portion of the food service personnel employed by
Tubby's Franchisees are paid at rates related to the federal minimum wage,
and accordingly, increases in the minimum wage increase the labor cost
incurred by Tubby's Franchisees.
In addition to the above rules and regulations, Tubby's Company stores are
subject to state and local laws governing such items as health, sanitation,
licensing, etc. All stores are subject to local inspection and ongoing permit
approval. Local inspections govern items that Tubby's believes are essential
to providing a quality customer experience and bringing customers back after
their initial visit. Tubby's works hard to comply with these laws and
regulations.
Customers
The Company is not dependent on a single customer.
Backlog
Company-owned restaurants have no backlog orders.
Research and Development
The Company works hard to ensure that the menu meets the needs of its
customers. Research and development efforts are done in conjunction with
suppliers. New products, if approved, are introduced via a variety of
marketing programs. While the Company considers research and development to
be essential to the successful long-term operation of the Company, its
expenditures in this area at this time are not material.
Employees
As of November 30, 1996, the Company employed 10 persons in the management
and administration of the corporation. In addition, the Company owned five
Tubby's Sub Shop stores, one Stuff-Yer-Face restaurant, and one Tubby's
Express store. These stores employ a total of 81 persons, including related
store managers. None of Tubby's employees are covered by collective
bargaining agreements. The Company considers its employee relations to be
good.
ITEM 2. PROPERTIES
The Company leases approximately 6,000 square feet in an office building
which it uses as its headquarters under a five year lease. Tubby's believes
that these facilities offer sufficient space to allow it to conduct its
business affairs.
The Company owns three parcels of real estate. Two parcels are leased to a
Franchisee. The other parcel is currently being offered for sale. All of the
Company's real estate has been pledged as collateral on outstanding mortgage
loans and notes.
The Company leases all its Company stores including its Stuff-Yer-Face and
Tubby's Express locations. These leases are for various terms and various
expiration dates.
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ITEM 3. LEGAL PROCEEDINGS
Patrick J. McCourt, et al v Tubby's, Inc., et al (Case No. 95-CV-73339-DT).
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
recision 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.
Thereafter, plaintiffs 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 recision of the
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 is going to be transferred to the Circuit Court for the County of
Oakland and should be consolidated with the Oakland County Action. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There is no information required to be reported hereunder.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
MATTERS
The following table sets forth the high and low stock prices for the
Company's $.001 par value common stock as reported by NASDAQ for the fiscal
years indicated.
The following quotations do not include retail mark-ups, markdowns or
commissions and represent prices between dealers and not necessarily actual
transactions. The past performance of the Tubby's, $.001 par value common
stock is not necessarily indicative of future performance.
<TABLE>
<CAPTION>
1995 1996
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <S> <C> <C>
Quarter 1 5/16 5/32 Quarter 1 25/32 1/8
Quarter 2 9/16 5/32 Quarter 2 15/32 1/4
Quarter 3 13/32 7/32 Quarter 3 3/8 7/32
Quarter 4 5/16 1/16 Quarter 4 11/32 5/32
</TABLE>
As of February 11, 1997, the approximate number of shareholders of record of
the Company was 7,039. The Company has never paid cash dividends on its
common stock. Payment of dividends is within the discretion of the Company's
Board of Directors and depends, among other factors, on earnings, capital
requirements and the operating and financial condition. At the present time,
the Company's anticipated financial capital requirements will be such that it
intends to follow a policy of retaining earnings in order to finance the
development of its business.
ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto. This section contains
forward-looking statements that involve uncertainties. Actual results could
alter materially from those in the forward-looking statements, due to a
number of uncertainties, including but not limited to, those discussed below
and in the "Business" section.
Financial Overview
Tubby's and its consolidated subsidiaries experienced a decrease in 1996
Total Revenue of $539,105 or 14.7%. The Company earned net income of $117,357
in 1996 versus net income of $274,439 in 1995. This decrease in revenues is
primarily attributable to lower food sales resulting from the sale of (2)
Tubby's Express restaurants and the closing of two (2) Tubby's Express
restaurants in 1995 and one (1) Tubby's Express restaurant in 1996. Prior
year food sales resulting from these five (5) Tubby's Express restaurants
totaled $476,688 or 37.1% of 1995 food sales.
Operating Income in 1996 of $65,464 decreased by 50.0% or $65,999 as compared
to the 1995. This decrease in Operating Income was a result of the reduced
food sales described above. The decrease in Operating Income attributable to
Foods Sales was $126,508 or 37.7%. Other Income items in 1996 decreased by
$91,083 or 63.7% as compared to 1995. Significant amounts comprising this
change resulted from a $78,433 decrease in Minority Interest in Losses of The
McTub Co. resulting from, in part, a distribution to a minority partner in
1996, a $55,584 decrease in Gain on Sale of Fixed Assets primarily resulting
from the sale of Company owned restaurant in 1995, and a $29,090 increase in
the Provision for Estimated Loss on Disposal of Tubby's Express Restaurants,
also occurring in 1995.
In 1996, the Company reacquired three Tubby's Sub Shops from seriously
delinquent franchisees. One Tubby's Sub Shop was reacquired for a payment of
$107,500 less delinquent amounts owed the Company of $15,000. One Tubby's Sub
Shop and one Stuff-Yer-Face restaurant were reacquired from a
-11-
<PAGE>
franchisee who later filed for bankruptcy. Any excess income or loss from
these franchised restaurants will be used to offset the amount owed by the
franchisee to Tubby's and will not be included in the operating results of
the Company. Sales derived from these restaurants were $140,562 in 1996.
These restaurants were reacquired by Tubby's in one case, pursuant to its
rights as a secured creditor, to retain its retail presence in areas
considered to be strategically significant to the Company. The Company
anticipates that these restaurants can be operated profitably until they are
re-sold to new franchisees.
In November, 1995, the Company hired a new director of franchise development.
This individual brought to Tubby's five years of restaurant industry
experience in franchise sales. After his first year as the director of
franchise development, the Company believes the results have indeed been
impressive. Under his leadership, the Company attended, as an exhibitor,
several national industry trade shows in its effort to gain national
recognition and expand into new regions of the country. Among the impressive
results of 1996, DA Agreements representing one hundred (100) new Tubby's Sub
Shops, over the next ten years, were initiated for the City of Detroit, the
City of Cleveland and adjoining areas, the State of Arizona, and the State of
Florida. Stores that are expected to result from the implementation of DA
Agreements are the contractual responsibility of the DAs. Tubby's anticipates
that these agreements will be fulfilled on a timely basis as stipulated in
their respective contracts.
Tubby's currently conducts most of its business in the Metropolitan Detroit,
Michigan region. The Detroit area economy is largely tied to the results of
the domestic automotive industry. Employment and spending patterns of the
people living in this area tend to mirror the operating results of these
companies and their suppliers. During the last five years the domestic
automobile industry improved significantly. As the domestic automobile
industry hired additional workers the local economy also improved and so did
the operating results of many of Tubby's franchised restaurants. Although
weather can be a factor in the sales of the Company's products, the Company
does not consider this business to be seasonal.
In addition to the local economy, the Quick Service Restaurant Industry (QSR)
business is experiencing renewed customer demand and increased levels of
business. Further, the demand for new Franchisees and new stores has
increased since 1993. Since the last quarter of fiscal year-end 1993, the
Company has experienced renewed demand from prospective Franchisees.
Results of Operations
Comparison of the years ended November 30, 1996 and 1995 Tubby's and its
consolidated subsidiaries experienced a decrease in 1996 Total Revenue of
$539,105 or 14.7%. The Company earned net income of $117,357 in 1996 versus
net income of $274,439 in 1995. This decrease in revenues is primarily
attributable to lower food sales resulting from the sale of (2) Tubby's
Express restaurants and the closing of three (3) Tubby's Express restaurants
in 1995. Tubby's opened one new Company owned store and reacquired one store
in the third and fourth quarters of 1996. Food sales from these stores were
$74,933 in 1996 or 9.4% of 1996 Food Sales. Prior year food sales resulting
from the five (5) Tubby's Express restaurants totaled $476,688 or 37.1% of
1995 food sales.
Operating Income in 1996 derived from Food Sales decreased by $126,508 or
37.7% from 1995. Operating Income from Food Sales was approximately the same
in 1995 and in 1996. Management believes that Operating Income derived from
Company owned restaurants in 1997 will increase as a result of a
restructuring of management regarding the overseeing of these restaurants.
Early indications suggest that Food Sales from Company owned stores are
improving while related Cost of Food Sales are decreasing.
Monthly Franchise and Advertising Fees remained relatively constant in 1996.
The negligible decrease from a total of $1,231,752 in 1995 to $1,229,056 in
1996 resulted from reduced estimates of fees expected from new and existing
Tubby's Sub Shops.
Initial Franchise Fees decreased by 10.0% or $13,125 in 1996. Initial fees in
1995 consisted of amounts received from three (3) new franchisees and fees
received from ten (10) franchisees who either transferred ownership of
existing Tubby's Sub Shops or open additional restaurants at reduced
licensing
-12-
<PAGE>
fees. Initial fees in 1996 consisted of amounts received from two (2) new
franchisees and fees received from thirteen (13) franchisees who either
transferred ownership of existing Tubby's Sub Shops or open additional
restaurants at reduced licensing fees. Initial licensing fees for Tubby's Sub
Shops opened pursuant to a DA Agreement and stores opened by existing
franchisees are at reduced fees.
The Company experienced a minor increase in Equipment & Restaurant Sales of
$7,676 or 1.3%. With the addition of a new individual, whose responsibilities
encompass equipment and restaurant sales, to the Company's management team in
late 1994, the gross profit from this activity has dramatically increased. In
1995, gross profit increased to $74,136 or 12.3% of sales. In 1996, gross
profit again increased to $84,059 or 13.8% of sales. The growth of Equipment
& Restaurant Sales in 1997 is expected to continue as restaurants are opened
pursuant to the various Development Agent Agreements already entered into by
the Company.
Commissions & Other Fees are comprised of vendor rebates and rental income of
existing Company owned franchised Tubby's Sub Shops. Vendor rebates decreased
in 1996 by $57,077 or 15.3% as compared to 1995. This decline resulted
primarily from timing differences in the recognition of vendor rebates.
Rental income increased by $13,822 or 36.0% as compared to 1995. The increase
in rental income resulted from the rental, in July of 1996, of a newly
acquired existing Tubby's Sub Shop to a franchisee. This stand alone,
drive-thru restaurant with improvements was acquired by the Company for cash
payments totaling $191,800. Annual income of $28,200 is expected from the
rental of this location.
Interest Income increased by $2,660 or 2.9% in 1996. Management anticipates
that interest income will decrease in 1997 as Tubby's growth accelerates. The
Company's working capital is utilized, on a short term basis, to finance the
new construction and equipment of franchised restaurants during the
construction phase. Upon the completion of a new restaurant, the franchisee
is invoiced for the construction, equipment costs and a profit margin. As the
pace of new restaurant construction accelerates; additional amounts of
working capital will be utilized and interest income will decrease, as a
result. Interest Expense decreased in 1996 by $9,229 or 24.6% when compared
to 1995. Management expects this trend to continue in 1997 as long-term debt
continues to decrease. Management has continued to exercise fiscal restraint
by not incurring additional debt in 1996 and does not anticipate incurring
additional debt in 1997, either.
The Provision for Estimated Loss on Disposal of a Tubby's Express Restaurant
in 1995 reflected a charge of $29,090 which management expected to be
incurred during the closing of this restaurant. Gain (Loss) on the Sale of
Fixed Assets in 1996 of $5,880 reflects the additional loss incurred in the
closing of this Tubby's Express restaurant in December, 1995. The Gain (Loss)
on the Sale of Fixed Asset in 1995 of $49,704 reflects gain on the sale of a
Company owned restaurant and the loss incurred on the closing and/ or sale of
four unprofitable Tubby's Express restaurants.
Liquidity and Capital Resources
Cash and Equivalents combined with Investments decreased by $287,240 as
compared to 1995. The issuance of 450,000 shares in 1996 generated $56,250 in
cash while the acquisition of property and equipment utilized $462,155 in
cash. Increases to Prepaid Expenses of $65,506, and Inventories of $67,965
utilized a total of $133,471 of cash.
Cash Flows From Operating Activities Was $46,509 in 1996
Operating Activities Creating Significant Cash Inflows:
o Net Income of $117,357.
o Non-cash adjustments to the Net Income included Depreciation &
Amortization for 1996 of $105,226.
o Increases in Accounts Payable of $26,457.
-13-
<PAGE>
Operating Activities Creating Significant Cash Out Flows:
o Accounts Receivable increased by $11,596.
o Increase in Inventories of $67,965 relates primarily to a
increase in equipment inventoried for future use in new
restaurants of $14,249, a increase of food items inventoried
for sale in company owned stores of $8,341, and a increase in
construction-in-progress of new franchised restaurants of
$45,376.
o Increase in Prepaid Expenses and Other by $65,506 relates
primarily to prepaid Federal Income Taxes of $10,000, vendor
payments of $18,000, and franchise development expenses of
about $29,000.
o Accrued Liabilities and Joint Venture decreased by $19,344.
o Decrease in Deferred Revenues of $44,000 resulted from the
realized sales of franchise fees resulting from the opening of
new franchised restaurants and vendor rebates realized but
received in a previous year.
Cash Flows Used By Investing Activities Was $186,371 in 1996
Cash Flows From Investing Activities:
o Sales of Investments generated $154,290.
o Net Proceeds From Sale Of Property & Equipment in the amount of
$13,500 reflects the sale and disposal of a Tubby's Express
restaurant.
o Payments and Other Changes in Notes Receivable resulted in a
$134,936 increase in cash.
Cash Used In Investing Activities:
o Purchase of Certificate of Deposit and Investments utilized
$25,000.
o Purchase of Property and Equipment of $462,155 including a
newly constructed Company owned and operated Tubby's Sub Shop
costing $91,132, a recently reacquired Tubby's Sub Shop
costing $107,000, and the building, land and improvements of a
franchisee operated Tubby's Sub Shop costing $191,800.
Cash Flows From Financing Activities decreased by $17,788
Items Creating Cash In Flows:
o Proceeds From Issuance of Capital Stock of $56,250.
Cash Used In Financing Activities:
o Payments of Long-Term Debt of $74,038 relates to principal
reduction on notes owed by the Company.
Other Liquidity Related Items
To generate sufficient cash flow to meet the needs of the Company, the
Company must continue to operate profitably. In order for this to occur,
Company owned restaurants must operate profitably and new stores must be
added to the system.
During fiscal year 1994, Tubby's concentrated on a "back to basics" approach
to its business. The Company concentrated on eliminating unprofitable
operations, consolidating administrative functions and development of new sub
shop franchises. With a leaner and more focused management team, the Company
was able in 1995 to concentrate on its core business of franchising Tubby's
Sub Shops and becoming profitable. In 1996, the Company continued its focus
on its core business of franchising Tubby's Sub Shops while remaining
profitable. The Company used 1996 as the year to become a national chain of
franchised restaurants rather then a regional chain as it had been in
previous years. The Company initiated four DA Agreements that when completed,
as anticipated, will generate an additional one hundred (100) locations and
was present at numerous national franchising related events.
-14-
<PAGE>
Additionally, expense control remains a critical element leading to the
continued profitability of the Company. Management is continuing its ongoing
review of expenses and is initiating cost reductions where appropriate. In
the fourth quarter of the 1994 fiscal year management initiated significant
salary and expense reductions--the full benefit of which is still being
realized.
The Company does not anticipate that the legal proceedings discussed in Item
#3 will have a material impact on liquidity.
During 1997, the Company has identified several items which will impact cash
flow and the liquidity of the Company. Those items are:
Items Creating Cash Inflows
o In the first quarter of 1997, the Company expects to complete
those locations that were under construction at the end of 1996
and realize $59,114 in cash from the respective sales at that
time.
o The Company expects to sell, in 1997, two of its Company owned
stores acquired during 1996. If these sales are completed, the
Company will realize about $200,000 in cash.
o The Company anticipates the construction and opening of as many as
fourteen (14) new restaurants in the first two quarters of 1997.
If these restaurants open as planned, the company will realize
income from the sale of equipment of about $13,000 of each store.
The Company will also receive initial licensing fees, and ongoing
monthly royalty and advertising fees.
o The Company also has sufficient equipment inventory (see footnote
#3 of the Consolidated Financial Statements) to meet some of the
needs of the new Franchisees entering the system. Based on the
existing commitments for new Franchisees, the Company anticipates
that it will convert most of its existing inventory to cash in the
1997 year.
Items Creating Cash Outflows
o At November 30 ,1996, the Company had ten (10) restaurants at
various stages of construction. These new locations will
require significant additional expenditures before completion.
The Company expects to sell these restaurants upon their
completion and recoup its investments in these locations.
The Company believes that it has sufficient liquidity to
complete these restaurants.
o Other new Tubby's Sub Shops, as they are acquired by franchisees, may
be constructed by the Company. The approximate cost for each
restaurant is $100,000. The Company believes that the cost of
each restaurant can be financed with a combination of internal
funds and bank financing, if necessary.
As a result of the above sources and uses of cash and the expected continued
cash flows, the Company believes it has sufficient liquidity to meet the
needs of the Company in 1997. The Company maintains a $250,000 line of credit
with a local financial institution to meet short term financial needs.
Management believes that as a result of its "back to basics" approach, the
recognition of these reoccurring items, and the ongoing reduction in
operating expenses, the Company's operations will continue to improve in
1997.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets Being Disposed Of," which provides
guidance on how and when impairment losses are recognized on long-lived
assets. The
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<PAGE>
Company will adopt this statement December 1, 1996 and does not
expect it to have a material impact on the Company.
The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. This statement provides a choice to either adopt the fair
value based method of accounting or continue to apply APB Opinion No. 25,
which would require only disclosure of the proforma net income and earnings
per share, determined as if the fair value based method had been applied. The
Company will adopt this statement December 1, 1996 and continue to apply APB
Opinion No. 25.
Impact of Inflation
The Company does not believe inflation has had a material impact on earnings
during the past several years. The Company has demonstrated an ability to
manage its assets, adjust retail prices, and use long-term debt for real
estate holdings - made less expensive by inflation - and take such other
steps as necessary to mitigate the effects of inflation.
-16-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 793,494 $ 951,144
Certificate of deposit 100,000 100,000
Marketable securities 25,000 154,590
Accounts receivable - trade,
less allowance for doubtful
accounts of $20,850 and $48,512
in 1996 and 1995 245,267 233,671
Notes receivable 72,091 139,517
Inventories 102,805 34,840
Prepaid expenses and other 110,644 45,138
----------- ----------
Total Current Assets 1,449,301 1,658,900
----------- ----------
Property and Equipment
Land 325,347 253,623
Building and improvements 693,347 460,181
Equipment 440,705 387,013
Furniture and fixtures 219,464 118,104
Vehicles 15,009 15,009
----------- ----------
1,693,872 1,233,930
Less accumulated depreciation 654,255 560,381
----------- ----------
Net Property and Equipment 1,039,617 673,549
----------- ----------
Net Assets Held for Disposal -- 17,843
----------- ----------
Other Assets
Goodwill, less amortization of
$68,045 and $57,369 in 1996 and
1995 338,241 346,675
Notes receivable, less allowance for
doubtful accounts of $5,894 and
$142,209 in 1996 and 1995 505,380 572,890
----------- ----------
Total Other Assets 843,621 919,565
----------- ----------
$ 3,332,539 $3,269,857
=========== ==========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
1996 1995
----- -----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 189,929 $ 163,472
Accrued Liabilities
Compensation 21,075 36,127
Other 13,305 17,597
Deferred Revenue 87,000 77,000
Long-term debt due in one year 266,825 270,427
----------- -----------
Total Current Liabilities 578,134 564,623
Deferred Revenue 40,000 94,000
Long Term Debt, less amounts due in one year 175,770 246,206
----------- -----------
Total Liabilities 793,904 904,829
----------- -----------
Stockholders' Equity
Common stock, $.001 par value,
60,000,000 shares
authorized, 25,831,131 issued and
outstanding 25,381,131 shares
in 1995) 25,832 25,382
Additional paid in capital 3,485,844 3,430,044
Retained earnings (deficit) (973,041) (1,090,398)
----------- -----------
Total Stockholders' Equity 2,538,635 2,365,028
----------- -----------
$ 3,332,539 $ 3,269,857
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
1996 1995
---- ----
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Food Sales $ 796,990 $ 1,284,695
Franchise Fees
Monthly 659,074 661,160
Initial 118,250 131,375
Equipment and restaurant sales 611,064 603,388
Advertising fees 569,982 570,592
Commissions and other fees 367,856 411,111
------------ ------------
Total Revenues 3,123,216 3,662,321
------------ ------------
Costs and Expenses
Operating expenses 1,942,490 2,052,152
Cost of food sales 588,257 949,454
Cost of equipment and restaurant sales 527,005 529,252
------------ ------------
Total Costs and Expenses 3,057,752 3,530,858
------------ ------------
Operating Income 65,464 131,463
------------ ------------
Other Income (Expense)
Interest income 94,899 92,239
Interest expense (28,235) (37,464)
Gain (loss) on sale of fixed assets (5,880) 49,704
Provision for estimated loss on
disposal of restaurants -- (29,090)
Miscellaneous (8,891) 67,587
------------ ------------
Total Other Income 51,893 142,976
------------ ------------
Net Income $ 117,357 $ 274,439
============ ============
Earnings Per Share .005 .011
============ ============
Common Shares Outstanding (Average) 25,567,197 23,934,376
============ ============
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, at December 1, 1994 19,631,131 $19,632 $2,975,794 $(1,364,837) $1,630,589
Issuance of common stock 5,750,000 5,750 454,250 -- 460,000
Net income -- -- -- 274,439 274,439
---------- ------- ---------- ----------- ----------
Balance, at November 30, 1995 25,381,131 25,382 3,430,044 (1,090,398) 2,365,028
Issuance of common stock 450,000 450 55,800 -- 56,250
Net income -- -- -- 117,357 117,357
---------- ------ ---------- ----------- ----------
Balance, at November 30, 1996 25,831,131 $25,832 $3,485,844 $ (973,041) $2,538,635
========== ======= ========== =========== ==========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 117,357 $ 274,439
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 105,226 124,655
Provision for estimated loss on disposal of restaurant -- 29,090
Loss (gain) on sale of fixed assets 5,880 (49,704)
Increase (Decrease) In Cash Due to Changes In
Accounts receivable (11,596) (142,582)
Inventories (67,965) 28,775
Prepaid expenses and other (65,506) (30,496)
Accounts payable 26,457 1,919
Accrued liabilities (19,344) (24,006)
Deferred revenues (44,000) (30,875)
--------- ---------
Net Cash Provided by Operating Activities 46,509 181,215
--------- ---------
Cash Flows From Investing Activities
Sale of certificate of deposit and marketable securities 154,590 --
Purchase of marketable securities (25,000) (254,590)
Purchase of property and equipment (462,155) (5,621)
Net proceeds from sale of property and equipment 13,500 247,300
Other assets (2,242) 21,416
Payments on note receivable 133,899 128,648
Other changes in notes receivable 1,037 --
--------- ---------
Net Cash (Used In) Provided by Investing Activities (186,371) 137,153
--------- ---------
Cash Flows From Financing Activities
Payments on long-term debt (74,038) (94,930)
Proceeds from issuance of capital stock 56,250 380,000
--------- ---------
Net Cash (Used In) Provided by Financing Activities (17,788) 285,070
--------- ---------
Net (Decrease) Increase in Cash (157,650) 603,438
Cash and Equivalents, at beginning of period 951,144 347,706
--------- ---------
Cash and Equivalents, at end of period $ 793,494 $ 951,144
========= =========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>
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<PAGE>
TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Tubby's Inc., its wholly-owned subsidiaries and its fifty-one percent
partnership interest in the McTub Company (Tubby's Express).
Intercompany balances and transactions have been eliminated.
Natures of Operations
The Company's and its subsidiaries' revenue is derived from: (1)
franchise and advertising fees for the rights to operate sit down and
carry-out restaurants specializing in submarine sandwiches, hamburgers
or steak sandwiches, pizzas or ice cream; (2) food sales at Company
owned stores; (3) equipment sales to franchisees; and (4) vendor
commissions and rebates. The Company and its franchisees operate
restaurants in Michigan, Ohio and New Jersey.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, certificates of deposit, marketable securities and accounts
and notes receivable. At times such cash and equivalents in banks are in
excess of the respective financial institution's FDIC insurance limit.
The Company attempts to minimize credit risk by reviewing all
franchisees' credit history before extending credit and by monitoring
franchisees' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on accounts and notes
receivable, when necessary, based upon factors surrounding the credit
risk of specific customers, historical trends and other information. The
Company also establishes an allowance for possible losses, when
necessary, for declines in market value of its marketable securities.
Fair Values of Financial Instruments
The carrying amounts of cash, cash equivalents, certificates of deposit,
marketable securities, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these
items.
The carrying amounts of the long-term debt issued pursuant to the
Company's credit agreements approximate fair value because the interest
rates on these instruments approximate market rates.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as
of the date of the financial statements, and (2) revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Cash and Equivalents and Certificate of Deposit
Cash and equivalents consist of cash, certificates of deposit, money
market funds, U.S. Treasury bills and commercial paper with maturity
dates not exceeding three months.
Certificates of deposit with maturity dates exceeding three months are
separately classified on the balance sheet.
-22-
<PAGE>
Inventories
Inventories include food and equipment held for resale to franchisees.
Inventories are stated at the lower of cost (primarily on a specific
identification basis) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over
the useful lives of the assets ranging from 5 to 19 years, using the
straight-line method. Depreciation expense was $94,550 and $114,655 in
1996 and 1995, respectively.
Goodwill
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at acquisition. The Company amortizes
goodwill over periods not exceeding 40 years. The Company reviews
goodwill for impairment based upon the estimated undiscounted cash flows
over the remaining life of the goodwill. If necessary, impairment will
be measured based on the difference between undiscounted cash flows and
the book value of the related goodwill.
Revenue Recognition
Monthly franchise and advertising fees are recognized based on the
franchisees' sales as earned, except where collection is not deemed
probable.
Initial franchise fees and fees from Area Development Agreements (ADA's)
and Development Agent Agreements (DA Agreements) are deferred until the
Company has substantially met its obligations under the franchise
agreement, which is generally at the time the store is opened. Deferred
revenues under ADA's and DA Agreements are recognized as revenue on a
pro rata basis as each store opens.
Advances under vendor rebate agreements are deferred and recognized as
revenue over the term of the agreements.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising
expense was approximately $582,000 and $659,000 in 1996 and 1995,
respectively.
Taxes on Income
Deferred income taxes are recognized for the tax consequences of
temporary differences between the financial reporting bases and the tax
bases of the Company's assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
Earnings Per Share
The computation of earnings per share is based on the weighted average
number of outstanding common shares and equivalents. Common share
equivalents included in the computation represent shares issuable upon
assumed exercise of stock options which would have a dilutive effect in
years where there are earnings. The weighted average number of shares
outstanding was 25,567,197 and 23,934,376 for 1996 and 1995,
respectively.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets Being Disposed of,
which provides guidance on how and when impairment losses are recognized
on long-lived assets. The Company will adopt this statement December 1,
1996 and does not expect it to have a material impact on the Company.
-23-
<PAGE>
The FASB has issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method of accounting
for stock-based compensation plans. This statement provides a choice to
either adopt the fair value based method of accounting or continue to
apply APB Opinion No. 25, which would require only disclosure of the
proforma net income and earnings per share, determined as if the fair
value based method had been applied. The Company will adopt this
statement December 1, 1996 and continue to apply APB Opinion No. 25.
Reclassifications
Certain 1995 balances have been reclassified for purposes of comparison.
2. MARKETABLE SECURITIES
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 each of the fiscal years
and as of November 30, 1996 and 1995, there were no realized or
unrealized gains or losses reported as cost approximated fair value.
The following information pertains to marketable equity and debt
securities at November 30, 1996 and 1995.
<TABLE>
<CAPTION>
Aggregate Unrealized Holding Aggregate
Fair Value Gains and Losses Cost Basis
------------ ---------------- ----------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
securities
(corporate bonds
and bond fund) $25,000 $ 55,005 -- -- $25,000 $ 55,005
Held to maturity
securities
Corporate debt securities -- 99,585 -- -- -- 99,585
------- -------- --- --- ------- --------
TOTAL $25,000 $154,590 -- -- $25,000 $154,590
======= ======== === === ======= ========
</TABLE>
At November 30, 1996, corporate bonds included in available-for-sale
securities have contractual maturities exceeding ten years.
3. INVENTORIES
Inventories at November 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment $ 80,994 $21,370
Food and paper goods 21,811 13,410
------ ------
$102,805 $34,840
======= ======
</TABLE>
4. NOTES RECEIVABLE
The Company measures its estimates of impaired loans in accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." The 1996
adoption of SFAS No. 114 and No. 118 did not have a material impact
on the consolidated financial statements. Interest income on impaired
loans is recognized only when payments are received.
Notes receivable consisted of the following at November 30, 1996 and
1995.
-24-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note receivable, due in monthly installments
with interest at 10%, collateralized by a second
mortgage on property, maturing in 2007 $347,629 $364,818
Various notes receivable, due in monthly
installments with interest at various interest
rates up to 12%, collateralized by equipment
maturing through 2001 229,842 347,589
------- -------
577,471 712,407
Less amounts due within one year 72,091 139,517
------- -------
Total Notes Receivable - Noncurrent $505,380 $572,890
======= =======
</TABLE>
The Company's recorded investment in impaired loans totaled $49,000,
with $6,000 of related credit loss allowance, in 1996 and $228,000,
with $142,000 of related credit loss allowance, in 1995. At November
30, 1996, $43,000 of impaired loans had no credit loss allowance. The
decrease in the Company's recorded investment and credit loss
allowance in 1996 is primarily due to direct write-downs charged
against the allowance and payments received. The average recorded
investment in impaired loans during 1996 was $139,000, with no
related interest income recognized.
5. REVOLVING CREDIT AGREEMENT
In November 1995, the Company entered into a $250,000 line-of-credit
with a bank with interest payable at the bank's prime rate plus
one-half percent (8.75% at November 30, 1996). Short-term borrowings
are due on demand and are secured by a blanket lien on all assets of
the Company and a pledged $100,000 certificate of deposit, as well as
a requirement to maintain a $100,000 of collected funds in the
Company's checking accounts. No borrowings were outstanding under the
line-of-credit at November 30, 1996 and 1995. Subsequent to year end,
the Company replaced this line-of-credit with a line-of-credit
agreement from another bank. The new line-of-credit agreement
contains substantially the same terms except the requirement to
maintain $100,000 of collected funds is eliminated.
6. LONG-TERM DEBT
Long-term debt consisted of the following at November 30, 1996 and
1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable in equal monthly installments of
$3,140, plus certain balloon payments
(includes $200,000 due a stockholder)
through September, 2000, with interest
up to 12.0% $242,034 $276,804
Mortgage notes payable in equal monthly
installments of $3,058 through February,
2002, with interest ranging from the
bank's prime rate plus 1% to 9.25%,
reflects refinancing discussed below 180,704 204,241
Other obligations payable in equal monthly
installments of $1,660 through November
1998, with interest of up to 19% 19,857 35,588
------- -------
442,595 516,633
Less amounts due within one year 266,825 270,427
------- -------
$175,770 $246,206
======= =======
</TABLE>
-25-
<PAGE>
A mortgage note totaling $152,500 at November 30, 1996, was
refinanced in January 1997. The new note requires monthly principal
payments plus interest at 9.25% through February 2002, at which time
the remaining balance is due. In accordance with the refinancing, a
total of approximately $142,800 due pursuant to the note was
classified as long-term at November 30, 1996. The Company has pledged
substantially all of its property and equipment as collateral for
repayment of debt.
Annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997 $266,825
1998 33,983
1999 17,352
2000 15,906
2001 13,700
Thereafter 94,829
--------
$442,595
</TABLE>
7. RELATED PARTIES
Three founding stockholders of the Company are directors, two of whom
are also officers. These stockholders own approximately 27% of the
outstanding common stock. In addition to their responsibilities to
the Company, they also own and operate six franchised Tubby's
restaurants. The following is a summary of activity with these
stockholders and their restaurants as of and for the years ended
November 30, 1996 and 1995.
<TABLE>
1996 1995
--------- ---------
<S> <C> <C>
Accounts receivable $ 26,262 $ 25,618
Notes receivable, due in quarterly installments
plus interest at 9%, due September, 1997 24,436 97,347
Franchise and advertising fees 150,215 165,136
Interest income 3,401 7,450
</TABLE>
On April 1, 1995, the Company acquired an existing Tubby's restaurant
and inventory from a current officer and director of Tubby's Inc. in
exchange for 1,000,000 shares of restricted common stock valued at
$80,000.
Notes receivable, related party consisted of the following at
November 30, 1996 and 1995.
<TABLE>
<S> <C> <C>
Due from related parties $ 24,436 $ 97,347
Less amounts due within one year (24,436) (21,918)
-------- --------
Total Long-Term Notes Receivable $ - $ 75,429
======== ========
</TABLE>
8. INCOME TAXES
Significant components of deferred tax assets and liabilities consist
of the following at November 30, 1996 and 1995.
<PAGE>
<TABLE>
<CAPTION>
Deferred Tax Assets (Liabilities) 1996 1995
--------------------------------- ---- ----
<S> <C> <C>
Net operating loss carry-forwards $ 725,000 $ 725,000
Allowance for doubtful accounts 10,000 65,000
Deferred revenue 43,000 58,000
Depreciation 13,000 10,000
Other (30,000) (34,000)
--------- ----------
Net Deferred Tax Asset 761,000 824,000
Valuation allowance on net deferred tax asset (761,000) (824,000)
-------- ---------
Deferred Taxes $ -- $ --
========= =========
</TABLE>
-26-
<PAGE>
The following reconciles the expected income tax rate to the
effective income tax rate.
<TABLE>
<CAPTION>
1996 1995
---- ----
<C> <C> <C>
Income taxes (benefit) at federal statutory rate 34.0% 34.0%
Valuation allowance adjustment (53.7) (39.5)
Non-deductible goodwill and entertainment
expenses 14.6 5.5
Other 5.1 --
---- ----
Effective Tax Rate -- % --%
==== ====
</TABLE>
The Company has acquired net operating loss carry-forwards 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 taxable income, the related tax benefit will first
be credited to goodwill until fully eliminated and then to income
(the Company did not have taxable income in 1996 or 1995).
Utilization of these losses is limited based on the taxable income
generated by the activity that generated these losses and the
carry-forwards expire beginning in 1999.
The Company also has net operating loss carry-forwards for tax
purposes of approximately $877,000 relating to losses incurred
subsequent to the SYF acquisition which expire beginning in 2006,
through 2009.
9. STOCK ISSUANCES AND STOCK OPTION PLAN
On January 17, 1995, the Board of Directors authorized the sale of
5,000,000 shares of common stock through private placements at $.08
per share and, on February 28, 1995, amended the authorization to
increase the number of shares to 5,750,000. On February 28, 1995, the
Company sold 5,750,000 shares. Total proceeds are as follows:
<TABLE>
<S> <C>
Cash (1) $380,000
Tubby's Sub Shop (2) 80,000
--------
Total Proceeds $460,000
--------
<FN>
(1) The sale of 2,750,000 shares to three
unrelated investors and the sale of
2,000,000 shares to officers/directors
resulting in total cash proceeds of
$380,000.
(2) The sale of 1,000,000 shares of Tubby's
Inc.'s common stock to a
director/officer in exchange for all the
stock of P.T.P., Inc. a Michigan
corporation, which owns and operates one
Tubby's Sub Shop valued at $78,500 plus
inventory valued at $1,500, which was
determined based upon historical
valuation methods used with outside
franchisees. The Company took possession
of this restaurant effective April 1,
1995.
</TABLE>
<PAGE>
The Company has stock option plans under which key employees may be
granted options to purchase a specific number of shares of the
Company's stock. Options are subject to the terms of each plan.
As of November 30, 1996, 2,833,833 shares were reserved under the
Incentive Stock Option Plan and 833,000 were reserved under the
non-statutory Incentive Stock Option Plan. A summary of the options
is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Incentive Stock Option Plan
(option prices range from $.16 to $.84 per share)
Outstanding, at beginning of year 579,667 617,167
Granted during the year (at $.125 to $.1875 per share) 550,000 200,000
Expired (at $.15 to $.40 per share) (75,000) (237,500)
Exercised (at $.125 per share) (450,000)
Outstanding, at end of year
-27-
<PAGE>
(option prices range from $.16 to $.84 per
share, 200,000 shares exercisable at
November 30, 1996) 604,667 579,667
------- -------
Non-Statutory Incentive Option Plan
(option price is $.36 per share)
Outstanding and Exercisable, at beginning and end of year 200,000 200,000
------- -------
</TABLE>
10. OPERATING LEASES
The Company leases buildings, equipment, and restaurant space under
various operating leases. The future minimum rental payments, under
all operating leases containing minimum annual rental payments, are
as follows:
<TABLE>
<S> <C>
1997 $ 93,501
1998 76,540
1999 44,370
2000 30,560
2001 14,300
--------
$259,271
========
</TABLE>
Total rent expense under the operating leases was approximately
$129,000 and $153,000 for 1996 and 1995, respectively.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<CAPTION>
Year Ended November 30, 1996 1995
---- ----
<C> <S> <C>
Interest $28,235 $37,464
Income taxes 10,000 -
</TABLE>
Non-Cash Investing and Financing Activities
In 1995, the Company exchanged 1,000,000 shares of Tubby's Inc.
common stock for a Tubby's Sub Shop valued at $78,500 plus inventory
valued at $1,500.
12. ASSETS HELD FOR DISPOSAL
The net assets held for disposal consisted primarily of:
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Net property and equipment $ 0 $ 46,933
Reserve for estimated loss on disposal $ 0 $(29,090)
------ --------
Net Assets Held for Disposal $ 0 $ 17,843
====== ========
</TABLE>
Revenues from the Tubby's Express restaurant disposed of totaled
approximately $199,000 in 1995.
13. LITIGATION
-28-
<PAGE>
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 recision
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.
Thereafter, plaintiffs 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 recision of the 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 is going to be
transferred to the Circuit Court for the County of Oakland and should
be consolidated with the Oakland County Action. 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.
-29-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tubby's, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Tubby's, Inc. and Subsidiaries as of November 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Tubby's, Inc. and Subsidiaries at November 30, 1996 and 1995, and
the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Troy, Michigan
January 21, 1997
-30-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There is no information required to be reported hereunder.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There were seven (7) meetings of the Board of Directors held during the past
fiscal year. Each director attended at least seventy-five percent of the
meetings of the Board of Directors during the fiscal year ended November 30,
1996.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid to
the Company's President and Chief Executive Officer. No other officer of the
Company earned a salary and bonus of more than $100,000 during the Company's
fiscal year ending November 30, 1996. The Company did not grant any options,
restricted stock awards or stock appreciation rights, nor pay compensation
that would qualify as "All Other Compensation", nor did the Company make
payments to any Executive Officer earning an annual salary or bonus in excess
of $100,000, which may be categorized as "Other Annual Compensation" or "LTIP
Payouts", during the Company's fiscal year ended November 30, 1996.
<TABLE>
<CAPTION>
NAME & PRINCIPAL POSITION FISCAL YEAR SALARY ($)
- ------------------------- ----------- ----------
<S> <C> <C>
Robert M. Paganes, President & CEO 1996 $66,346
</TABLE>
No stock options were granted to the above-named Executive Officer during the
fiscal year ended November 30, 1996.
Directors' Compensation
A fee of $250 per meeting attended was paid to each independent, non-employee
Director for their services as such for the fiscal year ended November 30,
1996. The total amount paid to independent Directors as a group was $6,500.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTS
Set forth below is certain information concerning management and other
persons who are known by the Company to own beneficially more than 5% of the
Company's common stock, $0.001 par value, on November 30, 1996.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS (2)
------------------------ -------------------- ---------
<S> <C> <C>
Robert M. Paganes 2,700,241 10.5%
6029 E. Fourteen Mile Road President
Sterling Heights, MI 48312 Director
Peter T. Paganes 1,914,000 7.4%
6029 E. Fourteen Mile Road Vice-President
Sterling Heights, MI 48312 Director
Vincent J. Tatone 1,000,000 5.0%(3)
6029 E. Fourteen Mile Road Secretary
Sterling Heights, MI 48312 Director
John M. Fayad 1,175,000 4.6%
P.O. Box 388 Director
Roseville, MI 48066
Ralph R. Roberts 1,025,000 4.0%
30521 Schoenherr Director
Warren, MI 48093
Ronald Boraks 0 0.0%(4)
38345 W. Ten Mile Road Director
Farmington Hills, MI 48335
J. Thomas Paganes 2,025,752 7.8%
38633 Moravian Director
Mt. Clemens, MI 48043
Melvyn B. Erdos 6,500 0.4%(3)
6029 E. Fourteen Mile Road Treasurer & CFO
Sterling Heights, MI 48312 Shareholder
All Executive Officers and 9,846,493 38.1%
Directors as a Group (8 persons)
<FN>
(1) The nature of ownership is sole voting and investment power unless
otherwise indicated.
(2) As of February 28, 1997.
(3) Pursuant to the rules of the Securities and Exchange Commission, the
Company's common stock which is not outstanding but which is subject to
options is deemed to be outstanding for the purpose of computing the
percentage of outstanding common stock owned by the optionee, but not
deemed to be outstanding for the purpose of computing the percentage
owned by any other person.
(4) Less than 1%.
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Peter T. Paganes and Robert M. Paganes, each of whom is a director, officer
and shareholder of the Company and owns and operates franchised stores, and
J. Thomas Paganes, who is a director and a shareholder of the Company and
owns and operates franchised stores, received loans and advances in years
prior to 1991 related to their stores.
<TABLE>
<S> <C>
As of November 30, 1996:
Included in Accounts Receivable $26,262
Included in Other Assets; Notes Receivable $24,436
For the Year ended November 30, 1996:
Included in Revenue $150,215
Included in Interest Income $3,401
</TABLE>
Prior to January 1, 1993, the above persons had an exemption from paying
royalties on their stores. Effective January 1, 1993, this exemption was
limited to previously existing stores and was discontinued until such time as
these persons were not employed by the Company. Each of the above persons is
in full compliance with all personal obligations to the Company as of
November 30, 1996.
As of November 30, 1996, certain of the officers and directors of the Company
had remaining balances regarding loans from the Company and/or credits for
loans made to the Company. The loans made to Robert M. Paganes called for
quarterly payments of principal and interest at 9% per annum and Robert M.
Paganes was in full compliance with these loans as of November 30, 1996. The
activity of such accounts for the year ended November 30, 1996, is shown
below.
<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING AS OF
1996 12/1/95 ADDITIONS DEDUCTIONS 11/30/96
---- ------- --------- ---------- --------
<S> <C> <C> <C> <C>
Robert M. Paganes $45,864 $(21,428) $24,436
------- -------- -------
Total $45,864 $0 $(21,428) $24,436
======= == ======== =======
</TABLE>
The following table summarizes the amounts due as of November 30, 1996 from
all stores owned by officers or directors of the Company:
<TABLE>
<CAPTION>
NUMBER OF
FRANCHIS AMOUNT DUE FROMSTORES AT
NAME OWNED NOVEMBER 30, 1996
---- --------- -------------------------
<S> <C> <C>
Robert M. Paganes 2 $ 7,667
Peter T. Paganes 1 7,025
--- -------
Amount due from Officers 3 14,692
J. Thomas Paganes 3 11,570
--- -------
Amount due from Officers and
Directors 6 $26,262
=== =======
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON 8K
Page
----
<S> <C>
(a) Documents filed as a part of this report:
(1) Financial Statements:
Consolidated Balance Sheets as of
November 30, 1996 and 1995..............................17, 18
Consolidated Statements of
Operations for the Years Ended
November 30, 1996 and 1995..................................19
Consolidated Statements of
Shareholders' Equity for the
Years Ended November 30, 1996
and 1995...................................................20
Consolidated Statements of Cash
Flows for the Years Ended
November 30, 1996 and 1995..................................21
Notes to Consolidated
Financial Statements........................................22
Report of Independent Auditors..............................31
(b) Reports on Form 8-K
There were no reports on
Form 8-K filed during the
year ended November 30, 1996.
(c) Exhibits:
Name/Type of Exhibit
21......Subsidiaries of the registrant
23......Consent of independent certified public accountants
</TABLE>
-32-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDED REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TUBBY'S, INC.
/s/ Robert M. Paganes
-----------------------
By: Robert M. Paganes
Its: President & Chief Executive Officer
/s/ Melvyn Erdos
------------------
By: Melvyn Erdos
Its: Treasurer & Chief Financial Officer
(Signed Originals on File)
-33-
TUBBY'S, INC.
LIST OF SUBSIDIARIES
NOVEMBER 30, 1996
EXHIBIT 21
Name State of Incorporation
- ---- ----------------------
Tubby's Sub Shop Advertising, Inc. Michigan
The SubLine Company, Inc. Michigan
Tubby's Company Stores, Inc. Michigan
Tubby's Sub Shops, Inc. Michigan
Name State of Partnership
- ---- --------------------
The McTub Company Michigan
Exhibit 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Tubby's, Inc. and Subsidiaries
Sterling Heights, Michigan
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement (Form S-8) of our
report dated January 21, 1997, relating to the consolidated financial
statements of Tubby's, Inc. and Subsidiaries appearing in the
Company's Annual Report on Form 10-KSB for the year ended November 30,
1996.
/s/ BDO Seidman,LLP
BDO Seidman, LLP
Troy, Michigan
February 27, 1997
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> $ 893,494
<SECURITIES> 25,000
<RECEIVABLES> 849,482
<ALLOWANCES> 26,744
<INVENTORY> 102,805
<CURRENT-ASSETS> 1,449,301
<PP&E> 1,693,872
<DEPRECIATION> 654,255
<TOTAL-ASSETS> 3,332,539
<CURRENT-LIABILITIES> 578,134
<BONDS> 0
<COMMON> 25,832
0
0
<OTHER-SE> 2,512,803
<TOTAL-LIABILITY-AND-EQUITY> 3,332,539
<SALES> 1,408,054
<TOTAL-REVENUES> 3,218,115
<CGS> 1,115,262
<TOTAL-COSTS> 1,899,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,235
<INCOME-PRETAX> 117,357
<INCOME-TAX> 0
<INCOME-CONTINUING> 117,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,357
<EPS-PRIMARY> .005
<EPS-DILUTED> .005
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